A very quick look at the problems of nationalisation (from an historical perspective)

 

Henry III remains an inspiration for governments everywhere

Nationalisation is not the answer

Political consensus is a sign that thinking has been abandoned, says Max King

Having fought an expensive civil war against the barons, Henry III was short of money. Jealous of the lucrative revenues earned by the City of London Corporation, which had from London Bridge sided with the barons in the civil war, Henry seized control of the bridge in 1269 and handed its administration to his wife, Eleanor of Provence. The money raised from tolls was supposed to pay for maintenance and repair, but instead was squandered. The bridge fell into disrepair and, in the winter of 1281-1282, partially collapsed. Henry’s son, Edward I, handed the bridge (then the only one in London) back to the City of London Corporation, which has been responsible for the City’s bridges ever since. 

So successful has this been that the City Bridge Foundation has been able not only to maintain the City’s five bridges without tolls, but also donates £30m a year to London charities. Meanwhile, Hammersmith Bridge, the responsibility of the Borough of Hammersmith & Fulham, has been closed to motor traffic for five years as the council can neither afford repairs nor sees the necessity for them, supposedly because they think it benefits those south of the river more than those north of it.

London Bridge’s period of nationalisation is immortalised in the humorous song London Bridge is falling down, the full version of which disparages Queen Eleanor. It set a precedent for future nationalisations: cream off the revenue for other purposes, hand management to inexperienced cronies, mismanage the assets and underinvest. Such a strategy has proved perennially popular with governments.

Hence Henry VIII’s dissolution of the monasteries, tearing up England’s rudimentary welfare system, which provided education, medical attention and the relief of destitution, so that its assets could be handed to the crown and Henry’s favoured sycophants. In the last century, nationalisation was used to prop up failing industries, such as coal mining, steel and railways, or squeeze revenue from monopoly utilities, such as electricity and gas. In each case, the precedent of Henry III was followed; instead of propping up these businesses, their decline was accelerated at vast cost to the Exchequer.

Thatcher’s unfinished revolution

We may have thought that this catalogue of financial disaster had ended with Margaret Thatcher’s privatisation programme in the 1980s, but the political appeal of grabbing control of failing businesses has proved enduring. Governments appear to believe that market failure is not an indication of a doomed business, but of bad or venal management. Surely the government can do better?

Hence the current government’s enthusiasm for nationalising the Scunthorpe steel works, which met with approval across the political spectrum. This is nearly always a warning sign; actions which are universally approved of indicate a lack of scrutiny. The politicians speak grandly of the strategic importance of maintaining a UK capacity to manufacture steel as if a time might come when Britain cannot rely on imports.

However, steel cannot be produced without a plentiful supply of coking coal and iron ore, bulk commodities that are expensive to transport long distances. Britain had both in the past, but now has neither; a proposal to open a mine producing coking coal in West Cumbria was turned down by the government. Instead, both have to be imported, which wrecks the strategic case for the production of steel.

In any case, what are the circumstances in which the UK could not rely on imports of coal and iron ore? A return of the conditions of the last war, perhaps, but that possibility is well beyond remote. Meanwhile, the recently deposed Chinese owners of Scunthorpe claim to have been losing £700,000 a day. History says that, under British government control, those losses will multiply, to be paid for by British taxpayers in general. 

America, with domestic production of both iron ore and coking coal (and with more accessible from Canada), can make a coherent case for maintaining domestic steel production, even if it can be imported more cheaply. Without a domestic supply of at least one of the two basic raw materials, and with an ideological objection to cheap energy, the UK is nowhere near that position.

Remember British Rail

Moreover, the government’s appetite for nationalisation does not end with steel. The government grabbed control of the rail network more than 20 years ago, with costs escalating rapidly thereafter, but it now seeks to control the operating companies. It seems that people have forgotten the disastrous record of the old British Rail for passengers, businesses and taxpayers. 

The problems with Thames Water (and other water utilities) are the result of excess debt, constrained pricing and under-investment. Ofwat, the sector’s regulator, believed that keeping consumer charges down was more important than long-term investment and that replacing equity with debt would reduce the cost of capital of the industry, enabling lower prices. 

Nationalisation is no solution; it will just allow bad news to be buried. Some lessons of history, it seems, will never be learned.