COMMUNITY ECONOMICS


Community and Public Ownership

by Manfred Davidmann



CONTENTS

Summary
Community and Public Ownership
Aims and Objectives
Planning and Control of Activities and Performance
Protecting the Community
Accountability to the Community
Political Reasons for Privatising
Conclusions
Notes <..> and References {..}


Case-studies Used
Rescuing an Important Industry: Rolls-Royce
Imposing the Will of the Government: Coal Board
Profitable Service: Remploy
Benevolent Monopoly: British Oxygen
Price Increases above Inflation: Gas Board
Shrinking Industry: British Leyland

Relevant Current and Associated Works

Relevant Subject Index Pages and Site Overview



SUMMARY

This report is an objective evaluation of community ownership and reviews the reasons both for nationalising and for privatising.

Performance, control and accountability of community-owned enterprises and industries are discussed.

A number of striking case-studies clearly illustrate the points being made.



COMMUNITY AND PUBLIC OWNERSHIP

We are here considering enterprises and industries which belong to, and are controlled by, the community.

Some of these are very big. The National Health Service in the UK, for example, was at one point the largest employer in the country, employing something like one million people.

The term 'nationalising' refers to the process of taking enterprises and industries into community ownership, 'privatising' refers to the process of returning them to private ownership.

'Community ownership' has elsewhere been called 'public ownership' and also 'common ownership'. But 'community ownership' is used here to get away from preconceived ideas and political propaganda which have become associated with the other terms.

Enterprises or industries in community ownership are often given labels such as National Corporation, Nationalised Industry, Public Corporation or Public Enterprise.

Such enterprises, however, trade just like privately owned enterprises and are often of comparable size to multinational corporations. What community-owned enterprises have in common is that they aim to serve the community.

Community-owned enterprises use surplus funds in the usual way for capital expenditure (new plant or equipment, updating or expanding) or repaying loans. And instead of paying dividends to private shareholders, remaining funds are passed to the government and so reduce the level of taxation. There are many ways in which surplus funds can be allocated between these categories.

When a community-owned enterprise requires financial support, the core consideration should be present and future service to the community, with the community providing required funds via the government.


Community owned enterprises were nationalised, that is taken into community ownership, for reasons connected with serving and protecting the community. They are accountable to the community for what they do and how they do it.

Important issues are
  1. Aims and objectives,
  2. Who appoints directors and chief executives and how they are appointed.
  3. Accountability to the community of the enterprise, of its directors and chief executives, of those who appointed them and defined their aims and objectives.



AIMS AND OBJECTIVES

The first act of nationalisation in the UK was by a Conservative Government which nationalised the electricity grid in 1926 so as to rationalise and organise the supply of electricity.

The next act of nationalisation in the UK was carried out by a Labour Government which nationalised London's transport in 1933. Disorderly competition between private bus companies had been slowing down traffic and here also the need was to organise and improve a service to the community.

So the aims and objectives of community ownership, of nationalising enterprises or industries <1>, are as follows:


AIMS

  1. To provide an efficient and satisfactory level of service.
  2. To ensure the supply of quality goods at reasonable prices.
  3. To safeguard the community against exploitation.


OBJECTIVES

Included in the aims are these objectives:
  1. To keep important and needed industries going which would collapse without government support.
  2. To protect the community from being exploited by a monopoly, a monopoly being one which provides say 15 per cent or more of the total. The community must not be exploited when in need or when supplies are restricted. Profit mark-ups have to be reasonable in relation to actual costs incurred.
  3. To provide capital when the amount to be invested or required is too big or when only a small or no return could be expected for a considerable time.
  4. To provide and ensure essential public services in an effective way such as free education to the highest level, a national health service, public transport, postal service, energy and service utilities and public health.

Aims and objectives give priority to the community's needs and interests over purely profit making. For example, a loss-making industry may be kept going because national security requires this, or to prevent the rise in unemployment which might otherwise result.

But service to the community is not enough by itself. For the service to be effective there has also to be accountability to the community to ensure services and goods are being provided effectively.



PLANNING AND CONTROL OF ACTIVITIES AND PERFORMANCE

Planning and control of activities and performance are matters in which community-owned enterprises do not differ from other enterprises.


Consider Rolls-Royce.

The development of the RB211 aero-engine brought Rolls-Royce to insolvency in 1971 and it was nationalised by a conservative government to prevent its collapse.

About £500 million were invested in the company under public ownership by the community, as well as many hundreds of millions of pounds by way of research and development aid for new engine projects. In 1986 the government was providing about £150 million out of Rolls-Royce's £250 million spending on research and development and this level of government support was expected to continue after privatisation.

By 1987 Rolls-Royce had achieved a commercial market share of about 25 per cent for its engines, and it was returned to private ownership.

Here we see how an important industry was rescued from insolvency by nationalisation and later returned as a successful enterprise to private ownership.

However, one would like to see a factual analysis of the whole episode from cost of nationalising to final privatisation deal. Bearing in mind the considerable sums invested by the community in the company while it was nationalised, it seems that this acclaimed high-tech company was returned to private ownership at considerable loss to the community.

When there is no need to sell then it would seem that selling at a loss amounts to subsidising new owners.


An enterprise, however, is expected to make a profit after allowing for social costs and benefits, and this means that the enterprise's Profit and Loss Account has to include social costs and benefits. {2, 3}


Take the bitter struggle in 1985/86 in the UK between the Coal Board (which controlled the community-owned coal mining industry) and its workforce, the miners. The miners were defeated after about twelve months by top-level management which appeared to be following government policy.

The Coal Board apparently intended to close most coalmines while maintaining that commercial considerations (profitability) were the only criterion and that the Coal Board alone would decide which pits were to be closed, and when and how they were to be closed.

The miners opposed the unilateral closure of pits by the Coal Board, that is they opposed the closing of pits without first consulting its employees and the local community. In effect the miners maintained that the social benefits of keeping a mine going, and the social costs of closing a mine, to employees and to the local as well as to the national community, had to be taken into account.


Take REMPLOY, a company which has about 80 factories employing only disabled workers for producing a wide range of quality goods.
  1. Commercial considerations:
    (a) Unprofitable and making losses.
    (b) Subsidised by the community via the government of the day which makes up the losses.
  2. Social benefits:
    (a) Social security benefits saved which would otherwise have had to be paid by the government.
    (b) Income tax received by government from employees.
  3. Overall:
    Social benefits greater than the government's subsidy. In other words, a profitable operation from the point of view of the community as a whole.
  4. Add:
    Not quantified or included so far is the impact of paid employment on disabled employees who now see themselves as useful members of society doing needed and worth-while work.

In other words, the profitability of community-owned enterprises can only be assessed by including social benefits in Profit and Loss statements.


Community-owned industries are in effect monopolies and need independent, thorough and effective control of quality of service and pricing system. Much has been achieved in this area by government investigative committees.

Progress has also been made in controlling the pricing structures of national monopolies by government appointed committees with statutory powers to control prices and price systems.


However, what seems to be missing is effective public grassroots discussion, evaluation and participation in decision-taking about basic policy matters. Such as the future of the industry, direction and speed of progress, quality of service and effectiveness of management.



PROTECTING THE COMMUNITY

British Oxygen Company, a privately owned British multinational, then sole supplier of oxygen in the UK, was investigated to determine whether they were using their monopoly power against the public interest. The inquiry found, for example, that uneconomic but essential supplies to small consumers, such as small garages and farmers, were being subsidised by large industrial tonnage-oxygen customers. British Oxygen was not misusing its monopoly power and was allowed to continue as before.

If the inquiry had found that British Oxygen had misused its monopoly power, exploiting the community by charging excessive prices, then British Oxygen would almost certainly have been nationalised by the government to protect the community.


One reason for taking an industry into public ownership is to protect the community from being exploited. But what if the government of the day has other ideas?

In the early eighties the British Gas Board was increasing its prices to domestic consumers each year by a substantial amount above the rate of inflation, in line with government instructions. For the financial year to March 1983, for example, its profits were enormous. On a conventional historic-cost accounting basis, its profits were probably £1.6 billion. British Gas depressed profit figures by using a current-cost accounting basis, to a current-cost profit of £660 million after paying a gas levy to the government of £530 million.

Here a government instructed a community-owned national industry to increase its prices each year substantially above inflation, and then collected a good deal of the resulting profits by means of a levy. The government was in effect using British Gas to collect a special tax from its customers.

The government was able to do so because gas was then much cheaper than electricity, and the government forced British Gas to increase its prices to near the electricity costs. The resulting profits were enormous.

To me it seems that this is a clear example of exploitation of consumers by misuse of monopoly power by a government.



ACCOUNTABILITY TO THE COMMUNITY

Directors and chief executives of nationalised enterprises or industries are appointed by the government of the day.

The Board of Directors is responsible for the day-to-day operation of the enterprise or industry it controls, and the directors are generally accountable for the quality of their work to those who appointed them.


The Minister who appointed them lays down the overall policy which they need to adhere to, and in the end have to adhere to, if they wish to be reappointed. In this way the Board's role becomes that of putting into effect the politically biased policies of the government of the day and so the government's policies are imposed on the nationalised enterprise or industry.

In practice the Minister can blame the board for the resulting problems but they are unlikely to be able to criticise the policies of the government.

It might be argued that the appointees are responsible through those ministers who appointed them, and thus through the government of the day, to the policy making delegate body such as Parliament. But this method of accountability is so remote from what is actually happening that it does not work effectively.


Consider what happened to British Leyland:

British Leyland was formed in 1968 by merging British car manufacturers with the intention of creating an enterprise big enough to compete effectively with foreign car manufacturers.

British Leyland (BL) was producing roughly 850,000 cars a year in the UK with 190,000 employees world-wide, making a pre-tax profit of about £40 million each year, from 1968 to 1973.

But 1973 to 1975 production dropped to 600,000 cars a year, profit turned into a loss of £90 million, and the government took control of BL in 1975.

Management became tougher, more authoritarian. Confrontation developed between workforce and management. Production continued to fall and an initial profit of £70 million had by 1980 turned into a loss of £390 million. There were massive redundancies. By 1982, BL's workforce had been reduced to 110,000 employees and the loss had been reduced to £100 million.

What had gone wrong?

Between 1968 and 1982 about £2.2 billions of taxpayers' money were poured into BL in the form of new share capital. The time taken from drawing-board to consumer had increased from three to five years. A model built under licence from a foreign company was launched in 1981.

Market share can be defined as the sales achieved by one enterprise in an industry, expressed as a percentage of total sales in that industry. It is an indication of relative success between competitors and roughly independent of the state of the economy.

Now consider this. In 1968 BL's UK market share was about 40 per cent. From 1972 BL's UK market share dropped until ten years later it had fallen to 19 per cent, and this process continued.


Summarising:

1968   Production   850,000
    Profit (GBP mill)   40
    Employees   190,000
    Market Share (%)   40
In Between:
  • Taxpayers pour in £2.2 billion to keep the company going.
  • Market share drops and continues to drop.
  • So production drops and profits turn into increasing losses.
  • Massive redundancies.


1982   Production   400,000
    Profit (GBP mill)   -100 (Loss)
    Employees   110,000
    Market Share (%)   19


Compare the figures:

    1968   1982
         
Production   850,000   400,000
Profit (GBP mill)   40   -100 (Loss)
Employees   190,000   110,000
Market Share (%)   40   19


The market share dropped and continued to drop, for ten long years. This situation surely requires an explanation.

How come the informed press and media failed to get across to the general public the points being made here? To the general public which was paying these enormous sums to keep the company going and who surely had the right to know how their investments were being applied and how the company was performing as a result.

What is needed is direct accountability to the community for performance in achieving the community's aims and objectives.



POLITICAL REASONS FOR PRIVATISING

Large-scale privatising has been carried out in recent years for reasons which at times appear unsound and misleading. A political party, or government, may believe that private profit is more important than service to the community or the welfare of the community, of people. They would then privatise for the sake of private profit regardless of the cost to the community.

We have been told, for example, that privatising is necessary because 'government' cannot afford to support financially the community-owned industry. Those who put forward such ideas usually ignore the value of the social benefits obtained by the community from the service provided by the community-owned enterprise.

One example of such considerations is the REMPLOY enterprise, which was discussed earlier. Another clear example can be seen in arguments about what is happening to the British National Health Service. 'Unable to support financially' is not a valid argument for privatising unless social benefits and social costs are included in the cost-benefit analysis.

Another reason for high subsidies being required may well be that policy is being decided by politicians from the point of view of preconceived ideas instead of being decided on the basis of the real situation and the community's needs. It is also possible that senior management may be unable to implement policies imposed from above.


In addition, it appears that enterprises and industries may be privatised without the community getting its money back, that is sold at a loss. That is without getting back the money put in by the community while rescuing or supporting the enterprise or industry. Privatising at a loss when there is no need to sell would seem to amount to subsidising the new owners, handing public money to them.


Another reason for privatising may be to use the resulting funds for financing tax cuts so as to win an election or redistribute income and wealth from bottom wage-earners to the rich. Tax cuts hardly benefit the bottom 95 per cent of the population to any extent but the top 5 per cent gain much and very much. Using income from sale of community-owned enterprises, from privatising, in this way amounts to selling much which belongs to all, and then giving the proceeds to those who are already well-off or rich.



CONCLUSIONS

We have seen that there are good reasons for nationalising an enterprise or an industry, based on providing better service and high quality goods where needed and on the need to protect the community from exploitation.

Rolls-Royce, for example, was taken into public ownership when insolvent and returned to private ownership as a successful enterprise.


But there are political parties and governments to whom private profit is more important than service to the community and who privatise community-owned industries and enterprises regardless of the cost to the community.

From the point of view of the community there is great need to take community ownership in all its aspects out of this political tug-of-war situation.

Community ownership and nationalisation are essential ingredients of economic policy and must not be abused for the sake of private profit.


We need to make people aware of
  • Aims and objectives of community ownership and nationalising,


while stressing the crucial importance of
  • Service to the community,
  • Grassroots control by the community, and
  • Accountability to the community, combined with
  • Open policy-making and
  • Open decision-taking.



NOTES AND REFERENCES


NOTES

<1> This section owes much to {1}


REFERENCES

{1} Organisations at Work
M R Frampton, R T Norrie, A J Rees
Nelson, 1983

{2} Community Economics: Principles
Manfred Davidmann
http://www.solhaam.org/

{3} Exporting and Importing of Employment and Unemployment
Manfred Davidmann
http://www.solhaam.org/



Relevant Current and Associated Works

A list of other relevant current and associated reports by Manfred Davidmann:
     
     
Title   Description
     
Style of Management and Leadership     Major review and analysis of the style of management and its effect on management effectiveness, decision taking and standard of living. Measures of style of management and government. Overcoming problems of size. Management effectiveness can be increased by 20-30 percent.
     
Role of Managers Under Different Styles of Management     Short summary of the role of managers under authoritarian and participative styles of management. Also covers decision making and the basic characteristics of each style.
     
Directing and Managing Change     How to plan ahead, find best strategies, decide and implement, agree targets and objectives, monitor and control progress, evaluate performance, carry out appraisal and target-setting interviews. Describes proved, practical and effective techniques.
     
Motivation Summary   Reviews and summarises past work in Motivation. Provides a clear definition of 'motivation', of the factors which motivate and of what people are striving to achieve.
     
The Will to Work: What People Struggle to Achieve   Major review, analysis and report about motivation and motivating. Covers remuneration and job satisfaction as well as the factors which motivate. Develops a clear definition of 'motivation'. Lists what people are striving and struggling to achieve, and progress made, in corporations, communities, countries.
     
Work and Pay   Major review and analysis of work and pay in relation to employer, employee and community. Provides the underlying knowledge and understanding for scientific determination and prediction of rates of pay, remuneration and differentials, of National Remuneration Scales and of the National Remuneration Pattern of pay and differentials.
     
Work and Pay: Summary   Concise summary review of whole subject of work and pay, in clear language. Covers pay, incomes and differentials and the interests and requirements of owners and employers, of the individual and his family, and of the community.
     
Exporting and Importing of Employment and Unemployment   Discusses exporting and importing of employment and unemployment, underlying principles, effect of trade, how to reduce unemployment, social costs of unemployment, community objectives, support for enterprises, socially irresponsible enterprise behaviour.
     
Transfer Pricing and Taxation   One of the most controversial operations of multinationals, transfer pricing, is clearly described and defined. An easily-followed illustration shows how transfer pricing can be used by multinationals to maximise their profits by tax avoidance and by obtaining tax rebates. Also discussed is the effect of transfer pricing on the tax burden carried by other tax payers.
     
Inflation, Balance of Payments and Currency Exchange Rates     Reviews the relationships, how inflation affects currency exchange rates and trade, the effect of changing interest rates on share prices and pensions. Discusses multinational operations such as transfer pricing, inflation's burdens and worldwide inequality.
     
Organising   Comprehensive review. Outstanding is the section on functional relationships. Shows how to improve co-ordination, teamwork and co-operation. Discusses the role and responsibilities of managers in different circumstances.
     
Social Responsibility, Profits and Social Accountability   Incidents, disasters and catastrophes are here put together as individual case studies and reviewed as a whole. We are facing a sequence of events which are increasing in frequency, severity and extent. There are sections about what can be done about this, on community aims and community leadership, on the world-wide struggle for social accountability.
     
Social Responsibility and Accountability: Summary   Outlines basic causes of socially irresponsible behaviour and ways of solving the problem. Statement of aims. Public demonstrations and protests as essential survival mechanisms. Whistle-blowing. Worldwide struggle to achieve social accountability.
     
Co-operatives and Co-operation: Causes of Failure, Guidelines for Success   Based on eight studies of co-operatives and mutual societies, the report's conclusions and recommendations cover fundamental and practical problems of co-ops and mutual societies, of members, of direction, of management and control. There are extensive sections on Style of Management, decision-taking, management motivation and performance, on General Management principles and their application in practice.
     
Using Words to Communicate Effectively   Shows how to communicate more effectively, covering aspects of thinking, writing, speaking and listening as well as formal and informal communications. Consists of guidelines found useful by university students and practising middle and senior managers.
     
Ownership and Limited Liability   Discusses different types of enterprises and the extent to which owners are responsible for repaying the debts of their enterprise. Also discussed are disadvantages, difficulties and abuses associated with the system of Limited Liability, and their implications for customers, suppliers and employees.
     
Ownership and Deciding Policy: Companies, Shareholders, Directors and Community   A short statement which describes the system by which a company's majority shareholders decide policy and control the company.
     
Creating, Patenting and Marketing of New Forms of Life     Evaluates problems in genetic manipulation, and consequences of private ownership of new life-forms by multinationals. Lists conclusions and recommendations about man-made forms of life, their ownership and patenting, about improving the trend of events.
     
The Right to Strike   Discusses and defines the right to strike, the extent to which people can strike and what this implies. Also discussed are aspects of current problems such as part-time work and home working, Works Councils, uses and misuses of linking pay to a cost-of-living index, participation in decision-taking, upward redistribution of income and wealth.
     
Corrupted Economics and Misleading Experts   Shows how 'Economics' is used to misinform and mislead the general public. Clearly states underlying considerations of specific important economic relationships and comments on misleading political interpretations and on role of independent experts.
     
Reorganising the National Health Service:
An Evaluation of the Griffiths Report
  1984 report which has become a classic study of the application and effect of General Management principles and of ignoring them.

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Relevant Subject Index Pages and Site Overview


The Site Overview page has links to all individual Subject Index Pages which between them list the works by Manfred Davidmann which are available on the Internet, with short descriptions and links for downloading.

To see the Site Overview page, click Overview

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Copyright    ©    1996    Manfred Davidmann
All rights reserved worldwide.

History
27/06/96 Completed
30/06/96 To Website
02/06/02 Added 'Relevant Current and Associated Works'