Economics

Student Loans: Time to keep it in the family?

The government's privatisation drive has slowed down of late, but will—and should—it continue?

July 22, 2014
Is the Business Secretary's U-Turn on the sell-off of student loans indicative of a wider trend? © Alex Folkes/ Fishnik Photography
Is the Business Secretary's U-Turn on the sell-off of student loans indicative of a wider trend? © Alex Folkes/ Fishnik Photography

The Business Secretary Vince Cable said over the weekend that plans for the privatisation of student loans are being shelved. This comes on top of a stop to the privatisation of the Land Registry, the reclassification of Network Rail from the private to the public sector and no progress at the Treasury on the idea of selling off parts of the road network (a topic that the Chancellor had asked officials to look at again in the 2012 Autumn Statement). Asset sales were supposed to be part of the answer to closing the deficit; so far their contribution has been minimal.

Some of this is sound decision-making. Private investors would have demanded a discount on the book value, as opposed to the market value, of student loans, not least because there is much uncertainty about future repayments, which are linked to graduate incomes. Selling at less than book value would have made the deficit worse rather than better. Equally government may not be feeling so confident about its capability to manage sales after the experience of floating the Royal Mail, when it was criticised for allegedly undervaluing it. Vince Cable announced two weeks ago that Lord Myners was going to lead an independent review into how government conducts stock market offerings.

The focus of that review suggests that selling off public assets remains on the table, at least. This is just as well. The latest set of Whole of Government Accounts, a consolidated set of financial statements for the UK public sector, states that the government holds £1,264bn in assets. It is hard to imagine that it is the most effective owner of every one of those. A commercial owner may be more successful in exploiting the potential of some of them, a judgement that may be reflected in it paying above book value for the asset, providing a profit that could be used to help pay down the deficit. Sales of land and buildings for which the government no longer has any use are one such example.

The challenge is that profits the private sector makes off former publicly owned assets will come back to haunt the government. Many will ask whether the government could have made these profits instead. This is the argument that some members of the Labour party employ when it comes to rail franchises. They point out that profits from the East Coast line are swept back to the Treasury after Directly Operated Railways stepped in to run it when the private franchisee handed back the contract. The dominion of the state railway company could be extended, after all some of the leading bidders for other train lines are the state-backed companies of other countries—for example, the Hong Kong train company just won the contract for running trains on Crossrail. We could have kept it in the family instead, they cry.

The problem with this argument is the well-known disclaimer that performance can go down as well as up. When a private firm buys a state asset or runs a public service, it takes the risk as well as the potential reward. In the worst case scenario, it exploits market conditions to ensure it makes a profit - the asset stripping approach. But regulation and competition should prevent this happening. In the best case scenario, the state insulates itself and therefore the taxpayer from risk, and benefits from the opportunities or higher quality of service that the private operator may create in order to turn a profit.

That's the theory. But then there's little public faith in the ability of politicians, civil servants and regulators to deliver the best case scenario. What we see in Vince Cable's decision to hold an independent review of sales like the Royal Mail and his honest assessment of the student loans sale is an attempt to rebuild that confidence. It will be a hard slog—in the meantime keeping it in the family will be the easier choice to make.