Privatisation – The last refuge of a spendthrift?


The Government’s aim to raise £16 billion through such sales seems optimistic, unless there are plans to sell large stakes in either RBS or Lloyds. Given the £220 billion gilt issuance programme for this year - funded mainly by the money-printing Quantitative Easing policy - even £16 billion is a comparatively modest sum.

Around £11 billion is expected from Local Authority sales: the remainder is targeted from business disposals. Various candidates have been suggested. Most were discussed in last year’s ASI publication: Privatisation – Reviving the Momentum. Subsequently, the Government’s 36% British Energy stake was sold – and the cupboard is getting rather bare.

In reality, it is £billions of proceeds – not £millions – that are now desperately needed. Selling the Royal Mail, ex its burgeoning pension fund deficit, would raise several £billions despite the company’s putative value falling daily as strike action continues.

The Government apparently lacks the political will to privatise Scottish Water, whilst Network Rail is not yet ready to re-enter the private sector. The 33% Urenco nuclear stake could raise c£1 billion, but agreement with the two other shareholders is necessary. The Channel Tunnel rail link may be a viable candidate, along with the CDC Group.

But the plunge in media valuations means that any sales proceeds from selling BBC Worldwide, or especially Channel 4, would be lower than previously. The Tote has long been an obvious target but its valuation keeps slipping. Leading bidder, Gala Coral, is struggling: even Ladbrokes has recently been driven to a rights issue.

British Waterways’ operating returns remain very low, despite its attractive asset portfolio, whose value has fallen of late. Other names in the frame are distinctly small-time. None of the Royal Mint, the Meteorological Office, Ordnance Survey or the Queen Elizabeth Centre is going to generate sizeable sales proceeds.

Which will the Government choose?

The Royal Mail loses another customer


Well, that's another small monthly earner that the Royal Mail has lost because of its disruptions and strike threats. I have just organised to pay my credit card bills online. I used to send cheques, but if they get delayed in the mail I know I could find myself racking up huge interest payments. So now I'm not going to mail cheques any more. It's even quicker, and it saves the costs of the stamps.

Sadly for the Royal Mail, it also means less revenue for them. Not much, but then how many millions of us are doing the same thing, or something like it? The answer is quite a lot – the number of letters that the Royal Mail carried fell by about 500m over the period 2007/8 and I cannot imagine that the 2009 figures will reverse the trend. Their monopoly status has left them resistant to change, and too willing to raise the price of a stamp to cover their inefficiencies. Unless they do something fast – privatizing themselves, or finding a commercial network partner to breathe some better ways of working into the business and find new things for it to do – then the Royal Mail seems to be in a downward spiral.

Dr Butler's book The Rotten State of Britain is now in paperback.

Working in the UK


Recently I was at dinner speaking to an overseas student doing her PhD at Cambridge University. For someone who has only been in the UK a number of weeks, she told the most unbelievable story about English emigration authorities.

I was told that even though she had already done her undergraduate and masters degree in the UK, she had to complete the full application for a visa in order to do her PhD. If this wasn’t bad enough, she also had to pay a £20 phone bill to get an appointment – "you are now number 25 in line, please hold" – to have a new biometric card made, plus an additional £350 fee to get her new visa.

But the struggle is not over for her yet. The UK is very reluctant to let overseas people, who want to contribute to the country’s economy, in to the country in the first place. This means that you can’t apply to live here unless you have been studying here for 10 years, or been working at least 5 years in the UK. This policy means that all overseas students, after doing their degree, are kindly told to leave the country, unless they are able to get a job directly after finishing university.

The good question is now to consider where the overseas students go. Not surprisingly they tend to go to the US along with many of their British colleagues. So what is really happening here is? Students going to university in the UK, who speak perfect English and whose qualifications are requested to go to the US. The most repelling thing about this case is that the UK is estimated to need about 12 million highly educated emigrants during the next 40 years in order to be able to pay for the social benefits provided to an aging population.

The alternative of this would be an increase in taxes of about 10 percent, which would certainly devastate the British economy. You may have a Labour government, but they know nothing about the labour market, which is unfortunately the case of many European governments.

Nobel economic prize for Elinor Ostrom and Oliver Williamson


Nobel economists' work on common ownership shows that markets, not distant governments, manage things better.

For the first time, the Nobel economics prize has gone to a woman, Elinor Ostrom of Indiana University. She shares it with colleague Oliver Williamson.

Much more significant, however, is what the pair have to say about the management of resources, particularly resources that are owned in common, like forests, parks and fisheries. The bottom line is that they show these things are much better managed by the people who use them, than by some distant owner – particularly distant government owners.

One of the things the pair studied, for example, was the case of the Maine lobster fishing families, who brought in their own system of tradeable quotas. It meant that market principles were brought to bear on the exploitation – and protection – of this natural resource. Iceland's trawler industry also derived great benefit from the system of individual transferable quotas designed by my free-market friend Hannes Gissuarson.

Of course, the BBC and friends will stress that the new laureates also say that commons resources don't need to be privatized to be well managed. That is true. But at the moment, many commons resources are squarely in the hands of governments – meaning bureaucrats – who are very far removed from the actual concerns of the users and local residents, and wouldn't know a market principle if it bit them. If privatization merely hands the resource to some new absentee landlord, it will do not good at all. But privatization can be a good way to get the resources out of these bureaucratic hands, and into the hands of those who care about them and – if the right incentives are put in place – will protect and manage them. I have no doubt that we should sell the Forestry Commission's plantations in Scotland and Wales, for example, to local people. There may be implications in this for all sorts of other areas – such as whether we can simply let people who own historic houses get on and care for them in their own way, or whether every new window pane has to be approved by English Heritage or some other quango. As with so many things, perhaps it's time to clear out the quangos and trust the people again.

Dr Butler's book The Rotten State of Britain is now in paperback.

Agriculture’s new electronic bandwagon

I agree that it would be good for rural communities to have access to broadband internet and it could be a useful commercial tool for them – not least to generate more competition in the rural supply chain. But there are two important issues here, one economic, and one technical. The economic one is that a group of rent-seekers has found a pork barrel they believe can feed off at the expense of other taxpayers. They are seeking a subsidy. They shouldn’t, they will end up beholden to other parties for a key tool of their business, losing some more of their commercial freedom in the process. They need to pay for this service themselves, perhaps at a premium, but it will be theirs to make gains from and it will also upgrade itself to their advantage through time through their sovereignty as consumers.

The technical issue is that broadband, as presently delivered, is a “cludge". ADSL uses copper wire technology, raising the voltage and data frequency/capacity of existing wires that are in most places very old. That’s why broadband is faster when you are nearer to your local telephone exchange. If you live in a distant place you need to wait until a locally situated sub-exchange exists with an optical fibre connection. That puts you near to your exchange like everyone else with broadband.

But think about it, putting this technology into rural areas is a civil engineering issue, digging trenches, running cables, building small huts with optical amplifiers in remote valleys. There is almost nothing that government is slower or less efficient at as agreeing where to place infrastructure. Planning, agreeing a plan, funding a plan, clearing a plan through Local Authority Planning takes for ever. That’s why some rural communities have actually taken to digging their own trenches to bring optical fibre nearer (privatization has allowed you to hook third party fibre into BT’s networks thank goodness).

During “for ever" there are other technologies that will be ready with a far faster installation track; broadband wireless, broadband satellite, broadband via the power grid to name three. Rural communities would be far better asking the government to get out of the way, lobbying private entities (or creating their own Rural Broadband Corporations) to get a price, a contract and a timescale for their own broadband. They’d pay a bit more, but they would get an early service, with proper upgrades and wouldn’t be beholden to others because of an unjust begging bowl.


A new bandwagon is being loaded up by a familiar cohort of rent-seekers – this time on behalf of the rural communities without access to broadband internet. Climbing aboard after an initial rousing by the Prince of Wales are the Commission on Rural Communities, the Telegraph newspaper and other worthies from the shires.

Their claim is odd. The internet has become so important to doing business in rural areas, especially for farmers, they say, that not having it is seriously disadvantaging them. The first oddity is that if any service really is of critical importance, businesses usually pay over the odds for it to make sure they get it delivered. The second oddity is that farming is a controlled, essentially nationalised, industry in which the need for the internet is being imposed by government regulations. The disadvantage is not a competitive one, it’s a bureaucratic one. Having created more regulating bureaucrats to monitor farming practices than there are farmers, an unanticipated consequence is that these clerks need to communicate with their clients. On-line methods are cheaper than driving a post van with mail to them, so government is enforcing on-line methods of servicing the industry. It’s their very own version of “any colour as long as it’s black". (Note to HMG – Ford’s now come in all shapes and colours.)

Mission creep for the bandwagon is already happening; “rural traders" are also affected, and rurally based specialist on-line food businesses. Well, just a minute, if you are a specialist on-line food business shouldn’t you have thought about your on-line access before you started? And isn’t there a way around the problem, Britain is not a big country; a decent internet connection can’t be more than twenty miles away almost everywhere. These businesses are not sending their cheeses through the wires of the web, they’re taking orders that way and I doubt next day delivery is absolutely essential. Putting your administration where there is a connection and your production in the hills can’t be that complicated. Get real, you’re deep in the country, you’re in business, adapt.


Britain's financial crisis was 100% home grown


One year on from the part-nationalizations of Lloyds-HBOS and RBS, a new ASI report by John Redwood MP has pinned the blame for the financial crisis squarely on the government and the Bank of England.
In Credit Crunch: The Anatomy of a Crisis, published this week, Redwood attacks the notion that the UK economy was well run, and that its problems were imported from the US. He blames bad monetary policy from the Bank of England, bad regulation from the Financial Services Authority, and bad fiscal policy and crisis management by the British government for the severity of the crash. Britain's crisis may have had much in common with America's, Redwood says, but it was very much home grown.

Britain's fake boom
The report traces the roots of the banking crisis to the "false boom" of 2001-2007. A boom fuelled by ultra low interest rates, lax credit controls, and an explosion of lending, rather than real, sustainable growth. These economic conditions encouraged banks, like Northern Rock, to pursue an aggressive growth strategy based on selling securitized mortgages and borrowing short-term from the money markets to finance new lending. As well as driving a house price bubble, this approach sowed the seeds of later disaster.
Blame the Bank of England
The Monetary Policy Committee of the Bank of England must take a major share of the blame for the crash. Redwood explains that having first kept interest rates too low for too long, it then raised them too far and too fast in 2007. They starved the money markets of cash and triggered the first phase of the financial crisis, as Bradford & Bingley, Alliance & Leicester and HBOS had to be bailed out, and Northern Rock, ultimately, nationalized. Incredibly, Redwood points out, in the year that followed the run on Northern Rock, the Bank of England acted as though nothing serious had happened, keeping interest rates relatively high when they should have been cutting them.

The government got it wrong
The report argues that the worst policy mistake of the crisis was the government's. In autumn 2008, just as world markets were showing serious signs of strain, they suddenly decided to insist that the banks hold more cash and capital than they had required during the boom years. As Redwood points out:

"That was the worst possible moment to make such a request, and the worst possible thing to do when markets needed reassurance from the authorities that the banks would survive. As soon as the regulators' demands became public, confidence in the major financial institutions was undermined, and RBS and Lloyds-HBOS were forced into semi-nationalization, at huge taxpayer risk."

Reforming Britain's banks
The result of this disastrous intervention, Redwood says, is that Britain has been left with a banking sector with too few competitors and too many weak balance sheets. He argues that the prime task facing the next government will be to remodel the state owned banks, splitting them up into smaller institutions to encourage domestic competition, and return them to the private sector as soon as possible. The report also suggests that banking regulation should be returned to the Bank of England, who would in future focus on the 'big picture' and set counter-cyclical cash and capital reserve requirements for the banks.

Click here to read the report.

David Wiletts and student fees


Tory David Willetts could raise student fees to £7000. It's not enough.

The Conservative Shadow Minister for universities, David Wiletts, said that he would consider demands to raise the annual fees charged by universities fo £7,000, roughly twice the current levels. That's a step in the right direction. People complain about students leaving university with debts of £20,000 and suchlike – but the fact is that a university education can raise their future earning potential by much more than that, so it's still a really great deal.

If the universities had to balance their own books and pay for themselves instead of taxpayers handing them cash, their fees would have to be a lot higher than that, though. ASI Fellow Terence Kealey, himself the head of Buckingham University, reckons that £15,000-£20,000 would be nearer the mark – comparable to the fees in top US universities.

The public interest argument is that we don't want bright but poor students to be discouraged from going into higher education. Quite right. But the US universities solve that by accepting students only on the basis of merit, then having endowment funds to pay the fees for those who can't afford them. It's a very sensible sort of arrangement, and we should strive to have it in the UK. But I'm skeptical of the argument that the taxpayer should subsidize the universities because the country needs lots of graduates. The main benefit of a university education goes to the students themselves, and not to the general public. So the students should pay most of the cost – the real cost. A loan system is a good way to make that manageable for them. But it is right that people should look at the costs and benefits of higher education and decide on the basis of the realities – not on the basis of subsidized prices. That would be a more rational allocation of taxpayer funds, and better for the students themselves.

Dr Butler's book The Rotten State of Britain is now in paperback.