Eleanor McHugh: Public infrastructure should not be a profit-making venture

Eleanor McHugh is a resident of Edmonton and a life-long Tory voter. She currently provides consultancy services relating to next-generation internet technologies and the social changes associated with their mass adoption. For light relief she produces and plays guitar with punk band 'Toxic Frock'.

> Policy summary

Some public infrastructure is vital to the life of the nation and should not be a profit-making venture (water and sewage, highways, railway tracks, gas pipelines, electricity grid, network backbone).

> Policy explanation

Privatisation works well where a genuine competitive market can be established, but where large-scale fixed infrastructure is concerned, consumers (whether private individuals or businesses) are forced to purchase their supply from whomever provides that infrastructure in their geographic region without access to alternative suppliers. This leads to grotesquely profitable monopolies, running contrary to the core Conservative belief that the fair operation of the free market will ensure an equitable price for the product supplied.

One approach is to regulate the industries as is the current case, however the controversy surrounding the water industry as well as ongoing concerns regarding the effectiveness of BAA and Network Rail suggest that regulation does not sit well with the voting public or provide the value for money expected by government. Indeed for those of us living in the southeast of England under perennial hose-pipe bans, the whole affair is reminiscent of the worst years of the nationalised industries.

The natural Labour approach would be to nationalise these companies and put them under state control, which experience suggests would lead to equally indifferent performance and doubtless increase the overall cost of their services.

As Conservatives nationalisation is not our natural instinct, so what can we do? Increasing market competition is difficult due to the exclusive nature of fixed infrastructure so how about encouraging the corporations that manage these infrastructures to restructure themselves as charitable organisations operating not for the profit of share-holders but for the most efficient delivery of services to the public?

These corporations would be encouraged to raise capital for large-scale projects through bond issues, would continue to be regulated to ensure quality of service, and would charge service-providers for access to the infrastructure. Removal of the profit motive would encourage lowering of prices and greater investment in infrastructure, both desirable outcomes.

> Political risks and opportunities

Investors would expect to be compensated and there will be allegations of nationalisation via the backdoor. This could be politically embarrassing for a Conservative administration and might lead to a drop in market confidence, but this depends upon the mechanism used. Conversely the public confidence would be boosted by removing the profit motive from services which are currently seen as the preserve of unaccountable monopolies. The Conservative party's social justice credentials would be greatly enhanced and the impact on inflation due to price increases in these sectors would be reduced. Labour would either have to nationalise or look obstructively reactionary.

> Questions for ConservativeHome readers

• How best to create effective free markets for the provision of commercial services over these non-commercial infrastructures?
• How to manage the transition to non-profit status without damaging market confidence?
• Could the same principle be applied to Local Government and/or the worthier organs of the welfare state?

> Costs

Difficult to assess, but probably equivalent to the upfront cost of nationalisation (as a pure guess, £20 billion for the Water industry), plus the investment required to reorganise management as effective not-for-profit commercial enterprises. After that the primary costs would be those associated with the regulatory process. As charities these organisations would not be paying taxes so there would be a consequent loss of revenue to the Exchequer, balanced by decreased pressure on inflation and stimulation of the market in service provision.

Comments

[Yet Another Anon]

I rather favour Private Charities Limited by Guarantee running such monopoly services and also schools, hospitals, National Parks and companies such as British Waterways, Met Office, Ordnance Survey, NATS etc.... it would however be unreasonable to expect private shareholders not to make a profit while the assets remain owned by them where they are already.

As I understand it a few years ago the water companies and the government agreed contracts that included a clause requiring a 25 year notice of any nationalisation, naturally they would presumably expect similar notice if they were to be required to convert to not for profit companies or the assets to be transferred to such.

Given that Gas is a fossil fuel and so the aim should be to move towards phasing it out, is there not an argument for deregulating the Gas Industry except for safety matters and no longer classing it as an essential utility and focusing on Nuclear Power and renewables.

So far as airports goes and consumer functions of the CAA shouldn't these be deregulated and the remaining civil airports that are publically owned be sold off.

Network Rail should takeover and merge with Post Office Counters and given charitable status with the rest of Royal Mail Plc being privatised - Network Rail actually is a not for profit company already.

[Phil Taylor]

This idea is pretty dumb and ignores how useful profit is.

Companies try to make lots of profit. Great! Much of it it gets recycled into taxes and pensions. When they make profit a regulator can see it and tighten the screw if it is unwarranted.

Where you have a not-for-profit company or charity you will almost certainly find that the cost base grows and grows over time as there is no profit incentive to chop it. You will find there are many handsomely paid staff sitting in beautiful offices with top of the range IT systems. Actually you will probably find that the staff aren't in the office much as they will forever be jumping on planes going to international utility conferences. Eventually you will find that the roads, pylons and pipes are horribly over-engineered and that charges for these services are galloping ahead of inflation.

Profit is great.

[TomTom]

Public infrastructure should be funded through a Roads Holding Company, a Railtrack Authority etc selling Bonds to Pension Funds and the National Insurance Fund.

The returns from rentals, road pricing etc should flow to the Bondholders.

This way National Insurance and Pension Funds would be invested in infrastructure instead of National Insurance Funds being used to pay rentals on PFI projects which enrich private banks and leasing companies both on the capital account and on the income account; yet produce no income for National Insurance Fund contributions

[Denis Cooper]

I half agree with this. There's certainly a question whether it's sensible to privatise activities which taken by themselves are inherently unprofitable, but which we wish to maintain for social reasons or because without their continuation the state would end up paying additional and greater costs in other ways. Much of the railway system falls into that category, where profits and therefore dividends essentially come from the subsidy provided by the taxpayer, not from the operation of the business. I would also question how one could allow retail customers to choose between genuinely competitive suppliers of water without them laying parallel systems of pipes, and as it's difficult and expensive enough to solve the problem of leakage with just one system, what would be the point of (almost certainly) increasing that maintenance cost, and therefore the cost to consumers, by having two or more competing distribution systems? The same with the postal service: it's one thing having couriers making special deliveries to widely-spaced individual addresses at extra cost, but as it's difficult enough to maintain a reliable universal service with daily deliveries to every address in the country, six days a week, would it really make sense to have two postmen from two competing companies following each other round the streets, each delivering part of the mail, two pillar boxes standing side by side in the street, two sets of collection and sorting equipment and staff? I realise some people will immediately say "use email", but not everything can go by email, and more importantly there's a large chunk of the population who cannot or will not use email. Yes, OK, many of those are just old fogies who fought or went through the war, so once again some people will say "who cares, they'll be dead soon", but is that the approach which a responsible government should take?

[Yet Another Anon]

two pillar boxes standing side by side in the street
Maybe collection could be done by Local Authorities with different coloured stamps for different companies and they could deliver the mail to each of the nearest sorting offices respectively for the particular stamp applied to - that way there would only need to be one set of post boxes, the respective sorting offices then could sort them according to where they were going.

[Kevin Davis]

Whilst in principle I agree with this, because I run a NFP, I am afraid you cannot "buck the market". We should not be going aorund forcing this to happen as it owuld not be dissimilar to re-nationalisation. I am not sure that turning Network Rail into a NFP has made much difference to its performance and until the NFP market is more mature I would also caution against massively expanding this.

In many ways there is not a lot of difference between a profit making company and a NFP company. They both make profit, but it is what is done with that profit that is important. A NFP does not have shareholders to distribute profit, which leads us to the problem of who would invest if they do not get a return.

The Government has tried to cure this with the Community Interest Company, but to date that has had little real experience with the size of business you are exploring here.

[Tom]

The key difference between monopoly providers(eg government) delivering a service and private organisations is not whether they make a profit, but whether they are capable of making economic calculations about the costs and rewards involved.
Monopoly government providers sustained either wholly or mostly through subsidy based on taxation have no mechanism by which to perform economic calculations, and hence they are by definition going to be inefficient in their delivery of economic resources.
Privitisation will never be a success where an industry continues to rely almost wholly on direct subsidy, since that industry will continue to be run on uneconomic grounds (the survival of Network Rail depends not on the efficient use of economic resources, but on pleasing political masters. The decisions it makes therefore, are not based on rational economic calculation, but on political judgement).
This applies equally where the government has no direct involvement in running the industry and all of the participants are (allegedly) profit making. Farming in the West is not an economic industry, it is a politically-run wealth redistribution scheme.
To return to the policy at hand, while changing the organisations involved from being profit-motivated to not-for-profit might appeal to the public, it won't have any impact on the performance of the industries if the structure of the market isn't changed at the same time.

[Roy]

The case for public ownership is that a natural monopoly (urban roads) should be subsidised for general use by taxpayers.

Even here, the running of the service (road maintenance) can and should be run by a private company.

Economic efficiency of the economy is generally reduced the further away from the "natural monopoly" concept you go.

The corollary is that the minority of taxpayers who pay the majority of taxes (the usual 80% of taxes paid by 20% of people) will pay higher taxes to provide this subsidy for the general public.

The voting public naturally prefers these taxpayers to subsidise their services, so there is always a tendency for the voting public to approve generally subsidised monopolies such as education and health.

A conservative government should be on the side of reducing these publicly subsidised services to the policially acceptable minimum.

This proposal does the opposite, so I vote NO.

[Wat Tyler]

I share many of Eleanor's concerns about the performance of our privatised natural monopolies, but I don't think we have much evidence things would improve if we moved these infrastructure utlities out of the for-profit sector.

Indeed, I'd prefer to tackle some of the problems by introducing MORE market. The best example is water shortages, where if we imposed (er, yes, imposed) metering on all consumers, it would be much more worthwhile for suppliers to maintain continuity of supply. We'd soon have TV ads encouraging us to water our gardens more- but of course, because we'd be paying according to usage, we'd all plant drought-resistant stuff anyway. Le marchais in action.

I agree with others that profit is the cruel master that drives efficiency. But as with any monopolies,what we do need is astute regulators and joined-up regulation. Sadly, tht'a not what we've got right now(see eg http://burningourmoney.blogspot.com/2006/05/danger-uxb.html ).

[Sean]

While I am a capitalist, I view public infrastructure as best being in the hands of the Government (though subcontracting construction et al can, and should, be given to private firms) but I differ in that I think nationalisation of utilities will get anywhere in this modern era. It will be costly in the short run and will cause investment to flood out of Britain in the medium term. If you nationalise water how about airlines? Many questions will be asked leading to a drop in investor confidence.

Locking the gate after the horse has bolted is not a good policy. But keep up the good work and I feel that this policy will spark off a lively round of debates as to the extent of government ownership of infrastructure.

[Bob B]

Famously, the late Nicholas Ridley always opposed the privatisation if the railways, which he believed would always require public subsidy for social reasons. But the market economics of telecommunications, electricity and gas supplies are very different.

Competition between producers and providers is possible and consumers greatly benefited as a result of privatisation and the introduction of competition. In the 1970s, it was necessary to beg BT for a new phone line. And besides, I take it that no one is seriously challenging that consumers of the services of public infrastructure should pay for interest and amortization charges for the capital employed.

The serial problem with NFP provision of public infrastructure is carrying the heavy burden of the cost-push mindset in management.

[TaxCutter]

Public infrastructure vital to the country should not be left in the monopolistic hands of the government and civil service.

[Automated Robot]

This policy proposal acknowledges legitimate concerns about the effective regulation of private interests in public services.

However:

1 - There is a jump from "vital to the life of the nation" to "should not be a profit making venture". A moral bridge across this gap is acceptable but should be acknowledged and evidenced.

2 - While politically, excessive profits are unpalatable to many, it does not follow that profits are unacceptable.

3 - Excessive profits may betray poor VFM for the consumer, failure to reinvest, a lack of competition, even an absence of effective regulation; but these are not a simple consequence of private ownership or commercial gain.

4 - Essential differences between the public utilities and services are not addressed. Consider the dominant shaping hand of public/private sectors on telecomms (regulation, competition and disruptive technologies), railways (state decision to split ownership of track bed and rolling stock), highways (unforseen growth in private car ownership) and water/sewerage (building homes and communities where there is insufficient water).

Therefore, I do not support this policy.

[Mike C]

In terms of the water industry, Dwr Cymru (Welsh Water) and Scottish Water have similar arrangements already. As far as I know, they are not significantly better performers in terms of operating/capital efficiency or average household bills compared to the private companies of England (you can refer to the Ofwat Relative Efficiency and Tariff Structure and Charges reports on their website for more information).

The cost of compensating the investors in the currently privately owned water companies will be huge (press reports suggest that Thames Water alone will go for £7-8bn.

As it stands, the water industry isn't perfect, but I believe that advocating such a major overhaul that does not have proven benefits can not be justified.

[Rothbard from the grave]

The only bad monopolies are government/govt supported monopolies. If a monopoly is bad competitors will enter the field, only governments through the use of force can stop this. Freidman has shown this to be the case.

Eleanor's idea is very bad. There is nothing wrong with profit - it's why people go into business and offer us the products we all love. This proposal amounts to theft - forcing people to be a charity rather than make money and so benefit society in the long term much more. Not that's the point - companies don't exist for society but for their owners.

It's worrying that a Conservative can propose such a thing. All this talk of social justice has went to people's heads (there can be no such thing as social justice rather only individual justice).

[Eleanor McHugh]

Where TaxCutter did I suggest putting it in the hands of either government or the civil service?

My proposal is that the companies that control infrastructure of strategic value to the nation (specifically water, railways, etc.) should be operated on a charitable basis and regulated to ensure that they are delivering good value for money.

Ideally there would be targets for efficiency of transport across the infrastructure and for investment in both maintenance and research & development. These would set meaningful economic and political parameters.

In reply to those who have mentioned the subject of subsidies, I would personally like to see these terminated at the first possible opportunity. Less subsidy equals lower taxation which will always be a desirable thing for the economy as a whole.

If the companies maintaining infrastructure are doing their job properly they should be capable of earning their income from carriage charges and/or access subscriptions on both suppliers and end-users. This would aggregate the cost of infrastructure usage and development with higher efficiency than the current system of private industries thriving on public subsidy, even with the risk of over-engineering that goes with wanting to do a job well.

There may be a case for the state subsidising access to certain infrastructure for some end-users as part of a package of concessions for the low-paid or unemployed, but that's a whole different argument.

[Eleanor McHugh]

Rothbard I care less for ideology than for the nation maintaining an effective public infrastructure as represented by roads, railways, water supply, etc.

Two of the privatised industries, electricity and telecommunications, both operate very effectively. However both have something in common - moving electricity and light around the country is relatively inexpensive given how wonderfully productive each resource can be per unit mass. In these areas we have world class infrastructure and market regulation which in general seems to work well.

However when it comes to the railways and water supply many parts of Britain are perceived to reach third-world levels of provision. This is probably not the case, but there is definitely something wrong with the way in which our rail and water infrastructure is being maintained and something has to be done to bring them back on track.

Whilst my suggestion would probably annoy most core Tory voters there is a definite concern amongst the electorate at large over the current way things are being managed, and this is an issue that the party really ought to address as part of regaining the trust of the British public.

[Jonathan Mackie]

Eleanor, I don't share your view that the public at large are exercised by who provides their services.

Atavistic views of public ownership are also I suspect few and far between.

The private sector will always be a better service provider because it must allocate its resources more effectively, manage risk better and ultimately return a profit. Government has none of these incentives. The fact of core competencies applies.

Governments have a duty to manage the wider economy. The borrowing levels to fund improvements to public infrastructure such as we are seeing today in water, rail, energy supply etc, would not be possible were they in state hands. Interest rates would be pushed up as the state demanded more and more money. The economic corrollary would be a disaster.

Instinctively private monopolies are better than public monoplies, simply because of the profit motive.

[DavidTBreaker]

This is just a version of renationalisation without the dreaded 'N' word. The answer is breaking the monopolies by having shared delivery (the pipes) but multiple providers (as with gas, internet, electricity etc). I live in Kent but can buy Scottish Power, Powergen, Electricity De France etc. One delivery route, multiple providers.

This could be achieved by a water grid, smaller rail franchises and rail routes with more than one operator or smaller franchises for example.

Companies wish to make as much profit as possible, we must use the profit motive to deliver good results. It is the government's fault for letting them run monopolies. Why will a 'not for profit' or 'public' company be more efficient than a private, for profit company?

[Rothbard]

Eleanor you write 'Rothbard I care less for ideology than for the nation maintaining an effective public infrastructure as represented by roads, railways, water supply, etc'.

The two are not mutually exclusive.

Eleanor you write 'there is definitely something wrong with the way in which our rail and water infrastructure is being maintained and something has to be done to bring them back on track'.

This is correct but does not mean we should do away with profit making industries. The problem is not proft but the government - take away the masses of regulations, high taxes and government hand outs and favours and things will improve. Government is the problem not profit.

[Bob B]

"The only bad monopolies are government/govt supported monopolies. If a monopoly is bad competitors will enter the field."

The (continually controversial) issue is whether a particular public utility is or isn't a "natural monopoly". At one time it was argued that telephone phone services were a natural monopoly because of BT's heavy investment in the local networks to serve each and every business and residence which wanted a telephone connection. But then mobile (wireless) telephones came along and cable TV companies invested hugely to provide piped TV and, incidentally, telephone services. It is now extremely doubtful whether developing countries will ever have (or need) investment to build landline telephone networks. In short, technical innovation came along to challenge what started out as an arguable natural monopoly.

To start with, similar considerations applied to domestic gas but we now have competition among gas suppliers without multiple networks of pipes.

However, just to make sure the markets for public service utilities operate, we have official, independent regulators to monitor the markets and intervene whenever they deem it necessary. Broadly speaking, their principal initial directives to the regulated industries was a formula of the kind: "For the next so many years, reduce prices by the retail price index minus X% a year."

The last I read, Oftel, which regulates telecommunications markets, was proposing to withdraw from regulating landline telephone charges as the market was now so fiercely competitive that further regulation isn't needed.

[Chris Hughes]

Removal of the profit motive would encourage lowering of prices and greater investment in infrastructure, both desirable outcomes.

I dont understand how, and would be grateful of a follow up to explain this if thats ok

[Eleanor McHugh]

I think I should probably make clear that infrastructure describes the physical pipes, rails, etc. over which supply is carried and not the goods which are supplied as this seems to be causing some confusion.

I am not suggesting that all the water, gas or electricity in the country should be provided on a non-profit basis. However I am suggesting that the infrastructure over which they are provided should be.

Nor am I suggesting that this infrastructure should belong to the government or be managed by the civil service.

[Eleanor McHugh]

''Removal of the profit motive would encourage lowering of prices and greater investment in infrastructure, both desirable outcomes.''

To clarify Chris, if founded as charities the source of trading profits and the use to which they could be put are circumscribed by the charitable purpose for which they are intended, such as providing communal water supply. There is still an economic incentive to make a profit so as to continue with the charitable purpose, but this must be used for reinvestment in the managed infrastructure and its day-to-day operation.

Given a free market in supply (as opposed to carriage) there is also an incentive for increased competition between those providing the resource (clean water, waste disposal, etc.) which would help to keep consumer prices at a fair market level.

This is effectively a combination of rent (the cost of accessing the infrastructure, itself a function of the cost of prudent maintenance) and free market competition which should in principle give rise to a fairer price than the current monopolistic arrangement.

[TaxCutter]

When you mentioned upfront cost of nationalisation. Government or your loosely described method, what's the difference - monopolies with no profit motive and no accountability. Would it work in lower prices or greater investment - it might but not necessarily for the right reasons, more likely it would become like the big state industries, education and health - unresponsive, uncompetitive and delivering a generally rubbish product.