Is it better to own nothing?

The Guardian reported last year on how fire engines in London had been sold to a private equity firm for £2.  Although fire services grew from private insurance companies, the modern fire service is a clear example of how certain organisations benefit from being owned and run by the government.  There are very large positive externalities from a fire service – they not only stop a building burning, but prevent damage to everything else in the neighbourhood.  People’s willingness to pay for a fire service is much lower than society’s benefit.

Is it a concern, then, that parts of the fire service appear to be in line for privatisation?  Many are seeing this as a first step towards the government selling off the fire service, and relying on independent contractors as it does with transportation of prisoners and certain ambulance services.  However, this type of sale of assets is common in industry and normally occurs because it’s a more efficient way of operating.

It would be expected, for example, that a car servicing company would be better at maintaining an courier van than a company whose primary function is to transport parcels.  Not only is it likely that the job would be carried out more professionally, but also, since the servicing equipment can be used for other vehicles when courier vans aren’t in the garage, it is likely to also be cheaper.   Further to this, the garage will have an even greater incentive to maintain the vehicles well if they are owned by the garage and therefore the garage will make more money from them the longer they last.

Why the courier company must pay out a leasing cost, it avoids depreciation, the cost of capital, and direct maintenance expenses.  If the leasing cost is lower than these direct capital-related costs, this means there is an efficient improvement.

The same argument holds for the fire service, with a few important caveats.  Although having engines owned and maintained by another company may be cheaper, it is important the make sure that this is not achieved through a fall in quality.  It is more important that a fire engine is reliable than a courier van.  Therefore, the contracts under which fire engines are sold and leased back must be very prescriptive and harsh on the quality of service expected.

As long as this is in place, however, there is no reason this would lead to the eventual privatisation of the fire service; instead, this is simply making sure that it runs as efficiently as possible.

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