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Published on Thursday, February 22, 2001 in the International Herald Tribune
The Privatization of Public Utilities Can Be a Disaster
by William Pfaff
 
The disasters that have overtaken electricity privatization in California and rail privatization in Britain have failed to provoke much comment on a basic issue, which is how often people in power are prepared to let themselves become prisoners of ideology.

Privatization has become the fashionable remedy for the deficiencies and problems of national utilities. Until fairly recently, these were generally considered natural monopolies, properly managed by regulated private companies (the case, until the 1980s, for telephones and most electric power companies in the United States) or by state-held corporations, the usual case outside the United States. By the 1980s, however, these private and public monopoly companies had, in many cases, become bureaucratically inefficient, overstaffed and unresponsive to consumer interests. This fired enthusiasm for the market solutions argued in Margaret Thatcher's Britain, and then in the United States during Ronald Reagan's presidency.

A persuasive case was made for ending public ownership. This, however, was a case in which little critical spirit was exercised with respect to intellectual assumptions. It was also a case which too often lacked realistic analysis of how privatization would actually work in specific circumstances. Russia's privatization of public assets is an outrageous example. In the West, as well, privatization ideology was applied in cases where common sense suggested its relevance was doubtful. Where public assets were concerned - nationalized utilities and industries in Russia, Western Europe and elsewhere - privatization's appeal was enhanced by the money governments expected to realize by selling off public assets. (A former British prime minister, Harold Macmillan, described this as selling the family silver.) The money was then available to governments to spend on getting themselves re-elected. Current notorious examples of this ideological excess are provided by California's power industry and Britain's railroads. Ruin there is so complete that defenders of privatization can only argue that privatization was mishandled, only partially applied, or that bureaucrats subverted it. That it might have been the wrong remedy is still inadmissible.

In the California case, it is argued that state officials (described in the debate as "socialist-minded bureaucrats") deregulated the wholesale market for electricity, but foolishly or perversely maintained regulation of the retail market.

Paul Krugman of The New York Times, in his account of the affair last week, explained that retail prices actually were pegged at the request of the newly privatized utilities themselves, so as to protect or augment their income when the privatized wholesale electricity price fell - which is what privatization ideology said would happen.

Instead, wholesale prices soared, and the out-of-state electricity suppliers made enormous profits, in some cases 700 percent over the preceding year.

The result was chaotic shortages of power in California, disruption elsewhere, and the possibility of up to a 1 percent reduction in U.S. national growth this year. In the British rail case, the irresponsibility and haste (politically motivated) that went into the program for deregulating a state-controlled railroad industry already in desperate straits is now all but universally acknowledged.

Britain's newly fragmented rail system, even though it continues to be subsidized at the rate of some $2 billion a year (a sum that is expected to increase to at least $6 billion by 2005), came close to collapse before Christmas, after an accident in October when four people were killed and more than 30 injured. That was the latest in a series of accidents revealing incoherent relations among the 25 train operating companies, and further confusion between them and Railtrack, the company charged with maintaining and improving the national rail infrastructure. The accidents also resulted from poor maintenance and lack of investment by all of these participating companies. Yet the argument for privatization has not been wholly discredited, even in Britain. The Labour government of Tony Blair still favors partial privatization of the London Underground rail system, which is in grave decline. The idea behind selling off the railroad system, which was nationalized by postwar Labour governments (again, for ideological motives) and then left underfunded for years, is that profit-seeking companies would make new investments, rehabilitating the system to attract more customers. What happened was easily foreseeable. The companies went after short-term profits, which the current business consensus - making quarterly shareholder return management's priority - enjoined them to do. Long-term investment can tie up a company's profits for a generation. That is why government funding has always been essential to national infrastructure projects.

The new British rail companies all chose management teams heavy in financial specialists rather than composed of the people really needed: managers experienced in heavy engineering enterprises, able to grasp and remedy the rail companies' fundamental deficiencies.

The neglected reality was that non-financial management determines the success of such an enterprise. There can be excellent management in public enterprises, including armies and navies. There can be disastrous management in private ones. The ownership of the enterprise is a secondary concern.

The other neglected reality was that if an enterprise cannot function efficiently when profits are not demanded from it, introducing the profit requirement makes reform harder, not easier. The profit motive may incite management to work harder, but it doesn't make management smarter or more effective.

© 2001 the International Herald Tribune

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