The hazards of privatisation

by Seamus Saidlear

Privatisation of infrastructural systems like electricity, telecoms, water and gas is a gigantic mistake. It removes control of essential public services from governments without leading to really cheaper services.

Gas and water that use pipes, phones and electricity that use lines, and transport that use rails and roads are natural monopolies. If you sell them you get private instead of public monopolies, and the private monopolists are not subject to democratic control, as governments running public ones can be.

Ireland's experience with privatising the telecoms firm Eircom shows the truth of this. Thirty years ago Ireland had a poor phone service. The government decided to replace it with the most up-to-date system available.

The order was given and implemented. Twenty years later the IDA could still use the boast of Ireland's world-class phone service to attract foreign companies to Ireland.

Some years ago a decision was made in favour of a broadband system and the talk was of Ireland becoming the e-hub of Europe. Eircom was now privatised and dealing with private companies stymied this ambition. The government has had to pay private firms to bring lines around the country. Firms like Eircom that promised to provide this failed to do so. When NTL bought Cablelink they promised that they would upgrade the system so as to provide Broadband via their cable network. Now they say it would cost too much todo this.

At present the Irish government is shelling out close to 100 million euros to put a Broadband network in 19 towns across Ireland. Backbone networks are being built by the semi-state firms Bord Gais and the Electricity Board, and without them the Government would have to pay private firms to do the job. We had hopes of being an electronic hub, but with private firms waiting for hand-outs before doing anything, plus the high prices they then charge for the services they do provide, this looks unlikely to happen.

At bottom the privatisation push is due to the EU. EU directives order that state monopolies be broken up and that competition should replace them. This is folly as regards natural monopolies like those mentioned, where it does not pay different operators to supply the basic infrastructure. The break-up of a state monopoly into several firms does not get rid of the monopoly.

Britain tried this with its rail system. The result was firms that became local monopolies in their own area, which proved harder to regulate than the national monopoly.

Does privatisation lead to cheaper services as claimed? The normal result of privatisation is a cut in staff numbers and a big increase in management salaries, especially those of the top executives, who may expect increases of up to ten times their previous salaries in the public sector, if things go smoothly. The work the former employees used to do does not disappear. It is now "outsourced," done as contract work or by temporary staff. If the people working in the outsourced area are included with the remaining company staff, it will be found that there is little if any reduction in total numbers. If there is a reduction, then services that were formerly given to customers are just no longer provided.

Out-sourcing work costs the firm less, as there is no longer need for sick pay or holiday leave. In slack periods there are no staff working and so no pay costs at all, and of course there are no pension costs. As there is no 'free lunch' in the world, who actually pays for this? The taxpayer does in the form of dole, social welfare pensions etc.

These 'savings' from privatisation usually result in shareholders getting a dividend and management a bonus, but the customer does not get cheaper or better services. That will only happen if the state-appointed regulator is in a position to bring strong pressure to bear on the firm and the Regulator is seldom in a position to do this.

If you are a private firm and have bought part of a previous public monopoly and inflation makes you seek a price rise from the public Regulator, your position is not weak. If the regulator refuses the price rise, the private owner reduces maintenance costs as much as possible and does not upgrade the system. This will save enough to enable you to still show a profit and pay dividends and bonuses. This can go on for years until the system you are running is on the point of complete breakdown.

You should go on pension before this happens, giving yourself a golden handshake. Let your successor then go to the government and say: “Pay us to rebuild the system or you will have to take it over and do it yourselves!”

Another way in which privatisation is expensive for ordinary consumers is that when a government decides a state company should be privatised, it has to show the private market that it is making plenty profits. People will not buy shares in firms that are not going to make them money. To ensure the public shares are bought when they are placed on the market, the price charged for the firm's services will be greatly increased before privatisation. This happened when Northern Ireland Electricity was privatised. As a result for a time they had the distinction of having the dearest electricity in Western Europe.

In the last two years the Republic's Electricity Board has had several price rises, and now instead of having the cheapest electricity in the EU, its cost equals the EU average. A few more rises and finance minister Charlie McCreeevy should get a good price for selling off the ESB. But does anyone think this is good for the customer?

As regards electricity Big Business is in a position to build their own generators or threaten to do that unless they get special pricing deals. The ESB had a report at the start of talks on privatisation which said that the price to ordinary householders would have to rise significantly so that cheaper rates could be given to big corporate customers who would go elsewhere unless they got special deals. So for the ordinary man privatisation of infrastructure costs him extra now as a customer and will cost him extra later as a taxpayer, while those owning and managing the private firms rip people off in all sorts of indirect ways.

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This document was last modified by David Granville on 2004-04-01 08:58:46.
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