Friday, 3 January 2014

Don't Nationalise The Rail Industry!

If you're a Brit reading this, it's a pretty safe bet to say you'd hate to see the NHS privatised, wouldn't you? I know what you mean - it's a wonderful thing, isn't it - national insurance contributions making health service free at the point of delivery. Although personally I wouldn't want to see it privatised in one foul swoop just yet, there aren’t many things I want to see remain in the hands of the government.

You see, in net terms even the health service would be more efficient if it were privatised (take Singapore's health service as the nearest case in point) with people able to keep their money instead of paying it in NI contributions. The NHS costs are so high primarily because it is so inefficiently used - and the reason it is so inefficiently used is because it’s free at the point of delivery, so there's no financial incentive to minimise one's health and well-being.

To give you an illustration, imagine the government nationalised all food and asked us all to only eat what we needed - we'd be a nation of severe overeaters (we are already, and that's when we pay for our food). That said, despite the health service ideal, where incentives are locked in place, we just don't have the collective wherewithal to optimise this model, which is why I favour a State-funded NHS.

In just about every other instance in the UK, in just about every decade, privatisation has proved far more efficient for the economy and for the taxpayer than services run by the government, or services too heavily subsidised – and that’s an almost ineluctable law in economics. The reasons are standard textbook stuff.  Privatised companies have a much greater incentive than government-run companies to spend efficiently and reduce profligacy.

Not only are governments wasteful (people generally spend other people's money more carelessly than their own) - they do business in accordance with party politics and political pressures from the electorate, as well as subsiding or bailing out failing industries. Furthermore, investment in the rail industry is more proficient when governments aid private companies rather than running it themselves, as economic management that extends long-term is not always good for point-scoring in general elections.

Shareholders are good agents for profit-inducement, which means you usually get better managers in the private sector. Where there is inefficiency, the best recourse is a takeover or switching to competing forces, not State bailouts which are so often inefficient, party-based and largely ideology-driven.

But most of all, increase in competition is proven to be the greatest catalyst for efficiency and improved services. Competition is hard in the rail industry (even these regional franchises don't entirely guard against monopoly power) - but the government needs to do more to engender competition, not take steps backwards to the old days of nationalisation.

Lastly, profits make for a tiny proportion of the rail industry's investors - for example, staff costs alone are about 25% compared with 3-5% profits. The politicians in favour of nationalisation fail at basic rationality when they allude to a public sector profit in one region as evidence for greater efficiency than the private sector in other regions (that’s as injudicious as saying that all restaurants should be nationalised because city hall’s restaurant makes more profit for local government than privately owned restaurants in the nearby high street).

And they fail at basic arithmetic when they count railway labour costs (always the headline-grabbing ‘jobs’) as part of the benefits rather than part of the costs. Those 25% staff costs are borne by the taxpayer in public sectors and by the company in private sectors - but it doesn’t end there – not only are they costs that are only borne by nationalisation – with government expenditure we have to include pension contributions, sick pay, holiday pay, human resources costs, and so forth that aren't factored into the balance sheet, they are costs that carry on through all employees’ working life and henceforth thereafter – and it is either disingenuous or plain incompetent to omit them from the enquiry.

No, while nationalisation has the occasional success story - this usually occurs when the State has come in to take over from a failing private sector firm (and please note: a bad private firm does not logically necessitate a slightly better public sector agent, it necessitates a much better private firm) – history has continually shown that it is not to be preferred to the much more efficient market of competition, enterprise and diversity.

EDIT TO ADD: As is usually the case, the measure of success is in the evidence. Here's evidence that the number of rail passengers has doubled in the times of privatisation, following years of decline under the State:

* Photo courtesy of

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