We need to talk about renationalisation

Labour's proposals may be worrisome, but they raise important questions.

by Adam Gale
Last Updated: 26 Sep 2018

Technocratic debates, once resolved, rarely resurface. The same cannot be said of those that stir the passions. Nationalisation is a case in point. After lying dormant during the consensus era of Blair, Brown and Cameron, the question of whether public utilities should be public or private-owned is back with a vengeance: the Labour Party under Jeremy Corbyn and John McDonnell is proposing to draw water, energy, the railways and the postal service back into state hands.

Many business people of a certain age will shiver at the thought. The great state-run enterprises of the 70s and 80s deserved their reputation for sluggish, drab bureaucracy. Surely in the era of Alphabet and Alibaba, of the cloud and AI, we can’t be talking about taking three steps backwards?

Yet Labour’s proposals, which also include worker representation on boards and a curious scheme to force larger employers into siphoning 10% of their dividends to either their employees or the Treasury, touch on a fundamental question about the type of society we want to live in.

To say there is discontent over modern capitalism is an understatement. For many people, globalisation and the rise of technology have ushered in an era of stagnation - and at least one of these trends will only continue to accelerate. Had productivity growth not slowed to a crawl, the rise of the 1% may not have mattered, but when the pie is no longer growing, people are far more concerned about who gets what slice.

Business would be wise to be concerned about these issues. These people are our employees, our customers and the voters whose representatives set our boundaries. Proposals like McDonnell’s are now part of the mainstream debate, with which companies absolutely must engage.

Could these proposals work? Let’s look at each in turn.

Nationalisation

The nationalisation of utilities is in many respects the least controversial of Labour's proposals. There are numerous cases of state-run utilities around the world that function at least adequately. French electricity is largely state-owned for example, as are many European railways.

The reason nationalised utilities don’t dramatically underperform compared to private enterprise, as you would expect if a company were to nationalise its smartphone industry for instance, is that there is no such thing as ‘real capitalism’ in the railways, water or energy.

To varying degrees, these are natural monopolies which do not allow genuine competition. As a result, the famed hand of the market is not invisible, it’s just not there: you can’t use Great Western to go from Doncaster to Edinburgh, just as you can’t buy your water in London from Severn Trent.

There is some rather forced competition in the energy sector, but you’re still using the same shared infrastructure. In railways, meanwhile, the franchise tender process is supposed to inject some competition, but arguably this only manifests in the skill with which the operating companies submit their bids.

The argument that the shareholders can impose some private sector cost discipline doesn’t really fly either – public utility franchises are so tightly specified that management has very little room to manoeuvre in any case.

The bigger issue with renationalisation is less how the industries will be run under state control, as how they get there. The government paying billions for these businesses at market rates would be possible, but burdensome on the already stretched national finances. What Labour is proposing isn’t quite that, however.

McDonnell has suggested that shareholders would be compensated with bonds that are ‘cost-neutral’ to the taxpayer, which sounds suspiciously like an IOU. The party has also spoken of reductions in these payouts in the event of pension deficits or evidence of ‘asset-stripping’ under privatisation (bad luck, presumably, if you only recently purchased shares in one of these companies).

Needless to say, if this turns into a snatch and grab of privately owned firms, it could have disastrous consequences for the UK’s reputation as a place to invest and do business.  

Workers on boards

Labour’s proposal to bring workers onto boards isn’t entirely beyond the pale either, at least in principle – many countries such as Germany have workers on their supervisory boards, which oversee the main board. Putting workers on the main board is somewhat more problematic, in part because the skills set of running a large company is quite rare and specific, in part because of the potential conflict of interest for the employee involved.

But these are not necessarily insurmountable – it’s arrogant and unreasonable to assume that no worker could ever understand the complexity of their company’s financial situation, and indeed, some highly developed countries with a single-tier board system already require workers on boards, such as Sweden and Norway.

Employee ownership

The most radical proposal is to take 10% of dividends from companies with 250 or more employees and give them to the workers, up to a value of £500 each a year, with any unallocated money going to the government. The idea is that investors will be forced to share the spoils with workers.    

This would penalise shareholders, clearly, and could easily turn into an onerous new business tax, at least for capital-heavy, mature businesses that pay regular dividends. It also risks creating perverse incentives. For example, a company with 230 employees might think twice about hiring another 20 people. Depending on how the formula was calculated, foreign companies might also eschew hiring in the UK in order to avoid potentially huge bills.

You could argue that such a structure doesn’t hold back the likes of John Lewis, but partnerships and co-ops have unique cultures that can’t easily be transposed into any old business. If enacted, it almost certainly would make UK industry less competitive.

That doesn’t mean the proposal can simply be ignored as unworkable. Perhaps this exact idea needs revision. Perhaps a better way of redistributing income would be to raise taxes to Scandinavian levels, rather than interfering with how companies conduct their internal affairs. But the principle – that business and its profits can’t just be for the shareholders – is one that society is entitled to debate through the political process.

If business does not show willingness to engage with the problems being debated, then it risks the decisions being taken while it’s not in the room. This could only be bad for all involved.

Image credit: Garry Knight/Flickr (Public Domain)

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