Regulation of former state-owned industries has spectacularly failed
It seemed such a good idea at the time. The government should retreat from owning or controlling great swathes of activity, allowing those running them to make good, long-term decisions, freed from the push-me-pull-you of everyday political pressures and short-term thinking. This approach, from the Thatcher era, was applied widely, from the nationalised industries that were sold off, to health, schools, financial regulation and much else besides.
It has not quite worked out as planned. It was just wishful thinking to suppose that the National Health Service or education could ever be far away from everyday politics, whatever bodies were nominally in charge. Both require constant injections of money, and every attempt to broaden their income base from general taxation meets fierce resistance followed by political retreat.
But it is the regulation over the former state-owned industries which is the greatest failure. That in energy is the most egregious and apparent. It follows years of fiddling with the rules, sticking extra hidden costs onto electricity and gas bills in the form of the green levy, and culminating in a mechanism which threatens to bankrupt small businesses and lower-paid workers. The price cap was a piece of political fudge in response to the clamour that those who actively switched energy supplier were gaining at the expense of those who couldn’t or wouldn’t.
The new rules also encouraged tiny businesses into the market, using the customers’ direct debits as their working capital and gambling on the gas price. The regulator, Ofgem, failed to see the absurdity of dozens of undercapitalised suppliers until the surging gas price wiped half of them out. Only a few technocrats had really looked at the price cap, which it turns out boasts a complexity worthy of the Schleswig-Holstein question. It is not only the big oil companies which have struck gold, but also owners of wind turbines – some of whom are getting a government subsidy on top.
Then there is water, perhaps the most spectacular failure of privatisation. The rules allowed investors in this vast industry to pay themselves the “green dowry” of capital, designed to finance much-needed upgrades of water and sewage, and replace equity capital with debt. Thames Water, the largest, worst offender and most opaque, ended up with a balance sheet too weak to support the construction of the super-sewer underneath the river.
Of the 10 privatised companies, only three remain on the quoted markets. They are also the least-worst offenders. As listed businesses, they must publish proper accounts, see the value of the business tested every day in the markets, and face the shareholders in general meeting once a year. These are not trivial restraints on bad behaviour. The other six (Welsh Water is owned by the local government) are constantly complaining about finding the funds to meet the demands on them, while mostly managing to pay handsome dividends to their private equity owners.
There is a simple solution proposed by my colleague Jonathan Ford here. All nine of the companies should be obliged to have at least 25 per cent of their shares in public hands, with a full quotation on the London Stock Exchange. Forcing them to do this would not only encourage better behaviour, but a share sale offers the opportunity to raise more permanent capital to boost those weak balance sheets.
It is too late to roll back the clock on this disastrous privatisation. The regulator Ofwat, the Environment Agency and DEFRA have all the legal powers they need to start repairing the damage. Of course, if the political will is not there, the environmental fish will rot from the head. The omens here are not good. The latest iteration from the government gushes with the feelgood generalisations that we have come to expect as substitutions for hard policy from this administration. As one small, and very cross pressure group put it: “It is clear that the companies choose how and when they are regulated and far off vague targets suit them perfectly – especially as they are still allowed to monitor themselves.”
Both energy and water betray all the signs of regulatory capture, where those who are there to protect the consumer have instead put the producers’ interests first. Both systems have failed miserably. There are ways of fixing them, but first of all we need an administration that wants to do so. That would be a novelty.
Reality bites
The enthusiasm of investors large and small to lend to their governments at interest rates close to, or even below, zero, was one of the wonders of the last few years. The combination of regulatory pressure to invest in bonds, and the central banks’ determination to keep buying-in stock regardless of the price, fuelled the most bizarre boom in a worldscale market you will ever see.
It all went fine, until it didn’t. While he was sitting on the beach, a holder of a 10-year UK government stock has just lost over 5 per cent of his money. For bond investors, August has indeed been the cruellest month. In a market where changes in yield are usually registered in a few hundredths of one per cent, declines of ten times that have become commonplace. From being a price-blind buyer of stock for QE, the Bank of England is turning to a seller. Its dealers could always find someone willing to sell. Finding enough willing buyers as inflation rises and the UK government stays as incontinent as ever, is a different matter.
This is why gilt prices are falling, and could fall a great deal further. The yield on the 10-year UK government stock is still only 2.8 per cent, a miserly reward for holders when inflation is eating the capital at over 10 per cent a year. The only consolation is that most other major countries are in a similar, if less extreme, state, but then few of their administrations are practising the sort of dash for growth policies of the (likely) incoming prime minister. Perhaps they have noticed that this policy has never worked, and is always followed by spending cuts, high interest rates and recession. Reality bites in the end.