Will Hutton had an article in the Guardian yesterday that I did not have time to comment on (I do have a day job). In it he argued that with regards to the major public utitlies (electricity, gas, water, public transport, the Royal Mail):
What voters want is the best of both worlds. Public services run as public services, but with all the dynamism and autonomy of being in the private sector, not least being able to borrow for vital investment.
He said so in response to oft quoted stats that a significant majority in this country support renationalisation of these enterprises and yet no one (quite rightly) wants to return to British Rail sandwiches (although I would appreciate a return to British Rail engineering, which was world beating before privatisation).
Will argued that:
It seems impossible, but building on the proposals of the Big Innovation Centre's Purposeful Company Taskforce, there is a way to pull off these apparently irreconcilable objectives — and without spending any money.
I like his logic, which I will cherry pick as follows:
The government should create a new category of company — the public benefit company (PBC) — which would write into its constitution that its purpose is the delivery of public benefit to which profit-making is subordinate. For instance, a water company's purpose would be to deliver the best water as cheaply as possible and not siphon off excessive dividends through a tax haven.
The next step would be to take a foundation share in each privatised utility as a condition of its licence to operate, requiring the utility to reincorporate as a public-benefit company. The foundation share would give the government the right to appoint independent non-executive directors whose role would be see that the public interest purposes of the PBC were being discharged as promised. This would include ensuring the company remained domiciled in the UK for tax purposes and guaranteeing that consumers, social and public benefit interests came first.
He then argued:
The non-executive directors would (have to) deliver an independent report to an office of public services each year, giving an account of how the public interest was being achieved. It is important to have an independent third party: regulators, however good their intentions, too easily see the world from the view of the industry they regulate.
Critically:
Because the companies would remain owned by private shareholders, their borrowing would not be classed as public debt.
And because:
The existing shareholders in the utility would remain shareholders, and their rights to votes and dividends would remain unimpaired .... there would be no need to compensate them — no need, in short to pay [them to] buy the assets back.
And as he also notes:
But the new company's obligation would be to its users first and foremost, and would be free to borrow free from any Treasury constraint.
And:
Nor would any secretary of state get drawn into the operational running of the industries — one of the major reasons Attlee-style nationalisation failed. Inevitably decisions get politicised.
There would be penalties:
The aim would be to combine the best of both the public and private sectors. If companies do not deliver what they have promised, there should be a well-defined system of escalating penalties, starting with the right to sue companies and ending with taking all the assets into public ownership if a company persistently neglected its obligations. But the cost would be very much lower, because the share price would fall as it became clear it was operating illegally.
So, what would be achieved?
Britain would have created a new class of company. Indeed, there is the opportunity to start now. If Virgin and Stagecoach are unable to fulfil their contractual obligations on the East Coast line, the company should be reincorporated as a public benefit company. The shareholders would remain, but the newly constituted board would take every decision in the interests of the travelling public guaranteed by the independent directors, empowered consumer challenge groups and the office of public services — so that the taxpayer can trust her or his money is spent properly. Corbyn and John McDonnell have a way of delivering what the electorate want — and still keeping the industries off the public balance sheet. The circle can be squared.
That's the argument. Candidly I thin k it is a good one. I'd have been happy to have thought it up and to promote it.
But there have to be buts and there are buts, although they would also exist with nationalisation.
One 'but' is how does this square with the rights of employees? I can see how it does with consumers, but there are more stakeholders than government, investors and consumers. It is employees who actually deliver these services. I think more thought has to be given to them and their fair representation in such company.
And there is another 'but'. This relates to capture. How is it to be ensured that those new directors are not drawn from the same cadre of directors who currently run companies and who will as a result act in the same way as such directors always have, in the interests of a very limited range of interests and views? I see only one answer to this, and that is training. It is completely untrue that the skill to run a major company comes from a public school and legal and accounting training, or a conventional MBA. The skills in question are much more widely available, but that is not recognised, and it is also true that those with those wider skills are not provided with appropriate financial training, probably with the intention of providing a barrier to entry to the inner sanction of the board of directors.
Tackle those issues and I think this idea has some legs to it, using existing private capital for social gain, with the new rules simply being expressed as reform to existing regulation. That, as Will says, has to be a win.
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I don’t get what role shareholders play in this. Once the initial offering changes hands dividends are purely unearned income extracted from workers.
There is no shareholder risk since the company cannot be allowed to fail.
Richard, Will Hutton’s article shows a lack of knowledge of the rules around public sector finance statistics and specifically how businesses are classified to the public sector or not. Just because the shares are owned by private shareholders does not necessarily mean the business would not be classified as a public sector unit and its debt as public sector debt. The decision on whether to classify a business to the public sector or not revolves around who controls the corporate policy. The specific rules are as follows (http://ec.europa.eu/eurostat/cache/metadata/Annexes/nasa_10_f_esms_an1.pdf):
2.38 General government secures control over a corpo¬ration as a result of special legislation, decree or reg¬ulation which empowers the government to deter¬mine corporate policy. The following indicators are the main factors to consider in deciding whether a corporation is controlled by government:
(a) government ownership of the majority of the voting interest;
(b) government control of the board or governing body;
(c) government control of the appointment and removal of key personnel;
(d) government control of key committees in the entity;
(e) government possession of a golden share;
(f) special regulations;
(g) government as a dominant customer;
(h) borrowing from government.
A single indicator may be sufficient to establish control, but, in other cases, a number of separate indicators may collectively indicate control.
What Will Hutton is proposing regarding the role of government appointed directors, foundation shares, restrictions on where the business can locate itself, implicit or explicit government veto powers over dividend payments to tax havens etc all looks like government being in control of a large enough chunk of corporate policy to see the unit classified in the public sector. In which case you still end up with Treasury borrowing constraints.
It is slightly alarming that Hutton and his thinktank can have produced a report on this area without ever seeming to have read up on the rules and constraints these provide.
As I read it there is no breach of those requirements – and if there were then a lot of other businesses may be at risk
But candidly I don’t give a fig if there is because I do not care about the quantum of public debt
What I do care about is achieving effective governnance and not having to pay compensation
I think you’re wrong
But more important, you’re arguing on the wrong issue
A welcome contribution from Will Hutton. We clearly need new business models that deliver real improvements in service and value, instead of just cutting investment to maximise profits for shareholders. However, we must avoid the inflexibility and lack of innovation that too often comes with public ownership – particularly for automation and changes in working practices. Employees will never welcome investment which could lead to job reductions, or require new skills and changes to demarcations in the workforce. I don’t know, so can’t comment on the issues surrounding “driver only trains” which have caused so much disruption to train services, but we can only expect these kind of conflicts to accelerate dramatically in future. We are entering a new era of unprecedented automation, which could see many existing jobs eliminated entirely within the next 10 years. The correct response to this challenge is not to give employees so much power that they are able to effectively block technological progress. Instead, we need positive programs for training and re-deployment, backed up by the introduction of a national basic income. Any structure of ownership we put in place must aim to facilitate these changes, rather than setting up future lines of conflict between government and public employees over job reform.
A more straightforward problem is the question of how to get the right managers in charge, to which there is one simple answer. Just set fixed salaries and caps on benefits for board level roles. Executives driven by greed will simply not apply if rewards are below their expectation, leaving only those candidates interested in doing a good job for sensible pay. This approach needs to be adopted far more widely to replace a culture of “personal salaries” which is supposed to attract the best talent, but in practice simply pushes up executive pay rates relentlessly, regardless of performance. As a general rule the correct rate of pay should attach to the job, not to the person doing it, and this rate will of course be the same regardless of whether the job is filled by a man or a woman.
I think the idea for this new type of company does seem like a good idea too but to be fair to Rick part of Will Hutton’s justification for this is because of treatment of debt.
“The trouble is, it’s expensive: at least £170bn on most estimates. Of course the proposed increase in public debt by around 10% of GDP will be matched by the state owning assets of 10% of GDP, but British public accounting is not so rational. ”
This paragraph in itself sums up the irrationality of the ‘living within our means’ rhetoric. Proponents of Neoliberalism only discuss the countries debt and not the countries asset so they fail under their own flawed concept of treating the economy as a company, or as a household, by not having both sides of the accounts.
Agree with the last para, emtirely
Seems like an ALMO hybrid to me and we all know what happened at Grenfell Tower.
Not all ALMOs are the same. Some are just extensions of housing departments.
Kensington & Chelsea TMO is indeed acting like an ALMO in its management role but it is still a Tenant Management Organisation (TMO) first as tenants out number other board members on the Board significantly.
The ALMO I work for has equal numbers of tenant/independent and councillor board members on the board.
I see Grenfell more as a failure of the TMO model rather than the ALMO system (arms length management organisation) to be honest. K&B TMO may have taken on an ALMO role so as to access spare cash for investment from Government but it still looks like a TMO to me.
The issue with TMO’s is always one about sustaining operational competency from mostly volunteer tenant board members (as it can be with ALMOs) but the the purposeful over-representation of tenants on TMO boards means that the consequences of a lack of competency can be more pronounced.
My organisation has been checking our stock and we have not used materials such as those used at Grenfell in any of our refurbishments of the our tower blocks.
This is nonsense from Hutton and will never work.
When the change in law is proposed for these “new” companies the political cover for such an act will be to “improve” the running of the companies with more spending on customer service, higher pay and lower dividends.
As such it is enormously likely the shareholders will freak and simply sell, probably at a loss to their previous value. If you prevent them from selling then you are nationalising it and it will go to court for compensation of their loss.
When the share price falls low enough two things will happen, politically it will become difficult and scenting a long game some of the big city players will buy shares.
From that point you cannot win, if the government does nothing and the share price falls further you will have a storm over destroying value and “stealing” from pensions etc.
If the government relents and increases dividends or promises a more equal split of control, whatever it takes to prop up the share price then the vultures who bought low will report big profits and you will have a political storm…..why is the state making £100m plus for city vultures etc.
Either leave it alone or buy at the current price plus a small premium so the current shareholders leave happy, then you can do whatever you want with the company. This is like your pension theft commitment, trying to get something without paying for it because you don’t like the cost!
Do you think these ‘games’ cannot be anticipated?
Do you think there is no law on nationalisation?
And no precedents?
Come on…….
I think that for the fiction to work and shareholders believe they still own the company you will need to let them sell and have a floating value for the stock.
Anything else and the fiction fails, it becomes obvious the State has taken over the company but refused to pay for it.
Nothing said that the stock market listing would end
I can’t see this idea working, sorry.
Those that have ridden trains abroad know that most of the world’s Railway’s are public and that British fares are shockingly extortionate compared to most of those that you’ll find overseas.
Most of the world’s railways are public for good reason. To begin with there is the point about natural monopoly besides which some industries are just more efficient in public ownership. Healthcare is another example of that.
Hutton’s proposed model won’t have the benefits of public ownership because it won’t be cheap. It will continue on with the premise that the current level of ‘user-pays’ extortion is (and has been accepted as) the new normal.
It won’t be cheap because you cant have a genuinely affordable public transport system if you are out to make profits and provide shareholders with dividends etc. No matter how you dress it up those two aims are irreconcilable.
I also note with some distrust that Hutton’s piece contains two of the tiresomely predictable red herrings that often appear in the company of this topic:
1. Making comparisons with the old British Rail. You can do that (and Richard’s point about engineering was a good one) but for most purposes that time was too long ago. The more timely and relevant comparison is that which should be made with good public rail services in comparable nations abroad.
2. That nonsense about the “sandwiches”. Most of the world’s good public rail services delegate their food business to private suppliers in 2018 and most provide a variety of options. On points like that comparisons with the past are too obviously misleading and more likely to annoy the reader than win their support.
Just finally, I have seen the polls showing public support for re-nationalisations but I have yet to see any evidence that:
“What voters want is the best of both worlds. Public services run as public services, but with all the dynamism and autonomy of being in the private sector”
“What voters want” – says who? And as for the bit about “being able to borrow for vital investment”. This is one blog where I don’t have to explain why that is rubbish.
Thanks
Responding to this point by Mr Fante:
“The more timely and relevant comparison is that which should be made with good public rail services in comparable nations abroad”
The book “The Wrong Track” about Uk railways from inception to the 2000s notes that many of the mainland-Europe intercity rail services re-modelled themselves in the late 1980s and early 1990s on……BR’s Intercity service – which was considered an ideal model. So – back to the future on that point. On a related note: BR 2 could also usefully re-introduce Red Star – the best & cheapest parcel service I have ever used. A nice low cost earner (when you are running an integrated railway system.
Responding to you, Richard, & this point:
“How is it to be ensured that those new directors are not drawn from the same cadre of directors who currently run companies and who will as a result act in the same way as such directors always have, in the interests of a very limited range of interests and views?” – my broken record starts: the directors could be representatives who instructed by a committee of citizens – which could be as large or small as desired. citizens selected by lot & rotated in and out of the committee over time.
Thanks
Red Star worked
Think of the demand now
And all those inter hub road movements it could eliminate
Mike Parr,
Supposing I take your word about the “inter-city services” the obvious questions for me are:
Did they model their pricing on British Services? Apparently not?
Is there more to rail than inter-city services? Yes?
Is there more to the world than mainland Europe? I believe so.
Try taking a train in NSW Australia. I choose this example (from a range of many) because they have far greater distances to cover, a lower population and a decent, much cheaper service that people can reasonably afford. Many Brits have been to Sydney and adjoining areas so they know this.
There are no polls in Australia suggesting that a majority of Australians want privatised rail. Far from it. I would imagine that the same could be said for any nation where good public railways operate.
The points made in my previous comment were mostly about passenger affordability. Nothing that you have said addresses that issue.
“Supposing I take your word about the “inter-city services” – I’m quoting from the book it is zero to do with “my word”.
In the case of pricing: French services, high speed or otherwise are very good value for money compared to the UK. However, SNCF have very very big debts. They also have a crumbling network outside of the TGV lines – due to a focus on TGV. Price comparisons with Europe are relevant since from a climate & structural point of view European countries have similarities. For clarity: I wrote a number of reports on rail for a japanese company in the late 2000s which led to “some events” in the Uk that doubtless you are familiar with. I thus comment as a reasonably informed person & not as a rail user (although I’m that as well).
I cannot see shareholders, most of whom are institutions or foreign, as well as executives through their share-options, being happy to see a 5 ton elephant sitting on them preventing them from “encouraging” the directors to maintain their de facto strategy of “maximising shareholder value” (even though that’s not their legal duty) through the usual means of share-buy-backs, returns of capital, short-termism and all the rest of the creative devices used to increase dividends and share price. Might not the shares might become un-tradable and worthless? “their rights to votes and dividends would remain unimpaired” is surely disingenuous.
In your October blog on Nationalisation you suggested funding by QE gilts, long- or un-dated and very low coupon. Seems a better solution to me. If that’s still the case, then the important issue is how to create a company which will meet the social and economic aspirations and functions the government and public demand of it.
Did RBS become untradeable and worthless?
And is Sprts Direct?
Shall we get real here about what markets are actually quite happy with?
I’m not sure what you mean by “get real”.
I suppose that it is conceivable that these hypothetical companies could operate as some sort of solid, blue-chip, no-risk, low-return investment with modest reliable dividends – and then attract investor support from the sort of people who want that. Although that suggestion does raise numerous questions.
At any rate that’s from the shareholder view. From the public’s perspective I fail to see the point in retaining these companies. The only point that I can find is the suggestion that ” there would be no need to compensate them — no need, in short to pay [them to] buy the assets back.”
Are we who are fondly familiar with this blog not also aware that that point is ultimately not much of a point at all? Especially not on a major, long, long-term decision like this. I won’t explain the MMT case or the PQE case. We know those. And besides, this “compensation” is not a direct loss or just any form of simple compensation. In national accounting terms is there not some considerable offset that applies to government net capital formation? I recall that there is (the exact details elude me at the moment) and that offsets would certainly apply to the acquisition of an asset with a revenue stream. Think of the ‘Red Star’ example above.
We know this
Andcwe know the public does not know this
So realpolitik requires a process of adaptation
Hence Hutton, maybe
In saying this I am not trolling or being insistent for the sake of it – but, just thinking it through and developing the conversation, I would say that in realpolitik terms it is quite likely that the public isn’t all that concerned about the technicalities of funding an affordable service. Not any more (perhaps not ever).
People on modest incomes just want their trains back
Point noted
Thanks
So why ditch the “QE” arguments of http://www.taxresearch.org.uk/Blog/2017/10/01/the-public-want-nationalisation-because-nationalisation-makes-sense/ which received a lot of support from contributors in favour of what looks like a way of placating those who don’t understand MMT, and who, as Marco points out probably don’t much care about the technicalities?
I don’t nece3ssarily think I have
I think there are steps towards it that may help in some situations
I see no reason Tim be closed minded either so I thought it worth sharing another view that may help pave the way
All politics is about compromise
All good public investment feeds into local land values. Let’s remind ourselves of the story of the Jubilee Line Extension: cost to taxpayers £3.5bn, increase in local land values £13bn. There is a simple way to fund infrastructure without putting an excessive burden on users: LVT.
I think that we need to look wider at the issues with railways.
Although I agree with at least trying Hutton’s idea in regard to service operators, what about the Rolling Stock Leasing companies and the over-complicated and expensive way that works? What used to be working together is now just a means to print money. A market has been made and those in it are motivated by turning in a profit. Everything about service provision now is too transaction orientated.
In the good old BR days , those days were good because we had relief trains when there was over crowding. The operation watched passenger behaviour and responded. There were always extra locomotives and rolling stock on hand that could be marshalled to form a service at short notice.
Now everything is treated as an asset and if it is not in constant use it is then listed as stored to avoid being seen as idle or as an excuse not to maintain it well enough to be used. There is rolling stock and motive power in sidings all over the system just sitting their rotting away in the name of efficiency.
These days, the rolling stock is programmed it seems for the expected service level timetable and then anything extra to that must come in terribly expensive if needed at short notice (unless it fails and how many times is a service cancelled because of no extra stock around?). It is not a way to run a service.
Every day the 07:30 departure form my local station is standing room only when it gets on the main line. The 17:30 and 18:30 return journeys are very often the same. And yet the same 2 car train is used in all cases.
At weekends a 1 car train on the same line has to deal with football traffic if the local team are playing at home. The train is dangerously overloaded with people sitting on the tables. Once again, the operator knows this but nothing changes.
You don’t have to supremely intelligent to realise the money that is being made by under providing carrying capacity on our rail system. Get rid of the leasing companies please. Now.
We could do what mainland Europe has done and move to the Berne gauge which would mean bigger car bodies, more room and more carrying capacity per train. Think of the SNCF outer urban trains around Paris. But no, instead we decide to build a new high speed line instead of re-gauging the network over a long project time scale.
The Great Central route was built to the Berne gauge and it was mostly closed down. What visionaries we Brits are!
Having said all that, I do believe that the profit motive is too far to the fore in many of our public services. Orthodox economics completely ignores the positive ‘externalities’ of rail stations on house prices, cheap fares on disposable income (and therefore what can be done with those savings in the rest of the economy) and electrification.
As for me please bring back the Merrymaker excursions. And a revamped early morning Nottingham – Glasgow train routed over the Settle and Carlisle, loco hauled throughout would go down nicely too.
BTW – My favourite station buffet used to be on the down Platform at Grantham. It used to be more central on the station than it is now with two brass handled green doors that used to swing open back and forth every time non-stop a Deltic powered express used to blast through on the way to Kings Cross. The buffet used to serve a wicked cup of tea and I never ever had a curled up sandwich not once. Ever.
What fairy came up with cost of re-nationalization as £170b.
All the investment and funding and hence value came from the taxpayers, customers and employees. “We need to increase our prices because of the investment that is required”. Naturally people need a fair price for their input. I suggest the correct way to do this is to separate Capital and Labour and measure the contribution of each. So the directors and major shareholders (Capital) are set to work and the workers are sent on holiday. After a suitable time period the roles are reversed and Capital is sent for a well earned rest.
I estimate the ratio and hence value of the two outputs would approximate to 99.99999999999 for labour as opposed to 0.00000000001 for Capital. That I suggest is a good basis for a valuation. So I reckon we could offer £1.70p.
Some people may object and say that is too much. I say so what. We should be nice to rich people.
I see that Wolf is writing rubbish again. He’s really past his sell-by date. The carbon tax plug at end is only good bit. https://www.ft.com/content/0470ad62-f623-11e7-88f7-5465a6ce1a00
As someone commented his argument is assertion and selective memory – unencumbered by evidence. And boils down to bad management, chronic underinvestment, dire performance and a drain on public finances. Might as well throw in greedy obstructive workforce as well.
But these are the sorts of arguments that need to be rebutted along with a convincing rationale and perhaps an alternative to somewhat toxic term of Nationalisation.
Personally, I would prefer a different paradigm altogether (of which nationalisation would be part), one based on the kinds of obligations a government owes its citizens as it works towards the creation of a decent society based on liberté et égalité. Such as: the provision of quality housing; cheap fuel, water and food; a national health service; cheap, efficient, comfortable, reliable public transport for every community; cheap access to the law; employment for those who want it; realistic pensions and so on.