The private sector is always going to be more expensive

So, you may be aware of David Cameron’s latest wheeze, which is being described as privatising the roads.  I’m not sure that’s an accurate description, and, frankly, neither is anyone else – not as the result of any failure of journalistic diligence, but just due to the fact Cameron’s comments are spectacularly vague.  Truthfully, he could be talking about almost anything, from leasing the entire motorway and trunk road network to private companies to expand and improve as they see fit (then paying the companies a ‘shadow toll’ from general taxation for each vehicle that uses the road), to a much more modest change, such as extending the length of the maintenance contracts already awarded to private companies by the Highways Agency.  The possibility of funding new road construction with tolls paid directly by motorists at the time of use seems to be garnering the most attention – probably because it’s the most unpopular – but would also seem to me to be the least likely to come to widespread fruition – precisely because it’s the most unpopular.  Unless I’m misreading the situation, this is a fairly obvious kite-flying exercise, and the vagueness therefore deliberate: the government want to gauge reaction to substantial change, but keep in reserve the possibility of being able to say they were only ever proposing minor changes if the grand plan turns out to be unpopular.

Obviously, there’s a range of problems with the plan, beginning with the standard objection to new road-building projects – that if you build extra road capacity you don’t get free-flowing traffic, just bigger jams in different places.  Then, too, there’s the fact that England is a very crowded country, particularly in its south-eastern corner, and our road network is necessarily going to be more congested than in other countries that have significantly lower population density.  It doesn’t matter how many roads you build, if several million people are all trying to move around the same small area at the same time it’s going to be busy.  But I want to take a step back from these immediate concerns, and look at something much more fundamental: the inescapable but ostentatiously ignored truth that the private sector is always going to be more expensive than the public sector when it comes to delivering any public service.

This basic principle really isn’t hard to understand.  Take the example of roads.  If the roads are owned and operated by the public sector then we, the public pay for

  • The cost of building the roads
  • The cost of maintaining and repairing the roads.

If, on the other hand, the roads are operated by a private company then we, the public  pay for

  • The cost of building the roads
  • The cost of maintaining and repairing the roads
  • The cost of funding the company’s profits.

A public service that is run in the public interest can be provided at cost price, but a public service that is run by a profit-making organisation has to be provided at cost price plus profit.  It occasionally seems to me that I’ve entered some kind of version of the Twilight Zone because nobody ever seems to ever make this point.

Occasionally you will hear the claim that the private sector will provide a given service more efficiently than the public sector, or with more entrepreneurial flair, because the people who work in the private sector are motivated by profit.  There are two major objections to this argument.  Firstly, it’s only possible to run a particular service more efficiently if there is scope to reduce costs; since most public services have largely fixed costs – an X-ray machine costs the same to buy and use whether it’s being operated by a privately or publicly run hospital – the scope for efficiencies is sharply limited.  Secondly, entrepreneurial flair may be a hallmark of entrepreneurs – which is to say, individuals working for themselves and putting their own money at risk – but the contacts for providing public services are never awarded to entrepreneurs.  On the contrary, they are awarded to large companies with salaried senior management – in other words, to corporate bodies that operate in a very similar way to public sector bodies.  There are ways people in corporate structures can be ‘incentivised’ (man, I hate that word) by things like performance-related pay or productivity bonuses to act as though they had invested their own money, but these can be applied just as easily in a not-for-profit organisation.

It’s not even as though there can be meaningful competition in most of these areas.  In the case of health care, for example, a large city might be able to support more than one hospital, but in smaller towns and cities there can only be one, making this a de facto monopoly – if there’s only one radiotherapy suite within 40 miles, there’s only one place the money for radiotherapy treatments can be spent.  The addition of private sector involvement won’t, on it’s own, make competition magically appear out of thin air.  It will just replace a monopoly that was run in the public interest with one that is run in the private interest – which is to say one that was run at cost price with one that is run at cost plus profit.

An interesting detail of Cameron’s speech was the way he spoke about the water supply industry in England:

We should be asking ourselves, ‘Why is it that other infrastructure’ — for example, water — ‘is funded by private sector capital through privately owned, independently regulated utilities, but roads in Britain still call on the public finances for funding?’

It’s interesting that Mr Cameron appears to regard the water supply industry as such a beacon of good practice, since many people don’t see it that way.  Many people see a deeply dysfunctional market, where consumers have no option about who they buy from, and the private water companies therefore have no incentive either to improve services or hold down prices – and only do either of those things to the extent they are forced to by a regulator that functions as a bureaucratic replacement for the pressure that ought to come from competition.  Many people see a monopoly that heretofore was run in the public interest being run instead in the interests of private profit; they see a service that used to be provided at cost price now being provided at cost plus profit.

It’s clear that David Cameron sees the replacement of ‘the public finances’ with ‘private sector capital’ as a necessarily good thing.  The question is why he does.  I mean, look at it from the perspective of a water customer.  She used to pay for her water by making payments to a publicly-owned water authority, where now she pays for her water by making payments to a private company.  From her perspective nothing has materially changed, except the cost: where once she paid for water and sewerage services, now she pays for water and sewerage services – and profits on top.  The great ‘improvement’ heralded by Mr Cameron has done nothing but cost her money.

Regarding this as a net benefit to society as a whole is only possible if you view things in entirely ideological terms.  It’s only if you insist that the public sector, no matter how efficient, is always bad and the private sector, no matter how inefficient, is always good that you can argue the situation a water customer (or a railway passenger, or, soon, an NHS patient) finds themselves in has improved.  If you take a non-ideological view – if you look, directly, from the perspective of the service-user/ customer – it’s obvious in an instant that replacing the public sector with the private sector is always going to be more expensive.

Profit-making entities have to make a profit, and non-profit-making entities don’t (the clue’s in the names, really).  Public services should be run on a not-for-profit basis, not for ideological reasons, but because – in circumstances where costs are largely fixed and meaningful competition is not possible – profit-making entities can add no value, and only add cost.

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