A Future History of privatisation, 1992 - 2022
The Economist 21st December 1991
Norman Macrae looks forward to the end of politicians.
IT is possible that the word "privatisation" first appeared in print in The Economist, just over 30 years ago, It was suggested by somebody now dead, who may have subconsciously pinched it from some-thing published earlier somewhere else. For those who used it in these columns, the word then seemed part of a hopeless crusade. In the 1960s it was hard to persuade even sensible people how wrong were those like J.K. Galbraith, who told eager politicians that the interests of the poor could be served best by spending much more of GDP through politician-dictated monopolies in-stead of market-leading common sense.
Actually, in the 1960s rich countries were achieving marvellously greater equalisation in almost everything provided by private enterprise, but the underclass became further downtrodden in America's and Europe's inner cities whenever services were instead provided from the public purse. For the first time in history, millionaires and welfare mothers were spending their leisure hours in the same way: watching the same television programmes, from armchairs of the same comfort in similarly heated rooms, while other consumer durables spread to the living rooms, kitchens, bathrooms and (in some countries) parking spaces even of the few unemployed. So did opportunities for holidays in the sun and purchases of clothes; remember that in 1945 the average Englishman had owned only one pair of trousers. Supermarkets spread from the suburbs to the slums, and found similar expenditure per consumer there.
There was no such equalisation between suburb and inner city in things where public servants spent increasingly more of the taxpayers' money. This was especially true on the worst public-housing estates, from which 90% of an area's crime might emanate; where it became unsafe to walk down graffiti-desecrated corridors, because anything that belonged to the community was deemed to belong to nobody; where life deteriorated into drugs, hopelessness, squalor.
The great divide
The luckiest young Londoners returning from the war in 1945 were those whose applications for flats in these great new tower blocks overlooking the Thames were, to their fury, turned down. They had to buy, for perhaps £1,500 in 1950, supposedly shoddier homes built by "speculative" builders several decades before, with weekly mortgage payments at about thrice a favoured council tenant's rent. Forty years later they had a capital asset worth perhaps £150,000, while the "favoured" tenant had something worth nothing, except a vicious circle of hell. In the inner cities, police protection, state education, safeguarding of poorer people's life environment grew steadily and - for both taxpayer and customer - ever more expensively worse.
After vast inpouring of public money, people in poor areas had to send their children to more modernly-built but much nastier and less parent-selected schools, where their kids had a growing prospect of being turned into drug-addicted delinquents. After quadrupled spending police protection in the Bronx, the prospect of a mugger being apprehended there fell to under 2%, so mugging became an attractive way of teenage life. In Lyndon Johnson's presidency, 1963-69, America created a huge welfare state, which proceeded to cripple instead of aid its clients. All of the forward indices of misery (illegitimacy, welfare dependency, lack of neighbourliness, crime, drugs, riot so as to loot) grew worse.
In Britain the "commanding heights of the economy" had been nationalised originally on the argument that it would be too easy to make vast profits in these great monopoly industries (like coal, rail, steel, ship-building, public utilities). As soon as the state took over these industries, they plunged into vast losses instead. They were operated in the interest of their unions, instead of their customers, and without any innovative spark. If a middle manager in a private company thinks his boss is making a horlicks of his job, he can set up another firm in competition. If he is in a state firm, he writes a memorandum which says the boss is making a horlicks; and loses all chance of promotion. In Russia he got shot. The inefficiency of state spending in rich countries was shown further when the mighty United States began to lose a war to slightly ridiculous North Vietnam, despite spending 1,000 times more money on its arms and soldiers than did Hanoi.
Nobody listened, then everybody did. At the time I was doing some moonlighting work with an American management consultant. Together we tried to invent new Greek-derived words, distinguishing between activities which were wholly driven by customers' demand (and were generally succeeding), and those driven by expenditure of taxpayers' or sometimes private money (whose productivity declined with each extra zillion pumped in). None of these Greek words caught on. In The Economist we tried terms like recompetitioning and privatisation. Privatisation was meant to signify the return to profitable private motivation of anything that had declined through unprofitable state intervention, in Europe usually through state ownership, in America usually through excessive regulation (including what Herman Kahn called "health and safety fascism").
The clear advantage of privatisation was that everybody working in private businesses, from the entrepreneurs to the often non-unionised workforce, got more money if their new ways of doing things succeeded (a success they sometimes overhyped). If they did not attract more customers, they went bust. People in public activities soon learnt that they got more money if their settled ways of doing things failed, because then they could wail that governments must pump still more money to them.
One school in south London produced 80% of the juvenile delinquents in its area; the educational authorities directed ever more money to its often absentee and strike-ridden staff; because so many of their pupils were truant (sometimes after a hard night mugging), they clearly faced "special problems". Today's Soviet Disunion produces far more wheat, rye, potatoes, barley than the United States; yet Moscow faces bread riots because most of it fails to reach the shops. This is because the distribution system is socialist, so nobody has an incentive to move the stuff (as distinct from either staying away or turning up just to fill forms).
That is also true in many town halls across the free world. Morale has naturally deteriorated in all the activities run in the failure-welcoming socialist way. Economic decline has correlated closely with the proportion of the workforce in public-sector jobs, from Merseyside (way above the British average) to Brezhnev's Omsk(100%). But during the 1970s those of us who appealed for reform via privatisation were still generally regarded as nuts. The word barely appeared in Margaret Thatcher's 1979 election campaign.
Then it took off. In the past dozen years, 1979-91, privatisation has become a real policy in more than 70 countries. Although the lead was given by Thatcherdom, some of the most extensive privatisers have been Labour governments in Australia, Scandinavia and Spain. Privatisation is seen in all the ex-communist countries as a means through which industries and services long buried under dead socialism can bring some springtime to the frozen earth above. The policy has taken wing in Japan (telecoms and railways) and the Asian dragons. It stumbles forward in the third world. Less than a decade after the Falklands war, British merchant banks are drawing fees from a Peronist government for advising on privatisations to stop Argentine industries being mismanaged by Peronist colonels. No-body could have imagined this 12 years ago.
Unfortunately, much of it is being done the wrong way. Fortunately, the scope for further privatisation is everywhere huge. The rest of this article sketches a plausible future history for privatisation. The suggested timetable will be wrong, but things will move this way. Parochially, in a viewspaper published in London, this future history will most often be told as it may develop in Britain. Other countries may move at a faster pace, but this blinkering will protect the article from being diffused. It will also help emphasise that party political changes will not slow the caravan.
Kinnock privatises coal and rail
Start with the two industries which the British Tories have promised to privatise if returned to office: coal and the railways. In our scenario these would be privatised even by a Kinnock Labour government in the 1990s, although for opposite reasons.
The fudged three-year agreement, whereby privatised British electricity firms have to buy some uneconomic British coal, runs out in 1993-94. The European Commission will be bound to forbid continuance of this clearly anti-competitive arrangement. The number of viable deep British pits will then fall from today's 68 to about three. The Kinnock government would not want a nationalised coal company to fight the long strike with Arthur Scargill about this. It will therefore say that wicked Brussels has ordered coal privatisation (which it virtually will have done), and that the pits to remain open must be decided by the market.
Some of the abandoned pits may have coal drawn from them by any teams of miners that find this economic, rather like anybody can go blackberrying. At first the attempted safety regulations will be tougher than potholing, but will then decay. In America the safety people were pilloried when they demanded the installation of a stretcher by the owner of a one-man mine. In the 1990s opencast mining, at present environmentally unpopular, will become environment-loved. The opencast machines rip off the topsoil, but are then required to replace it in the form that local people want which is no longer for agriculture, but as golf courses and pony-trekking land. This helps mitigate one of the worst drains on enterprise, which is that planning restrictions tend to forbid any land to be turned to alternative use.
The railways will gain from the prejudice against changing land use. In the 1990s and 2000s crowded countries like Britain will sensibly turn to charging for occupying the roads. An electronic attachment on each vehicle, especially each lorry, will be activated whenever it enters an area where it adds to delay-causing traffic jams. The bill will be sent to the vehicle's owner, and be-come quite high. Coupled with technology that makes it much faster to load and unload containers at railhead, railways will be ripe for privatisation.
As argued by Oliver Letwin (the Tory candidate standing against Glenda Jackson in Hampstead), a privatised railway system will become rather like an airport. A centralised body (which may not be privatised until the 2010s) will run the safety and signalling system. If anybody in the early 1950s had said how many thousandfold would rise the passenger miles flown on the airlines, and yet with a large drop in accidents, he would not have been believed. His surprise would be greater when told that efficiency would increase fastest when Ronald Reagan sacked all America's public-sector air-traffic controllers for going on strike. Today, incoming and take-off aircraft rarely run into each other, even though landing slots are being "chaotically" sold through private agents, even though all sizes and speeds of aircraft are taking off from and homing into the same narrow and some-times foggy runways. Thus it will become with the privatised railways.
The opening of the Channel tunnel will allow new railway locomotives into Britain, which are half as expensive as British locomotives now and of much more varied design. Light railways (often driven by computers, sometimes by volunteer commuters) will run from exurbia to connect with rush-hour commuter trains, suddenly making profits again. Lush cruise trains will take rich Americans and Japanese through the cultural centres of Europe. The end of duty-free drinks at European airports in 1993 will be mitigated for international trains, the one form of transport where booze does no damage. Slightly more important, the railways will make money from the fibre-optic and other cables or the new-technology pipelines laid beside their tracks.
Most important, property development will boom at stations and on other parts of the railways' ridiculously underused land. The world's richest billionaire in 1991 is a 55-year-old Japanese who spotted the money to be made from railway land in Japan. By the early 2000s the successful privatisation of British Rail will be followed by privatisation of the Bundesbahn, the trans-Siberian railway and every other railway on the Eurasian land mass.
Other utilities will follow
The success of railway privatisation will set the tone for the proper competitioning of other utilities. In electricity the grid should usually belong to a separate organisation, and entrepreneurs make money by feeding competitively into it. By the late 1990s the partial success of British electricity's privatisation will mean there is some sort of commodity price per kilowatt hour of electricity on the European grid. Suddenly scientists will manage, eg, to isolate hydrogen from something in which it abounds, like seawater, and feed it as a power source much more cheaply into that grid than electricity from coal or gas. This will be followed by the discovery of ever cheaper ways of releasing energy from storage in matter. All will come competitively into the grid.
In the gas industry, British Gas will have lost its monopoly, because cheaper gas from Siberia will have to be allowed into its pipelines, after the 1996 free-trade agreement with the post-Gorbachev Soviet Union. During the brief 1991 Gulf War the Japanese invested in ways of bringing frozen natural gas from all round the Pacific. These will succeed. The near-bankrupt oil wells of the Middle East will have to follow, by exporting similarly cheap gas by all means to Europe and America. As energy prices fall, food prices will dramatically accompany them. After free trade with Russia, the EC's common agricultural cartel will collapse. Cheap food will pour in by rail from the black earth of Ukraine, as cruise trains to Samarkand pass them the other way.
Telecommunications (whose grid is anyway disintegrating with mobile telephones) and television (recompetitioned by satellite) will also leave the public sector entirely. In tones similar to today's lessons about 19th-century child labour, sociologists will tell with horror of the exploiting classes' device named the BBC. A poll tax (called the licence fee) was levied on every family, even poor widows and pensioners in Hackney, in order to impose on them toffee-nosed programmes which only the upper middle classes (in the name of "culture") thought they wanted. Actually, as we will soon learn, the BBC's brief 74 years from 1922 to 1996 were when British culture rotted worst, because it was brought under duopoly control.
Then everything, including the policy
During the late 1990s the privatisation of the social services will gather worldwide pace. The first privatisations will take some disguised form of the "voucher" system discussed for decades. Everybody except the teachers' unions will see that schools should get money only if they attract pupils. Dreadful schools, which parents shun, should be closed. Each child will carry a voucher, paid for by the state, to the school of his choice. "Choice units" in each area will take parents round available schools, to show what is on offer. Many people will rightly say that children from disadvantaged backgrounds should have specially topped-up vouchers, so that schools should compete most keenly to attract them. At juvenile courts, orders will be made to increase the vouchers for offenders; some-times the parent will be ordered to pay the topping-up.
Both the American and British health systems will gravitate towards a system of health maintenance organisations (HMOs, or bodies that compete to get your capitation fee, and then seek to provide all your health-care needs as economically as possible). In America the present fee-for-service system has proven quite uneconomic. Doctors make more money if they treat patients as expensively as possible after they become ill. The patients do not mind this money being spent, because it comes from insurance cover paid for under tax incentives by their employers. In its umpteenth attempt to stem the federal budget deficit, sometime in the 1990s, the American Congress will see that it can save tens of billions spent on hypochondriacs a year if it grants tax relief on employers' health insurance only up to the point where everybody can pay a basic HMO capitation fee. If anybody wants more expensive fee-for-service medicine, he must pay for it out of taxed income.
Britain's NHS has always had something like an HMO system for its family doctors or general practitioners (GP's). But nearly 90% of British government NHS spending has gone to hospitals with hierarchies of state-salaried doctors, nurses and far too many trade-unionised workers (three times as many as in some of the better Japanese hospitals). The GP system, whereby Britons choose their family doctors and the government pays those doctors a capitation fee, has been reasonably successful. By any criterion of cost effectiveness, the NHS hospital system has not. In 1991, amid loud and sometimes mendacious political controversy, some seeds of reform have already been sown.
Under the 1991 NHS reforms, budget-holding family doctors will compete to get patients into hospitals without waiting lists, and hospitals will get more money only if they thus attract patients. There are only minor and gradual steps from this reformed NHS system to a proper HMO system. Under any governments in Britain, those steps will occur. They will probably occur rather faster under a Labour government.
Labour 1992-96 will have less public money to spend on the NHS than the Tories, because it has promised to spend so much more on other things, and (partly thereby) is bound to scare more money out of the country. Labour will have to try to spend the annual £30 billion or so on the NHS more effectively. The row about Tory reforms is that Tory "trust hospitals" then proceed to sack workers. Since British hospitals have long been overstaffed, that is what any reforms (including Labour's) will have to aim for.
British prisons have long been a ridiculous public service, with negative gross production. They create recidivists, instead of cure criminals. A 20-year-old who is sent to prison is more likely to become a habitual criminal than one who narrowly escapes being sent there. America has moved towards some private-enterprise prisons, whose entrepreneurs will be paid more if their inmates do not recommit offences. In the decade 2000-10, governments will recognise that the same "recompetitioning" is also highly desirable for the police.
Modern police forces have huge computer files of genetic fingerprints, ordinary fingerprints, case histories and behaviour patterns of particular villains and for particular crimes. These files are secret to everybody except the police, who (being a public-sector body) are PC Plods who are not innovative at using them. In the early 2000s the increased efficiency of hackers at breaking into secret files will bring scandal about the police into the media in many countries. There will be accusations that the police are deliberately not tracking down some big gangs of criminals, ostensibly because those criminals are paying them with information about other criminals, but really because they are paying them money. In Britain police will be found still concocting cases against black people, Irish people, long-haired youths, short-haired youths, other folk they dislike. The interesting question will explode: why should police files be kept secret?
Some civil libertarians will say "the police have to keep secret the record of petty offender Joe Bloggs, because it would be wicked if all his neighbours know it." A compromise will be effected whereby each computer file, though thrown open to investigation by many competitors to the police, will have a number instead of proper name attached. After a certain stage in a criminal career, even that anonymity will be removed e.g., for the under 1% of people who commit over 50% of some crimes because, on release, they go straight back to offending and soon to prison again. Even in the early 1990s, each year spent by anybody in prison in Britain costs the state £25,000. Gradually, the whole unsuccessful police and justice system in most countries will be transformed, by recognising that it should be a modern open-to-everybody information industry.
By 2000 the cost of lawyers will be falling fast. People will recognise that most of the work of lawyers can be done more quickly by telecommuting into programmes that interpret the statute law of England. Those programmes will answer the specific question you have posed via your personal computer. Cases in non-criminal law will then increasingly be settled by each side putting its case to the computer, and agreeing to accept its verdict.
When a suspected criminal is arraigned before a court, the first question will at last rightly become "did he do it?" Until after about 2010, suspects will still be able, if they wish, to insist on submitting themselves to the present lottery system of adversarial lawyers, widely differing juries and erratic Lords Justice. But more and more criminals will agree to plea-bargain after seeing on computer file all the evidence against them, and the computer's judgment of how little chance they have of getting away with their defence.
The courts will then usually go on to the next and civilised question, though preferably with the lightest punishment: "how best can we discourage you from doing this again?" There should be lots of competing organisations offering "if the state will pay us the £25,000 a year that it would otherwise cost to put this man in prison, we will try to reform him within the community in the following way. If he recommits an offence within a certain time, we lose our fee." Sometimes that will require electronic tagging of the man concerned. If so, he should have some choice of which regime he prefers. There will be an increase of "bobbies on the beat" (i.e., policemen within the community), but various competitive bodies will start submitting tenders for this job saying they will seek to simplify their tasks by, e.g., better street lighting near notorious trouble spots.
Then, around 2010, local authorities will begin to change their way of providing municipal services. It is absurd that you should have to vote either Conservative or Labour when choosing who best can man-age your drains. Multinational corporations will appear On the ballot for local elections. They will say: "We will charge only this level of poll tax or property tax. We will promise by contract to reach the following targets for reduction in the crime rate, for environmental cleanliness, etc. If by the judgement of independent auditors we fail, we will have to remit some of your property tax to you. But we are confident we can fulfil this contract, and make a profit for our-selves at this level of property tax. Liverpool and New York city will be-come two of the first areas to elect commercial firms instead of politicians as their municipal authorities.
The poor and the military
By 2015 there will be only two main "public goods" left in the sense economists use the term (things best provided by government rather than markets). These two remaining public goods will be redistribution and military protection. These will then become competitivised.
Some part of redistribution can be handled by insurance. "I want to make sure my income never falls below half the average income": for some people, that could be an insurable risk. Others, such as the handicapped, some elderly and a few children, need special help. This can best be provided competitively. Children in the care of local-authority homes in Britain have an appallingly higher delinquency rate than other children, including those from equally troubled families but foster-parented or in charitable institutions like Barnardos. "Public sector" means there is a trade-union row if employees are sacked for mere inadequacy, or for monstrous incompetence. In institutions on performance contracts, there can be a continuous search for methods that succeed.
These performance contracts will eventually spread to tackle poverty. In the early 1990s the United States has 13% of its population below the officially defined poverty line, but an American has less than a 1% chance of staying long in poverty provided he or she does three things: completes high school, gets and stays married (not necessarily to the same person), stays a year in his first job even if at the minimum wage. People will start to bid for contracts to try to help "endangered people" thus to avoid being long in poverty, and some of the con-tracts will work.
The future of defence can be seen from what happened in the Gulf war. Long-distance rockets can already be pinpointed down the bedroom ventilator of any dictator, or on to any of his lorries and tanks. More sophisticated weapons than that are not going to be needed any more. Idealists say that military operations should be put under the control of the United Nations. Since many of the nastiest dictators have votes in the UN, that would not work. But in the next two decades NATO will more or less join with the old Warsaw Pact, in what will become a rich man's club.
NATO-Warsaw will keep a register of arms sent to any poorer countries, and will start to forbid any such sales. It will gradually assume a world policeman's role. It will equip itself at lowest price with stuff that actually works and will therefore probably buy much of its electronic hardware from the Japanese. It will recruit its soldiers in the cheapest high-quality markets: Gurkhas, Britain's SAS, Sons of old soldiers from various villages round the world with fighting in their blood.
By the 2020s it will be recognised as absurd that only the Republican and Democratic parties should field serious candidates for (say) the 2024 election for president of the United States. A competing "contractual" candidacy will be emerging a cabinet team who say they will never raise income tax above 10% (watch their lips), but will contract to provide government of the following quality...