IEA Blog

The dismal economic returns on the Channel Tunnel Rail Link are a stark warning to supporters of a high-speed line to Scotland and the North of England.

The total cost of the link, now renamed “High Speed One” (HS1), is close to £10 billion in today’s money, when all the hidden subsidies and extras are included. And this figure does not include the substantial “deadweight” losses from the additional taxation required to fund the line. A commercial business would expect to make an annual return well above £500 million on such an investment, particularly since railways typically need to be substantially rebuilt after 30 or 40 years.

In this context, the return on HS1 is pitiful. Last year, the “investment recovery charge” levied on Eurostar was reduced by more than half to about £2,200 for each train service using the route. By my calculation, this adds up at most to about £40 million a year – a return of less than half of one per cent on the government’s original investment.

But even this return is questionable. Eurostar has made large losses during its sixteen year history and it remains to be seen whether the hidden subsidy of cut-price access charges will enable it to make sustained profits in the medium term. In other words, not just the infrastructure but the service itself has been heavily subsidised by taxpayers, meaning the overall economic return on HS1 has almost certainly been negative – even before inflation is taken into account. The local “Javelin” services to North Kent now using the line are also subsidised.

Of course, advocates of high speed lines may point to “wider benefits” such as regeneration. Indeed, the expensive re-routing of the Channel Tunnel link through East London was supposed to boost the area’s economy (as well as to facilitate currently non-existent through trains to the North of England). However, state-funded regeneration tends to be a negative sum game. Resources are inefficiently transferred from some areas to others, while social problems are displaced rather than reduced. Moreover, if nebulous “wider benefits” arguments were used consistently as a rationale for taxpayer support, just about every business activity would be entitled to subsidies and almost the entire economy would become socialised.

After sixteen years of support, the government should stop subsidising train services to the continent. Taxpayers could receive at least some compensation if the high-speed line were sold off to the highest bidder with the proceeds used for tax cuts and (unlike in current proposals for its “privatisation”) no restrictions imposed on how the route is used. Perhaps an unsubsidised international service could just about cover maintenance costs, with the sunk capital effectively written off. But far better returns could almost certainly be achieved by shutting down the line and disposing of the assets – which include substantial plots of land, tunnels under London and the Thames, and large amounts of scrap metal.

The current flirtation of the main political parties with cuts cannot hope to solve Britain’s financial problems. We need to take dramatic action and make substantial structural changes over the medium term to pull the country back from the current crisis.

Consider the size of the national debt. Its vastness is demonstrated when measured against some of our state assets. The sheer depth of the fiscal hole is so immense that you’d have to make an enormous transfer off the state’s assets sheet to even dent it. Flogging off Royal Mail might bring in £6bn. BBC Worldwide – the corporation’s vociferously carnivorous commercial arm – might bring in £10bn or so.

Flog off Ordnance Survey, the Met office, the Tote, the National Air Traffic Services, the Hydrographic Office, the Queen Elizabeth II conference centre, Channel 4, the British Waterways Authority, the National Nuclear Laboratories, the Forensic Science Service and Bradford and Bingley’s and you’ve brought in about another £5bn. All of that amounts to a little more than a tenth of the deficit the Government is running this year. Meanwhile, the overall £1 trillion debt continues to rise.

Read the rest of the article on ConservativeHome.

Further worrying evidence of the decline in adult and further education was revealed in the debate about selling off the banks yesterday. The Conservatives have proposed selling bank shares cheaply to people on low incomes to reward taxpayers for putting their money at risk by buying bank shares in the first place. The political aspects of this are arguable (see below) – but this particular argument is a failure of elementary logic. The taxpayer will reap any of the revenue from the sale of bank shares. Selling them cheaply to one set of taxpayers will merely benefit that group of taxpayers and cost taxpayers in general. The Conservative Party might as well say that they will reward taxpayers for the money they have lost in the banks by cutting income tax financed by a rise in National Insurance.

The responses were just as incoherent. Vince Cable said that the Conservative proposals would cost taxpayers a lot of money because, if banks were sold quickly, they would be sold cheaply at a heavy discount. At the same time, he argued, the plan was flawed because it would encourage people to invest in highly risky shares – shares that he believes, according to his previous sentence, could only go up in price. He went on to say that young couples on low incomes are more concerned with putting food on the table than on speculating in the stock market. This patronising remark seems to suggest that Vince Cable does not believe that people on low incomes should have private pensions and should only save (if at all) through bank deposit accounts.

The Conservatives did give some better arguments for their proposals – wanting to widen share ownership and so on. This is certainly a reasonable debate to have. Arguably the more successful privatisations were those that focused on political as well as purely economic objectives. However, the Tories’ proposal undoubtedly represents yet further transfers from taxpayers in general – and particularly middle-income taxpayers – to people on low incomes. It does not bode well for a future Conservative government if it simply regards the interests of middle-income taxpayers (who have suffered greatly in the last 12 years) as expendable.

The current cold snap has led to widespread disruption on Britain’s roads. Much of the network has been left untreated as local authorities have struggled to cope and many routes have been blocked by uncleared snow or abandoned vehicles.

Is there a solution to the transport chaos that descends on the UK whenever temperatures drop below freezing and a few inches of snow fall? There are good reasons to believe that privatising the road network would produce far stronger incentives to keep traffic flowing.

Under current arrangements trunk roads and motorways are managed by the Highways Agency and the rest of the network by local authorities. While their staff undoubtedly work hard to respond to disruption as it happens, the financial incentives for these organisations to resolve this recurring problem in the long term are very weak. Taxpayers fund their activities whether or not they perform well.

By contrast, profit-seeking private road owners – heavily dependent on tolls for their income – would have very strong incentives to keep the roads clear. Nightmare scenarios, such as motorists being stuck overnight in their cars in freezing weather, could do immense damage to the reputation of private road companies and their brand names. Moreover, the possibility of costly insurance claims from accidents caused by poor road conditions would provide a further incentive for owners to ensure their infrastructure was adequately cleared and gritted.

●  The IEA’s climate change debate, featuring Nigel Lawson and S. Fred Singer, is now online (videos)

●  Mark Littlewood talks to Al Jazeera about the state of the UK economy (video)

●  Tom Clougherty discusses a new introduction to liberty

●  Charles Rowley considers the likelihood of hyperinflation in the United States

●  Razeen Sally sets out the case for a transatlantic free trade area

●  Scott Sumner analyses George Selgin’s IEA classic Less Than Zero

●  And from the IEA archives, John Blundell asks why the state should grow our Christmas trees

Way back in 1970, the IEA published my first monograph recommending the abolition of the then Post Office’s letter monopoly. In 1983, I followed up with Liberating the Letter: A proposal to privatise the Post Office.

Circumstances have changed radically since then. In particular there has been the astounding technical advance of the internet and e-mails. This means that letters are now declining in volume. I believe that in 10 to 20 years they will be extinct.

The second major change is that Royal Mail has been disastrously over-regulated by Postcomm. From its formation in 2000, Postcomm arguably took the view that the more it hurt Royal Mail, the better it was doing its job. It micro-managed Royal Mail’s prices and profits, transforming a once healthy business into a basket case that has had to go to the government cap in hand for loans and requests to fill the hole in its pension fund. 

Enter Peter Mandelson. He leaps on a report by Richard Hooper that recommends a solution to Royal Mail’s problems: sell off 30 per cent of Royal Mail’s shares to TPG, the Dutch postal system. Granted this is an efficient and profitable company with its shares traded publicly. However, the very existence of a regulator who meddles with prices and profits means that any value ascribed to Royal Mail’s shares depends on the whims of Postcomm’s commissioners at the time.

The way forward towards privatising Royal Mail requires three steps:

1. Abolish Postcomm, leaving Royal Mail to make good profits subject to not abusing its dominant market position.

2. Allow Royal Mail to accumulate sufficient profits to fully recapitalise the pension fund.

3. Float Royal Mail on the market in full but with a ban on shareholdings by any postal administrations such as the French post office whose national markets have not been liberalised and fully opened to competition.

Ian Senior is an independent postal economist.

What’s the easiest way for a government to push their country into the top ten in a worldwide ranking of economic freedom? Coupling unpopular reforms (such as spending cuts) with popular ones (such as tax cuts)? Starting the reform programme in a crisis, when the need for reform is widely accepted? Implementing reform at a rapid pace, so that opponents have to aim at a moving target?

None of the above. The easiest way is starting in the top five in the first place. This is how the UK’s ranking in the latest edition of the Economic Freedom of the World(EFW) report should be interpreted. In the overall ranking, the UK shares a respectable 9th place with Australia, out of 141. In absolute terms, this corresponds to a point score of 7.89 on a scale from 0 to 10, where “0″ represents a fully state-run economy and “10″ represents an economy relatively free of state intervention. By European standards, this is not bad at all. Only Ireland and Switzerland do better. But by the UK’s own recent standards this is clearly a backward step which continues a downward trend since 2000.

The UK was rated 6.72 in 1980, 8.12 in 1990 and 8.25 in 2000. The country is now back to where it was about 20 years ago – though, of course, there has been a lot of movement below the surface of the big aggregates. Back then, the UK performed worse than today on subcategories like “government enterprises and investment”, “top marginal tax rate” and “inflation”. Today, areas in which the UK fares particularly badly (score < 5.00) are “government consumption spending”, “hiring and firing regulations”, “bureaucracy costs” and “burden of [business] regulation”.

Amongst other things, then, the pronounced increase in government spending over the last decade is a major factor behind the downward tendency in economic freedom. Given the UK’s exceptionally high rate of implicit government debt, and given that the EFW data do not yet incorporate the full effect of the financial crisis, this trend looks set to continue.

Unless, of course, we begin to ask more fundamental questions about which public services really need to be “public”. Relinquishing some major tasks to private provision would be an alternative to huge tax increases on the one hand, and to deteriorating public services (while private substitutes are out of reach) on the other. But this would have to be preceded by an intellectual revolution no smaller in scope than the one which enabled the UK to climb to the EFW top five last time.

Advocates of privatisation have often paid insufficient attention to one of the most important reasons why scholars like Friedman and Hayek argued in favour of privatisation: that people are the best judges of how to spend their own money and, moreover, that they have a right to spend their own money as they wish. Privatisation must not be separated from the broader libertarian project of making government smaller and giving people control of their own lives – which includes their own money.

If privatisation is justified primarily on efficiency grounds then there is no reason why it should not be used by the enemies of freedom as a means of expanding the role and scope of the state: let the private sector do the dirty and expensive work of providing essential services and what’s left of people’s income after paying for those services is then taken by the state to make transfer payments and fund all manner of dubious activities, bodies and agencies.

Successive governments have not used the proceeds of privatisation to give people back more of their own money to spend. Rather, they have used the savings made to expand the role of the state, for example by providing ever more generous transfer payments, higher pay for public sector employees and the funding of new regulatory bodies and agencies. Money that would have previously supported the nationalised industries is now allocated to a host of other government activities rather than being returned to taxpayers.

Those who believe in freedom should therefore not uncritically praise privatisation. It should be supported solely as a means to the end of increasing individual freedom by giving people back more of their own money to spend. Where privatisation becomes a backdoor way of expanding the role of the state and thereby reducing people’s freedom this should be exposed and criticised.

For several decades the British economy has been hampered by the poor quality of its infrastructure. Whether in transport, education or health, investment has typically been low by international standards and levels of service have suffered as a result.

Public-private partnerships (PPPs) seemed to offer a solution to this problem. Private capital would be used to fund much-needed projects. Better still, private companies could build and operate the new infrastructure, bringing, it was hoped, huge cost savings.

New investment could be detached from the purse strings of the Treasury. It would no longer be so dependent on the short-term imperatives of the public finances. And because the money was borrowed privately, there was no need, at least initially, to count it as public debt.

Moreover, contracts could be written to incentivise firms to complete schemes on time and on budget. The main pitfalls of public-sector procurement – the delays and mammoth cost overruns – could be avoided.

The first modern PPPs were began in the 1980s under what became known as the Private Finance Initiative (PFI). Their numbers grew during the early-mid 1990s, with several design, build, finance and operate (DBFO) road schemes, as well as the construction of a number of privately-operated prisons. These projects were generally viewed as successful within government – a higher proportion were delivered on time and on budget than would have been expected using traditional procurement methods.

Building on these foundations, the election of a New Labour government saw a rapid expansion in the number of PPPs. The model fitted well with Labour’s ‘Third-Way’ approach to the economy. Instead of outright nationalisation, with its well-documented ineffiencies, the dynamism of the private sector would be harnessed for social objectives. 

Read the rest of the article here.

In September 2007, BPP Professional Education made history by becoming the first for-profit private company in the UK to be awarded degree-granting powers by the Privy Council. While this is clearly a positive development, it also helps to shed light on the depressing fact that throughout the twentieth century successive UK governments have discriminated against for-profit institutions in higher education.

The end result is that in the first decade of the 21st century, one of the UK’s most important service sectors is now dominated by approximately 133 non-profit educational charities, which nobody appears to own and which are heavily dependent on government handouts. As the profit motive plays a critically important role in a majority of the other sectors of the economy, it would be naive to believe that the crowding out of the profit motive from higher education would have no unintended consequences or hidden costs.

BPP’s innovative approach to education is also attractive. For example, while regular lectures are used, BPP’s programmes also have a strong focus on small group sessions including tutorials, seminars and workshops. Lectures are also available in a variety of formats including traditional delivery, DVD and streamed for download to an MP3 player. As BPP Business School’s mission is to train people to become business professionals they also operate a professional careers service which they view as being an integral part of the educational experience which they provide. A student will receive career support as soon as they enrol.

Finally, the Business School also claims to lead the field not only in client-friendly but also in time-efficient course design. In short they have adopted the Buckingham model and now deliver three year courses in two years. Contrast this with the non-profit, publicly funded institutions who continue to meet and publish reports and set up committees to discuss the pros and cons of reforming the academic curriculum.

The simple fact that BPP can now deliver degree programmes in business and law in two years instead of three, without receiving government handouts, at a lower cost and still generate a profit, confirms that there is no market failure in the provision of these services. Instead it is simply the case that the market has not been allowed to develop. The solution is to privatise every law and business school across the country, allowing each university to keep the proceeds from each sale.