The Official History of Privatisation, Vol. II

Popular Capitalism, 1987-97

David Parker

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136331220
• Edition: 1
• Topic: History
• Subtopic: British History
• Index: History

This is Volume II of Professor Parker's authoritative Official History of Privatisation, covering the period from the re-election of Margaret Thatcher in 1987 to the election of Tony Blair in 1997.

Volume II considers in detail several of the major privatisations, including those of airports, steel, water, electricity, coal and the railways, as well as a number of smaller ones. Each privatisation involved major challenges in terms of industrial restructuring, organising successful sales and, in a number of cases, establishing effective regulatory regimes. The policy evolved and new methods of selling and regulating were put in place that enabled further disposals to occur. Monolithic nationalised industries with their emphasis on the benefits of economies of scale, vertical integration and rationalisation, were replaced by industrial structures rooted in the importance of commercial management, risk taking and competition. In government departments and parts of the National Health Service, direct employees were replaced by private contractors, and private investment became a characteristic of public infrastructure in the form of PFI/PPP schemes.

This study draws heavily on the official records of the British government, to which the author was given full access and on interviews with the leading figures involved in each of the privatisations, including ex-ministers, civil servants, business and City figures, as well as academics that have studied the subject.

This book will of great interest to students of privatisation, British political history and of business and economics in general.

1

THE PRIVATISATION PROGRAMME BY JUNE 1987

In 1979 the nationalised industries in the UK employed about 1.75m people and accounted for around 10.5 per cent of Gross Domestic Product (GDP), 14 per cent of total investment and 10 per cent of the Retail Price Index.¹ The industries dominated a number of sectors of the economy, in particular energy, telecommunications, public transport, aerospace, shipbuilding and steel production. However, between May 1979 and June 1987 a radical privatisation programme occurred under the leadership of Margaret Thatcher as Prime Minister. What started as a tentative programme became a key element of the economic strategy of the Thatcher Governments to reduce state intervention in the economy. As Margaret Thatcher confirms in her memoirs, during the 1980s “privatization … leapt from fairly low down to somewhere near the top of our political and economic agenda.”²

Volume 1 of this Official History discussed in detail the privatisation programme between the election of the first Conservative Government led by Margaret Thatcher in May 1979 and the General Election of June 1987, which brought to an end Thatcher’s second administration. This chapter provides a brief overview of some of the developments during those years, so as to provide the context for the privatisation policies pursued after the 1987 Election, which are the focus of Volume 2.

* * *

Disenchantment with state ownership had grown during the post-war period after the high expectations of the Attlee Governments of 1945–51, which nationalised a number of industries, especially coal, gas, electricity, airlines, railways, freight transport and steel. The boards of state industries were expected to become “the high custodian of the public interest”,³ but in reality management of the industries proved very problematic. The industries were open to political and bureaucratic intervention with strategic and sometimes operational decisions subject to ministerial approval, notably significant new investments, relocations, redundancies and even, sometimes, pay levels. The nationalised industries were given a break-even financial objective in the 1940s and although in the 1960s this was reinforced with the introduction of further and more demanding objectives, usually involving a target rate of return and criteria for setting prices and determining investments, the industries struggled because of a mis-match of social and economic objectives.

The industries suffered from two main weaknesses. These were, firstly, political intervention in the management of the enterprises, usually justified in terms of wider social and economic objectives; and, secondly, a lack of effective corporate governance and accountability for management actions. Throughout the post-War period and especially at times of macroeconomic difficulty, public finance constraints determined investment programmes and pricing policies. In particular, in the 1970s, for a time the industries’ pricing policies became, in effect, a tool of the Government’s counter-inflation strategy, with damaging effects on the industries’ finances. An important report in the mid-1970s into the sector by the National Economic Development Office confirmed that the arm’s length relationship between ministers and Boards was failing and that numerous inefficiencies had arisen in terms of managing the industries.⁴

From the 1950s to the 1970s, on average the nationalised industries had a substantially poorer performance than private sector industry in terms of profitability and return on capital, although some of the industries performed better than others. Generally the worst performers in financial terms were the National Coal Board and British Railways (later British Rail). In terms of productivity growth, the nationalised industries seem to have performed relatively well in the 1950s and 1960s compared to private manufacturing industry, but productivity growth slowed sharply during the 1970s. The 1970s were associated with worsening labour relations in a number of Britain’s nationalised industries. In early 1974 a strike by the National Union of Mineworkers led to “three day working” across the economy, after power station coal stocks were targeted by pickets, and the fall of the then Conservative Government led by Edward Heath.

In February 1975 Margaret Thatcher replaced Heath as Conservative Party leader, by which time the failings of nationalised industries were a popular topic of debate. However, at the May 1979 General Election, when the Conservatives replaced the Labour Government elected in 1974, there was little indication of the major denationalisation programme that was to come. The Conservatives were elected on a Manifesto containing only modest commitments to denationalise. In other words, in the Manifesto there was no suggestion of challenging the big nationalisations of the immediate post-war period, such as gas, electricity, coal and the railways. Indeed, within the Conservative Party there was no such programme under serious discussion. As the Financial Secretary, Peter Lilley, acknowledged in a speech in September 1989: “Despite a clear recognition of the failings of nationalisation, privatisation formed only a modest component of the approach of the incoming Conservative Government in 1979.”⁵ Rather than abolish them, the new Government proposed to make the nationalised industries work better.

Nevertheless, during the 1980s the Thatcher Governments developed an extensive privatisation programme, which became an exemplar to countries around the world. By 1992, John Moore, Financial Secretary to the Treasury from 1983 to 1986 and effectively the unofficial Minister for Privatisation at that time, felt justified in concluding: “In my view, the argument about state versus private ownership of industry in the UK is over. Private ownership has won, and debate has come to centre instead on the theory and practice of regulation. The reason that the political contest over privatization came to an end is simply that implementation succeeded. Facts overtook the debate.”⁶ Or as the Chancellor of the Exchequer, Nigel Lawson, commented earlier during a speech in Paris on 15 December 1988: “When we first took office, the question was ‘why privatise an industry?’ Now, the question is: ‘why should any industry remain in the state sector?’”⁷

Just as privatisation policy was unplanned in 1979 and evolved over time, so did the objectives of privatisation. Each privatisation had its own particular goals, reflecting the industry’s financial condition and the precise economic situation. However, the following objectives generally applied to all of the major sales, namely widening share ownership, increasing competition and consumer choice, raising efficiency and reducing the power of the trade unions. Not all of the objectives were necessarily compatible and tensions existed from time to time over which should be the priority. As explained in Volume 1 of this Official History, the trigger for privatisation was the difficult macroeconomic condition the Government faced in 1979. The new Conservative Government came to power just as the world economy was heading into recession and inflation was rising in the wake of higher world oil prices. The economic recession had a depressing effect on taxation and led to higher expenditure on welfare, in particular unemployment benefits. The sale of state assets or what became officially known as “special asset sales” was a largely Treasury driven initiative, initially motivated by the need to raise additional revenues for the Exchequer. In public sector accounts asset sales were treated as negative public expenditure and the intended result of the sales was to reduce the gap between state revenues and expenditure, or what was known as the Public Sector Borrowing Requirement (PSBR).

In the early 1980s, within the Treasury the PSBR had an important almost iconic significance, being seen as an important cause of monetary expansion and therefore inflation. In March 1980 the Government committed itself to what was termed the “Medium Term Financial Strategy” with the aim of bringing down inflation, reflecting the new interest amongst economists in Monetarism and the link between growth in the money supply and price rises. As it was perceived that there was a relationship between the size of the PSBR and monetary growth, special asset sales helped to support the MTFS. The result was that Government departments were pressed during the first Thatcher Government, from May 1979 to June 1983, to find assets to sell.

Later, the revenue from privatisations became less of a pressing concern to the Treasury and therefore less of a driver of the privatisation programme. This was because after 1982 the public finances improved. In the mid to late 1980s the Government ran a budget surplus rather than a deficit, for the first time since 1960. This meant that within Government there was now more emphasis on achieving the “supply side” benefits of privatisation, in terms of raising economic efficiency and widening share ownership. In terms of share ownership, the programme was successful. The number of adults owning shares rose from 3 million (or 7 per cent of the adult population) in 1979 to around 8.5 million (or 19 per cent of the adult population) by 1987. In some of the larger privatisations, notably BT and British Gas, special incentives were introduced to attract the small investor, including share bonuses and discounts on telephone or gas bills. From the mid-1980s ministers used the phrase “popular capitalism” to encapsulate the shift from impersonal state ownership to public share ownership. As Lawson records:

“‘People’s capitalism’ was my own coinage. Margaret Thatcher liked the idea, but not the precise formulation, which she thought sounded Communist, reminding her of expressions like ‘people’s republic’. She amended it to ‘popular capitalism’ and thus modified it became part of the stock-in-trade of Conservative speechmaking from that moment on.”⁸

In addition to small private investors, the privatisations attracted employee shareholdings. These typically took the form of an allocation of free shares to the company’s employees, a matching share offer (involving granting further free shares in proportion to shares purchased), a discount offer and a special application form that gave employees (and pensioners of the business) priority in the allocation of the shares they applied for. On average, 90 per cent or more of the employees took advantage of these arrangements, despite usually strong trade union opposition to each privatisation. Also noteworthy in terms of widening ownership was the parallel programme of council home sales. Starting with the 1980 Housing Act, council tenants were given a statutory right to buy their homes and at an attractive discount on the market price. Between 1979 and 1987 around one million council homes were sold through the “right to buy” programme. Over the period the proportion of the population living in public sector housing fell from 45 per cent to 27 per cent.

Between May 1979 and June 1987 or the first two Thatcher Governments, 14 large state enterprises were privatised, alongside a larger number of smaller asset sales. Table 1.1 lists the major privatisations, the gross sale proceeds and the sale dates. As a result, some 600,000 jobs were transferred to the private sector and the majority of employees acquired shares in the firms in which they worked. Sell-offs took a number of forms, including IPOs, mainly through fixed price offers for sale but sometimes through sales by tender (where investors made price offers for the shares), trade sales (where the business was sold to an existing private sector company) and, on occasions, management and worker buy-outs (e.g. the National Freight Corporation (NFC) and some shipyards and steel plants). In terms of the scale of the privatisations and the value of the assets sold, IPOs were by far the most important. Paralleling the disposal of industries, the Government embarked on expanding the use of competitive tendering/contracting out for public service contracts in central and local government and the NHS. At the same time, the welfare state remained largely untouched by privatisation. Privatisation of welfare services, especially health and education, was seen as a step too far politically. In the face of public concern that the Conservatives might dismantle the National Health Service, Mrs Thatcher confirmed that “the NHS is safe with us” – to the undoubted disappointment of some of her supporters.⁹

Table 1.1 The major privatisations May 1979–June 1987

* However, of the proceeds of £54 million, £47 million was paid into the under-funded pension scheme by the Government, providing an illustration of where the net proceeds from privatisation (which were also affected by capital injections and debt write offs) were much less than the gross proceeds.

The early state sell-offs involved public enterprises that operated in competitive markets. For example, aerospace and shipbuilding faced intense international competition for orders; indeed, in the face of such competition the UK shipbuilding industry was in terminal decline, something privatisation failed to reverse. The NFC faced competition from numerous domestic private freight and storage companies. While state owned it never held more than 10 per cent of the UK market for such services. BP, Britoil and Enterprise Oil competed for oil and gas contracts. By contrast, the privatisation of British Telecom (BT) and British Gas, in the mid-1980s involved enterprises that operated in monopoly or near monopoly markets. BT and British Gas benefited from privileged legal positions and economies of scale and scope. In this respect their privatisations were landmarks in the privatisation programme. Previously both enterprises had been seen as “natural monopolies” and therefore unsuitable for private ownership. The sale of BT and British Gas established the principle that the public utilities could be sold off despite their size and market power. The new regulatory offices created to prevent monopoly abuse once the companies were privatised, namely the Office of Telecommunications (OFTEL) and the Office of Gas Supply (OFGAS), became the model for later sector regulatory offices for water and sewerage, the electricity industry and the railways. The creation of robust regulatory systems for telecommunications and gas provided reassurance when contemplating the controversial privatisation of other monopoly public utilities. In a speech in the City in July 1985, the Financial Secretary to the Treasury, John Moore, felt sufficiently confident about the new regulatory structure for BT to scoff at the idea that monopolies should be state owned. The original idea had been that only the public sector could be trusted with monopoly powers:

“What nonsense this proved to be! Experience over the last forty years has surely taught us that, from the customer’s point of view, the State is just as likely to abuse a monopoly position as a private owner. And worse, when it does, despite Ministerial responsibility and Parliamentary accountability, the customer has little redress.”

He went on:

“I firmly believe that where competition is impractical privatisation policies have now been developed to such an extent, that regulated private ownership of natural monopolies is preferable to nationalisation.”¹⁰

The new regulatory offices, in addition to limiting price rises through an innovative RPI-X price capping mechanism, enforced service standards and promot...