Saturday, 29 November 2008

Nationalisation and profit, the new chalk and cheese

As we enter a new era of nationalisation my mind goes back to the 1970s when vast swathes of British industry were in "public ownership". The railways, the coal mines, steel manufacture, the telephone service, the supply of gas and electricity, shipbuilding and British Leyland (which made things they tried to say were motorcars) were among the largest and best known of the nationalised industries but there were many more. Now we have three nationalised banks, Northern Rock, Bradford & Bingley and the Royal Bank of Scotland and calls are being made for failing businesses to be supported by the taxpayer as these banks have been. It is a staggeringly different position from just fifteen months ago, but what does it really mean?.

Private ownership is easy to define. I own FatBigot Towers and everything within it. I have the right to use my property as I choose provided that my choice does not contravene the law and if anything goes wrong with my property I have to pay to sort it out, either directly in cash or through a claim on an insurance policy. No one has the right to use my property without my permission and no one other than me is burdened with the need to repair it or pay for replacement when it wears out. It is a two-way process which can be put in terms of benefit and detriment, profit and loss or rights and obligations. However one chooses to describe it, the up-side and the down-side both attach to the owner and to no one else.

Businesses are a little more complex because they often involve a company, indeed every nationalised enterprise has involved a business run by a company. A company is not, strictly speaking, owned by anyone. A company operates by having a sum of capital which it uses to do business and, with any luck, to make a profit. In order to raise capital a company issues shares. It says "pay me £1 and you will be entitled to a share of the profit I make using your £1", a million shares are sold at £1 each giving the company £1million to work with. If it makes £10,000 in profit in one year it might pay a dividend of 1p to each of the 1 million shares or it might re-invest all or part of the profit with a view to making an even greater profit next year. The shareholders do not own the company they own the right to participate in profits if those who manage the company decide to pay a dividend. The chairman and board of directors do not own the company, they manage it and work for it. In fact no one owns a company any more than anyone owns you or me.

A company, however, can own things just as you and I own things. We own our cars, televisions, fridges and all the rest of it. Companies might buy their business premises, furniture, carpets, cars and so on (although in practice many such things are rented) they also buy the things they need to be able to trade. A manufacturing company buys raw materials and turns them into finished products which it then tries to sell, a trading company buys goods from suppliers and tries to sell them for an enhanced price to purchasers. Each company owns the things it buys until such time as it sells them, that much is blindingly obvious. What is not so obvious is that companies with an established business have a further assets, goodwill. Goodwill is what causes people to do repeat business with someone. There are two dry cleaning shops in close proximity to FatBigot Towers, I only use one because I tried that one first and they have always provided an excellent service at a good price. When a new neighbour asks where they should take their curtains for cleaning I point them in the direction of the cleaners I use. That is what goodwill is all about. It is a valuable asset of a business and can be sold just as a machine or a desk can be sold.

So, what happens when a company is nationalised? There are various ways nationalisation can occur but the essence is that the government takes over the shares. It might take them all or only enough to give it effective control, but when we talk of a company being nationalised it means that sufficient shares are held by the government that it can dictate how the company operates. As I said above shareholders do not own a company, but they do have certain powers over how it operates. They can dismiss and appoint directors and pass resolutions requiring the managers of the company to adopt certain trading practices. Such decisions can only be made by shareholders if a sufficient number agree and nationalisation occurs when the government holds a high enough proportion of the shares to be able to appoint directors and dictate commercial policy.

In other words, nationalisation is not about ownership but about control. The rather romantic notion that the people of the UK "own" Northern Rock or that they "owned" the coal mines and the railways prior to privatisation is misleading phooey. The people of the country neither own nor control anything about a nationalised company. The government has the right and power to control how a nationalised company conducts business, to suggest that this automatically confers a benefit of ownership on the 60 million is utter nonsense. That not only explains my dislike of the term "public ownership" it also lies behind the biggest problem nationalisation causes. That problem is that nationalised companies are run by government and, therefore, political rather than business reasons dominate decision making.

There are four main political pressures that prevent governments operating nationalised companies as businesses. First, the fear of failure. If you take on an ailing business because it needs to be saved, anything short of saving it is failure and failure can cost votes. As a consequence the political need is to keep the business going even if it makes losses year after year. Secondly, jobs. Loss making companies are, almost by definition, overstaffed. Shed jobs and you risk shedding votes. Thirdly, the need to appear consistent. Businesses often need to change their strategies at short notice when market factors make their established approach inappropriate. It is not easy for governments to do this because a change of tack can be interpreted as indecisiveness, and indecisiveness can cost votes. Fourthly, the effect of the business on other people. We are seeing this at the moment with the government making moves to force banks to lend even where the bank is not sure the customer is a good bet. They are pressurising all banks not just the nationalised ones, but the nationalised banks will have to do it even if it is bad for their own business.

There is also the issue of profit. Profit is a particularly difficult matter for the present government because almost every minister, and certainly all senior ministers, have condemned the making of profit consistently throughout their political careers. For them profit is a consequence of workers being exploited. We should never overlook that every senior member of the current government entered politics as a dedicated Marxist. They will not find it easy to oversee a nationalised business that becomes profitable (not that I expect any of them to do so). What can we expect if Northern Rock returns to the lending policies which made it a successful building society? Either the government will sell it as a going concern far too early and suffer a substantial loss to the public purse or it will rein-back the profit making and force it to break-even.

Whatever happens to Northern Rock, Bradford & Bingley and any other company the government nationalises over the coming year, we can be certain of one thing. It will cost the taxpayers a hell of a lot of money and all notions of us owning them are nothing more than vacuous guff.

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