Saturday, 14 December 2019

Renationalisation: back to the future?

The recently released Renationalisation: Back to the Future? by Julian Jessop and Len Shackleton is number 72 in the IEA's Current Controversies series.

The paper discusses the idea, common among a number of political parties in the UK, that some industries should be bought back into government ownership, that is, these industries should be renationalised.

A brief summary of its main points is:
Actual and perceived problems associated with privatised utilities have led to some public disenchantment with these businesses. Polls suggest that there is a popular majority for renationalising them, and there is some cross-party support for this.

Examination of these industries suggests grounds for concern over aspects of their recent operation. However, other criticisms are not substantiated, and there have been significant gains from privatisation which should not be ignored.

Many of the problems of these sectors are not intrinsic to private ownership but are the consequence of continued government intervention and regulatory failure. Some problems – such as the conflict between prices to consumers and cost to the taxpayer – would persist even in the event of renationalisation, and could get worse.

The record of post-war nationalisations was for the most part unhappy. The clamour for taking businesses back into state ownership ignores important lessons from that period, such as the instability of investment hen nationalised industries have to compete against other government priorities.

The cost of renationalisation would be considerable. The issue of compensation to private shareholders is being treated superficially: wider UK share ownership and the increased involvement of foreign investors would make it be much more difficult than in the past.

Foreign nationals would be in a strong position to challenge attempts to acquire assets at less than market value. Such attempts would damage the UK’s reputation for upholding property rights and could also lead to retaliatory measures against the UK’s own large stock of overseas investments.

Proposed new organisational arrangements for renationalised businesses are untested and may lead to continual politicisation, adversely affecting future performance.

It could be more sensible, where necessary, to strengthen the regulation of these businesses with a focus on reinforcing market mechanisms. The aim should be to reduce political interference and reduce disruption to business operations.

Notwithstanding political support for renationalisation from several parties, it seems unlikely that there will ever be complete consensus. Future governments might re-privatise, or threaten to re-privatise. The instability created by this sort of ping-pong would damage these industries’ performance, with consequent adverse effects for customers and taxpayers.
Remember that one way to think about privatisation is that it is a way for a government to commit to a policy of non-intervention in the operation of a firm. Selling a business maximises the "distance" between the government and the firm and increases the political cost to interference with the firm. Renationalisiating a firm reverses this process and makes government interference that much easier. Renationalisation minimises the "distance" between the firm and the government and thus makes political intervention that much cheaper for the government.

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