Windfall offset financing: A way forward on public ownership
I recently had an interesting conversation with a fellow socialist who was up visiting. We were talking about the potential for a left realignment in Scottish politics following a successful vote for independence in 2014. We agreed that there could be a shift to the left electorally and a general pubic mood to reverse the neo-liberal policies of the last thirty five years, and that opportunities would arise to raise the key question of public ownership both in the Scottish Parliament and the wider community.
Inevitably, we came to the question of just how a resurgent left – perhaps one with a majority in Parliament or sufficient support to raise concrete bills and legislation – would go about the task of beginning to reverse decades of Tory and New Labour privatisations. How would we take key sectors of the economy back into public ownership, and into democratic public ownership for the first time?
My friend was of the firm opinion that the most important thing would be political will. There would need to be an unshakeable conviction in driving through the necessary nationalisations against the tidal wave of propaganda that would spew forth from big business, the establishment press and the pressures that would come from the forces of neo-liberalism internationally. Yes, I agreed let’s take the need for political will as a given, but how – concretely and pragmatically – would we go about it in legislative terms? How would we take the energy sector, or say, the Scottish parts of the rail network or Royal Mail (due to be privatised soon by the Con-Dem coalition) back into public hands?
When I was young pup in the Labour Party, and in what was then called the Militant Tendency, one prominent idea was that the left would win a majority in the Labour Party, then win an election on a principled socialist programme. An Enabling Act would then be passed allowing mass nationalisations to proceed, with only minimum compensation on the basis of proven need paid to shareholders. It seems like such a long time ago! However, the basic idea of an enabling act is not in itself an outrageous one. In Venezuela, a parliamentary enabling act was used to give Hugo Chavez powers to push through a number of important social, economic and democratic reforms.
However, such a radical plan can only really be carried out when an absolute majority in society are convinced of the need for fundamental social change and when there is a rank-and-file mass movement outside Parliament to support it. Even then the idea is not entirely unproblematic. What does minimum compensation on the basis of proven need actually mean? And how in the short, medium and longer terms would we protect the value of worker’s pension funds invested in those industries?
Moreover, and perhaps more importantly, that is unlikely to be the situation the left faces initially on the terrain of the political battlefield in Scotland. We will not be afforded the luxury of waiting for what would, in effect, be a pre-revolutionary situation, armed only with broad slogans and concepts. We will have a duty to put forward a pragmatic, realisable program of radical and sustainable reform in an election manifesto.
The Scottish Socialist Party, at the height of its pomp between 2001 and 2004 was able to win the support of a significant section of the electorate by putting forward detailed policy proposals even within the very constrained limits of the initial devolutionary settlement. A resurgent left in an independent Scotland would have real powers to work with, but the principle would remain the same. We’d need detailed plans on how we were going to go about our work. We would need to convince a Scottish working class, perhaps only beginning to recover from recession and austerity, that bringing the privatised utilities back into public ownership wouldn’t cost an arm and a leg, and divert much needed cash resources from housing, education, pensions, benefits and infrastructure. We would need to convince people that their pension funds invested in those industries would not devalue in the long term.
We need to begin a serious discussion on public ownership and how we might go about it. I don’t pretend to have all the answers but I’d like to kick start the debate by proposing a system of nationalisation that would be cheap, robust to potential legal challenge and that could protect worker’s pension funds.
This model of nationalisation is only applicable in full to the privatised industries and projects built using the ruinously expensive Private Finance Initiative, but nevertheless bringing back into public ownership that which was taken from society and put in private hands by generations of Tories and Blairites would surely be a good first step.
Let’s call it the windfall offset financing model.
The ability of governments to impose windfall taxes on companies with bumper or excess profits is well enshrined in law (although I always wondered what ‘excess’ profit is?). Gordon Brown imposed a windfall tax, and this Con-Dem government also did on the North Sea Oil companies (though it has now withdrawn it). The fact that a profits ‘windfall’ comes about as a direct result of previous government policy should be neither here nor there – especially so when that ‘previous’ government has no constitutional relationship with a new, independent Scotland.
Surely the biggest ‘windfalls’ in economic history were the privatisations of publicly owned industries under Thatcher and Blair, and the disgraceful PFI contracts awarded under Major and Blair forward for capital projects such as the building of schools, hospitals, roads, bridges etc?
What in reality people were urged to ‘tell Sid’ in Thatcher’s famous ad campaign for the sell-off of British Gas were that these shares were grossly undervalued and that a huge immediate profit could be made by selling them on. PFI’s have burdened health trusts, education authorities and governments through the huge profits inbuilt into the contracts. Even recently, shares in Northern Rock which had to be rescued by the taxpayer in the financial crisis were sold cheaply to Richard Branson’s Virgin corporation who made an immediate profit. These have been the great ‘windfalls’ of neo-liberalism for the corporate private sector, at the expense of the rest of us.
The idea behind windfall offset financing is a devastatingly simple and elegant one: appoint a panel of independent economic experts to calculate the windfall from privatisations and PFI’s in terms of the undervaluing of assets and their potential, allowing for on sale effects of the original shares, and arrive at a figure representing the cumulative windfall arising from the underselling of the original shares or over padding of the contract with profit subsidised by the taxpayer. Then offset the price paid for the acquisition of the shares/company/asset against a windfall tax on the total excess profit over the years.
Such a windfall tax, set at 100% of cumulative excess profit generated, would be huge. Of course, in practice, in the course of the re-nationalisation of say, the Scottish energy sector, Scottish Royal Mail, or Scottish Rail, no actual windfall tax would change hands, other than in paper terms. But by offsetting the new shareholder/corporate tax obligation against the existing purchase price of shares a radical reforming left government could embark on serious program of extension of public ownership in the lifetime of a single parliament, both within the existing legal framework and at much reduced cost. For example, shares that cost £5.50 might only cost £2.75 once the windfall tax is offset against the price.
This would be a welcome ironic reversal of the privatisation process; it would be the private sector being forced by government action to give up its assets into public ownership for a song.
A secondary but important beneficial irony would be the collapse of the share price of the industry about to be re-nationalised. Corporate shareholders, seeing the boot on the other foot for a change, and the legislative train bearing down upon them, would try and get rid of unsellable shares as fast as they could. The share price would plummet, allowing a socialist or social democratic government to purchase them for pennies.
So how do we protect the pension fund investments of ordinary working people that may wholly or partially be currently invested in these companies? We would need to propose parallel legislation that allowed – even compelled, if necessary – the transfer of pension funds held in shares to long term government bonds, linked perhaps to a sovereign wealth fund.
So to briefly re-iterate, the four key component policies for a windfall offset finance model of public ownership would be as follows:
* Legislate to create an independent investigatory commission to quantify the profits windfall for private companies created through privatisations and PFI
* Legislate to enshrine in law the right of government to set taxes on such windfalls and where necessary to offset such tax obligations unilaterally against share and asset prices during government purchase
* Legislate to enable, and where necessary, compel the transfer of pension funds from privatised industry shareholdings to long term government bonds, guaranteeing workers with pensions in such schemes no decrease in their projected value on retirement
* Proceed to take back into public ownership using the windfall offset finance model those industries, sectors and capital assets deemed strategically necessary for developing an economically advanced and socially just society
The devil, of course, as always, would be in the detail, and such a model would probably be open to legal challenge. It would certainly face mass opposition from the organised political voices of capital. That’s where my friend returns to this argument, with her canny observation that political will is all important in any radical process of social and economic change.
And, of course, there are other critical issues. How do we ensure that such new publicly owned institutions are democratically run and accountable? How do we get the balance between consumer and producer interests right? What are the best ways to encourage technical and scientific innovation in a socially owned context?
Doubtless we’ll return to these questions in future issues of The Point, but the purpose of this article was to focus in on the mechanics of how we might take things back into public ownership. It is also worth pointing out that, though this article has concentrated on the possibilities for public ownership in a future independent Scotland, the fundamental principle of windfall offset financing is universal and potentially applicable in Greece, or Spain, or Brazil or the UK.
At the very least, I hope to have made a small contribution that kick starts a real discussion on this critical issue.