In the forthcoming general election in the UK, the Labour Party is expected to come into power. Their election manifesto promises a major reorientation of policy in the provision of essential services. Margaret Thatcher pioneered a new paradigm of economic policy — the Reagan-Thatcher neo-liberal version of capitalism. This became the ‘Washington Consensus’.

We embraced this with our economic reforms in 1991. Implementation was, however, constrained by ‘politics’. A core belief has been that the private sector is intrinsically more efficient than government agencies and the state should reduce its role to the provision of ‘public goods’ such as policing, deregulate, and privatise everything else. For essential public services, the prescription became, split the enterprise through unbundling, create a competitive market structure where feasible, and privatise with oversight through independent regulators.

The privatisations in UK were sweeping. Electricity, gas, water and the railways were all privatised. This completely reversed the nationalisations undertaken after World War II by the Labour government which came to power with a sweeping mandate. The nationalisations, undertaken to stop profiteering and to serve the public better, were popular. These institutions were working well over the years and provided quality services. There were no major problems that needed attention. The privatisations were ideologically driven. They also suited Thatcher’s politics as she was able to break the back of the trade unions. These then became the template for policy advice from the World Bank and consultants. India has now embraced this with the ambitious asset monetisation programmes.

But in UK the private supply of essential services has had problems which have come as a surprise and have been causing growing unease. For the railways, separation of the track systems from the running of trains on different routes was undertaken and these individual entities were privatised. Competition was introduced in the running of trains. The track network on a route, being a natural monopoly, remained with one firm. A fairly complex system with many firms was created. With the passage of time, the quality of service of some of these firms deteriorated. Some reached the verge of bankruptcy leaving government with no option but to intervene to keep the trains running. Underinvestment in the physical assets has been a persisting issue.

The Conservative government had to accept the seriousness of the problem. A White paper was published in 2021 and reforms of the rail system were envisaged. But hardly any progress has been made. The National Audit Office in its March 2024 report observed, “The rail sector’s performance for passengers and the taxpayer is not good enough and has not been so for some time.” The Labour party in its manifesto promises to bring railways into public ownership in a unified system under Great British Railways.

In the water sector which was privatised and has been under regulatory oversight of the water regulator, Ofwat, there have been startling revelations. The BBC reported in January that Thames Water, the largest in the country, had 6,950 hours of sewage spills in the last nine months of 2023. They were fined around £3.33 million in July 2023 for discharge of millions of litres of untreated sewage, and the judge held that “Thames Water had deliberately misled the Environment Agency during its investigation”. Thames Water pleaded guilty, and the Environment Agency told the court that that it was a case of ‘reckless failure’. Between 2017 and 2023 Thames Water paid £35.7 million as fine for pollution. Thames Water has a heavy debt burden and is having difficulty in raising finances. There has been a growing public outcry.

Energy market

The experience of the fully deregulated energy market in the UK following the conflict in Ukraine is educative. The sanctions imposed on Russia disrupted gas supplies to Europe. Global gas prices reached record highs. Though gas for the UK came from its own North Sea and not from Ukraine and there was no supply disruption, gas prices went up to reflect global spot market prices. Electricity wholesale prices went up correspondingly; even for renewable and nuclear energy producers though their costs had not gone up. All energy companies made historic record profits. Household energy prices rose by 132 per cent.

This drove inflation to high levels not experienced in decades. The Conservative government then had no option but to give cash support to consumers to help them cope with the sudden burden of seeing their energy bills more than double. Then to generate revenues for this outgo, the government imposed a windfall tax on the energy companies of 25 per cent which was soon raised to 35 per cent in addition to the normal corporate tax. The older policy instruments of price regulation remained off the table for ideological reasons. The Labour party promises to set up “Great British Energy, a publicly owned clean power company, to cut bills for good… paid for by a windfall tax on oil and gas giants.”

There has been a growing disconnect with the feelings of ordinary people. In a YouGov poll in October 2022 most Britons believed that trains, water and energy should be in the public sector. That profit maximising firms would raise prices to the extent they can when external shocks create the opportunity should not have come as a surprise. In markets where demand is inelastic, price spikes are extremely high. Again, profit maximising firms have little incentive to invest without seeing short term returns and that is typically the case with investment needed to increase railway network and sewage treatment capacities. The limitations of independent regulation functioning with information asymmetry were also underestimated.

It would be prudent to revisit our ambitious plans for asset monetisation, analyse the UK experience on our own with transparent consultations, and then take fresh decisions.

The writer is former Secretary, DIPP, and Distinguished Fellow, TERI

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