IFS Attacks Labour’s Takeover Plans

 The Institute for Fiscal Studies (IFS) is on the warpath again. Earlier they condemned Labour’s spending plans as “not credible”. Now they are steaming in to Labour’s proposals to nationalise rail, energy, water and the postal service - plans which are popular even among Tory voters. 

Lucy Kraftsman of the IFS has claimed that nationalisation would be costly, complex and risky and said Labour might do better to tighten regulation instead. The IFS also suggests that taking over energy firms could slow decarbonisaton, without trying to explain why. 

The energy firms have chipped in to defend the IFS’s position. Of course they have. The Energy Networks Association  said Britain’s privately owned network operators are well positioned to help cut emissions to ‘net zero’ by 2050, but state ownership proposals would be “likely to lead to delays to decarbonisation reduced public accountability, disruption to innovation and higher costs to billpayers.” This is pure scaremongering. 

Since these privately owned firms are immensely profitable it is clearly in the interests of the present owners to resist Labour taking them over. It needs to be pointed out that these profit-making firms make their living by emitting huge quantities of carbon, so how they are helping to decarbonise Britain is a mystery. They take decisions as to how to generate energy purely based on market prices as to what’s cheapest, not on ethical considerations. To consciously decarbonise the country, which is absolutely necessary, needs government planning. Nationalisation of the energy industry is the best way to achieve this.

John McDonnell has robustly rejected the IFS’s claims. “Labour’s proposals for nationalisation will enable us to speed up the transition to a sustainable economy and enable us to meet our decarbonisation targets all the sooner,..Arguing for sticking to a regulation approach, after years of its failure, is a nakedly ideological stance and one at odds with all the evidence.” He is right.

The earlier IFS critique of Labour’s spending plans was fundamentally flawed. Far from being a genuine cost-benefit analysis of the Party’s plans, their survey concentrated on the costs and ignored any benefits. For instance it is obvious that rolling our ultra-fast broadband throughout the country will bring significant economic benefits (though this may be difficult to measure). The IFS ignores potential benefits and just counts the costs. This approach would make Ebenezer Scrooge look like an enlightened philanthropist. If we followed the IFS approach we could never get out of the pit of austerity as it would always ‘cost too much’. In short the IFS is propounding a failed economic theory which has brought millions of British people hardship and woe - but serves as useful propaganda for the rich and powerful to perpetuate their privileges.

We rebutted the IFS’s criticisms in an earlier article: https://labourrep.com/blog/2019/11/26/ifs-talks-nonsense-in-trashing-labours-plans

Instead of nationalisation, the IFS proposes regulation of these rail, mail, energy and water companies. There is just one problem here. We’ve had regulation for donkeys’ years - and it doesn’t work.

The most spectacular example of governmental regulatory failure is of those bodies that were supposed to control the finance industry. The bankers destroyed millions of people’s livelihoods in the 2008 crash. They got away with it scot free. There are multiple reasons for this failure to regulate capitalist behaviour effectively. One is called regulatory capture. There is an establishment in Britain and regulators may be part of it or anxious to join it.

Years ago financial crime consultant Rowan Bosworth-Davies made a speech about money laundering in the City. A bank director sitting next to him declared, “If you think Her Majesty’s Government is ever going to prosecute people of my class, you are utterly mistaken. We are a protected species.” The banker was right. Not a single speculator is in jail on account of the banking collapse of 2008.

Mail, rail, water and energy all have one thing in common. They are natural monopolies. I get my water supply from Thames Water. I have no choice in the matter. Since choice is impossible, the firms don’t need to compete. I cannot contract with Northumbrian Water instead - that would be ridiculous in any case. By the way Northumbrian Water is owned by Cheung Kong Infrastructure Holdings, who have worked out that owning a British privatised utility is a very easy way of making money.

Privatisation was supposed to offer competition and choice. It doesn’t. The same is true of energy provision: just one gas pipe to your house and one electricity supply. If you want to travel from Euston to Liverpool by rail, you must ‘choose’ Virgin West Coast.

Since these monopoly firms don’t have to compete, they are in a very strong position to collude and drive up prices to the customers in the process. As Adam Smith noted, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

What have the regulators of these industries targeted by Labour done? They’ve let them get away with it, just like the financial regulators. They have failed to rein in greed for decades. OFWAT was set up in 1989 to regulate the newly privatised water industry. Thames Water is all too typical of how the privatised utilities have behaved.

As we reported two years ago, in 2006 Thames Water was acquired by the predatory Australian company Macquarie. Over the next ten years Thames Water was loaded with £11bn in debt. Macquarie has since walked away from Thames Water, but left the debt behind. One advantage of loading a company with debt is that it counts as what the firm owes, and can therefore be offset against tax. So Thames Water under Macquarie paid no corporation tax for ten years. The firm walked away with £1.6bn in dividends over the same period - tax free. The new owners have followed the same lucrative course of action. 

It gets worse. Macquarie was fined for discharging 1.4bn litres of sewage into the waters they were responsible for stewarding. The judge in Aylesbury called the spillage “borderline deliberate” He excoriated the firm for “inadequate investment, diabolical maintenance and poor management.” The unfortunate people of Little Marlow called the stretch of the Thames down their way ‘crappucino.’ IFS economist Kraftsman might be less sanguine about the effectiveness of regulation if she lived in Little Marlow. 

Who owns the Big Six energy companies? EdF is actually Electricite de France, 80% owned by the French taxpayers. Npower is a German firm, part of RWE. E.on is also German owned, while Scottish Power is owned by the Spanish multinational Iberdrola. What’s going on here? Privatisation was supposed to be about transferring ownership to British shareholders. British Gas shares in the 1986 privatisation were advertised as ‘Tell Sid’, with the implication that working class people would get a windfall by buying the shares. Instead giant foreign firms have muscled in on the monopoly profits on offer. 

This is what they’re in for - from the SSE website:

“Our dividend obsession.

We have just one strategic priority: sustained real dividend growth.

Receiving and investing dividends is by far the biggest source of investor return over the long term. Our dividend obsession ... has delivered for shareholders.”

Dividends, of course, represent income that is just sucked out of the utilities without even touching the sides. 

In other words the privatised utilities and their customers have been sucked dry and the regulatory bodies have just sat there and watched for decades. The old socialist adage that ‘you can’t control what you don’t own’ is as true today as on the occasion when it was first minted.