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Public ownership of industries and services

Published Thursday, May 31, 2018

Utilities, industries and services can be owned by the public or the private sector. Various models have existed in the UK, including full nationalisation, privatisation with regulation and municipalisation.

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Since the late 1980s, the private sector has owned and run the majority of industries and utilities in the UK. But this situation has been debated by all political parties in recent years: the Coalition Government’s Big Society ambition included the aim of increasing the public’s role in running utilities; the Labour Party’s 2017 General Election manifesto stated that a Labour Government would “bring key utilities back into public ownership”; and the prospect of Brexit has provoked more discussion around the role of the state in industries.

History

Before the Second World War, the state’s involvement in industries and utilities was piecemeal. The era was characterised by a proliferation of smaller firms running most industries and services. The Second World War led to an enormous expansion of the role of the government in the coal, energy, agriculture and manufacturing industries in order to plan and generate the materiel needed for the War.

The Labour Party was elected in 1945 and by 1950 had passed legislation which transferred the ownership of the Bank of England, the coal industry, the telecommunication industry, the transport industries, the energy supply industries and the steel industry from the private to public sector.

During the 1950s and 1960s, some industries were transferred between the private and public sectors, but mostly, the state’s role in running utilities was unchanged. The political consensus on this issue broke down in the 1970s, and through the 1980s and 1990s most industries and services were privatised.

Bringing industries into public ownership

A wide variety of forms of public ownership exist, ranging from the post-War nationalisations, to State Owned Enterprises, to municipally owned services, to co-operatively managed services. The model of public ownership will determine the mechanism used to transfer ownership of the industry or service.

In the nationalisations of the 1940s, legislation formally transferred ownership from private sector owners to the government. Compensation, normally in the form of government bonds, was paid to the previous owners. A Board was set up which ran the industry or service at arm’s length from the government and which was accountable to Parliament.

If the ownership of an industry is to be transferred through the creation of a State Owned Enterprise or by buying an existing private sector company, then the government would likely be subject to the same competition and takeover rules that regulate private sector acquisitions.

Municipalisation involves local authorities contracting utility or service provision to private sector providers, or setting up a provider which then competes with other private sector providers.

Co-operatively owned companies do not necessarily involve the state, but the public have a greater role in their management. Typically, employees or customers own co-operatives, are involved with decision making and take a share of profits.

Economics of public ownership

The role of the state in the economy is much debated by economists. Private ownership is seen as incentivising utility providers to ensure a good service and fair prices to customers because if they don’t, then customers can change to a competitor. The public sector is seen as important when the market fails to deliver fair prices or high quality services, and because the government can promote social objectives like reducing inequality.

Utility provision in the UK involves economic regulators which aim to ensure that private utility companies provide a high quality of service and fair prices, whilst being able to run profitable businesses.

EU rules and public ownership

EU rules do not prohibit the public ownership of utilities or companies. But they do mean that all enterprises must behave competitively, including state owned enterprises. This means that subsidies to prevent failure, or a tax regime that discourages new entrants into a market would be illegal under EU rules.

Whilst it is not clear what the precise nature of the UK’s relationship will be with the EU after Brexit, it is likely that a trade deal will involve some similar rules. Outside a deal with the EU, the UK will still be bound by World Trade Organisation rules on state support for industries, but these rules are much less stringent.

Specific industries and services

Railways

The current system of railway ownership separates the infrastructure, which is state owned through Network Rail, and rail services, which are mostly run by privately owned train operating companies. The Labour Party have stated that if they came to power, they would introduce more public control into the railways, not in a ‘big bang renationalisation’, but through a gradual process as franchises come up for renewal.

Water

Water in England is provided to households by privately owned companies. Most people cannot choose their provider because the water in an area is provided by one pipe network. Consequently, the water industry is regulated (by OFWAT) to ensure fair prices and services. There have been some calls for reform of the water industry, with some arguing that the whole industry should be publicly owned, and others calling for more powers to be given to the regulator to ensure higher investment by water companies and lower prices for consumers.

Energy

Gas and electricity supply services in the UK are privately owned and run, and regulated by OFGEM. Concerns have been expressed over the dominance of a small number of energy suppliers, with some criticising them for raising prices “excessively” in recent years. A number of new suppliers have entered the market in recent years, including a number of municipally owned providers set up by local authorities.

Royal Mail

The Royal Mail was privatised in 2013 and remains the universal service provider in the UK which means that it must provide at least one delivery and collection of letters on Monday to Saturday at a geographically uniform price. The Labour Party stated in their 2017 manifesto that if they came power they would “reverse the privatisation of Royal Mail at the earliest opportunity.”

Commons Briefing papers CBP-8325

Authors: Chris Rhodes; Lorna Booth; Jennifer Brown; Louise Butcher; Daniel Harari; Matthew Keep; Federico Mor; Edward Potton

Topics: Coal, Companies, Economic policy, Electricity, Industry, Postal services, Railways, Regulation, Utilities, Water industry

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