It's even simpler than that. All of these privatized entities are incredibly efficient... at extracting profits from the public. Of course their goal is to extract profits. And you don't extract profits from a rail line by offering the best service. Bonus points if you can convince the government to bail you out and provide some extra cash.
> "It's even simpler than that ... their goal is to extract profits"
According to the article, profit has not been the primary goal for the utilities though, because there is limited scope for extracting profits from uncompetitive essential utility services - the focus instead has been on maximising shareholder returns. So in the case of the water utilities, they "borrowed £53bn in debt while distributing £72bn to shareholders", which of course is what the issue is now interest rates have risen significantly. The article describes this as "the tension between generating strong returns for investors in uncompetitive monopoly conditions and providing high-quality, affordable infrastructure to the public". The end result is still the same though - transfer of wealth in a socially destructive direction.
Specifically table 1 on page 2, "The ten industries with the highest profit margin", has the spots 1 (elec: 42.5% profit), 2 (gas: 40.5%) and 8 (water: 32.1%) being utilities.
Sounds like good "modern" governance. You've got assets? Use them as collateral to take on debt so you can free up capital and give it back to the shareholders. Value!
That is inevitable with super low interest rates for a super long time, especially near zero. Your options are to acquire appreciating assets quicker than your competitor, or you get left behind.
See people who bought homes at 5% down versus people who waited to have 20% down. The people who took on more debt were rewarded nicely with huge gains, and the people, who were prudent, now decide on paying a few hundred thousand more, if they were even able to keep up with saving a larger down payment.
This is a very naive reading of the situation - it almost comes across as twisting in knots to avoid placing the blame on the responsible party: the company and its owners who were responsible for this.
> Your options are to acquire appreciating assets quicker than your competitor, or you get left behind.
This is wrong twice over! First of all, they are effectively monopolies, they have no competitors in their industry. The only thing they are competing against is which company can extract money the fastest (at the expense of the company and English citizens). Second of all, from the article, they aren't spending the raised money on capital investments.
> For example, South East Water—thousands of whose customers were left without running water this summer—spent more on dividends and servicing its debt than on infrastructure in the two years to March 2022. Water bills for Britain as a whole have increased by around 360%, more than double the rate of inflation, since privatisation. Over that time, annual capital investment by the ten largest water and sewage companies has fallen by some 15%, according to research by the Financial Times (FT).
Privatization is an utter failure here, just as would be predicted given the situation, and it's crazy to see an attempt to rationalize it away.
> This is wrong twice over! First of all, they are effectively monopolies, they have no competitors in their industry. The only thing they are competing against is which company can extract money the fastest (at the expense of the company and English citizens).
I think that's what the poster above was trying to say - they're not competing for customers, they're competing for investors. Effectively their only products are ROI and share value.
And when I say it out loud, I get a little shock, as I realize how much all industries are trending that way. No matter how consumer-facing your business is, the real competition is for capital investment. Consumers had better hope that capital investment depends on their happiness, because if it doesn't, their happiness is going to slide far down the priority ladder.
The irony is we might all be complicit in supporting this dynamic by choosing to invest in whichever 401k/pension fund option offers the highest returns and lowest expense ratios.
Utility companies in Illinois are private & can only charge X% (10% for electrical) more than they invest. Frankly, the power & rail network here are amazing, in large part because that system incentivizes maximum reinvestment as they can then charge more money and return larger amounts to share holders.
Competitors who take large loans and fail to deliver are out competed by alternatives who went a more efficient route.
The profit margins are fixed, but everything is still competitive.
>The only thing they are competing against is which company can extract money the fastest (at the expense of the company and English citizens). Second of all, from the article, they aren't spending the raised money on capital investments.
The owners of the company are competing with others in society to buy land/houses/cars/services/etc.
If the owners want cash they can do the same thing, take out a loan vs the value of the stock to buy more X. The advantage when a company does it is your liability stops at the value of the stock where leverage isn’t.
Except, not every investor wants every investment to be highly leveraged in this way. The entire point of utilities in most peoples portfolios is as very stable dividend stocks. It’s the people running the company who have incentives to do these kinds of transactions.
This is highly specific to the period of time with rapidly rising interest rates - not generally true. It does sting though as someone still looking to buy a house.
The lenders will come out alright. Even if the utilities end up being renationalised their debt will be converted into government bonds. The mugs here are the public, which end up paying to service the debt that has been used to issue dividends.
> That The Economist, the City of London's answer to Pravda, published this article at all is telling.
Do you mean it's extremely left wing? Or pro-authoritarian capitalist? Or the most left-wing publication you can find in an otherwise capitalist group?
Pravda is both the Russian word for ‘truth’ (правда) and was/is a publication advancing the interests of the USSR/Russian state establishment.
The ‘economist’ implies a similar ‘truthfulness’ (it must be right about the economy if it’s an economist!) and advances the interests of the London financial establishment.
I'd assume they meant (generally) uncritically pro City of London corporations and the London influenced strain of economic liberalism which they represent.
But I do think it's a bit of hyperbole in a way, although I'm only tangentially familiar with the publication.
Profit is the gain made by the enterprise. Shareholder returns are monies paid out to shareholders.
When the board is more like a group of Huns than a Shepard, you find that after you pay out the shareholders, the enterprise is toast. In some cases, like most recently in big box retail, the private equity investors are running an obvious and odious, but legal, fraud.
With utilities, the business is all about capitalization and cash flow. They should be stable and boring businesses. When they are exciting, the management is burning the candle at both ends.
Shareholder returns can come from profit, or selling off assets, or taking on loans, or underfunding pensions, or probably other ways financial experts can invent.
The financing agreements surely require business assets and equity as collateral. At the end of the day, any cash flow that goes to the owners has to come from long term profits from the business, which comes from extracting money from customers.
Maybe not today or this year or next year, but everyone is always going to
want a return on the money they put in, whether it be owner or lender.
Unless I sell off assets. Or take loans now, give the proceeds to the shareholders and get a bonus for it, and leave before the company declares bankruptcy. Or leave a unfunded pension obligation.
Or run a nationally important service into the ground and then need emergency government money to keep providing it.
If it's buying goods and services. I would not treat it as a customer, and instead one of the unenumerated other ways of generating shareholder dividends, if it paid money to keep a nationally vital industry from imploding under the weight of its bad choices.
Borrowing is accounted differently from earnings. But yes, at the end of the day the people getting rich don't care which pile of money it comes from, and the people getting poor service are equally unhappy.
No lender is going to lend a business money just so it can pay the owners.
They must have used the debt to finance operations, as opposed to cutting the dividend or even putting more money in.
This allowed them to continue to have profits in the short term, at the expense of higher interest costs in the long term (which probably cause higher prices for customers in the long term).
> No lender is going to lend a business money just so it can pay the owners.
Of course they will! There's an entire industry (leveraged buy outs) built around it. And more generally, lenders will let you do dumb things with the money they lend you. As long as they expect to get paid back.
So, could a small business borrow money to pay it's owners? Probably not, it's not likely to get paid back. Could a multinational corporation borrow money to pay dividends? Yes, it's happened.
Money is fungible. Lending should only be used for capital investments, not operations or maintenance. The lender's money may have been used for what little capital investment is still happening, but the money they would have otherwise used was diverted to shareholders.
In the case of the UK water companies the parent fund was often involved in getting or making the loan e.g.
Water company does a debt bond issue, parent owning fund takes a % of the issue (enough so that the bond issue is a success at a good price), parent fund extracts all the funds raised as a dividend, and sells the % of the issue it own too
Right, so the “parent” posts a profit, and it comes (either tomorrow or next year) from revenue earned by the “child” that borrowed, trading revenue tomorrow (going to lenders) in exchange for cash today (going to “parents’” owners).
Without getting into the weeds, my point was that in order for owners to end up with cash in their pocket, the business has to earn a profit, at some point. And that profit must come from revenue (higher prices for customers) minus expenses (lower quantity/quality for customers).
You can insert a lender in there to shift when those cash flow changes happen, but the money must come from customers, eventually.
Barring any research and development that results in technology that will allow for lower expenses and/or increased production, but I do not think that is the case here.
No the business doesn’t have to make a profit it just needs enough revenue to service the debt
Of course what happens is many business geared this was don’t make a profit, fail their banking covenants, interest on the bond rises and eventually they go bust leaving lenders out of pocket
This is how a lot of the private equity industry is funded. Shareholders are "de-risked" taking the proceeds of a refinance out of the business upfront. The financier offers the upfront loan in return for a consistent stream of their cash flow (the interest and capital on the loan, and sometimes not even the capital). These businesses tend to have very steady cash flow generation.
Instant Brands went bankrupt because it could not pay its debts in a timely manner, so lenders decided to take the collateral.
It is possible lenders did not do sufficient due diligence, or maybe they got unlucky, but they did not lend Instant Brands money specifically so Instant Brands’ owners could pay themselves (maybe they did if there was corruption in this case, but it is not the norm otherwise why would anyone lend to anyone?).
And of course, Instant Brands’ owners will lose equity and credibility in the bankruptcy, so it is not like any dividends made possible due to the financing were “free money”.
Loading up orgs with unnecessary debt is what private equity (neé corporate raiders) does. The financiers who underwrite the raids certainly get paid. All the other stakeholders lose.
It's just fancy accounting talk for theft. A shell game. Like u/Spooky23 states upthread.
It's wrong. It doesn't make any sense. And yet here we are.
You can return value to shareholders that doesn’t come out of profits. For example, selling off your assets doesn’t make you profit, but gives you cash on hand. If that money is returned to shareholders, you’ve changed your balance sheet, but haven’t made any profit. An even simpler example is just selling the company to someone else. The shareholders get whatever the agreed on price was to take it private.
> For example, selling off your assets doesn’t make you profit
if it's on the balance sheet and you sell it for more than it cost you, then you have to book it as non-operating income, i.e. capital gains, i.e. profit.
Ok, so you make X percent profit but the proceeds are more, and you distribute the proceeds to shareholders. You can also sell at a loss and still make distributions to shareholders. This is Private Equity 101.
It can come from a claim on future profits which aren't realized, which is the case here.
When does profits don't materialize, the company goes bankrupt, the government rescues it (can't just cutoff power and water!) and everyone is happy! Well everyone but the majority of taxpayers who aren't also shareholders of the utilities...
Because revenue is pure income without taking costs into account.
So you could still be giving away money to cash out that is owed to someone else? If your revenue is based upon fictional income then these privatised public services will become tax payer problems because they can't be shut down.
- buybacks are taxed when a person gets money for their shares, as capital gains tax
- lots of corporate tax is about exactly the opposite of what you say; i.e. reaching inside a company's bank account and taxing its profits directly, rather than waiting for the money to flow out and taxing it as VAT/income tax/cap gains. A huge amount of money and effort is spent on balancing this correctly, with R&D credits, structuring profits to appear in the correct year, etc etc.
You left out the "to shareholders, the majority of whom are international investors".
A water company caring about some international investors more than the people they serve, and siphoning money out to those foreign interests, borders on treason.
Yeah exactly. In fact anyone who believes in markets should laugh in the face of private natural monopolies as an obviously terrible idea.
The UK structures water provision as regional monopolies. This should be a hilarious joke but it's the reality. You can't change water company without living in a different region. There is no effective market competition for water provision in the UK. We already rely on price caps to keep this state of affairs in check.
Pretty much the only argument that almost stands up for them is that they're quite good at contributing to private pensions as a byproduct of being good stocks because people need water to not die. We gloss over where the rest of the money goes, possibly into PR management around frequent sewage dumping.
No, that's not it. They make sense as investments for things like pension funds because what those pension funds need is basically the other side of what's needed to have infrastructure like water and sewage treatment: the pension funds have a bunch of up-front money that they need to turn into a reliable income stream, whereas providing water and treating sewage has a bunch of up-front cost to buy/build/upgrade the infrastructure but only receives money slowly over time from people using that infrastructure. The British media has been obfuscating this because for partisan political reasons they want to convince people that having to pay for things that they directly use and benefit from is somehow stealing from them, and that the fair solution is for Canadian teachers' retirement money to be used to deal with their literal shit for nothing in return. So far it's been working astoundingly well.
> The UK structures water provision as regional monopolies. This should be a hilarious joke but it's the reality. You can't change water company without living in a different region. There is no effective market competition for water provision in the UK.
This is how utilities/water work in the vast majority of the US. I’m unclear why you think this is strange? At the very least, it doesn’t explain the UK’s problems.
Yeah to an extent, I admit that last statement was a little bit of a barb although I felt the topic of dividends was implied by the part about stocks etc.
Isn't that the whole point of privatisation? By introducing a profit maximisation goal you (supposedly) create a more efficient operation.
I've worked in both the public and the private sector and can definitely understand the argument. In my government job it was way easier to slack off and no-one really cared about the results. There was no actual pressure from above to hit targets. You had your budget and it didn't really matter what you produced. Not hitting deadlines was no big deal.
Compared to my normal jobs where there is a constant stress from management to be lean, efficient and hit goals. I hate it but the team spirit is much higher and I probably produce 10x in comparison.
It's only cheaper for the consumer when there is a forcing function for price. In a competitive marketplace - lets say breakfast cereal - if you're inefficient another manufacturer can undercut you while maintaining profit margins. There are ways around this of course through product differentiation, but something basic like cornflakes all hover around the same price point. All manufacturers are trying to improve efficiency because they know if they don't their competition will.
Now pick something that's a natural monopoly, like water supply. Consumers can't choose water suppliers - deploying pipes is prohibitively expensive - so there's no incentive to lower prices. Instead the efficiency goes to paying shareholders and management. Additionally these companies often have set leases on the infrastructure. If you have a 20 year contract and you know the pipes will start to fail in 25 years if you don't do maintenance... why do maintenance?
Government departments might not be the most efficient, but we can demand they're open and report what they spend money on.
I recently learned about electrical utilities in the US - the only way they really make profit is through building new infrastructure (power prices are set by a control board). There’s zero motivation for them to do maintenance, which is how we wound up with some of the devastating California wildfires a year or two ago.
When something is of public importance, like a utility, it really seems that running it as a public service instead of a private company seems like the right call
> Isn't that the whole point of privatisation? By introducing a profit maximisation goal you (supposedly) create a more efficient operation.
Right, but efficient at what? The answer is almost invariably 'efficient at making money' - that's the whole point; competition normally forces alignment of incentives, wherein 'better' service (for some value of 'better') results in higher income. Thus a business that provides better service is more efficient at making money - the free market hypothesis. When there is a captive audience, as in the case of public utilities, there is no incentive to provide a better service, but the company goal is the same - make the most money - and they are freed up to do it in the easiest way possible, usually by cutting costs across the board and paring down the services to a bare minimum. This is still efficient in the sense that they maximise income for minimum outlay, but it's not in any way desirable for the customers who are forced to use the now crappy service.
/extracting/. Efficient at /extracting/ money. This is the metric that is being rewarded, and therefore this is what gets optimised. You also see this pattern when an asset stripping firm buys an ordinary competitive free market company and runs it into the ground. To align this with /making/ money, just having a free market isn't enough - the controlling entity has to be in it for the long term, and has to bear responsibility for the downside of any decisions it makes. Otherwise it's just plunder and flee, just as with the usual kind of private equity firm corporate raid.
Quite a lot of the nationalised water and sewage systems elsewhere in Europe don't even seem to be managing the bare minimum though, it's just that without the privatisation angle the media doesn't care so they appear better. For example, Ireland tried to privatise their water industry a good while back in order to fund necessary investments and gave up due to protests - this was widely seen as a success that protected them from the disaster that hit the UK. Except that they've still completely failed to build basic sewage treatment in a bunch of urban areas that was meant to be built a long time ago according to EU rules, and which the privatised English water companies did manage to build. Plus they have the same problems that British water companies do on top of that. It's just that no privatisation means that there's no easy target to blame that fits people's existing beliefs about the world, so it's not front-page news and most people don't realise it's happening and happily believe their sewage is so much better handled than in stinky Britain.
That being the case then, I wonder what's different about countries that get it right? Better public sector management? Privatisation with stronger regulation?
A well managed parastatal/state owned company. The shareholder returns can be pumped back into the business if they fail and management sacked. A get out of jail free card/the profits aren't being siphoned off to a select few and indirectly, the commodity is potentially cost efficient for consumers.
> The answer is almost invariably 'efficient at making money'
That's because it's a more general category, not because it's a better category. Going the other way: privatisation can for example invest money up front to make operations cheaper.
That example does result in "better at making money" but that money can then be used to lower prices / increase quality / pay shareholders dividends / pay employees higher wages.
> That example does result in "better at making money" but that money can then be used to lower prices / increase quality / pay shareholders dividends / pay employees higher wages.
Out of these, we often just see
> can then be used to…pay shareholders dividends
During the welfare capitalism of the early 20th century, we did see lower prices, higher quality products, and higher wages. Then Jack Welch and his ilk discovered that you could axe entire departments, lay off thousands of workers, and pay that money to shareholders while your company crashes and burns.
Why invest in making better products than “the commies” if you can make cheap products on par with imports and fire factory workers/QA/research? They learned that if the consumer doesn’t have a competitive choice for a product that will break in 1 year vs one that will last decades, then why not sell 10s of the cheap one over and over?
"Often" seems like weasel words? Look at e.g. tech worker salaries rocketing up. Or the year on year improvements in key items such as cars and phones.
What you're saying doesn't jibe with my understanding of the 20th and 21st centuries' explosion of innovation and quality of life improvements.
If you think Fords and VWs are no better than Ladas, or SpaceX rockets aren't better than Soyuz rockets, or people flock to countries run by "the commies" vs, say, the US, due to the better products and wages in said "commie" countries, then we might just have a fundamental disagreement on the state of reality. But my understanding is the opposite is true.
> why not sell 10s of the cheap one over and over?
Companies can do that, but in a decent economic environment a competitor or twelve can spring up and offer products at different prices and levels of quality. E.g. not every restaurant is McDonald's. Why is that?
I guess I should have qualified that it’s not always the case, but we have also seen a lot of factory and middle class jobs gutted by corporations who favor profits over people. Jobs in manufacturing that paid well and offer good benefits don’t seem to be as common as they once were. The fact that a single income can’t support a family for a lot of Americans is a sharp contrast to previous generations.
That’s not to say that good jobs and food companies don’t exist, as you pointed out we have tech jobs that lay well and other sectors. The divide between what’s achievable for the middle and lower class now vs the upper is staggering though. Having to worry about affording a mortgage, health care, food, etc is a reality for many Americans while a handful simply have to say what they want and they have it without batting an eye or considering the cost.
We can both pick and choose which sectors to look at to support either the idea that jobs are great or that wages are bad, my point is that there has been a very tangible shift for a decent number of companies to move away from good wages and benefits to giving C-levels and shareholders more money than they know what to do with.
Also the other side of the coin, little opportunity for growth, you serve an area with a certain population and a commoditized product like water offer little room for improvement, once you run out of quick wins to keep up that growth, you either increase prices or skimp on capital expenditure.
> Right, but efficient at what? The answer is almost invariably 'efficient at making money'
They don't make any money unless they give the customers what they want, that's the whole point. It's so basic even animals have an instinct for it. That's why government and private business shouldn't be mixed.
Animals have the instinct to shit in front of you and not feel the slightest discomfort doing so too. Should we all start shitting in front of each other to more closely align our behavior to animal instincts?
I've also seen many public places where people are efficient, and also stressed because of the amount of work to do. I feel like your experience is not very applicable to all situations.
What's more, a private company which has monopoly does not really have special incentive to respect deadlines and everything: it is the only choice, so customers won't deal with any competitor and are stuck with this private company.
Absolutely. My experience is completely anecdotal, and even if it's true that you get less bang for the buck in the public sector I still think it's ideologically sound and worth it. My country has a huge public sector but I think it's good.
What's normally the driving motivator in public companies to be efficient?
My experience with the public sector is the same. People must spend all their budget or it will be cut next year, so they do. Processes calcify and no one is incentivised to improve them. It's hard to fire people or make them redundant, so people get shuffled around between departments, costing far more than they contribute. Pensions are often very expensive. Strike action is more likely, as it's a big mass of people who can shut things down.
Fundamentally, it's the principle-agent problem. The customer isn't the one paying the bills. The customer is a politician or two who can heap money on the department or not, and they get praised for heaping money rather than saving money. The people paying the bills, taxpaying individuals and businesses, must do so or they go to jail. So why be efficient when your customers cannot legally avoid buying your service?
Public infrastructure doesn’t need to make a profit, that should never be the goal. It should be to deliver good reliable service/results at a consistent price.
That is often at odds with “making profit” either from over hiring so there’s always fallback people on call to overbuilding so in 50 years your still under capacity.
The goals are entirely different and so should the incentives
When the government is the customer, and the private company is maximizing profit, the company's effort goes towards figuring out how to 'raise' rates.
This might sound like free market, I'm just trying to increase prices while reducing my overhead (efficiency). But in practice you end up paying a lot for a little. So instead of government workers slacking off, you have even less well payed people slacking off, with managers making a lot of money.
If you ever had to go to a 'privatized' DMV you can see it. Just awful everything, because of cutting corners. Yet the company gets paid a lot. The money goes to the company leadership, it doesn't 'trickle' down to operations to do a better job.
You never invest in infrastructure - in 30 years since privatisation, water companies in Britain haven’t built a single reservoir, lose 30% of water to leaks and dump raw sewage on the beach where children swim
Profit maximization does not inherently create efficiency for all consumers.
A profit maximizing company may reasonably say "oh this population is super expensive to serve so we will let services there stagnate or even remove services for that population because it is more efficient for us to focus elsewhere."
Or consider a subscription service that makes it considerably more difficult to unsubscribe. That increases profit while making the product actively worse.
Profit incentive leads to efficiency of profit extraction, which is only loosely correlated to efficiency of services for consumers and occasionally runs in total opposition to efficiency of services for consumers.
I think that the differences between your experiences at government vs private might be correlated with the size of the organisation. I've worked at very large publicly traded companies that operate kinda like government institutions: too big to fail, tons of bureaucracy, endless meetings, silos / walls / not-my-job.
> I've worked in both the public and the private sector and can definitely understand the argument. In my government job it was way easier to slack off and no-one really cared about the results. There was no actual pressure from above to hit targets. You had your budget and it didn't really matter what you produced. Not hitting deadlines was no big deal.
Cuz that never happens in the private sector, lol. Guess where I'm at now...
There was a week while consulting pre-COVID I tried to see how many hours of Skyrim I could play on Switch, both in the office and remotely. I got to about 11.
>By introducing a profit maximisation goal you (supposedly) create a more efficient operation.
Yes but one way that happens is by ignoring unprofitable customers. That's great if you are a car dealership and sell higher end cars to wealthier people or run a botique grocery store with fancy all-organic produce, but terrible if you are (for example) trying to provide healthcare or education and decide that the profit margins aren't high enough for you to serve various segments of the population.
Anecdata: I used to work for public academia. I got out after a burnout due to massive overwork. I've worked in a couple of start-ups, among others, and found them all much more relaxing.
Sure, there's lots of pressure, but, at least for someone with my profile, it's limited by the fact that it's easier to walk away.
Seems to me like an incentive issue. I can't see why it'd be impossible to recreate a good incentive structure for employees in the public sector so that they'd perform similarly.
Your reply is a cynical take on GP’s comment that was providing a clear, concrete and simple solution to the problem at hand that most countries, especially in EU, are facing.
Your comment on the incentives of private companies missed his point about the competition aspect.
This is a pet peeve when market maximalists talk about how public services are "inefficient". Efficiency in economics refers to profitability. If a public service isn't profitable, that actually makes it efficient in a practical sense because a public service being profitable would mean it is overfunded (i.e. it's receiving more funding than it needs to operate).
In practice this often means politicians will squawk about how a given public
service that is inherently a cost center is "inefficient" (which is true in the economic sense because it is designed to use its entire budget and thus doesn't extract a profit), impose austerity by cutting its "bloated" budget (which is justified by also cutting the workforce and other cost factors) and then repeating this process until the public service is inoperable and its failure is seen as a demonstration why it must deseperately be privatised and sold to the highest bidder (who can now get the monopoly position at a fraction of its potential value). Potential extra steps along the way involve creating a (government-owned) corporation to make it easier to complain about its bad business performance.
On a related note, there is an independent "tax payers' association" in my country that makes a big deal about "tax waste" by highlighting (usually fairly small) public works that most often have legitimate uses/explanations but may seem absurd/wasteful at first glance but largely prefers to stay silent when it comes to business subsidies and such. They have a clear ideological bias and while the media seems to be somewhat aware of this, it's always interesting to see journalist report on inadequate welfare programs in the same breath as mentioning (and using b-roll of) the public "national debt clock"[1] installed by this association.
[1] The most recent example was a segment on youth debt stemming from welfare overpayments their parents received (which under the legal system at the time was partially imposed on underage children in the same household even if they didn't have any money - the law was recently changed so they could only be held liable for the amount of money they owned at their birthday when reaching the age of maturity). Ironically this debt was the direct result of the kind of legislation to cut "tax waste" (in this case: welfare overpayments) the association generally advocates for. The hook was something like "the government can be billions in debt but for a young person a much smaller amount can be life-ruining" but the lack of reflection was astonishing.
> This is a pet peeve when market maximalists talk about how public services are "inefficient". Efficiency in economics refers to profitability. If a public service isn't profitable, that actually makes it efficient in a practical sense because a public service being profitable would mean it is overfunded (i.e. it's receiving more funding than it needs to operate).
Ehhhh... nah. There is still a cost vs. return.
Postal Services, for example. $10 ships 1.1 packages on average, or they get efficient and $10 ships 1.9 packages, etc.
You absolutely see this in things like Medicare where $100 worth of spending doesn't get you 90-100 generic aspirin, but more like 20 pills, and the rest of it goes to pay middle men.
Yes, but economic efficiency measures profit, not "number of packages shipped per dollar". Also that metric may not even be meaningful in isolation and optimizing for it may lead to worse (social) outcomes.
The problem with Medicare in the US isn't that Medicare is inefficient. The problem with Medicare in the US is that the US has a private healthcare system and Medicare exists on top of it. A universal public healthcare system wouldn't perform the same way in terms of bang for the buck because the dynamics would be very different.
This is one of those times where the math is so simple that it's baffling that anyone misses it. When a private company must 1) do the same job as a public service while also 2) coming up with surplus bags of cash to hand over to investors and shareholders, how can it possibly be more efficient?
Minimise investment to maximise profits, which you take, whilst running the minimum service required to avoid contract penalties or publicity so adverse you lose your contract.
Then threaten to go bust and get bailed out by the government when the infrastructure starts to break a few years later.
> The passenger train operating company had failed to inform Railtrack and the signaller that the automatic warning system (AWS), which warns drivers of adverse signals, had been turned off in the cab of the HST.
But Ladbroke Grove was Railtrack's fault entirely (within the first few years of its creation). Meanwhile it's been 20 years since National Rail was created, when do we get to blame current governments and National Rail for bad infrastructure?
Not disagreeing, but words are important here to get at precisely what happened.
> Railtrack made a lot of money
"Made" implies creation, growth, increase.
This is the opposite of what happened.
The money wasn't made. It was /extracted/. They /extracted/ a lot of money.
Railtrack doesn't have that money. Their succeeding entity doesn't have that money. The government doesn't have that money. The taxpayer doesn't have that money. None of that money was invested such that any of these entities might benefit from it in any way. It was removed from the system into private wallets.
The private owners plundered and fled, and the remaining skeleton was socialised again so it might regrow a bit of flesh from public taxes for the next extraction cycle.
What about losses from federally funded corporations like USPS and Amtrak that are bailed out every year? Amtrak loses over $1 billion/yr and they are still "nationalized." USPS loses multi billions per year.
USPS costs billions, public services don't need to be profitable they just need to be paid for. Taxpayers pay for it with their taxes.
When we sell our public investments for a quick buck we complain when the real cost of the service gets priced in. The trouble is, we pay the same taxes still, they just no longer go to the service we privatised, so we feel it in the pocketbook individually.
Presumably those taxes are going elsewhere now, but I was very happy with them going to core public services.
The USPS is "loosing" money because it was told to prefund it's Healthcare having to set aside $100 billion in 10 years (unlike any other company) . Moreover, it's much more a service than a business, e.g. it can not really set its own prices.
I don't get it. The USPS has lost billions due to government policies and can't enforce prices due to government policies. They are forced to deliver to unprofitable routes and have prices set to inflation due to government policies. Private delivery services like Amazon and Fedex are generally profitable and don't have these issues. Why is a government alternative better?
> They are forced to deliver to unprofitable routes and have prices set to inflation due to government policies. Private delivery services like Amazon and Fedex are generally profitable and don't have these issues.
I, for one, think it's a good thing that people are entitled to their mail regardless of the profitability of their mail route. That's the point of a public service.
A cynic would say Congress's actions, loading the USPS with costs while denying it control over prices, is so that people ask "Why is a government alternative better?"
Is it your opinion that some people simply shouldn’t get their mail, or that people who live in rural areas should pay exponentially more to get their mail delivered? Why is either of those things desirable?
USPS is not a business, and it’s a fundamental mistake to pretend it is, solely for the sake of slandering it.
None of the competitors offer a similar service to USPS.
Among other core competencies, USPS has nationwide daily coverage of the entire United States and centuries(?) of experience interoperating the the respective mail services of every country in the world and then some.
None of the competitors are allowed to offer a similar service to USPS.
That said, the service provided by the USPS nowadays is primarily delivery of paper waste into a receptacle I am obligated to empty because very occasionally they also use the same box for packages.
Welcome to the world of privatising public services. This has been a scheme of free market politicians for years; call public services too expensive, strip them of funding and hamper them in other ways, then call out how they are not delivering on their promise. Then sell the off at bargain prices, often with additional government guarantees on revenue. After privatisation services don't improve and cost never go down, but somehow the public is better off?
We need to rearrange our brains. USPS provides a valuable service to the country. It does not need to make a profit. It should be evaluated based on the value it generates for the people. Why does something like the mail system get treated differently than something like road development, which is not expected to bring in any revenue at all let along a profit?
Amtrak is the least subsidies mode of Transportation. It has to compete with road transport and the subsidies given to highways, roads and parking is orders of magnitude larger then what Amtrak gets.
I think you may have conditioned by HN to assume that any comment is a refutation. I brought it up because it’s an additional piece of the explanation for why amtrack can’t support itself on ticket prices alone.
Mostly because it’s the single biggest thing that keeps me from using Amtrak. The last few trips I’ve taken, we ended up sitting waiting on freight trains for many many hours.
Each big city we came to we had to stop and wait without having any idea how long it would take for “freight traffic to clear”.
I love train travel, and I’m not price sensitive at all, but the delays were completely absurd.
I expect the maximum profit sweet spot actually includes a small amount of penalties. If you don't get any penalties at all, you are probably leaving money on the table re service cuts.
By running your lines on a shoestring budget, how else would you? The contacts have a fixed life time, keep your expenditures low and you can extract the highest profits. Long-term maintenance in particular suffers after privatization, because why would you, that doesn't align with your goals. And the risk is nill, because the government needs to provide the services so if things go awry you have little too worry about. They will have to bail the line out. Just find a way to move money from the entity to shareholders while you can and you're good, they are not clawing that back.
Offering shitty, expensive service. It's not like customers can use a competing rail line, so every dollar you invest in customer service is a dollar out of your pocket.
My experience of American railways as a tourist is having to show my passport to book a ticket from Davis to Sacramento (I assume I also did that on other trips like to SFO but don't remember), and it being expensive.
My experience in the UK and Germany is show up, pay, go, and it being cheaper.
US consumer rail way is a quasi public corporation (Amtrak) that has lost money for decades and is still funded to the tune of over $1 billion per year. You are confusing that with private US rails.
US private rails own the railways and, while in theory they are required to give way to passenger rail, are so long and take so much time to cross that in practice passenger rail is forced to adhere to the time-schedule of private rail.
This is arguably illegal and only exists because the govt refuses to enforce the obvious interpretation of the agreement.
Meanwhile, the US DOT has historically always taken the approach of "the solution is more highways. What's the problem?", losing far more than $1B/year.
There are 3 million rail cars moved per day that haven't produced apocalyptic skies and chemical rain. You misrepresent the overall safety of private rail lines.
We're talking about passenger rail here, not cargo. Amtrak has a legally mandated monopoly, so you can only compete with them by building your own rails or using a different travel mode (e.g., bus or air).
If you find their service to be good and cheap, I can only assume you've never ridden a train in Europe.
By stripping and selling off as many assets as you can and borrowing as much as possible leveraged on the income from future fares. There is no incentive to spend this on long term investment or contingency planning. The railways are an essential service so the government will always have to step in when the private company reaches breaking point, so no money is saved by the state in the end. It’s just disguised debt with terrible interest rates.
Amtrak, a public rail company gets over a $1 billion in public funding. Private rail lines do not. Amtrak has operated at a loss for decades unlike private rails.
You are comparing completely different services, though, right? Private freight lines versus passenger? Amtrak runs on lines owned by the freight companies. I've been on an Amtrak train that had to sit on a siding while a freight train passed. The passenger service has to have a published, predictable schedule. The freight moves when it is needed and breaks the Amtrak schedule, leaving a crap passenger service.
I think the extent to which freight shoves aside passengers varies from region to region. My worst experience was going to West Virginia from DC. I find the Vermonter keeps its schedule pretty well.
A "loss" here is just a politicized framing of the fact that government pays Amtrak to do something of use to society.
You might as well say that the US military makes a $1 trillion loss per year. No, they supply something which is required by the govt and which has a cost.
1.) Force other competitors to go belly-up or buy them to create a Monopoy or if the authorities don‘t let you do that, try to end up in a duopoly situation where you and your competitor come to some silent agreement to not overly compete.
2.)
Raise the regulatory bar to prevent startups from entering your field.
Milk whatever half dead infrastructure you have and people depend on.
Oh and raise prices every odd year while still not investing in the rotten infrastructure.
Somehow investors need to see growth and dividend payments.
Due to 1.) there is no competitor left that could offer a better service. People cannot simply switch.
Die to 2.) you are not in danger of ever having to face situation 1.) again.
Job of the government is to not let 1. and 2. happen.
Cutting corners and costs e.g. shutting ticket offices, doing just enough to barely offer the service. It's not like your passengers have any sensible alternative. If that doesn't do it then you can also load the company up with debt and pay yourself a nice dividend until rates rise.
> load the company up with debt and pay yourself a nice dividend
I am new to this. Doesn't a dividend come from profits? What profits are there if you need debt? And who will loan to you if your business plan is to exit scam?
> What profits are there if you need debt? And who will loan to you if your business plan is to exit scam?
If you’re a water company, after government bailed out the banks, chances were good you’re not going bust. What are they going to do? Let the entire population of London die of dehydration?
And since a lot of investors in large utility companies are international, should the government somehow not make them whole (or worse, just expropriate), there would typically be repercussions - with international arbitration courts adjudicating reparation with processes that are typically stacked in favour of businesses.
And they should thus pay the extra cost for that privilege.
30 years ago Terry Wogan was using his radio 2 breakfast show telling the 40-60 demographic how to send emails and watch his webcam. That demographic are now 70-90. I do sympathise for independent 95 year olds who can't use a ticket machine. I'd rather we spent the money in a far better way -- increasing services for example.
I dont think this is true, but suppose it was - so what? If I am travelling eith my daughter I often need advice from the ticket office folks. It does not matyer how they aquire it.
Additionally, often the ticket office gives better rates -
It could possibly be achieved here if our prices weren't so arcane and difficult to understand. There's tickets you can't get from the machines etc. There was a photo yesterday of a queue of 10 odd people waiting next to 4 idle ticket machines. It's solvable but nobody seems interested in actually doing it, presumably because it costs money to fix. International Airlines I assume gained some competitive edge by that move, there is no competition in a lot of our privatized industries so no real incentive to do anything but the bare minimum.
You asked how profits are extracted, and I answered your question. Now you're bringing up monopoly vs free market, which has nothing to do with the question.
The award of the contract to run that particular collection of routes is ostensibly free-market. Once it's awarded, they hold a monopoly for the duration of the contract though.
Actually, the very widely replicated experience of most challenger utilities is that the entrenched utility will stop you, sometimes in collusion with the government or municipalities. Try getting permits to dig up the road to put your competing pipes alongside the current monopolists.
In Britain, British Telecom spent around 20 years making it impossible for other players to supply an internet service to consumers. They used various anti-competitive practices and had very good capture of the largely toothless regulator OfCom. This is all documented.
By making sure there’s no water fountains on the train platforms, yet plenty of kiosks and vending machines that sell water.
I was just at EWR last night waiting for an arrival and there was an old man looking for water. He asks an employee where to find some and she looks at him like he has two heads.
“You have to buy some. Or you can drink out of the faucet in the restroom”
Can you imagine that? Telling an old man at 1am he has to drink out of a bathroom fixture to quench his thirst.
In my mind, I was hoping he was flying to a more civilized country. Because that’s the system we’ve built for ourselves. In a better present, the man would have access to a drink for free. But because a profit needs to be made, the entire airport is organized around little nickel and dime scams.
This is the way the world works now and anyone who disputes the justification of it just gets neatly added to the pile of "complaints" burned by elites for warmth.
By competing to make the best rolling stock, online booking systems, catering, cleaning services, etc. These contracts should be put out to tender and should the promised level of service not be delivered then contracts should be lost and/penalties applied where necessary.
Most important is that the target service coverage, quality, etc should be decided by government (who should be seeking to please voters), not corporations who are seeking to please shareholders.
Sell off assets, get subsidies, understaff, rundown and don’t maintain equipment. Provide a shit service. When bankruptcy comes up you’ll be bailed out.
Rail lines have inherent competition in form of trucks and boats (for transport of goods) and cars, busses and planes (for transport of people) and rail is often outcompeted by these as they don’t require large station in expensive real estate.
So the example of rail doesn’t really apply to this branch of the discussion.
However, once you’ve bought a house, it is very difficult to to but in new pipes from a different water works.
Thames Water's CEO has a $1.5 million pay package which is lower than CEOs of corporations of the same size. The funding for public unions in the UK is $233 billion. Great comparison there.
> The funding for public unions in the UK is $233 billion
That’s a pretty amazing figure, how was that calculated?
Are you seriously arguing that that the Thames Water CEO was underpaid? They have been mismanaged extraordinarily. Their debts, losses, costs, service and environment records are so poor that nationalisation is being discussed. They have been paying dividends and bonuses throughout.
CEOs of corporations of the same size quite often have to find and retain customers in competitive markets - which is hardly the case with Thames Water?
What is your point? $1.5 million is used to attract a CEO who can manage a large corporation. That is less than many players on second tier English clubs who are riding the pine. That is a rounding error when considering $233 billion paid to unions.
Yes they do, from rival businesses, superior and new technology, just look at Chat-GPT potentially putting programmers out of work, or telegrams being made redundant by pagers, and text messages and email.
@arethuza
>CEOs of corporations of the same size quite often have to find and retain customers in competitive markets - which is hardly the case with Thames Water?
Water companies are delivering a minimum standard of water, call it the least toxic form of water considering the energy constraints and logistics of delivering water en-masse compared to other methods of obtaining water.
Mains water from a very young age always made me sick, so where possible I use bottled spring water in the kettle, but am currently considering a reverse osmosis water filter, to deionise the water in the house as much as possible.
Deionised water is the best tasting, sweetest tasting water I've ever experienced, and if I listened to the medical experts I should be dead on numerous counts of their assertations. So two fingers up to them as well! LOL
I don't think you understand what these companies do if you believe Thames Water is in competition with Evian or Brita. Remember they're not just providing drinking water but handling the treatment, recirculation and safe disposal of wastewater too. So in addition to having inadequate fresh water storage for some parts of England and cutting back maintenance to the extent that they lose an enormous amount in leaks, one of the bigger problems is how they're failing to adequately dispose of wastewater. As a consequence of this there are some rivers, lakes and beaches in England + Wales that are now unsafe but which weren't before they were privatised.
> As a consequence of this there are some rivers, lakes and beaches in England + Wales that are now unsafe but which weren't before they were privatised.
Carefully chosen words, someone has done their research!
Thats what happens when new standards come into force and improve upon the old standards.
"The purpose of this dataset is to present a summary of bathing water compliance in England between 1988 and 2014 against the old bathing water directive (76/160/EEC), which was repealed on the 31/12/2014"
However I'm not against better standards, but I am against some of the "engineered" methods used to gain those standards....
You're going to have to do a bit more than hand-waving about a bathing water directive being repealed back in 2014 and dumping a couple of links. If you want to make a point, make it.
There's lots of factors at play here, it could be brexit related because the beachs have become soiled so people go to Europe for a break, we dont know who is invested in Thames water, are these british pension funds or other types of investors. Is this a sexism thing, what with a female ceo, has she been wrongly advised, manipulated with data presented in a particular way.
There's so many factors potentially at play here and some of it we wont get to ever know about, but life has taught me there is manipulation in many guises.
Wait before you were certain I was some sneaky trickster doing wordplay and that you had a slam dunk of a response, now “there’s lots of factors at play here”?
Nothing has changed, I simply didnt document all my thoughts on here straight away because its not a Rorschach test, besides I let google suggest some of the links, because I've noted how manipulative it is at shaping public discourse.
In the examples here, no, CEOs don’t face real competition. Water companies are sold off public utilities. They way they make profit is to degrade service and raise prices. No one is going to install a competing water system. No AI is going to do that anytime soon.
The Economist has a political bent, but they are clear on how privatisation has gone: ‘Dogmatic adherence to privatisation in the face of its sustained failure suggests ideology, not pragmatism, was the motivation.’
> Water companies are delivering a minimum standard of water
No they aren’t. That’s a key point in the article.
> They way they make profit is to degrade service and raise prices. No one is going to install a competing water system.
So that other technologies, like rainfall capture systems and water filtration systems can be become financially viable through economies of scale. If you have a roof you can top up water tanks, water filtration systems clean the water and can recycle the water. Reverse Osmosis filtration which deionises the water is about as pure as you can get, so pure nothing can grow in it, which is why colony forming units (CFU's) aka TVC's are so low, lower than spring water.
Not long to go.... standby for some more "engineered" news.
>The Economist has a political bent,
Whilst its easy to say, privatise problems, Thames water has its own unique problems, but when looking at something like the coal miners, what did it do? It shifted people away from using coal to other less large airborne particulate laden forms of fossil fuel, the latest being air source heat pumps 1w in 4watts out at best, solar power 15-22% efficiency, and nuclear with the debate over the use of different nuclear fuels, like plutonium and thorium. Sort by Specific Energy (MJ/Kg) at this link https://en.wikipedia.org/wiki/Energy_density#In_nuclear_reac...
Anyway some things are engineered including things in the news like Thames Water.... Someone's getting a shake down!
I'm in Scotland so I have perfectly pleasant tasting water from the state-owned Scottish Water whose CEO get paid a small fraction of what the Thames Water CEO gets paid (~£295K plus
bonus).
"Paid to unions"? Do you mean paid to staff who might be members of unions? And if so why you are comparing money paid to a specific company to money paid to union members across the entire public sector?
I don't think you want to point at English football clubs if we're talking about sensible compensation, not least since one of the issues highlighted in the article are the debt load of these English and Welsh water companies.
This is a nonsense delineation in systems thinking. That railroad shareholders are also the public doesn't justify ripping them off.
Unions are beholden to the same impulses towards monopoly and rent-seeking as corporations. Swap members (i.e. sellers of labour) for shareholders (i.e. sellers of capital) and employers (i.e. buyers of labour) for customers (i.e. buyers of goods and services) and union management starts looking remarkably like its corporate analog, churning undifferentiated workers into a differentiated and thus premium block of labour as truly as a mill grinds forests into houses.
