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Monday, 2 November 2009

Huttonomics

I have posted before about some of the ludicrous guff that comes from the pen of Will Hutton, but at the risk of boring you again I will point out this weekend's polemic in the Observer Guardian, where he seeks to question the doctrine that the private sector proides a better service than the public sector.

The article starts by comparing the service Mr Hutton gets from Virgin Internet with the service that he gets from his local GP surgery. He then goes on to criticise HSBC for calling him to enquire about his son's finances, clearly oblivious to the fact that his son has left his father's number as a contact, but let us leave that aside.

Yes, Mr Hutton, the service at your local GP surgery might be better than the service you get from Virgin, but lest you are in any doubt, they are both private businesses, and all the decisions about how you are served are made by private businessmen and women, some of whom happen to be doctors. It just happens that your local GP surgery is paid for by the bounty of the NHS, whereas the Virgin service that you choose to subscribe to has to compete on many factors, including price, to provide the service you require.

Then Hutton complains about the sloppiness of BAE Systems and Qinetiq in the Nimrod crash, conveniently downplaying the equivalent blame handed out by Mr Haddon-Cave QC to the RAF and the MOD. All government suppliers are often too close to government, but the relationship is often reciprocal, and I often question whether the best interests of either shareholders or tax payers are best served.

But then Hutton, supposedly an economist, criticises the level of service from Ryanair, and in particular the delay that he suffered when a flight he was due to take from Luton was delayed because an engineer had to be flown in from Ireland to fix the plane. Well, that Mr Hutton is what you get when you buy a cheap plane ticket. If you don't want to walk over the airside tarmac with your bags to the plane, be bombarded with adverts, have to fight to get to an unreserved seat, pay £5 for a sandwich and suffer the possibility of long delays when inbound aircraft are delayed on their hectic schedule, and land within 50 miles of your destination, then go with British Airways, but it may cost you three times as much.

And that is the nub of the problem. Hutton fails to appreciate that while his GP surgery gets lashings of cash from the government and BAE and other defence suppliers have always charged lavishly for their troubles because they know they have the government over a barrel, the rest of the private sector knows that they have to give value for money, or die. As a result, you generally get what you pay for and nothing more, but not much less. Private sector companies that make large profits attract competition, which drives down margins.

Most importantly, unlike government, companies cannot operate at a -40% gross operating margin (£500m revenue, £700m expenditure). It would be wonderful if all companies could trade at a loss and send the bill to our grandchildren, but life doesn't work that way Mr Hutton.

2 comments:

harmonyfuture said...

I don't think Mr. Hutton mentioned shareholders once in his article and therein lies a problem. The private sector will often use the demands of the shareholder as an excuse for a diminishment of quality when the real benefits lie closer to the Board. Conversely in the public sector a diminishment in quality originates with bad managment and ends up costing the shareholders (Taxpayers) more.

Alex said...

Contrary to popular notions, shareholders are willing to forego cash returns for a long time if they see real growth prospects, but it is reasonable and fair that shareholders can and should see a reasonable risk adjusted return on their investments.

Business are however constrained by the need to establish a product, secure sales and to operate profitably, none of which are necessarily requirements for all of the public sector.

How much of the public sector actually has to sell anything to survive. How many departments and quangos actually cost more to operate than they create in value (Asset Rcovery Agency)? And let us not forget that the entire public sector operates at a massive defict.