Economics of Nationalisation

Economics of Nationalization

A2 Microeconomics, April 2012

What is nationalisation?

The process of taking an industry or assets into public sector ownership by a national government

The changing public-private sector mix in Britain

• Private sector of the economy– Small & medium sized enterprises– Listed companies e.g. FTSE 100, FTSE250

• Public sector of the economy– State owned and/or state operated businesses– Government may have ‘controlling share’

• 1980s and 1990s – wholesale privatization• 2000 onwards – some reversal e.g. Network Rail• 2008 onwards – response to financial crisis – several

banks taken into whole or partial state-ownership including Northern Rock and RBS

UK Public Sector Businesses

Finance

Transport

Energy & Other utilities

• RBS• Northern Rock Asset

Management• Bradford & Bingley• Lloyds-TSB Banking

• Network Rail• East Coast Rail• Dartford Crossing• Channel Tunnel Rail

• British Nuclear Fuels• Royal Mail• Post Office Network• National Health Service• Student Loan Book

Royal Mail set for FloatationThe coalition government aims to begin the privatisation of Royal Mail by selling or floating at least part of it in autumn 2013 if the state-owned postal operator’s finances continue to improve. Analysts think Royal Mail could be worth up to £3bn-£4bn (News reports, 2012)

Nationalization in the UK news

Examples of state ownership overseas

• Hypo Real Estate (Germany)• Fortis (Netherlands)• Kiwi Rail (New Zealand)• AIG (US)• General Motors (US)• Bolivian energy company (Bol)• 50% of Gazprom (Russia)• Seylan bank (Sri Lanka)• 2009, Chavez ordered the army to take over all rice processing and

packaging plants• Zimbabwe has nationalised food distribution infrastructure• Nationalised oil industries in many OPEC countries

South Africa and Mining

Venezuela and State Ownership

Arguments for state ownership1. Weaknesses of the free market / private sector– Efficiency gains can come at expense of customer

2. Public ownership to meet economic & social targets– Not for profit businesses – social aims / public interest– Quality of service: Royal Mail Universal Service

3. Employment protection e.g. bank collapses and systemic risk

Arguments for state ownership

4. Strategic justifications e.g. nuclear power, airlines5. Public sector can be a vehicle for macro-control– Pay restraint at times of inflation– Employment at different stage of the cycle

6. If the State turns a bank (e.g. Northern Rock) around it could make healthy windfall profits

Northern Rock sold to Virgin MoneySold in November 2011 for £747m

75 Northern Rock branchesOne million customers£14bn mortgage book£16bn retail deposit book2,100 employees

The case against nationalization

• Cost to government/tax payer (opp. cost)• Inefficiencies arising from government ownership– X-inefficiency, weak productivity growth– Overinvestment + Diseconomies of scale (overstaffing)

• Government has poor track record with efficient project management or budget control (e.g. NHS IT budget)

• Public sector has poor record on industrial relations - often at direct cost to the consumer and to small businesses

• Privatisation has brought benefits to consumers in lower real prices, cost cuts, better services and higher investment, particularly where competition was allowed to develop

The case against nationalization

• Moral hazard if state owned industries cannot go bust• Poor record on customer service in some public enterprises• Limited gains in dynamic efficiency (including innovation)• Rate of Return regulation / Price Cap regulation could be

used instead of a full-blown nationalisation• Promotes unfair playing fields (NHS v Private Healthcare

providers, ITV/Ch4/Five vs the BBC, Loss-making state airlines v the rest of the competition)

• Political priorities can over-ride commercial issues on capital projects (possible regulatory capture and government failure)

Key concepts to apply to the issue

• Economic efficiency– Allocative (e.g. Monopoly pricing)– Productive – Dynamic

• Funding versus delivery of key public services• Public private partnerships• The role of regulatory agencies acting as

surrogate competitor• State aid inside the EU

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