Siphoning off public money

I'm taking some comfort in discovering other people, like me, are suspicious of the idea that privatisation and competition are bound to deliver a better-value-for-money service. Since privatisation of the railways it has seemed to me that, in effect, the system was one that appeared to be one where, in effect, the government paid shareholders and my question is why not cut out the shareholders? How would that not be cheaper?

Now,I'm not so naive as to think it is quite that simple. The riposte is that the impetus of competition would cause operators to look at cost savings and clever improvements to produce more service for less money and that the savings would then reward the investment of the shareholders in the form of dividends.

But I say that this assumes too much: first that we have an accurate benchmark for deciding what a publicly run service would cost and charge in order to say to the private sector: 'beat that'. if we don't have a clear view of what the putative savings are, we can't really know whether the companies are just, in the words of the title of the article referred to here, siphoning off money into their own pockets. If we are talking about a subsidised service, how can that not be happening? And given that subsidy has risen not fallen, it would seem that these suspicions are likely true -in spades.

I'm also skeptical that the savings they could produce would actually offset the costs of setting up a private system with all that entails about bidding and risk etc:

... costs of fragmentation and duplication; dividend payments to investors; contractors' profit margins; debt write-offs; and higher interest payments to keep Network Rail's debts off the government's balance sheet. Taken together, those privatisation costs amount to around GBP 1.2bn a year, according to a new thinktank report (Transport for Quality of Life's Rebuilding Rail), while genuine private investment is estimated at barely 1% of the total funding of the railway. It's hardly surprising that the mainly publicly owned rail systems in the rest of Europe – several of which now run bits of Britain's privatised rail – are cheaper.

The artificiality of privatising what is a natural monopoly incurs costs, it is hard to think that those costs would not normally overtop any supposed savings and efficiencies that competition might reasonably be expected to bring. Therefore, if we pay the shareholders, we must be simply giving them money for nothing, in effect. Let's just 'cut out the middle men' and all the costly apparatus that supports them in a manner to which they should not get used. And if you point out that the shareholders are our pension funds, then I simply reply that robbing the state Peter to pay the people's Paul is no solution either.

Worse, there's an incentive for private companies to exaggerate their bids and bear the cost of the penalty because it is less than continuing to make the payments to the government in the latter years of the contract:

Greening claims FirstGroup offers the best deal for taxpayers. In reality it's based on heroic growth expectations of 10.6% a year and payments to government that are heavily loaded on to the contract's last few years. The company in fact has an incentive to dump the franchise as those payments come due, because they dwarf the cost of the bond penalty. If FirstGroup – which is walking away from the Great Western franchise – defaults, it wouldn't be the first time. 

It's no way to run a railway. And in fact we should probably question the privatisation matter more widely than railways: remember the fiasco before the opening of the Olympics when we found that G4 Security had not been able to organise security as per contract from LOCOG? We have to remember that these are not real markets: they are artificial economic environments and so there's no guarantee that the contracts and arrangements have been put together in a way that would justify the belief that the market will deliver; what will be delivered is an outcome that arises from the interaction of the contract and the calculations of the winner bidder. That may or may not be what was intended. And in the meantime, there's no easy way back from a situation where the company simply leaves you in the lurch. 

Let's also recall that 'The market' invoked is usually a theoretical abstraction; a model based on the idea of 'perfect competition'. It is this little thought experiment which usually lies at the root of fetishising  The Market. But of course it is not in any way the situation in these artificial 'garden markets' (let alone in actual life where companies frantically flee perfect competition by differentiation and all sorts of little anticompetitive ruses -and who can blame them: no-one can live for long in the kind of uncertainty and constant vigilance presupposed by the PC model -it makes for bad staffing; how much more enterprises). 

What is needed is real world data filtered from the ideological spin of either left or right, to tell us how things work in actuality. And, impressionistically, I don't think that G4S have given any great confidence that private is always best: 

Whitehall bureaucrats don't have a monopoly on bungling. Private sector providers aren't necessarily the slick, smooth operators they can seem when they bid for work. Despite G4S's massive experience, it appears to have bitten off more than it can chew. If the banking crisis taught politicians anything, it should be that having shareholders, a whizzy logo and a worldwide corporate footprint is no guarantee of competence. (Heather Stewart)

 Rail is a gigantic scam for siphoning off public money | Seumas Milne | Comment is free | The Guardian: