Alf Young: The fast track to a certain fortune

When the East Coast Trains service is privatised major investors are likely to be the benefactors. Picture: Toby Williams

SPIVS and speculators. It’s a neatly nasty cliché that’s been deployed by Scotland’s first minister, Alex Salmond, to characterise the dark forces he claimed brought Royal Bank of Scotland to its knees. And by coalition business secretary, Vince Cable, to define those, into whose hands, he didn’t want to despatch Royal Mail.

Five years on, even Mr Salmond would struggle to sustain his charge. From all that has emerged since, RBS, still largely in state hands, was primarily the architect of its own downfall. And the day after new shares in Royal Mail soared way above the offer price, Mr Cable is struggling to deflect criticism that this latest privatisation is, in reality, a soft touch giveaway. It’s all market froth and speculation, he protests.

Some 700,000 members of the public applied for the shares. If a significant proportion of the 95 per cent getting precisely 227 shares each choose to cash them in, as those with access to brokers already are, will they instantly become speculators? If, in hard times, many of the 99-point-whatever per cent of Royal Mail staff who signed up for their somewhat larger free allocation fret that can’t immediately join in the profit-taking, will they be labelled speculators too?

Playing hunt the speculator quickly becomes a rather arid exercise. Making a quick killing has been a persistent feature of privatisations since the process started, under Margaret Thatcher, back in the early 1980s. However the timing of this once untouchable public asset roaring into life in the marketplace, its shares immediately changing hands at a 40 per cent premium, is intriguing.

This was also the week the Scottish Government announced it is to buy ailing Prestwick Airport, faced with the threat its New Zealand owner would close the doors and walk away. And this was the week when previously privatised energy utilities have been getting it in the neck, even from government ministers, for a new round of inflation-busting tariff hikes. In addition, the Westminster coalition took steps to cap some fare increases planned by the UK’s privatised operators.

It seems there some larger questions begging for answers. Are there any limits to what markets can best deliver? Or are there still some utility services so vital to life as we know it, that wholesale privatisation is simply the wrong answer?

After all we’ve been through these past five years, market power appears as untouchable as ever. The coalition’s city advisors so misread demand, the Royal Mail institutional offer was over-subscribed a whopping20-fold. But they’ll still get paid their vast fees in full. Governments are now so in hock to corporate power they’re fast becoming the sponge of last resort. The state’s main role is when markets mess up, it seems, there to mop up the pieces when the roof falls in.

When UK government ministers bemoan the lack of competition among the Big Six UK energy suppliers or slap caps on some rail fare increases it simply serves to remind us all that the way some of the big privatisations of the 1980s and 1990s were handled simply failed to deliver price transparency or curb the excessive consolidation that has resulted in large under-regulated regional monopolies.

New entrants find it difficult to compete effectively with established players. They have to cling to the fringes of the market. What Philip Augar calls “cosy rivalry” and “faux competition” has replaced the kind of head-to-head battles to drive down prices that have characterised industrial and service sectors that have always been provided by the commercial market place.

The rail sector doesn’t even pretend it can raise the revenues from passengers it needs to invest in a fully efficient, 21st century train network. It still requires significant public subsidy. And the energy sector has even resorted to threats of an investment freeze and black outs if it isn’t allowed to go on raising gas and electricity tariffs way beyond the levels more and more of their consumers can afford. Thatcher’s privatisation revolution wasn’t meant to look like this.

Worse, when privatised sectors get into trouble there’s that inbred belief that when the profit motive fails them, the state will still be there to repair market failure. The Scottish government feels compelled to acquire Prestwick to protect jobs at the airport and in surrounding aviation support facilities, like those of BAE Systems and General Electric. Current owner of the Ayrshire facility, Infratil, does not expect “material proceeds” from its sale. But that’s only the start of the Scottish government’s challenges.

It’s going to have to pay someone to run the place. And, as Prestwick is losing passenger traffic and is increasingly loss-making, ministers will also have to find the money to cover these losses and provide working capital. Worse, the one remaining commercial carrier using the airport is Ryanair, whose track record of squeezing ever-keener deals on landing and other charges is legendary.

Chief executive, Michael O’Leary, has demonstrated, across Europe, he’s happy to walk away from would-be hubs if the price for directing Ryanair’s business there is no longer right. Regional governments with airports in France and Spain have already had that treatment. Mr O’Leary must now be thinking he has the Scottish government over a barrel too.

Nationalisation, Prestwick-style, also creates an uncomfortable precedent. Over in Grangemouth, current owners, Ineos, are threatening closure of the loss-making petro-chemical side of the business by 2017, unless the UK and Scottish governments come up with grants and loan guarantees totalling £150 million.

Remember Scotland could be independent by 2017. Having taken ownership of Prestwick Airport to save jobs, how could an SNP government, committed to building Scotland’s prosperity on the hydrocarbons under the North Sea, refuse to extend the same treatment to Grangemouth if Ineos lives up to its threat to shut down loss-making production there?

There’s a third, more profitable prospect too. And it’s already in state hands. This week East Coast Trains, linking London to Edinburgh, Aberdeen and Inverness, announced it had handed back £208.7m to UK taxpayers last year on rising turnover. Having taken over the routes four years ago when National Express handed the franchise back to the UK government early, the service is due to be privatised again by early 2015.

Since one of the likely bidders is Eurostar which is, in turn jointly owned by the French and Belgian state rail companies and by LCR (London and Continental Railways), fully owned by the UK Department of Transport since 2009, might next month’s independence white paper propose a deal with the rest of the UK to make East Coast Trains the nucleus of a Scottish state-owned rail service? Somehow I doubt it.