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The Greatest Financial Scam of All Time?

June 7, 2014

Well, somebody has to say it, so it might as well be me. Privatisation is very probably the biggest financial scam of all time. It dwarves anything else I can think of. LIBOR? Fiddling small change. The original Charles Ponzi? Amateur! There has been renewed talk of privatisation recently, as the coalition government seek to use it to help balance the books, the Royal Mail and the NHS being the principle targets. It has become an issue in the Scottish referendum campaign, so it’s important to understand what it’s really all about.

It’s a scam, and here’s why: not only does it not always do what it says on the tin, it’s actually impossible for it to do what it says on the tin. I call it ‘magic pudding economics.’ Here’s the theory: You take a publicly owned organisation that is providing a service, let’s just take the example of a utility company, and you sell it off. Now of course that means you get the proceeds of that sale now. Which makes this year’s figures look better. But this is when, we have been told, the magic happens.

We are expected to believe that after the sale, the magic of private enterprise, the wonders of competition, will deliver a better, more efficient service. At a lower price. Not only has this never actually happened, if you think about it for five minutes it’s clear that it cannot possibly happen. Because the new owners are taking essentially the same organisation and extracting from it not only the grossly-inflated boardroom salaries and bonuses we’re now all so familiar with, but also profits for their shareholders. The salaries and bonuses might be scandalous, but the shareholder profits represent a vastly bigger impost.

But what about the magic? Well, we’ve been told for years that the public sector is somehow by its very nature bloated and inefficient. That the private sector is intrinsically efficient, and that they will find efficiencies which will allow this financial alchemy to occur. But I have to tell you, I’ve worked in both the private and public sectors over the years, and there really isn’t that much difference. In the public sector we hired all the same management consultants, did the same courses, probably more of them. If anything the public sector was a bit better planned and structured, with the private sector more chaotic. By far the greatest boost to efficiency, and consequently to productivity, in my lifetime has been computerisation, and that has benefited us all, has it not?

So in the quest for these mythical ‘efficiencies’ the first thing the new owners usually look to do is to cut the workforce. Now if you’ve bought the pitch, this should be fine, right? Because being a public sector organisation it must have more staff than it needs. Well, if that was ever true, it hasn’t been for a long time. So although this will save the privatised entity money, it will categorically mean a decline in service standards. In the worst cases this can manifest in a collapse in safety standards, or in a condition known as ‘corporate anorexia,’ where the obsession with becoming ‘lean and mean’ results in a workforce so emaciated that it is no longer capable of fulfilling its core functions. But even with these savings, they’re still not making enough to satisfy the shareholders. There’s only one other thing to be done, and that is of course to raise prices.

Now, we’ve been using the example of a utility company, perhaps an electricity supplier. Everybody knows how much electricity prices have risen in recent years, and whilst rival companies may offer you a few pennies discount on your tariff if you choose them over their competitors, you’re still paying twice as much, as a proportion of your income, for electricity than you were when it was publicly owned. Even with the energy saving light bulbs. Aren’t you?

Now in some specific cases this produces a very perverse outcome. Some public enterprises make money, and others don’t. If they do it’s not usually much, because there are no shareholders to suck it up, so prices are set to slightly above break even levels. But I want to consider those which don’t make money. Like public transport for instance. Public transport never makes money. It’s not really meant to. It’s infrastructure, it’s there so everyone else can make money, so that people can get to work, goods can get delivered and the rest of the economy can function. So what happens when you privatise say a railway company which costs millions to run? Well, nobody is going to buy a loss-making concern, are they? That would be silly. So governments are forced to offer guaranteed profits, in the form of subsidies, otherwise they simply couldn’t be privatised. The new owners do their usual tricks of cutting staff and raising prices, but due to the need to suck more cash out in profits than can possibly be saved that way, they still come up well short of the revenues the government has guaranteed them. So we see the bizarre spectacle of privately owned enterprises costing us, the taxpayers, more in subsidies than they used to cost us to run when we owned them!

So what is the true purpose of doing all this, if it’s not about efficiency, better services and lower prices? Lloyd George used to say that there was one question which should be asked of any enterprise: Who does this benefit? Well, that is clear. Certainly not the customers. The only beneficiaries are the owners of these privatised entities. Therefore there is only one possible explanation – it is the deliberate transfer of literally trillions of pounds worth of assets from the public sector (which is you and I) to the private sector (which isn’t). Often at prices which turn out to grossly undervalue those assets. And they’re doing it again. They’re not even bothering to hide the fact that Westminster politicians, and very often their relatives, are positioning themselves to profit from the creeping NHS privatisation that threatens to engulf the English part of what might arguably be described as the UK’s greatest social achievement.

So now that you’ve thought it through, you may be wondering how it was that we were all persuaded to accept for so many years something so patently illogical. Well, strangely enough, that’s the easy bit. It’s known as ‘The Big Lie.’ The bigger the better. The more ridiculous, the more credible it becomes, because people think that nobody would make up something so counter-intuitive. And if you tell it often enough, people will inevitably begin to accept it. The Bush II administration in the US spent a little over two years consistently and deliberately mentioning Iraq and al Q’aeda in the same sentences, over and over and over again. By the time the invasion of Iraq came, over 60% of Americans polled believed that Iraq had attacked the US on 9/11. That’s all it takes. With privatisation we have had 35 years of the lie being repeated. A bit longer if you’re an academic economist, but for most people it dates from when Margaret Thatcher came to power in 1979. That’s long enough not only for people to start believing it, but for it to become something that goes without saying. It’s just accepted. It’s not even questioned.

Well today I am asking you to question it. More than that, I’m asking you to become, with me, the little boy who points out that the Emperor is wearing no clothes. Because it’s true, he’s stark, bollock naked, and it’s not a pretty sight. And we Scots will have a chance, a unique opportunity, in just over 100 days, to start again, with a blank sheet, empty of this discredited ideology. But, some will ask, what about everything we’ve got to lose? Well, I think it’s about time we thought about that too:

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Post Script – brilliant satire on the absurdity of privatisation by Australian duo Clarke and Dawe – The Energy Market Explained by Wal Socket, Energy Consultant:

 

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11 Comments
  1. You might be surprised (or not) to find I have often said very similar. Never quite understood how privatisation is supposed to lead to lower prices either.

    Great article, Derek and just as applicable to Australia as to Scotland!

    • Thanks Robyn! I added Australian tags as well, as it is definitely applicable, particularly in our current circumstances, with state and federal governments casting around for more assets to sell off. Of course it’s a zero sum game in the end, as eventually there’s nothing left to sell, and you are faced with the full horror of your true budgetary situation. 😉

      • I think very applicable to Australia.

        If there is a problem with democracy, it is that it risks encouraging a short-term view: from election to election.

  2. Reblogged this on Love versus Goliath : A Partner Visa Journey and commented:
    Although written about the UK with particular emphasis on the upcoming Scottish referendum, Derek’s words are applicable to Australia and many other countries. I’ve often wondered how private enterprise can be cheaper when profits and dividends must be considered. Think of them as extra “costs” to be included in the charges to the end customer. Plus, where are our income tax cuts when these entities are divested?

  3. Charlie Sherry permalink

    I totally agree with your analysis, privatisation is indeed a massive swindle, of course it is the transfer of funds from the public sector to the private sector ( Power elite) on a mamouth scale ! As you rightly point out, in order for them to get away with it, they create the ” “Big Lie” The Tories are doing it right now with the NHS down south and although we are sheltered from this just now, I genuinely believe if we don’t vote independence, they will eventually get their hands on the Scottish NHS through squeezing our block grant etc !

  4. An excellently written piece – actually, it’s common sense, as anyone who thought about it would have realised the first time they thought about it (and that’s a LONG time ago for me! 🙂 ) but it does no harm to have the situation spelled out again neatly. Ammunition to hit (verbally) unregenerated morons over the head with…

    • I have indeed been saying this since the early 80s, but it seems there are still plenty of people who haven’t thought it through, so this is to save them the trouble. 😉

  5. I just think it’s illegal to sell something that belongs to someone else. Did the Thatcher govt ever ask me if I wanted these things sold off? No. Therefore that government did not have my permission and being a Scot I and the majority of Scotland didn’t give her a mandate.

    Give them back.

    • Completely in agreement with you there David, absolutely no mandate from Scotland and, had the truth about privatisation been understood, there would have been no mandate anywhere.

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