Articles

Privatisation – good for productivity?

In Productivity culture, Public sector, The board, The workforce, UK productivity on February 28, 2011 by Tim Aikens

There has been a lot of press recently about rises in water prices.  One of the Thatcher era’s ‘big successes’ was the privatisation of utilities – water, gas, electricity and telecommunications.  Of these water is the only one to have maintained a monopoly.  Water prices for the average household have gone up in real terms by about 45%  since 1989 (source; Ofwat).  Leakage is till at some 19% of supply!  Compared to the price of many other things, water has become increasingly expensive and yet the commodity has changed little as far as I can taste! (note I am talking about the cost of water, not sewage or drainage)

So is this a case of privatisation not working or are the water companies simply catching up after decades of underinvestment?  OR – does their monopoly position allow them to get away with inherently poor performance despite the existence of Ofwat?  This is not going to be a rant about privatisation or Margaret Thatcher, but simply to ask the question is privatisation necessarily good for productivity and the objective of delivering More for Less?  Another privatised utility that has had problems is Railtrack – the privatised organisation set up to manage the UK’s rail infrastructure.  Network Rail was set up to take over the remnant of Railtrack after it’s failure.  Network Rail is now desperate to introduce large efficiencies in its business.

There are some interesting similarities.  Two utility organisations, set up as private businesses yet not delivering real cost efficiencies.  They are both monopolies.  You have no choice over who provides your water and the train operating companies have no choice over who supplies track and services!  Despite government regulation neither have delivered. There are other similarities. Both have long thin infrastructure (pipes and rail tracks) with points of focus (waterworks and stations).  Both have a legacy of underinvestment.  Both like to think they have delivered a lot – but my water tastes no different and the journey time to my home town of Norwich is little different than it was in 1960!

I have talked in the past of a ‘productivity culture’.  Post privatisation, both management and the workforce stayed essentially the same.  If the people don’t change (either physically or emotionally) the culture won’t change.  If processes don’t change the outcomes won’t either.  Network Rail is being forced by budget cuts to deliver some big efficiencies.  This is an external driver acting on the organisation.  No such driver exists within water (Ofwat seems to rule with a very gentle hand).

The obvious conclusion that privatisation to a monopoly delivers little benefit will be of no surprise to students of economics .  The problem is that they can reap the benefits of a PLC and still behave like a public utility!  Things need to be the other way around,  perform like a PLC, but have the constraints of a public utility.

So what to do?  All the usual suspects come to mind:

  • have a formal and real focus on productivity (with clear, stretching, targets and objectives)
  • change the people or change the people (be both committed and ruthless)
  • processes will need to change and innovation will be vital (difficult without the previous two)
  • without real leadership in the area of productivity little will change!

Network Rail have a lot to do.  The driver for them is financial stricture.  It remains to be seen if their management and workforce can deliver.  The utilities don’t need to worry unless Ofwat really decides to use its teeth.  As well as measuring all the good stuff on water quality and availability, Ofwat needs to get back to basics.  What is the cost of a unit of water and just how efficiently is it being delivered?

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