Labour Research May 2018


Returning privatised services to the public

Labour Party plans to reverse the privatisation agenda pursued by British governments since the 1980s have been welcomed by unions and campaigners for public ownership.

The Labour party has pledged to reverse the privatisation of Royal Mail “at the earliest opportunity” and to bring rail operations back into public ownership when the existing private franchises expire. 

As Mick Whelan, general secretary of the ASLEF rail union commented last month, public utilities — such as gas, water, and postal services, as well as the railway — “are natural monopolies which should, obviously, be run in the public, not the private, sector”. And they need to be run “for the public good — not for private profit”. 

In its 2017 general election manifesto, Labour said that a future Labour government would regain control of energy supply networks “through the alteration of operator license conditions, and transition to a publicly-owned, decentralised energy system”, and would “replace our dysfunctional water system with a network of regional publicly-owned water companies”. 

In addition, the manifesto pledged to double the size of the co-operative sector, introducing a “right to own” whereby employees become “the buyer of first refusal” when the company they work for is up for sale. 

And it said a Labour government would also act to reverse decades of outsourcing of local services to private contractors, acting to “insource” public and local council services. 

In his speech at Labour’s Alternative Models of Ownership conference in London in February, Labour leader Jeremy Corbyn said that the failure of privatisation and outsourcing “could not be clearer”. He cited examples including the recent collapse of outsourcing giant Carillion, the exorbitant costs of the Private Finance Initiative (PFI — see Labour Research, December 2017, pages 13-15) and “the private sector’s chronic inability to run the East Coast Mainline”. 

Public ownership of rail

Labour’s plans to bring the rail network back into public ownership have been met with delight by the rail unions.

Mick Cash, general secretary of the RMT transport union, has welcomed the “clean break” made by Labour under Corbyn “from more than two decades of the privatised rip-off that has consigned Britain to the transport slow lane”. 

Research undertaken for the unions shows that since privatisation, the public subsidy for rail has more than doubled, despite high pay-outs for shareholders, while fares and the cost of running the fragmented and complex system have soared. 

Echoing proposals previously put forward by the unions, Labour’s plans involve establishing an arms-length public company to manage the rail system, integrating passenger train operations currently managed by private companies (many of which are owned by the state rail companies of other countries) and track and rail infrastructure already publicly-owned by Network Rail. 

The new company would also buy new trains, moving away from the current system whereby private rolling stock companies make huge profits leasing trains to the rail operators. 

Rail operations would be gradually brought into the new structure as the existing private franchises expire. This could take some time given that some franchises are not due to expire until the end of the next decade. 

However, there is also the possibility of taking advantage of break clauses, or cancelling contracts where this would provide better value for money. 

Some recent contracts have been awarded directly without going through a proper franchising process, possibly allowing greater flexibility to take over operations sooner. 

Private companies may also fail to keep to contractual commitments, obliging the government to step in. 

At the end of last year, the government announced that the Virgin Trains East Coast franchise was being replaced early after failing to meet financial commitments. 

The government has waived around £2 billion payments on a contract that was due to run until 2023. 

The franchise had been publicly run between 2009 and 2015 after previous franchises had failed. Yet despite making a surplus for the government and recording high levels of customer satisfaction, it was auctioned off again in 2015 (see Labour Research, July 2014, pages 15-16).

Democratic and accountable models of public ownership

However, shadow chancellor John McDonnell stressed that Labour was not looking to recreate the top-down public ownership model of the past which, he said, was “too distant, too bureaucratic and too removed from the reality of those at the forefront of delivering services”. 

A report presented at the conference, Alternative models of ownership, explored the potential of worker co-operatives, citing successful examples both nationally and internationally (notably in Spain and Italy) and the expansion of municipal ownership models (for example, banks or energy companies owned by local authorities and serving the local community). This would also require support from public investment banks or credit institutions. 

The report also outlined the case for publicly-owned enterprises at the national level. However, it advocated a more democratic, accountable and decentralised model to the old nationalised industries, with representation for users and workers while also leaning on professional and technical expertise. 

It said the case for public ownership was particularly strong in sectors that are “natural monopolies” such as rail, electricity and water. 

This is because “the technical conditions of the sector mean that it is impossible to have more than one supplier” and “a private supplier will be able to extract monopoly rents against the broader common good”. Private companies are able to hike up prices and make astronomical profits for delivering public goods. 

As Corbyn put it in his speech: “We don’t have anywhere else to go for our water when prices go up.”

He also linked Labour’s public ownership plans in the energy sector to the need to address climate change. 

“With the national grid in public hands we can put tackling climate change at the heart of our energy system, committing to renewable generation from tidal to onshore wind,” he said.

Bringing services back into public ownership would be cost-neutral

McDonnell pointed to wider international trends to support Labour’s argument for change, with other countries, regions and cities across the world also taking back control of essential services. He cited 835 examples of municipalisation worldwide in recent years listed by the Transnational Institute research centre, including 284 cases in the German energy industry alone. 

And he said that in France, with the longest history of water privatisation, over 100 authorities have brought their water in-house. 

He dismissed the “fantasy figures” being bandied about by some think tanks regarding the cost of Labour’s proposals and said bringing water, energy infrastructure and Royal Mail back into the public sector would be cost-neutral because it would bring an asset into public ownership and provide future income. 

These plans could involve simply buying back enough shares to restore majority public control, for example in the case of Royal Mail, or exchanging shares for government bonds. 

Buying up shares could be financed through government borrowing at current low interest rates which could then be paid back through the profit, usually passed back to shareholders. 

Energy and water

The private water companies in England would be taken into public hands — with the current publicly-owned water company in Scotland and not-for profit body in Wales providing ready-made models to follow for a new network of publicly-owned regional companies. And in energy, new locally-owned companies would be set up to compete with the existing big private suppliers. 

The national grid and other energy infrastructure could be managed via decentralised municipal networks. 

The UNISON public services union which represents members in both the energy and water industries has welcomed Labour’s shift on public ownership. 

A resolution at UNISON’s energy service group conference in 2016 referred to union research indicating the benefits of a publicly-owned energy industry. It said this would help to tackle the gross underinvestment in capacity and infrastructure and facilitate a nationally co-ordinated plan to drive the move to clean energy.

This would also enable measures to tackle “the scandal of fuel poverty” and eliminate “the drive for profit which leads to excessive bonuses for senior executives, attacks on the employment contracts of ordinary employees and an ever increasing cost to the consumer”.

Similarly, the Unite general union adopted a motion at its policy conference in 2016 calling for public utilities to be managed “with common benefit as its first priority, not private profit”, and for a modern-day Central Electricity Generating Board, allowing it “to build with UK public money via ‘energy bonds’ if necessary, new, diverse generating capacity”.

Unite acting national officer for energy and utilities Peter McIntosh told Labour Research that the union was fully behind Labour’s new commitment on public ownership of utilities and was contributing to policy development via the TUC’s energy round table with other unions.

Labour’s proposals also echo the case made by campaigners for public ownership over several years. 

These include the group, We Own It, which promotes the case for public ownership and campaigns against privatisation. It has been supported by UNISON and Unite among other organisations and individual funders. 

“To have the Labour party putting these ideas on the table takes the debate to a whole new level,” We Own It founder and director Cat Hobbs told Labour Research. “The conversation has essentially changed from whether public ownership could possibly be a good idea to how you do it. And that’s a really exciting change.” 

We Own It says that public ownership is hugely popular, citing data showing 83% of people support public ownership of water, 77% support it for energy, 76% for the railways and 67% for Royal Mail. 

It says that bringing the English water companies into public ownership would save £1.8 billion a year on shareholder dividends alone, and that if shareholders were paid £18 billion in compensation, the proposal would pay for itself over 10 years. Rather than compensate shareholders based on market value, We Own It says that the decision on how much compensation water company shareholders should get should take into account the poor contribution they have made to the industry since privatisation in 1989. 

Since then, the companies have increased debt from zero to £42 billion and used this debt to finance investments, while extracting £1.8 billion a year in profits and increasing bills by 40% in real terms. 

Hobbs said: “It’s up to the UK Parliament to decide how much you would compensate shareholders and so you could take into account the public interest, the amount of money that’s been extracted over the years, the amount of investment that hasn’t happened etc, and then make a decision about what’s best for the British public and how much shareholders should be compensated.” 

In relation to energy, We Own It cites a 2016 report by Professor David Hall of the Public Services International Research Unit at the University of Greenwich, Public ownership of the UK energy system — benefits, costs and processes. This says that moving to a publicly-owned energy system would generate savings of £3.2 billion a year. This is because of the lower cost of borrowing in the public sector and an end to extraction of dividends by shareholders. 

With compensation of shareholders estimated to cost between £24 billion and £36.6 billion, the report suggested the plan would pay for itself within 10 years. This would involve a new model of energy ownership based on a combination of national, regional and local public ownership. The model would encourage renewable energy generation by local authority providers, co-operatives and community groups. There would be a public purchase of some generating capacity, the national grid and energy distribution. 

The “Big Six” energy supply companies would not be bought. Instead, new local public sector companies would be created to compete with them. 

In Germany, such companies have captured up to 50% of the market. Closer to home, local authorities in Bristol, Nottingham and Leeds have already set up local companies to give people affordable energy and invest locally. 

Royal Mail

When it comes to buying back Royal Mail, We Own It points to the £800 million made by shareholders since privatisation. Royal Mail was sold off for around £3.3 billion, beginning in 2013 when the majority of shares were sold off, with the last tranche sold off in 2015. 

We Own It says that with the money saved on shareholder profit, renationalisation of Royal Mail will also pay for itself over a short period. 

Royal Mail nationalisation

The CWU postal workers’ union campaigned vociferously against Royal Mail privatisation and has since made repeated calls for its re-nationalisation. 

Endorsing Labour’s manifesto last year, CWU general secretary Dave Ward said the pledge to renationalise Royal Mail represented “a once-in-a-generation opportunity to bring it back into public ownership and end the relentless drive for profit”. 

The CWU has also called for Royal Mail and the Post Office network, which remains publicly owned, to be reintegrated. 

The UK is the only major economy that has separated the retail and delivery functions of its postal network in this way. Selling off the more profitable Royal Mail delivery operation has left the Post Office in a vulnerable position, with closures of post office branches accelerating in recent years. 

Furthermore, the CWU has called for the establishment of a publicly-owned post bank, similar to banking operations run in other European countries such as France and Italy. 

This would help to revitalise the declining Post Office network, providing services to small firms and the financially excluded and plugging the gap in isolated areas no longer served by the commercial banks. 

It would be a “people’s bank that works for businesses and works for communities”, Ward said at last year’s Labour party conference.

“Essentially public ownership is a really good deal for the public purse which pays for itself over a short period of time”, Hobbs said, with profits no longer being taken out of the system to pay shareholders but, instead, “being reinvested back in or going back to the public purse”.