THE BLOG
30/10/2013 10:35 GMT | Updated 23/01/2014 18:58 GMT

The Problems With Privatisation

There is a case to be made for free-market economics in the consumer sector, as competition is promoted, but we should not be surprised to see monopolies or oligopolies forming in sectors that require substantial infrastructure investment.

There is a case to be made for free-market economics in the consumer sector, as competition is promoted, but we should not be surprised to see monopolies or oligopolies forming in sectors that require substantial infrastructure investment.

Lets start with the big six. The barriers to entry in the energy market prevent new firms stimulating competition, and lower prices for consumers, and this allows the existing companies to dictate energy prices in order to maximize profits for their shareholders. And guess what? That's exactly what they've been doing. It should be no surprise to learn that Ofgem has proven claims from these companies that wholesale process have been the cause behind the price rises of up to 12%. Wholesale prices have in fact increased by a mere 1.7% according to a report in the Financial Times, whilst Ofgem also estimates net profit margins for the energy companies has increased by over 100%.

Putting the energy industry under public ownership would mean shareholders would no longer be prioritised over consumers. The same is to be said for the water industry. The bizarre decision to privatise such a basic necessity has resulted in real prices increasing by 50% since the assets were sold under Thatcher in 1989. There will never be any competition in the industry: nobody in their right mind would invest billions water infrastructure only to be undercut by the existing firms when they began to operate. Basic economic knowledge tells us water should be nationalized. The very fact that regulators such as Ofwat exist, along with the fact they have recently rejected proposals for Thames Water to raise its prices by 8%, means the government has recognized an underlying problem in the market.

The privatization of British rail in 1993 (once again under a Conservative government) has resulted in rail travel simply becoming too expensive for so many of us. As is the case with the water industry, ownership of existing infrastructure means there cannot be competition in the industry.

Perhaps it is too late to renationalise these industries - the cost of buying back assets would be phenomenal - but it is clear that privatization in the past has had negative long term effects for consumers. It is precisely because of this that we should reject the government's proposals to privatise the few remaining nationalized sectors of the economy. I dread to think what the impact it will have on the Royal Mail: purely the fact that there has been such high demand for shares indicates investors know there is a profit to be made from the consumer.

Certain sectors are simply not suited to privatization, and the Conservative ideology of privatizing anything it can get away with distorts the market and can only result in significant price rises. The sad truth is the Conservatives are a party that prioritises businesses over consumers (and over welfare provision for that matter!) and this will not change. Even Labour are too soft in their approach to dealing with the problems stemming from nationalisation: price freezes in the energy industry will not solve these problems.