Why nationalisation is not the answer to our problems

An interesting thing about water privatisation is that it has simultaneously proven a complete fiasco on one level whilst also, on another, working very well. The fiasco is well-known: the regulatory failure which allowed investors to freight companies like Thames Water with enormous debts. The successes are much less trumpeted.

They are twofold. First, privatisation has generally delivered much higher levels of investment in water infrastructure than occurred under nationalisation. This has nothing to do with market forces, however, and everything to do with the way the water industry is presently structured. By obliging water companies to reinvest a share of their revenue, we have created a funding pipeline for water infrastructure that doesn’t involve having to wring money out of the Treasury.

Another upside, even less often considered, is that having water in private hands permits an adversarial relationship between the industry and politicians which incentivises the latter to hold the water bosses to account. 

This is most apparent when it comes to things such as recording sewage overflow levels. Whilst it might have backfired on the politicians — the public is much more exercised about the issue now than it was historically when our rivers and coastal waters were much dirtier — it is obviously good for public policy and debate that England monitors 100 per cent of such overflows. For the same reason it is bad that Scotland, where water remains in public hands, does not.

It is not very fashionable, in these days of the independent body and the independent report, to extol the virtues of an adversarial approach to government. But it ought to be a significant concern for anyone contemplating Labour’s current enthusiasm for renationalisation. Whatever you think of the water companies (or the train operating companies), under the privatised model politicians at least had no qualms about highlighting their failures and demanding better.

Under nationalisation, this dynamic will change fundamentally. These sectors will still have serious problems, because it isn’t even slightly obvious how nationalisation will fix the problems they currently face; but the Government will now own those problems and those failures, and thus have little incentive to draw attention to them.

Consider the railways. Labour likes to talk boldly about “renationalising” the railways, but the reality is that the Major Government thoroughly lost its nerve on rail privatisation and it barely happened. The right to operate passenger services were put out to private tender, but control of the assets remained either with the rolling stock operating companies (trains), Network Rail (track and stations), or arcana such as London and Continental Railways, a state-owned company which owns various derelict stations. Control of the timetable, right down to how many carriages a particular train has, rests with the Department for Transport.

This structure means that the “railway companies” didn’t have the power to do anything strategically significant about the railway network, not least because they could hardly ever get planning permission for new routes. The principal advantage of nationalisation was the injection of private capital via the contract tendering process — capital a cash-strapped Treasury will now need to make up, but probably won’t.

You can safely assume that any “nationalisation” a minister seems to be doing on the cheap is mostly presentational

It’s a very similar story with water. In principle the case for some sort of nationalisation might be a bit stronger, so long as the state water company or companies retained control of water revenue for reinvestment. But with public ownership comes political pressure to hold down bills, choking off that revenue. And the biggest problem with our water network — the fact that we have avoidable droughts every summer because we haven’t built a reservoir in thirty years — isn’t the fault of the water companies at all. They have tried, repeatedly, to get planning permission; it is the politicians’ fault they didn’t. 

A lot of this agenda is smoke and mirrors, of course — any substantial transfer of assets into public hands would be extremely expensive, so you can safely assume that any “nationalisation” a minister seems to be doing on the cheap is mostly presentational. But presentation matters, and Labour’s parlour tricks seem likely to leave us with most of the same problems, but fewer politicians willing to talk about them.