Privatisation in the UK

V. V. Ramanadham, V. Ramanadham

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9780367189846
• eBook ISBN: 9780429576379
• Topic: Business
• Subtopic: Business General
• Index: Business

The Conservative's privatisation programme was one of the most ambitious aspects of their attempt to redraft the political and economic map of the United Kingdom. Originally published in 1988, this book explores the processes of privatisation from a variety of standpoints. Its contributors include academics, enterprise executives and government officials, many of whom had been closely involved in the programme. Fiscal, legal and social aspects of privatisation are explored but the book treats the subject as more than an immediate political issue and takes the opportunity to discuss the success – or otherwise – of public enterprise and to explore the implication of the UK experience for other countries which have an interest in privatisation.

Part I

The Approach

1

The Concept and Rationale of Privatisation

V.V. Ramanadham*

This is in the nature of an introductory paper for the Seminar on Privatisation. It is in four parts. The first contains a review of the concept of privatisation; the second aims at an analysis of the rationale of privatisation; the third is a brief statement of conclusions; and the fourth outlines the broad range of issues that merit detailed discussion as the seminar progresses. The approach of the paper is analytical; and the occasional empirical references are not limited to the UK experience alone.

THE CONCEPT OF PRIVATISATION

Analytically, if the essence of public enterprise is that it rests on some kind and degree of de-marketisation of enterprise operations, privatisation implies some kind and degree of re-marketisation.¹ The connotation of public enterprise is wide indeed, in terms of both government or public ownership and government or public control. Correspondingly privatisation comprehends a continuum of measures that erase certain or all elements of publicness characterising an enterprise or an economy.

Before looking at the continuum, we may note that there are two levels, not mutually exclusive, at which the concept can be understood: privatisation of the economy, and privatisation of an enterprise.

* Templeton College, Oxford

Privatisation of the economy

This represents a policy dimension going beyond the privatisation of an individual enterprise, and involves a decline in the relative extent of public enterprise in the national economy. It can result from

(a) no expansion of public enterprise as private enterprise expands;

(b) an expansion of public enterprise at a lower rate than that at which private enterprise expands; and/or

(c) some reductions in public enterprise such that, irrespective of the rate of new private investments, the private share in the economy tends to be higher than before.

Categories (a) and (b) go along with category (c) in many countries. The relative significance of the third category varies among countries: for example, it is high in the UK, whereas countries like Kenya² or India fall within the second category. It is hard to find an exact case under the first category, not even the USA, for it is likely that some expansion, even if very limited, takes place in the public enterprise segment of every country, in some sector or other, though, on the whole, it comes within the description of category three.

There are two directions of privatisation which do not automatically reduce the (absolute) extent of public enterprise in the economy, though, thanks to its own growth, private enterprise tends to occupy a relatively larger share of it. The first is where some public enterprises are privatised – let us say, because they are mature enough not to need continuance in the public sector, e.g. electricity and gas enterprises. At the same time, in certain sectors like chemicals and heavy-machine building, the technological and investment characteristics may – even currently – call for public enterprise initiative. Thus, the two processes of privatisation of certain enterprises, which are of age, and of new public enterprise inceptions in nascent fields, may go on hand in hand. There are elements of national investment planning here, in that certain resources which are available in private hands for investment as they wish are syphoned off into the public exchequer for investment in directions that, by hypothesis, private investors do not take up but are considered important on macro grounds. It is likely that the investment rotation in the public enterprise sector operates in a spiral fashion, such that as the economy matures and progressively marketises itself, the new public investments would be lower than the divestments. Just how much lower is a function of the development status of the country in question: they will be lower, the more advanced the economy and the more buoyant the entrepreneurship.

It is useful to recognise this facet of privatisation; for it can go some way in softening the emotional antipathy that exists in some developing countries to the idea of disbanding public enterprises. It helps to promote pragmatism in the formulation of policies which, far from denying the relevance of public enterprise, underscores the desirability of a change in its sectoral composition over time.

The other aspect of privatisation, which calls for more serious attention than it seems to have attracted, is that a public policy of privatising the economy, i.e. of reducing the relative share of public enterprise in the economy, has the implication, in certain countries, of reducing public investments in non-financial enterprises – such as manufacturing, trading and transport – while increasing public investments in financial enterprises. The latter essentially result from the fact that the aim of promoting private enterprise (and the policy of increasing the private share in the economy) predicates the supply of capital through public sector agencies in some measure. The degree of dependence of private investors on a public financial enterprise varies from country to country; but it is fairly high in countries where investible savings from private enterprise activities are not large and industrial risk taking is still underdeveloped. Thus, the extent to which divestments from non-financial public enterprises transform themselves into additions to public investments in financial enterprises depends upon the effectiveness of capital markets, given the public preferences, if any, as regards the organisational, sectoral, locational, and scale characteristics of the private enterprises. Where the government strongly favours the evolution of small-sized and new entrepreneurs, investments in the backward regions of the country, and a developmental focus on the rural and informal sectors, a substantial part of the moneys available to the government as a result of privatisation measures is likely to end up as its fresh investments through the medium of financial enterprises. The latter may either lend to, or hold shares in, enterprises.

A similar result may occur through another route. A government not interested in direct involvement as investor may find itself in a situation of being the direct recipient of foreign aid – a situation brought about by economic, administrative or political considerations; then it lends the funds on to private entrepreneurs. In this way public involvement in non-financial enterprise arises, often as an owner.

Whether a growth in financial public enterprise under a policy of privatisation is an acceptable proposition, and what problems it raises, are questions that are not examined here. Undoubtedly they are important, even as the results of many existing public financial institutions in several countries suggest.

Privatisation of an enterprise

The reasons why this may be distinguished from the overall economy level are that:

(a) the government may not have an overall policy of privatisation; yet it is willing to privatise a given enterprise on specific grounds; and

(b) even where the government has a general policy of privatisation, its implementation proceeds through individual measures of privatisation; and the selection of candidates for privatisation and the precise shape and process of the privatisation measures can only be determined with due consideration for the circumstances of individual enterprises.

Thus, what privatisation signifies with reference to a given enterprise becomes important. This may be examined under three headings: (1) ownership structures, (2) organisational devices, and (3) operational modalities.

Ownership structures

The most obvious of these is the denationalisation of a public enterprise or parts of it. This implies a transfer of ownership rights and benefits, along with which go management rights, to private parties.

Another possibility is that of reducing the proportion of public ownership, so that a wholly publicly owned enterprise becomes partially publicly owned, or a partially owned public enterprise becomes more partially publicly owned. The underlying theme here is that a joint venture between public and private owners offers ownership and management/control rights to the two sides in some proportion linked to the respective slices of ownership. (A recent illustration of linkage between the ownership proportion and governmental rights of directoral appointment comes from Britoil.³ There is one qualification to the principle of proportionalism. However logical, it may not necessarily be observed in every case. A recent uranium contract between the government of Guyana and foreign investors, for example, provided for the Government’s rights of majority directorships despite its minority ownership.⁴ Another version comes from China where joint venture agreements stipulate the condition of unanimity for decisions even in cases of minority equity investment by the government.⁵

The convenience that joint-venture participation by the government offers in the context of privatisation has long been recognised in many countries,⁶ though it has not been fully availed of. Even as early as in 1954 it was recognised by the UN Seminar on Public Enterprises held in Rangoon that a ‘mixed-ownership corporation’ could be a ‘useful device’ for the eventual transfer of the industry to private enterprise.⁷

The substance of privatisation through the medium of a joint venture depends on the actual fairness characterising the government’s exercise of ownership rights in management. The ownership proportion is not a conclusive index of privatisation. The joint-venture method of privatisation provides an inherent convenience to the government in the actual process of sale. Assuming that the shares are quoted on the Stock Exchange, the government can go by that barometer in determining the prices at which its shares may be transferred in appropriate instalments to private investors.

The ultimate subhead under ownership changes consists of liquidation, where a public enterprise has done too poorly to merit continuance in its present shape. This can also be treated as one kind of disposal (of assets) obviously at a distress price. It is interesting to refer at this point to the statutory specification of liquidation as the final one among the measures laid down for dealing with the self-managed enterprises that are in chronic difficulty in Yugoslavia (The Associated Labour Act, Article 342).

Organisational devices

One can construe elements of privatisation in certain distinctive features of organisation marking a public enterprise. One of these refers to the holding-company form of organisation under which, while invariably not so in every case, only the apex may be brought under the purview of direct government control, and the operating companies as well as any intermediate sub-holding companies are left to operate under direct market discipline within the general supervision of the apex level. IRI of Italy is a good example. It is interesting to note at this point that the case frequently made for introducing the holding-company system⁸ in public enteprise, and for its distant cousin, the Policy Councils,⁹ rests in part on the possibility of substantially insulating the operating companies from the de-marketisation that direct government control might exert over their working. There are two severe qualifications, however. Firstly, if the holding company complex so works as to breed the subsidisation of the weak constituent units by the others, in whatever obvious or subtle manner, the element of market discipline correspondingly thins out, and so does the essence of privatisation that the system could, in theory, contain. Secondly, if the apex functions as a tier that compounds rather than minimises the impacts of government control on the operating companies, the latter correspondingly lose the opportunities of being guided by market disciplines.

The monolithic enterprise is an organisational form prevalent in many developed and developing countries: eg., the British Steel Corporation, the Central Electricity Generating Board, British Coal, Electricité de France, the Ghana Industrial Holding Corporation, the Steel Authority of India Ltd and Bharat Heavy Electricals Ltd. What is needed in such cases is a meticulous review of how far the economies claimed for the monolithic structure on technical and other grounds are outweighed by a loss of benefits that autonomous managerial units might offer as an alternative. Where totally independent units cannot be created at once, the technique of forming reasonably independent subsidiaries can be adopted. To the extent that this introduces or reinforces proxies for market forces in the operations of the giant organisation, one can find in it clear traces of privatisation in substance.

Some of the monolithic enterprises claim that, for internal purposes, they do treat their plants as different units in essence and adopt rigorous techniques of scrutiny over inter-unit transfer transactions. Such proxies can be made more powerful as well as real by reconstituting them as independent subsidiaries, as a first step, and eventually as independent enterprises wherever their interrelationships can be handled across the market without a net loss in the conduct of operations.

There are two other organisational innovations which a government interested in privatisation can adopt without disturbing the ownership structure. The first relates to an arrangement of lease of the assets of a public enterprise to the best bidder or to a party determined as the most appropriate in given circumstances. The benefits of ownership are retained in the public sector, but the operations are, in effect, privatised. The lease may incorporate, if necessary, certain terms that guarantee to preserve any desired elements of publicness in the operations. There are two favourable aspects of the lease method: it gives the government time to decide on (total) denationalisation; and in the mean time it...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Half Title
• Original Title Page
• Original Copyright Page
• Contents
• List of Tables
• List of Figures
• Abbreviations
• Preface
• Part I: The Approach
• Part II: The Processes
• Part III: The Sectors
• Part IV: The Lessons
• Part V: Concluding Review
• Index