Britain - Public service sharks and capital's parasitism on the state

Jan/Feb 2002

For over two decades, the watchword of government policy, Tory and Labour alike, has private "entrepreneurship". According to official wisdom, market forces and private initiative (i.e. the capitalists' frantic pursuit of individual profits) were supposed to provide for an efficient (i.e. low-cost) organisation of the economy - including in those areas which had been traditionally part of the state's remit, such as public services. By the same token, governments were supposed to aim at systematically reducing their role in (and funding of) the economy.

The real objective of this policy had, of course, nothing to do with improving the workings of the economy in general, nor the operation of public services in particular. It was part of an overall drive by the capitalist class to increase its share of the national income. The standard of living of the working population, the jobless and pensioners was reduced in two ways. Directly, through cuts in the real values of wages and benefits, casualisation of labour and rising unemployment. And indirectly, through cuts in public services, as state-funded social expenditure was reduced to allow for the mushrooming of a large variety of direct and indirect subsidies to companies, shareholders and the rich in general.

The so-called economic "experts" were called in to offer a credible cover for this crude hijacking of state funds by the capitalist class. After the recession of the early 1980s, they came up with the crass argument that boosting capitalist profits was the only way for the working population to return to full employment and prosperity. And they twisted the facts to make their case more credible and sustain illusions. So the "jackpot economy" of the 1980s was portrayed as proof of the dynamism of the system and its ability to "produce" wealth - despite the fact that the rapid growth of the stock market merely reflected the massive rush of the capitalists to use the opportunity of Thatcher's financial deregulation in order to make a quick buck, rather than get stuck in long-term productive investment. Likewise the rise of the so-called "New Economy" of the late 1990s was hailed as the beginning of an era of unlimited expansion for the capitalist system, free of any remnant of its crisis-ridden past - even though it merely reflected the same frantic speculation compounded by the expectations that the capitalists derived from their success in increasing the exploitation of the working class.

Today, of course, the chickens have finally come home to roost. After the repeated, more or less limited, financial crises which marked the past two decades, the crisis of the capitalist system has resurfaced, once again, with all the features of the "good old" crisis of overproduction of yesteryear. And it began long before the attack against the World Trade Centre - which is offered to us as a completely absurd excuse. In their blind war for new markets, companies developed productive capacities which were far beyond the purchasing power of potential buyers. Now they are cutting production in order to maintain profits. Most affected is the so-called high-tech industry, with massive job cuts in British factories owned by Marconi, NEC, Siemens, Motorola, Nortel, etc... But these cuts have a snowball effect on many other industries, as more and more companies are trying to pre-empt a likely reduction in their sales and are making provisions for this.

Of course, by now, the so-called "experts" have dropped their fairy tales of a "New Economy" in the dustbin of history where they belong, and only refer to it as "dotcom madness". Significantly, however, there is no question of reversing the official policy of "rolling back" the role of the state for the benefit of the private sector. Never mind the fact that capitalist profit has been proved, once again, to be a major hazard for society as a whole. Never mind the rising number of cases of squandering of public funds by private contractors. Never mind, even, the evidence of criminal profiteering by capitalist sharks, in the railways in particular. Efficiency? Cost-effectiveness? That too, is now lying in the dustbin of history. What remains is the crude reality: the determination of the capitalist class to boost its profits by living as parasites of public funds and the willingness of its politicians to oblige. And all the more so today, against the backdrop of an economic recession which may eventually become a real threat for profits.

Chronic parasitism

In and of itself, of course, the parasitism of the capitalist class on the state is nothing new. After all, as long ago as the 18th century, a whole section of the British bourgeoisie (an estimated 20,000 households) was already living off the proceeds of the public debt.

Even in the 19th century, in the "glorious" era when Britain's capitalists posed as liberal free-traders (all the more willingly as they had few serious competitors anyway) the state played a decisive role in funding British capital. So, for instance, while the first rail companies were built using capital provided by private investors, it was the state which paid the bill when these companies where threatened with bankruptcy by the collapse of a speculative bubble on rail shares.

During the same century, it was the presence of the British army, financed on public funds, which guaranteed the investment and market share of British companies in the Empire and beyond. It is not a coincidence if, today, three of Britain's "big four" in banking (HSBC, Barclays and Standard Chartered) built their power on the Empire, to the extent that the largest among them has retained the name "Hong Kong and Shanghai Banking Corporation". As to the British soldiers who died during the "scramble for Africa", they did not die for "Queen and country" - they died to prevent the European competitors of City-based companies from laying their hands on Africa's untapped underground resources. Just as those who died during the bloodshed of the Boer War, lost their lives to protect the regional mining interests of Cecil Rhodes and his associates in the Consolidated Goldfield Company. In all these colonial adventures, it was the state which financed the promotion of British capital, while spilling the blood of colonial peoples and using British workers as cannon fodder.

In the 20th century, the development of the modern state resulted in the institutionalisation of capital's parasitism on the state. The two World Wars were a reflection of this phenomenon, which was taking place simultaneously across the industrialised world. On both occasions the entire resources of the state were pulled together to defend and, if possible enlarge, the share of the world market controlled by British capital - and on both occasions at an exorbitant price for the working class. In particular, today's British capitalist class would be a lot poorer if it had not been for the costly (both in human and economic terms) mobilisation of a million British soldiers across the Third World for several years after the end of World War II.

In peace time, state subsidies appeared as a regular feature after World War I, in areas like transport but also heavy industries. So, for instance, on "Red Friday", August 1st, 1925, it was the state which forked out a subsidy to the coalmine owners in order to pre-empt a confrontation with the Triple Alliance over the threat of a wage cut in the mines - a confrontation that the then Tory prime minister, Baldwin, was quite unsure of winning. The mechanisms of state procurement also provided other channels allowing the state to fund entire industries - arms manufacturing, of course, but also a large part of the construction industry, for instance.

It was in the decade between the 1929 crash and World War II that the state proceeded to pump massive funding into private industry, under the pretext of helping with its rationalisation. But in fact, the real issue was that the capitalist class was already reluctant to invest in production on a long-term basis - and consequently, Britain's ageing industry was becoming increasingly derelict and outdated. So public funds financed the setting up of a private steel cartel to help British steelmakers fend off foreign competitors; public corporations were set up to finance large-scale projects such as a national electricity grid and new airports, whose main beneficiaries were private companies; a comprehensive system of subsidies was introduced in farming. And, of course, from 1936 onwards, the policy of rearmament provided a whole range of industries with lucrative contracts and even, in the case of aircraft and tank manufacturers, whole factories free of charge!

The postwar nationalisations marked a change in the method, but not in the content of the state's policy towards capital. Instead of providing the investment that the capitalists were unwilling to make, the postwar Labour government bought the shares they had in the war industries. These shares were almost worthless, but they were bought for a total of £2bn - the equivalent at the time of nearly three years of defence spending! As a result, after having made exorbitant profits out of the war, British capitalists were able to cash in a huge bonus and, in addition, pick and choose the most profitable reconstruction contracts, thanks to this cash. Meanwhile, their remaining factories were supplied with coal, gas, electricity, transport, etc.., at cut down prices, thanks to the investment made by the state in the newly nationalised industries.

Feeding the financial system

The return of the world economic crisis, in the mid- 1970s, caused British capitalists to display even more reluctance to risk their capital in long-term productive investment. Once again, the state had to supplement their failure in order to maintain profits.

At first the Labour governments of the 1970s resorted to the old methods. They tried to rescue profits by imposing a wage freeze, both in the public and private sectors, under the pretext of fighting inflation - although with only limited success. But at the same time, Labour ministers splashed out huge funds to bail out the shareholders of private companies threatened with bankruptcy and finance large industrial projects designed to provide the private sector with fresh productive investment. However, due to the state's already huge indebtedness, such led to more trouble. Double-figure inflation provided a convenient way to reduce real wages. But it also presented the risk of major monetary disorder. In the end, this threat prompted the Labour government to change tack and start selling shares in some of the most profitable state industries.

When they came to power, in 1979, the Tories stepped up drastically the policy initiated by Callaghan's Labour government. Over the following fifteen years or so, all the state-controlled industries, utilities and public service organisations which could be made to show a profit were trimmed down and sold to the private sector, either directly or by means of stock market flotation.

However, what was presented at the time as a policy designed to free taxpayers from the "burden" of having to pay for the "inefficiency" of the public sector, was merely one aspect of a multi-pronged policy designed to rebuild the profit base of the capitalist class at the expense of the working population - a policy which involved, among other things, a turn of the screw on the working class, particularly by restricting its right to take industrial action.

Of course, the £85bn or so collected by the state through the big privatisations helped to balance the books. And so did the squeeze on social expenditure which was imposed on local councils soon after the Tories' return to power.

But above all, these measures allowed the Tories to halve the rate of capital gains tax and the top rate of personal income tax, while reducing corporation tax from 52 to 33%. This latter change alone was equivalent to offering an average 40% increase in afte-tax profits to all British companies!

The big privatisations were also meant to provide British capital with new sources of profits. But for this to work, huge funds had to be available to buy the public companies which were put out for sale, even at bargain basement prices - and, in this respect, Thatcher did experience a few setbacks in her early days in office. Moreover, even more capital would be required to finance subsequent investment in the privatised companies, in order to ensure their future profitability - something that the capitalists were not likely to do with their own capital. And, in the early 1980s, it was generally considered that the stock market just did not provide the large source of capital required for this.

So another leg of the Tories' policy was to revive the stock market by deregulating its operation. One after the other the various barriers which limited the ability of financial institutions such as pension funds, building societies, high street banks and insurance companies to make use of the funds entrusted to them by small depositors, were removed. At the same time, technology was introduced to allow market players to transfer enormous funds instantaneously, thereby providing unprecedented speculative opportunities.

Parasitic "blue chips"

It was the combination of all these measures which allowed the Tories to carry out the big privatisations almost without any hitch.

Ironically, these measures were carried out in the name of "free enterprise" - to "liberate" the economy (and, as a result, the whole population, or so it was claimed) from the intrusive interference of the state. By the same token, the economic weight of the state was meant to diminish.

But, in fact, the main feature of the Tory years was an unprecedented level of state intervention in the economy. Never before, except maybe in the aftermath of World War II, had the state carried out such an enormous transfer of wealth to the capitalist class - whether it was through its tax cutting programme, its big privatisations or its reshaping of the financial markets. If anything, under the Tories, the capitalist class became even more parasitic on the state than it had been under the previous administrations.

In fact, despite Thatcher's promises, state expenditure continued to increase. The main difference with the previous period, was the way funds were allocated. Budgets designed to provide direct or indirect subsidies to the bosses (training schemes, regional aid, etc..) ballooned, while most social budgets were drastically reduced, at central as well as local government levels. The only exception was the Social Security budget, which went on increasing even faster than under the previous Labour government. But then, this budget also included an element of subsidy for the capitalist class: after all the benefits paid to the jobless and the low paid allowed the bosses to hire and fire as they pleased, while paying Scrooge wages to a large section of the workforce.

To what extent the Tories' big privatisations and accompanying measures benefited the capitalist class is impossible to measure precisely. Indeed there are no available statistics which make it possible to work out the income generated from capital - if only because a significant part of this income is hidden as salaries, bonuses or pension payments, for which no distinction is made between low-paid workers and company directors.

However, it is possible to have an idea of the size of the loot by glancing through the list of today's FTSE100 companies - the 100 largest City-based companies in terms of stock market value.

Out of these 100 companies, 21 are direct by-products of the big privatisations of the 1980s: 10 are original privatised companies, which have subsequently grown through mergers and acquisitions (BAE Systems, Rolls-Royce, BOC, Amersham, BP-Amoco, Corus, British Telecom, Cable and Wireless, BAA, Enterprise Oil), 10 come from the privatisation of public utilities (5 in electricity production and supply, 3 in gas and 2 in water) and one, Vodafone, makes a large part of its profits out of the infrastructure developed by British Telecom when it was still a state company.

What is even more striking in this list, is what these 21 companies represent in terms of combined capitalisation: £360bn, or 29% of the total capitalisation of the FTSE100 companies. And since these 100 companies represent, on their own, 86% of the total capitalisation of all companies quoted in London, this means that more than one fifth of the value of the City stock market can be traced back to the Tories' big privatisations!

To various degrees, all these companies still live off the investment made in the past by the state, which they acquired on the cheap at the time of privatisation. Moreover, many of them still enjoy virtually the same national or regional monopoly that they had when they were state-owned - a monopoly which no government, Tory or Labour, has proved really willing to upset, despite all their talk about the benefit of "free competition" for consumers.

Privatisation with a crutch

Once this wave of big privatisations was completed, by the early 1990s, there was hardly anything left to privatise - at least nothing that made a profit.

However, there was at least one huge unprofitable organisation that the Tories did not want to leave in the public sector - British Rail. Out of their determination emerged this many-tentacled monster, made of dozens of companies, each with its own territory but also its own specific rivalries against the others, employing in addition hundreds of subcontractors. The result of this chaos is well-known: a general lack of coordination which can easily turn the slightest incident into major havoc; a generalised indifference to what happens on the network, since there is always the possibility of passing the buck to some other company; a general incompetence of managers who are recruited on the basis of their ability to "sweat the assets" rather than run a service; and above all, the criminal profiteering of the companies, which has already caused far too many casualties, for lack of investment and proper maintenance.

Apart from this on-going catastrophe, the main feature of the rail privatisation was the extent of its parasitism on state funding. The theory, according to Major's Tory government at the time of privatisation, in 1996, was that the railway system would eventually pay for itself, thanks to the magic wand of the "free market", thereby bringing to an end the need for state subsidies.

However, what has happened is the exact opposite. While the total annual subsidy paid to the 25 train franchises decreased from a peak of £1.4bn in 1998 to £814m this year, the total subsidy paid by the state to the railways (this time including Railtrack) has increased to fantastic levels since last year's Hatfield crash revealed the level of neglect in track maintenance. And although Railtrack is destined to become (allegedly, as this may well still change) a not-for-profit company, its big shareholders have nevertheless enjoyed lucrative dividends for over four years, all paid for by the state. Likewise for the train operating companies. According to a survey published last February by the monthly Labour Research, the 18 companies which made a profit last year, earned a combined pre-tax profit of £228m - just under a quarter of the combined subsidy they received from the state during the same period.

In other words, the private train companies are using an infrastructure which was originally developed with public funds. The money they pay for using this infrastructure comes out of the subsidy they get from the state and, in addition, they get their profits out of the same subsidy. To all intents and purposes, these companies are therefore merely subcontractors, who are being paid to do a job. With a major difference, however: they are entirely free to make a complete mess of the service they are supposed to run, to play havoc with safety rules and workers' jobs and conditions, without being really accountable to anyone for the duration of their contract. And this applies just as well to the other main private companies operating in the railways - freight, track and rolling stock maintenance, etc..

Indeed, by now, it has become obvious that the mountains of reports produced by the rail regulator set up by Blair's Labour government, are totally useless in forcing the rail sharks to put the public's interests (and that of their workers) before their profits. To do this would require a political will that this government simply does not have - that of confronting the profiteers and the hostility of the City.

It is worth noting that the train operating companies are not even cow-boys, like so many of the tiny subcontractors who operate across the network. Among them are big names, such as the shipping giant Sea Containers, the building company John Laing, bus companies like Arriva, National Express and Stagecoach, Virgin Trains (part of Richard Branson's empire) and the French media and water utility Vivendi. Big names which, nevertheless, are parasites of state subsidies.

An extension of the railway "model"

Since it came back to office, Labour has done nothing to sort out the railway catastrophe, except to splash out more and more cash on the rail sharks and to make the spectacular gesture of declaring Railtrack bankrupt - but it is no more than a gesture since the fundamental operation of the privatised railways will remain intact.

Worse, Labour has followed the Tories down the road of a very similar form of privatisation - that of the Private Finance Initiative, rebranded by Blair as Public-Private Partnership.

What are the similarities between PFI/PPP and the railway privatisation?

In both cases the private "partner" has complete control over the hospital or school it is supposed to manage or service it is supposed to provide, without being really accountable to anyone. In this respect, the Labour government has even imposed a rule which says that if the PFI contractor has its contract terminated due to a failure to deliver, the public sector purchaser must provide some compensation for the work done, including if this "work" has only resulted in utter chaos (like a number of PFI contracts in local authority Housing Departments) or is entirely sterile (like a number of large-scale IT projects which never worked in the Post Office and elsewhere).

In both cases also, the private company draws its profits out of a time-limited "lease" (the equivalent of the railway's subsidy) paid by the state for the duration of the contract and therefore has every incentive to cut the service provided, squeeze the workforce and reduce costs on maintenance and investment. However, in the case of PFI/PPP contracts, the private company takes no risk since most such leases are now automatically indexed on inflation and calculated to provide an agreed minimum return on investment.

Of course, there are some differences. The main one is that the PFI/PPP contracts are usually confined to a well-defined organisation and not part of a galaxy of rival contractors (although such situations can also arise, in local government for instance), thereby limiting the risk of chaos. Besides, the main purpose of these contracts is to get private companies to provide a share of the investment. So, in addition to the fee paid by the state for the service provided, the "lease" includes a repayment for the company's investment. But since the private "partner" borrows from the banks, this only means that the capital element of the "lease" must include both the interest payments to the banks and the fee that the private company demands for the "risk" involved in providing the funds - even though, contrary to what ministers say, most contracts already include clauses which protect the private contractors against any risk. And, as is now widely acknowledged, the real cost to the state of these private investments is considerably higher than it would be if the investments were made directly by the government.

In the end, the principle behind PFI/PPP is the same as it was in the railway privatisation: unaccountable private contractors living off expensive subsidies provided by the state, with every incentive to cut corners on services, essential maintenance and labour costs in order to maximise the profits they make out of the state "lease".

Of course, one could argue that in general, many PFI/PPP contracts are only small scale and can only do limited damage. Except that PFI contracts for the building or revamping of hospitals, for instance, often affect whole areas and tens of thousands of potential patients. If, as it is often the case, the number of staff and beds are reduced in order to allow the contractor to increase its profits, this is no longer small-scale damage - the cost may be counted in human lives.

Besides, since 1997, the number of such deals has risen rapidly under Labour. Since 1998, one hundred such deals have been signed each year, compared to less than fifty in the five years 1992-96. Since the introduction of PFI/PPP in education, no area of public services has been spared.

In fact, taken together, the economic scale of these PFI/PPP deals is already far beyond that of railway privatisation. In the NHS, already, 85% of all new investment comes from the private sector through such deals; in the prison service, the figure is over 50%. It is estimated that the combined PFI/PPP "leases" that will be paid by the state over the next 25-30 years should average £30bn/year if the present value of deals agreed every year remains the same.

In other words, PFI/PPP is big business. And it is big business for big companies. A recent survey published by the white-collar union Unison shows that 1040 contracts (proper PFI/PPP contracts and other kinds of subcontracting arrangements) involving Unison members in local authorities, the NHS, the prison service, education, etc.. are shared by only 10 companies. Among them are Compass, Capita and Rentokil-Initial (all three part of the FTSE100), Serco, the Danish multinational ISS, Sodexho and SITA (two French multinationals). Other big players include construction groups like Balfour Beatty, John Mowlem, Carillion, Taylor Woodrow, business support groups such as WS Atkins and Interserve, etc..

Thanks to PFI/PPP, a whole new layer of companies have, therefore, thrust their claws into the state coffers over the past four years and others are likely to follow. This means that in the coming years and decades an even larger share of the state resources will be hijacked by these capitalist parasites, this time under the terms of these contracts. Having mortgaged public resources in such a drastic way for the benefit of a small number of big companies, Blair or his successor in a future government will no doubt turn to the working class and claim that the state coffers are empty and that social provisions can no longer be financed by public funds - just as Blair has already started to do with his drive to roll back the state pension scheme.

For the working class there is only one answer to the growing parasitism of the capitalist sharks. The tens of billions of pounds of public funds swallowed each year by these companies and their shareholders could be traced by lifting the "commercial secrecy" used today by Blair's ministers to conceal their handouts to the capitalist class. Then the parasites could be brought to account and forced to give back what they have stolen from us.

1 January 2002