Local Government

State Enterprise: when it can work and why

  • Published: May 29, 2019
  • Category: Local Government

Part Five - State Enterprise: when it can work and why

Alan Sitkin, Senior Lecturer, Regents University London

When I retired in May 2018 after two terms as councillor in London Borough of Enfield (and four years as Cabinet Member for Economic Regeneration), I contacted NPI in that hope that some of the frontline economic innovations we had attempted as part of our “Enfield Experiment” might be of use to academics and future politicians seeking to re-define public sector interventionism in today’s cash-strapped circumstances. I was fortunate that NPI was kind enough to offer a platform for these two-blog series, a generosity for which I will always be grateful. Now, as the series draw to a close, it is time to summarise a few lessons learnt.

Looking back over these blogs, what stands out – beyond the first series’ focus on the institutional challenges endemic to any system where actors’ missions simultaneously converge and diverge – is the power of hybrid ideas. More specifically, my experience indicates that at a time when the only choice seems to lie between the extremes of neo-liberalism and monolithic state control, there remains enormous value in good old mixed public-private action.

Of course, this catch-all term can take many forms, some of which can be quite flawed: state capitalism, which often forgets that initiatives are only sustainable if financially viable; or at the other end of the spectrum, light touch “common good” corporate social responsibility efforts which are too sporadic (and/or geographically remote) to generate systematic benefits.

In between lies the business model that we chose for Energetik, Enfield Council’s municipally-owned heat-from-waste company, which has been the focus of this second NPI series. The aspirations driving this initiative – that it should achieve a priority policy objective (mass de-carbonisation) while paying for itself like any business must – were simple. The conditions enabling its success –that steady market demand for heat will reduce the volatility of Energetik’s earnings and justify its low returns (themselves fitting with the public shareholder’s low cost of capital) – are just as simple.

This simplicity is crucial, since it is what enables the replication of our entrepreneurial venture by other UK local authorities.

The UK lags far behind our Continental European counterparts in terms of offering householders access to viable district heating networks. Whereas a minimum of half the population in Scandinavia had access to these systems in 2013 (and 12% in Germany), the number in the UK was a puny 2%.

There are several reasons for this gap. The first is that the activity’s low returns and heavy upfront investments (with pipes costing about £2m per km to lay) leave private providers reluctant to invest in the sector, making it a space where state-owned utilities tend to dominate. The problem in the UK is our disinclination, in comparison with our European neighbours, to engage in state-owned enterprise.

The first prerequisite for the spread of municipally-owned heat networks in the UK is for British politicians to embrace the possibility that there is a place for publicly-owned and run entities performing business operations. The logic behind this is that as things stand, most potential state entities lack the fiscal resources to undertake certain crucial services that could be offered if operated using market mechanisms – while private providers are discouraged from these activities due to low financial returns. These returns are, however, sufficient for state shareholders benefiting from a much lower cost of capital.

The first blog in this series highlighted the artificial hierarchy that exists in the UK between public and private endeavour. It is only right for this final blog to repeat that point.

The default energy provider in the city where my wife was born, is Hamburg Energie, 100 per cent owned by the local authority but run according to “private economic” principles. In Sweden, Vattenfall is a major player in the global energy markets, specifically in the transition towards renewable sources, and remains wholly owned by the Swedish state. Even EDF, which competes directly in all markets with private sector energy behemoths in the UK and globally, remains 85 per cent owned by the French state.

The model for public sector corporations has long been tried and trusted, including where green business is concerned. The only thing UK politicians have to fear at this level is fear itself.

The second reason why we lag behind Europe in district heating has to do with unhappy memories about negative experiences that the UK has had with it. About 40 years ago, when a few local companies were trying their hand at a technology that had already spread across the Continent, there was a tendency to scrimp and save on the quality of the materials used. This focus on short-term costs was ultimately self-defeating since the inferior systems that resulted broke down more often, requiring expensive repairs and dismaying potential customers.

Energetik has addressed this reputational risk by only installing the highest quality (Scandinavian) infrastructure. The extra cost is more than justified by the steadying effect on operational performance. Besides, it is entirely in line with both green and quality business principles that a state-owned company either do something well or not do it at all. Energetik is meant to last a minimum of 80 years and welcome new public sector shareholders for many decades to come.

A lesson from my political experience is that if politicians really want to do something useful, they need to project well beyond their own necessarily limited time in office.

Lots has been written about the harm that electoral cycles and their associated careerism have on policymaking. The reality is that most economic initiatives will only produce positive outcomes many years in the future, well beyond the time that their initiator can claim credit for them. Anyone who goes into politics with their eyes wide open must know that these are the rules of the game. At which point, you have a choice: you either stick to the minor, immediate measures that will gain you brief headlines but not make a real difference to people’s lives; or you implement deeper, more structural policies where you get the blame for the upfront costs even as your critics will claim the glory for ultimate success.

It may not sound like a good deal but as Spike Lee once advised us, it’s always best to do the right thing, which makes a fitting final word for a blog series.

I thank you for reading.

 

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