In re: your example of Thames Water PLC, I would remind you that often it’s not just motorists but business who depend upon them who often die off in the short run while authorities attempt to fix long run problems. As jac lecou makes the point, it all depends on the circumstances. Here in New Orleans prior to Katrina an attempt at comprehensive sewer repair/street resurfacing on Tchoupitoulas St turned into a 3-yr affair that ripped up the streets and killed half the businesses. When completed the project was a marked improvement, but not for the people driven bankrupt by the very project that was supposed to help them. When the City proposed similar comprehensive improvements for Magazine St—another major business thoroughfare a few blocks over running parallel to Tchoupitoulas St.—the small shop owners, art galleries, etc., with the example of what happened to their brethren a few blocks over, went up in arms at the prospect of being “improved” out of existence and forced the City to make only temp. short-term patches—so Boris’ concerns weren’t necessarily unfounded. In this case it was the City Sewerage & Water Board that temporized, not a pvt company. There is always a struggle between long-term “preventive maintenance” and short-term “operational” needs that is never easy to balance out whether the chosen mechanism is public or private. As lecou points out—it all depends….
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This always seemed like sound enough advice to me. It’s absurd to make broad categorical, at least for the precise location of that border. When you get close enough to that fuzzy zone, a whole lot depends on very localized idiosyncrasies of geography, culture, business environment, government structure, management quality, etc.

So maybe the water utility works well in your town privately run. And maybe in the next city over it’s not working so well and they should consider switching it to more public management. It’s all in the details, and it’s usually very difficult to say with any certainty more than “It isn’t working this way. Let’s try it the other way.”

Which brings us to Sebastian:

What happens on the border? What happens when a sector shifts so that it once had factors appealing to government ownership, but now does not? We’ve seen that it can be very difficult to convince governments to relinquish control except in very singular administrations.

This is, I think, very much looking at the situation with blinders on. For one thing, it should be obvious that it is often equally difficult to move the other way – to move poorly performing private systems into public management. The same forces that resist one way (political ideology, entrenched interests, institutional inertia) resist equally well in the opposite direction. Movement between the sides is usually only possible in particular political moments, or when the problems become very bad. There are lots of examples, but for a big one, just look at the US health care system.

Also, this whole thread is about how we have just gone through a couple decades where in many places it has been quite easy to slide things from public to private management. That’s a lot of “very singular administrations”.

Clearly there’s tottering back and forth and some overcorrection, but I see no evidence that there’s necessarily any long term bias to one side or the other of the optimum.

All around the world we are seeing the rise of “green zones” where wealth and privilege are concentrated surrounded by barrios. This will come to America and the rest of the first world also. It’s exactly what certain people want. They want a global aristocracy, a global feudal state and most of all no more middle class. These economic “theories” are design to deliver just that.

and this:

And that’s leaving aside the question of whether agricultural subsidies are so awful. If the goal was to allow European integration to go forward without unacceptable costs to the significant fraction of the population that lived off, and the larger fraction of the population with a strong attachment to, more or less traditional farming, it seems to me they worked as advertised. Funny, isn’t it, how arguments in favor of liberalization always hinge on the fact that the gains are large enough for the winners to compensate the losers? but when the losers actually try to claim compensation, the costs turn out to be prohibitive after all.

I think are what strike at the heart of the matter. The problem here is not redrawing the line; it’s not deciding in advance what would constitute a good reason for moving it in either direction. Personally, I think there has been an large amount of evidence – even an overwhelming amount – that reflexively privatizing everything under the sun did not work out as claimed.

But that is not what libertarians/conservatives believe. Instead, there is a lot of talk about confounding factors, about how “That’s not real privatization.” Since there were no agreed-upon criteria before these experiments were tried, when they fail, they can always retreat without having lost significant ground on the overall argument. My question is, why isn’t Sunshine legislation used more often? Yes, go ahead and privatize, but if certain criteria are not met by a certain time, the situation reverts to what it was before the legislation. I don’t see how anyone on any side would lose from this arrangement.

Mind you, Thames Water plc is the company which decided it would rather build a desalination plant (i.e. convert natural gas into water) than repair the holes in the pipes through which a similar amount of water to the plant’s output leaks. And Boris is the man who let them, on the grounds that this was “pro-motorist”.

This didn’t actually happen in the UK, or in France for that matter. I say this in the interest of factual content.

If the government is going to get itself involved, then for one-off specialised projects I could never see a reason to believe that it would be more competent at writing contracts than at running the project itself. For purchases of general goods the government probably does better writing contracts, eg I can believe that the police manage to purchase petrol far more effectively than they could manage drilling, refining and transporting it, but if the government’s building something specialised like a sewage system, writing a contract to do so strikes me to be about as open to all the normal government incentive and knowledge problems as just building the thing directly involves.

As for the cost of capital argument, yes, government interest rates are lower. However that does not therefore mean that the government’s cost of capital is lower. At least part of the reason that people are willing to lend to governments at lower interest rates than to private firms is that governments can raise taxes to pay back loans. However raising taxes means increased administrative costs for the government and dead-weight losses for society. As these costs are shared amongst society generally, bond-holders benefit more from getting their bonds back than they lose from their share of the higher taxes. Just becuase the government has a lower cost of capital in the accounting sense does not mean that it’s cheaper for society as a whole.

The dynamic case for privatisation is based on the idea that the allocation of investment will be better undertaken by private firms than by government business enterprises. This claim in turn relies on the assumption that the evaluation of risk and returns undertaken by … will be far superior than anything that could be obtained by, for example, using engineering calculations of the need for investment in various kinds of infrastructure, and seeking to implement the resulting investment plans on a co-ordinated basis.

And it’s also based on the claim that politicians have strong incentives to invest in politically-appealing projects rather than engineering calculations of the need for investment in various kinds of infrastructure, and have serious problems stopping programmes that are no longer needed.

For infrastructure in particular, the decision processes of Byzantine creations like Macquarie and Babcock and Brown have determined the allocation of investment. Unsurprisingly, the result has been a mess.

The relavent question is whether it has been more or less of a mess than governments making equivalent decisions.

In re: rail franchises, I think that there’s the factor that the rail system is “too big to fail” even for a day; no government is prepared to let a failing rail operator stop running rail services unless they have someone ready to take it over (which is what they have done). They don’t get revenue from the TOCs, they compete on which TOC asks for the lowest subsidy ..

In any case, rail operators (TOCs) really do very little – they manage the train staff and some station staff and that’s about it. Stations and track are nationalised (were privatised as railtrack, but that was a huge failure). Rolling stock is usually owned by leasing companies. They have a small amount of leeway in setting ticket prices, but that’s mosly governed by the horribly complicated Rail Settlement Plan.

Then there’s EU law, which appears to require some sort of privatised system that’s open to certain kinds of competition.

Because they have already paid the campaign contributions (at a minimum) to the politicians who awarded them the contracts. That is exactly what is going on in Chicago in the example Slocum mentions: King Richard II has received enormous amounts of legitimate contributions from parking lot developers – and part of the deal has been the removal of street meters wherever a lucrative private garage is built. Handing over the balance of the meters in territory where large garages are not feasible is just the next step in that process.

Cranky

Yes, in the real world, there are going to be hard cases, and any insitituional design is going to need to be revisited to ensure it hasn’t been gamed or captured. But that is true no matter where you draw the line between private and public, and in cases where pure laissez-faire is not possible (a broader set for me than for you, presumably, but non-negligible in any case) it’s not at all clear that it’s harder to set up a workable system of public ownership than of taxes/regulations/subsidies. The point of John Q.’s post was simply that one result of the financial crisis is that wherever we drew the line before, we should now move it to increase the area on the public side, because we have gained new information about the costs of private ownership. Or do you see exactly the same tradeoffs between public and private ownership as you did before the crisis?

(And that’s leaving aside the question of whether agricultural subsidies are so awful. If the goal was to allow European integration to go forward without unacceptable costs to the significant fraction of the population that lived off, and the larger fraction of the population with a strong attachment to, more or less traditional farming, it seems to me they worked as advertised. Funny, isn’t it, how arguments in favor of liberalization always hinge on the fact that the gains are large enough for the winners to compensate the losers? but when the losers actually try to claim compensation, the costs turn out to be prohibitive after all.)

I’m curious – why weren’t their franchises revoked when they breached the obligations they incurred in order to obtain them?

1. This is patently untrue, I have worked for a few large global corporates, the people and ethics are generally of a high standard – this is just pure ad hominem.

2. Governments only care about votes. If they can sell a plan they will. Currently Brown is looking to nationalise the banks and sell that as a vote winning idea. This has nothing to do with his own ideology, past beliefs – he has never suggested such a radical idea. But it will be done for pragmatic reasons and to win an election.

Democratic Governments, by the nature of their formation, are governed by the tyranny of the majority. I don’t see that this allows them moral superiority over private organisations at all.

Both public and private sectors have their short-comings in this regard; I think overall the public sector has more in my purely anecdotal experiences.

What happens on the border? What happens when a sector shifts so that it once had factors appealing to government ownership, but now does not? We’ve seen that it can be very difficult to convince governments to relinquish control except in very singular administrations.

Also, what evidence do we have that governments are particularly good at distributing resources efficiently? Both the EU and the US have horrific and stupid agriculture subsidies that dramatically distort both internal and external markets in almost entirely negative ways. Yet they persist. How do we keep that from happening if we have the government deeply involved in many more allocation decisions? If we are going to engage in a much greater percentage of government involvement in currently private allocation of capital, shouldn’t we try to figure out why it goes so horribly wrong in the agriculture case? And if we can’t fix that case, how can we keep similar influences from extending into the new cases?

Having then under-invested in a public company, or being elected and having to face running such a company, isn’t it clear that governments face a strong disincentive to go through the painful and costly process of proper investment? So, even beyond wanting to champion free market ideology, you can certainly see why governments would want to pass on assets to private companies who can be unpopular without directly implicating the government.