The Privatisation Premium and the Case for Public Provision

The Privatisation Premium

The privatisation premium is the relatively elevated price that consumers are forced to pay to access basic necessities after privatisation. It has two drivers. First, the elevated cost of capital to finance essential infrastructure and goods relative to public investment, and second, the coordination frictions involved in unbundling hitherto integrated sectors.

Privatisation was supposed to lower rather than raise consumer costs. Why is it that in key, essential sectors, the opposite happened?

A guiding assumption behind privatisation is that competition disciplines costs and encourages prudent investment, delivered by shifting risk onto the private sector. However, many of Britain’s privatised essential sectors lack the disciplining force of competition because they are natural monopolies, and where unbundling attempted to create competition, it often led to more problems than it solved, with fragmentation gumming up investment and creating new transaction costs.

These dynamics will differ within and between sectors, but importantly, many of the privatised essential sectors are extremely capital intensive, where projects require upfront financing for which investors must be compensated over time. This cost of capital ends up as a very significant portion of total project costs, meaning that even a percentage point difference in interest rates can make a big difference to end prices.

To give an indication of the potential scale of the difference: the National Infrastructure Commission estimated the country requires £600 to 700 billion in infrastructure investment over the 2020s. Applying the documented financing cost premium of one to two percentage points that private borrowing carries over that of public corporations, and compounding over typical infrastructure lifetimes of twenty-five to forty years, produces figures that are very large even at conservative assumptions. On £600 billion of investment financed privately at one or two percentage points above the gilt rate over thirty years, the cumulative excess cost runs into the hundreds of billions — money that would, if undertaken by public investment, never have been paid at all.

The choice between public and private financing of essential infrastructure is, over any realistic time horizon, a choice about how much of the country’s wealth is transferred from bill-payers to bondholders for no additional physical output.

There are three sources of the higher cost of capital in privatised essentials. Firstly, a risk premium, since private lenders price in the possibility of default that does not exist for sovereign borrowers, elevating the cost of debt. Secondly, an equity return requirement, as shareholders demand a risk-adjusted return on equity commensurate with all manner of other investment — typically eight to twelve per cent for regulated utilities, compared with the three to four-and-a-half per cent on the fixed interest stock issued by the British Electrical Authority during 1948–55. Thirdly, financial complexity costs, since private infrastructure financing typically involves layers of holding companies, special purpose vehicles, and structuring fees absent from straightforward public borrowing.

These factors make public ownership of capital-intensive essential sectors prima facie significantly cheaper. This is especially true of networked natural monopolies like water, energy networks and railways, whose extreme capital intensity is no coincidence but, in fact, the principal obstacle to the entrance of competition. The privatisation premium in the water sector is significant: twenty-eight per cent of the typical water bill in England goes to funding shareholder returns and debt servicing, compared to around ten per cent for publicly owned Scottish Water, while almost a quarter of the average energy bill in 2024/25 — almost £450 — was corporate profit.

Other subsectors may offer scope for the increased efficiencies associated with market competition between private risk-bearing providers, offsetting the increased cost of capital. For example, the “dash for gas” in electricity generation benefited from market competition after regulations were relaxed on this technology, whose low capital intensity made control over operating expenditure the decisive factor. But creating a level playing field for horizontal competition in these cases involved unbundling what were previously vertically integrated industries, giving rise to malcoordination and transaction costs at the new interfaces between levels previously part of the same corporate whole.

For example, the separation between trains, tracks and operators halted rail electrification, whose costs and benefits, risks and rewards could not be properly apportioned both within and between the three new subsectors. Rolling stock companies leasing to an unstable demand base of service operators holding short-term franchises had no incentive to invest in new trains with forty-year lifespans. Electricity transmission operators are in a similar struggle with new generator plants, leading both to a connection queue bloated with spurious speculative applications and, in the absence of locational pricing, to the absurdity whereby unhelpfully located wind farms are paid to shut off generation on account of the grid’s inability to carry their power to demand centres.

Fragmentation and the high cost of capital have led to underinvestment. Water companies have sold off sewage treatment plants and neglected existing pipes. Energy networks have systematically underspent their allowances for the replacement of existing plants, exploiting the regulatory incentive to pocket a portion of the difference as profit. Notably while planning constraints are often blamed for delays to new infrastructure development, underspend includes “non-load” capital expenditure — which involves maintaining existing assets rather than building new ones — which typically requires little or no planning permission, suggesting that other factors are at play. The rail sector has seen no appreciable increase in the length of track, electrified or otherwise. Ageing rolling stock has rarely been replaced in the absence of government diktat or direct government involvement in procurement. Bus routes have been cancelled as local authorities struggle to subsidise the unprofitable routes that previously were cross-subsidised by more profitable ones.

Contrary to what was promised at the start of the privatisation experiment, risk was not shifted from the public taxpayers and billpayers to those private firms charged with delivering the services. Instead many services became too essential to fail. To wit, not only the tortuous negotiations over Thames Water, but train operators who gamed the franchising system to capture the upside risk for themselves while lumping the state with the downside.

How the Government Is Responding — And Its Limits

The privatisation premium has contributed decisively to three problems that define contemporary Britain. First, by inflating the cost of essential goods and services, it deepens the affordability crisis and sharpens inequality. Second, it drives up public spending, as the welfare state is forced to step in and help people access basic necessities that the market would otherwise price beyond reach. Third, it weakens the productive capacity of the economy — infrastructure suffers from underinvestment, while punishingly high costs for core inputs like energy sap competitiveness and weaken demand. Taken together they help trap Britain in a doom loop of stagnation and inequality.

Reflecting the seriousness and political urgency of the affordability crisis, the Government has responded with a three-pronged strategy — stronger regulation, planning reform and welfare redistribution. However, while each approach has value, none aim at reshaping the fundamentals of the supply side: who invests, at what cost, what gets built, by whom, accessed at what price, over what time horizon. As a set of solutions, they are therefore a less direct, forceful mechanism for reducing the cost of capital and addressing coordination costs from privatised provision than public ownership.

Tougher regulation has proven elusive, often for fear of spooking private capital, lest the perception of added “risk” marginally raise the cost of capital. Whether the Office of Road and Rail’s reluctance to regulate an uncompetitive rolling stock leasing sector, the ongoing saga of penalising Thames Water’s environmental infractions without frightening away rescuers, or Ofgem’s refusal to claw back networks’ excess profits despite outstripping the return that markets deem warranted by their level of risk.

The weakness of this bargaining position in part reflects the public sector negotiating against itself by preemptively ruling out its strongest card, what Franklin D. Roosevelt called the “birch rod” of a public option. The irony is particularly perverse when the option foregone scores by far the best on the very consideration frightening policymakers vis-à-vis investors — the cost of capital. Under privatisation, minimising this often means curtailing policy space and foreclosing the ability to adapt flexibly to new information changes in circumstance, because, in return for investing, companies demand that the state guarantee future returns, from Ofgem price rounds to nationally priced CfDs, locking in prices and limiting the ability to adapt how the cost of investment is recouped. More intractable is the informational asymmetry between the commercial entity charged with delivery and the regulatory entity charged with protecting the public interest, which privatisation drives a wedge between. One result is revolving doors and regulatory capture. Another is regulatory bloat, with Ofgem doubling its headcount and tripling its annual costs in the last decade. Such backseat-driving is often costly and ineffective, but bureaucratic sprawl is a feature, not a bug, of privatised utilities.

Streamlining planning consent and reducing the accumulated frictions, uncertainties and defensive provisions that attend even the possibility of rejection can help reduce the delays and costs that bedevil British infrastructure projects, even if many of these problems are artefacts of a fragmented, outsourced system with run-down public capacity. Essential to this would be moving to a more collaborative approach, as Dan Davies has persuasively argued, whereby planning authorities would play the role of active broker between interests rather than impartial adjudicator. This would produce far more reasonable mitigation measures than the disastrous kind that afflicted projects like HS2. However, reforms may fail to alter the fundamental mismatch between private capital’s preferences and the characteristics of essential infrastructure — long payback periods, modest returns and high coordination requirements.

By not altering who owns, finances and builds these projects, the drivers of the privatisation premium — and therefore upward cost pressure for essentials — remain largely in place. This may help explain why planning constraints seem so much more injurious in recent decades than throughout the postwar period. Planning reform might be welcome, but without public entities that are better placed to prioritise public needs, removing the barriers will clear the road but not adequately transform the investment landscape.

The welfare state can ameliorate but not solve a supply-side problem. In a system where essential services are controlled by private providers with pricing power, transfers flow through households into the pockets of the companies whose underinvestment drives the crisis. Each pound of demand-side support becomes a public subsidy to the market power that made it necessary. The intervention that breaks the cycle addresses supply directly — building homes, generating power, delivering services at cost — so that transfers are no longer captured before they reach the people they are meant to help. There is a further fiscal logic: demand-side responses to supply-side failures are recurring liabilities with no mechanism for reduction, creating exactly the open-ended spending trajectory that debt markets scrutinise most closely. Public investment in essential infrastructure would, over any realistic horizon, reduce the demand-side spending it displaces. Rebuilding public provision is not the alternative to fiscal prudence; it is fiscal prudence.

If we cannot adequately regulate the cost of living crisis away, if the market will not build what the country needs, and the welfare state cannot make essentials durably affordable by subsidising what the market charges, the question becomes: what can?

The answer: the state must come to market, not as a regulator adjusting incentives at the margins, but as a direct participant capable of reducing the cost structure itself through public investment, ownership and provision.

The Benefits of Public Ownership: Coherence, Certainty and Cost

There are three benefits that public ownership can bring to the investment pipeline and the operation of essential sectors, resulting in reduced costs and higher-quality services. These are: a lower cost of capital, greater certainty and system-wide coherence.

Essential infrastructure is capital intensive, which means the lower cost of capital that public borrowing enjoys translates directly into lower project costs and lower prices. Freed from the need to service equity returns and carry the risk premium of private debt, public corporations can price goods and services closer to cost. The gap between close to cost prices and what privatised providers charge is, compounded over decades of bills, the difference between affordable essentials and the water, housing and energy crises we currently face.

Public ownership internalises coordination that fragmented private provision cannot achieve. Where multiple private operators each pursue their own returns, investment decisions are governed by project-level hurdle rates, short time horizons and competitive dynamics that make system-wide planning difficult and expensive. The result is duplication, delay and inflated costs passed on to users. A publicly owned entity that rebundles core integrated functions, by contrast, can allocate capital according to systemic need — sequencing investments across an entire network, capturing interdependencies between projects and taking a longer view of returns. This produces better outcomes and it produces cheaper ones; because the savings from coordination compound across the system over time.

The benefits of a lower cost of capital, more effective coordination and greater certainty can deliver three further achievements: macroeconomic stabilisation by anchoring core costs and thereby reducing upward pressure on public spending; abundance by building essential infrastructure commensurate with public need; and security for ordinary people, as the affordability and quality of essential goods and infrastructure are progressively improved.

Public ownership and its resultant economic governance would replace the clear and observable failures of private provision for essentials. A criteria for action would emerge: make use of private capital where competition drives genuine innovation, discovery and efficiency (as long as private incentives align with the public), deploy public ownership where markets for essentials have devolved into mechanisms of unaffordability, rent extraction, investment failure, or systemic instability.

That final point is particularly important in the context of energy price shocks observed since the illegal attacks on Iran by the US and Israel. After these attacks, in early March 2026, oil and gas prices surged. When prices in foundational sectors are volatile, the shock cascades across the system rather than staying contained. Energy in particular is a systemically significant price that enters every production process. Given this, it makes practical sense for the state to intervene directly in price stabilisation to prevent, as far as possible, shocks translating into rapid inflation, intervening on the supply side through direct ownership and strategic reserves to stabilise costs at source rather than managing their destabilising consequences after the fact, and letting monetary tightening derail investment plans.

In an era of heightened geopolitical tension, militarism and the climate crisis’s compounding effects, shocks that elevate the cost of essentials are likely to become more regular and more severe. With this future ahead of us, it is prudent to design essential sectors in ways that can best absorb shocks, stabilise prices and protect households; public provision gives more tools to do that by proactively managing systemically important prices.

The Way Forward

The transformation of essential sectors should proceed in a three-stage pathway, each stage delivering benefits and building institutional capacity for a horizon of deeper change. In each stage, a different productive lever of the state is made use of. First, the dealer function: the state enters as purchaser and reseller, building strategic reserves and stabilising prices while building institutional capacity. Second, the producer function: the state builds and operates capacity directly, disciplining private pricing by offering a public alternative. Third, decommodification: we progressively move towards a future horizon where every household is entitled to a free or cheap amount of basics like energy or water to cover their essential needs, offered through universal public provision.

The institutional vehicle for this three-stage transformation is the vertically integrated, operationally independent public corporation, able to borrow at or close to the state’s cost of capital, and undertake investment and pricing based on systemic need. Vertical integration does not imply the full sectoral stack should always sit within a single corporation. However, reform should eliminate the interfaces at which transaction costs are the greatest to restore the internal coordination that fragmentation destroyed. Arm’s-length independence ensures day-to-day operations and investment decisions are insulated from ministerial interference and electoral cycles, governed by a board accountable to a clear public interest mandate and with worker voice rather than short-term political calculation. Finally, it should be able to issue government-guaranteed debt, eliminating the risk premium, equity return requirement, and financial complexity costs that make private infrastructure so expensive. The result is an institution that can build faster, borrow cheaper and invest at longer time horizons than any private equivalent.

The case for devolved public ownership rests on the same logic that justifies it nationally, with a similar, if adapted, institutional frame. Beneath the commanding heights of energy, water and rail, sit sectors — social care, retrofit, local transport and housing — where private capital consistently underinvests because social returns exceed private ones but where it is not appropriate to nationalise provision. Municipal enterprise thrived in the nineteenth and early twentieth centuries by addressing exactly this market failure; what destroyed this model was not economic failure but political choice. The lesson is that devolved public ownership needs institutional design to protect it from what dismantled it last time: arm’s-length enterprises, legally insulated from central interference and local capture, capitalised through public lending on favourable terms and capable of delivering essential services closer to cost rather than at profit.

Manchesterism Emerges

The privatisation premium plays a central role in the nature and acuteness of the affordability crisis. That is why it is important that Andy Burnham, Mayor of Greater Manchester, has clearly named the problem — that privatisation and outsourcing is a core driver of the affordability crisis — and articulated a solution: regaining public control over essential sectors to reduce costs, expand security and strengthen discipline over public spending. The task now is to build this insight into a programme of public provision for national renewal.

If Manchesterism provides a future guide, it can also build on historical precedents. The original Manchester School championed the productive economy against the rentier aristocracy of its day; today’s nascent Manchesterism makes the same case against the rentier class and affordability crisis that privatisation sharpened, and which has made life harder and more insecure for ordinary people.

The connections between privatisation and Britain’s present-day economic malaise have, for many years, been an elephant in the political room. Everyone knows that extensive marketisation and fragmentation have resulted in high-cost and low-quality essentials that drive up the cost of living and put chronic fiscal pressure on the welfare state. Rather than tackle the elephant directly, politicians have comforted themselves by treating its symptoms: opening windows to air out the room, shovelling the massive piles of excreta away, and denying the presence of the elephant at all.

Denying the link between privatisation and Britain’s chronic and acute crises is no longer possible, but admitting the diagnosis can only be a first step. With the stark and omnipresent evidence of the failures of privatisation, in spiralling bills, chronic underinvestment, and a seeming inability to escape the economic doom-loop, action is both urgent and long overdue.