Privatisation of utilities has benefited everyone

Andrew Smithers
Financial Times [In Letters] , 28th September 2017

Ignorance shown by those who have had responsible jobs is disturbing and that a former director of the EU Commission for water policy should be mystified by the benefits of privatising natural monopolies is a worrying example. (Letter to FT 27th September).

Before privatisation nationalised UK natural monopolies were run in the assumed interests of those they employed and, by stifling innovation and productivity, against the national interest. In his 2014 Nobel Prize Lecture Jean Tirole remarked that “By late seventies and early eighties, the antitrust and regulation doctrine was in shambles and had to be rebuilt.” Michael Valentine, Nick Fry and I constituted the team from S.G. Warburg which worked on the first privatisation, that of Telecoms in 1984, so we had to “rebuild” and in practice invent a new regulatory system. I proposed that British Telecom would be free to change its prices each year by some amount less than the rate of inflation, with the formula being reset every five years. The advantage of this proposal was that privatised utilities had a strong incentive to improve productivity. Over the next few years this was the achieved to the great benefit of the economy and thus also for employees.

Quality standards must not be lowered to allow price control to be circumvented, and balance sheets need to be constrained to ensure that returns on equity are boosted by improved productivity rather than by leverage. If these additional requirements are neglected it is possible, as UK water supply has shown, to regulate badly. It may also be possible to provide incentives so that nationalised industries are managed for the benefit of the economy, but history suggests that this is well-nigh impossible in the UK. The NHS provides a continual reminder of the problem and if the next government indulges in widespread nationalisation it is likely to be joined by others.

In the UK the greatest damage to the economy by a special interest group is currently from company managements through the perverse incentives of the bonus culture. We need to address this rather than add to the power of other special interest groups to hurt us.

Andrew Smithers