The truth about privatisation

Along with massive cuts in public spending that will hit jobs, pay and pensions, the coalition government – like the previous one – is committed to further privatisation of our public services.

Under the 2009 operational efficiency programme, some of the areas either proposed for privatisation, or prepared for eventual privatisation through increased marketisation, are the Royal Mint, the Land Registry, the Met Office, Ordnance Survey, the Defence Vetting Agency and the UK Hydrographic Office.

While private sector involvement is sold as a cheap and efficient way to run services, there is no evidence that this is the case.

Here we challenge some of the common myths and misconceptions about privatisation and outsourcing.

Myth 1: Privatisation saves money

The myth

Privatisation provides better value for money for the taxpayer, especially during times of economic crisis.

The facts

During times of economic uncertainty the best thing to do is invest in public services. Research shows that every £1 of public spending generates a further 64p in the economy.

Outsourcing and other forms of privatisation, especially involving transnational companies, suck money out of local economies.

The UK public deficit is now £150 billion. Yet this does not include more than £200 billion of private finance initiative (PFI) debt repayment.

So even when the government speaks of a ‘ringfenced’ NHS budget, this will still mean cuts in NHS services as massive and mandatory PFI repayments are hidden.

Myth 2: Public services are improved

The myth

Previously publicly owned utilities have been improved through privatisation.

The facts

The privatisation of the railways led to cost cutting and poor maintenance that resulted in failure to maintain the track network, and a series of train accidents at Southall, Ladbroke Grove, Hatfield, and Potters Bar.

Accident inquiries revealed that Railtrack had splintered the institutional knowledge of British Rail into many different contractors, resulting in inadequate maintenance records and no coherent asset register.

As for train companies, in May 2006 the House of Commons transport select committee concluded that rail passengers were being penalised by private companies attempting to “see how much they can get away with”.

The committee also concluded: “The private sector will never expose itself to risk unless it is proportionately, if not generously rewarded. Ultimately the taxpayer pays the price.”

Since the UK’s regional water utilities were put out to private contract in the mid 1990s they have consistently underperformed.

The European Union research project ‘Watertime’ found that – while the publicly owned and controlled Danish water utilities had an annual water leakage rate of 4% in Copenhagen, and the public water utilities of Paris and Milan each had leakage rates of 10% – the UK’s privatised water companies of Severn Trent and Thames Water had leakage rates of 26% and 32%.

Myth 3: It is the modern way

The myth

Privatisation is what all advanced industrial countries now do.

The facts

After disastrous experiments with privatisation, many countries are seeing the logic of public ownership and the renationalisation of formerly privatised utilities.

Sweden recently put a moratorium on all current planned privatisations, France renationalised the Paris water company, Germany renationalised the minting of its currency, Estonia renationalised its rail network, New Zealand renationalised its rail and air network, as did Australia, and Malaysia renationalised its national water supply.

The Obama administration in the US, having inherited a deeply flawed model of outsourcing public services from the Bush administration – which led among other things to the failure to respond effectively to Hurricane Katrina – has put the brakes on future outsourcing of what it calls “inherently governmental functions”.

President Obama’s budget director, Peter Orszag, recently stated that “over-reliance on contractors can lead to the erosion of the in-house capacity that is essential for effective government performance.

“Such over-reliance has been encouraged by one-sided management priorities that have publicly rewarded agencies for becoming experts in identifying functions to outsource and have ignored the costs stemming from loss of institutional knowledge and capability, and from inadequate management of contracted activities.”

As a result the US government’s Office of Federal Procurement Policy has issued guidance which calls on government agencies to decide whether in-sourcing may now be appropriate for services that had been outsourced.

Myth 4: PFI has benefited the NHS

The myth

The NHS has improved because of the involvement of private finance initiatives.

The facts

Since 1997 there have been 149 financed hospitals in the UK, for which the NHS will pay nearly £70 billion for construction costs to PFI consortia.

For example, it cost the private sector consortium Catalyst £9.4 million to build and run a new hospital for the NHS Wandsworth Trust, for which the trust must now pay Catalyst more than £10 million a year until 2034.

It is estimated that nationally the NHS has lost 12,000 beds since 1997 because of additional PFI costs.

Myth 5: Public services needs private innovation

The myth

Some civil services core functions, like welfare delivery, need private sector innovation and dynamism.

The facts

The previous government’s investigation into welfare delivery for the long-term unemployed (The Freud Report) found the UK already had “the strongest work incentives of any major economy” and that Jobcentre Plus performed to all targets.

The 2006 report ‘Third Sector Provision of Employment-Related Services’ (by Steve Davies of Cardiff University) concluded: “It is simply not true that the third sector has a consistently better record in the provision of employment services than in-house staff.”

The Davies report also found that “whenever Jobcentre Plus staff have been allowed the same flexibilities and funding as private sector companies or charitable organisations they have been able to compete with, if not surpass, the performance of contractors.”

Myth 6: Private companies do some things better

The myth

Private sector companies are more efficient in delivering certains functions such as IT.

The facts

There is no evidence this is the case. To take just one example, the former Inland Revenue’s outsourcing of its IT function to the American provider EDS was fraught with problems, and eventually investigated by a parliamentary select committee.

The re-tendering of the contract to the Aspire consortium did little to put things right, and another select committee investigation in 2008 concluded that HMRC was paying too much for the service, and the initial cost would rise from the estimated £3 billion to £9 billion.

For more information about the subjects covered, contact research officers John Medhurst or Enrico Tortolano, and for media enquiries contact national press officer Richard Simcox on

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