Europe’s privatization of public assets isn’t a model for the U.S.

By Cate Long
August 12, 2013

Chart: Policy Dialogues

Some think that when it comes to privatizing U.S. public assets, our nation is a laggard and we really should be following the path of Europe in selling infrastructure into private hands. Here is attorney Kent Rowey, who is a leading infrastructure privatization attorney (and whom I’ve sparred with previously):

This should be a golden age of public-private partnerships — the need exists in cities across the country. And the capital is there, from private investors seeking long-term returns. American infrastructure has fallen behind countries like France, Italy, Spain, Portugal, Poland, Hungary and countries that have long embraced privatization of urban systems. Ironically, the United States has become an emerging economy when it comes to developing P3 projects — in which opportunity needs to be matched with political will and bold thinking to undertake.

Europe went through a massive privatization process starting under Margaret Thatcher in the 1980’s. But unlike the United States, U.K. and European countries had enormous state holdings that encompassed telecoms, utilities, banks, manufacturing and energy companies and many other industries. Few of these are under public control in America, which makes the pool for privatization much smaller.

Another difference is that many of these UK and European enterprises were floated on the stock exchange and small and large investors were able to invest in British telecoms and British gas. As you can see in the chart above through 2004, the nadir of privatization, the greatest amount of revenues came from public offerings (the dark blue bars) rather than private sales (the light blue bars), which is the common model in the US. Other than floating the Tennessee Valley Authority or US Postal Service on the New York Stock Exchange, there are few equivalent opportunities in America.

And how have Europe’s privatization deals worked out? In the U.K., the cradle of privatization, not so well, at least for trains:

Analysis from The Independent newspaper in 2013 showed that Britain’s privatised railways has led to the most expensive train fares in Europe. These fares are increasing even further as privatised train operators seek higher revenue. Privatisation has not meant the end of taxpayers’ support. Since privatisation the government has subsidised different companies that separately own the track, trains and infrastructure to the tune of £3 billion (€3.4bn) a year. In other words, the state is subsidising private entities to take profits out of the railway system. It is estimated that privatisation has resulted in a cumulative loss of £11 billion (€12.6bn) of public funds, around £1.2 billion (€1.4bn) per year.

Maybe that was a one-off? The privatized water systems in the UK seem to be ignoring basic maintenance as water leakages skyrocket; maintenance which require capital from the privatizer to repair:

Water privatisation has also come at significant costs. The four biggest English water utilities have massive water leakage rates: Severn Trent loses 27%, Thames Water and United Utilities (supplier to northwest England) 26%, and Yorkshire Water 25%. In the case of Thames Water, which serves London, this reportedly equates to almost 200 litres, per customer, per day. These leakage rates are far higher than some public controlled water utilities including in Denmark, Milan and Paris.

Water privatization in Europe is actually going in reverse as France and other nations are remunicipalizing their water systems as they return the systems to public control:

In Paris, the transfer of water services from private companies to municipal authorities was a major success, resulting in savings of €35 million in the first year and improved service delivery. Similar trends of ‘re-municipalisation’ have taken place in Germany, Finland and the UK (where privatisation has failed); as local public authorities re-establish control over energy, forests, water, transport, refuse and recycling sectors.

America needs to study and understand the experience of Europe as we think through the potential for the privatization of public assets. Glorifying the idea that Europe has made a great success of moving public assets into private hands is not borne out by the evidence.

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