The Official History of Privatisation Vol. I

The formative years 1970-1987

David Parker

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781134031399
• Edition: 1
• Topic: Économie
• Subtopic: Finances publiques

This first volume of the Official History studies the background to privatisation, and the privatisations of the first two Conservative Governments led by Margaret Thatcher from May 1979 to June 1987. First commissioned by the then Prime Minister Tony Blair as an authoritative history, this volume addresses a number of key questions:

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• To what extent was privatisation a clear policy commitment within the Thatcher Governments of the 1980s - or did Government simply stumble on the idea?

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• Why were particular public corporations sold early in the 1980s and other sales delayed until well into the 1990s?

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• What were the privatisation objectives and how did they change over time, if at all?

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• How was each privatisation planned and executed, how were different City advisers appointed and remunerated, what precise roles did they play?

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• How was each privatisation administered; in what ways did the methods evolve and change and why? How were sale prices determined?

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• Which government departments took the lead role; what was the input of the Treasury and Bank of England; and what was the relationship between Ministers and civil servants?

The study draws heavily from the official records of the British Government to which the author was given full access and from interviews with 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 new official history will be of much interest to students of British political history, economics and business studies.

1
NATIONALISATION TO PRIVATISATION

1945–79 – The genesis of a policy idea

The term “privatisation” has common public currency from the early 1980s. Prior to this date the description “denationalisation” was preferred when referring to the sale of state-owned industries. It is not entirely clear who first coined the term privatisation. The writer on management, Peter Drucker, claims to have used the word as early as 1969,¹ but there are other claimants. A number of Conservative Ministers in the first Thatcher Government attribute the term to their shadow Cabinet colleague in the 1970s, David Howell, which suggests that Howell initiated the use of it within the Conservative leadership.² Margaret (later Baroness) Thatcher, the Prime Minister from 1979 to 1990, is on record as disliking the word – “Not a word I’m particularly fond of. In fact a dreadful bit of jargon to inflict on the language of Shakespeare”.³ But it was used in Cabinet and Cabinet Committees after 1979 and in the two volumes of her autobiography.⁴

Whatever the origins of the term and its possible detrimental effects on the English language, the years from 1979 to 1997 saw a large movement of assets in Britain from state to private ownership, now referred to as “privatisation”. The programme involved a complex set of interacting policy initiatives including public flotations and trade sales of nationalised industries, divestments and asset sales, and competitive tendering and contracting out in central and local government and the National Health Service (NHS). In addition, privatisation cannot be separated completely from other economic policy initiatives at the time, notably monetarism and controlling public expenditure, tax reductions and other “supply side” reforms. Sometimes the whole set of economic policies is labelled “Thatcherism”.

This opening chapter considers the origins of privatisation as policy from 1979. The starting point is a discussion of nationalisation. The chapter then turns to consider some developments in economic theory during the 1960s and 1970s which formed an intellectual underpinning for the privatisations that occurred later. The aim is to address why, by the late 1970s, privatisation was seen as being both a desirable and a feasible policy option by a growing number of economists. The extent to which privatisation was policy in the Conservative Party by 1979 is the subject of chapter 2.

The origins of state ownership

In 1776 Adam Smith published his seminal study of the market economy, The Wealth of Nations. In this treatise on capitalism, Smith commented: “Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct. The whole, or almost the whole public revenue, is in most countries employed in maintaining unproductive hands.”⁵ The message seemed clear enough: government enterprises are more likely to destroy the wealth of nations than create it. Although Smith acknowledged that some state provision would be needed for public works that would not be profitable for private enterprise to supply or where wider public benefits existed, normally economic activity was best pursued by competitive private enterprise. The success of the industrial revolution in Britain was founded firmly on Smith’s principles of private enterprise, private property and free trade.

However, from the late nineteenth century state enterprises slowly increased in number and state regulation expanded. In spite of the dominance of “laissez-faire” economics in the nineteenth century, forms of state intervention developed to tackle perceived market failure. In some cases state intervention took the form of state regulation of private business. The railways were an example. Built by private capital, as early as the 1840s there was a demand that the railways be brought under state control because of their economic importance in terms of moving passengers and freight. This was reflected in the powers given to the Government under The Railways Act of 1844. This Act empowered the state to purchase all railways constructed after the passage of the Act and that were in existence after 21 years. Although these powers were never used, during the nineteenth century the railways became heavily state-regulated, especially in terms of the charges they could levy.

In gas, electricity, the water supply and tram (and later bus) transport, state intervention went further. A mixture of state-regulated private enterprise and municipally-owned enterprises resulted.⁶ In the face of rapid urbanisation and the associated overcrowding and lack of sanitation in cities, during the nineteenth century municipal enterprises were established to provide water, gas and later electricity and public transport systems, often alongside state-regulated private sector operators. For example, the cholera outbreaks of the 1830s and 1840s were instrumental in leading councils to seek to improve water supplies and sanitation. This development is often referred to in the history books as the period of “gas and water socialism” or “municipal socialism”. However, as most of the councils in the nineteenth century were dominated by ratepayers and businessmen, it is misleading to label the development “socialist”. Rather it was a reflection of the social and economic needs of the time and the conclusion that the unregulated private sector was unable to supply adequate public services and that these services should be a function of the state, albeit at this time at the local rather than national level.

Between 1845 and the early 1870s there was a large growth in the number of statutory water undertakings, with 250 systems run by local government by the end of the period. There was also a similarly large spurt in local authority generation of electricity later in the century. Between 1895 and 1900 the number of statutory electricity undertakings in Britain rose from 91 to 229, of which 71 per cent were owned by municipalities. In the 1900s there was a comparable growth in tramways with the number of undertakings increasing to 311 in 1905, of which one half were municipally owned. In gas supply the most rapid growth of provision was from the 1850s to the 1880s, by which time local councils accounted for 39 per cent of gas supplies. The fact that these “public utilities” needed to seek compulsory purchase orders from Parliament to obtain rights of way to build their systems encouraged the movement towards state ownership.

The spread of municipally-owned enterprises was paralleled by a growth in state regulation of the private sector operators of public services. Charges and outputs for gas, water, electricity and tram transport became regulated by various state bodies. Arguments about the fair level of charges and the adequacy of services were not uncommon.⁷ Study of the development of municipal enterprises draws attention to the extent to which regulatory failures in the nineteenth and early twentieth centuries made public ownership increasingly popular. It sometimes proved difficult to regulate the private sector operators effectively.⁸ Also, research suggests that municipalisation may have been an economic solution to supplying public services. A number of municipally-owned gas and electricity suppliers may have performed no worse in terms of costs of production than their privately-owned counterparts.⁹

By the First World War, alongside the municipally-owned enterprises there existed a small number of businesses controlled by central government. The Royal Mail had been a Crown activity since the sixteenth century and in 1868 the Post Office took over the operation of the country’s telegraph system. The Port of London became publicly owned in 1908 and the telephone system came under the control of the Post Office in 1912 (with the exception of the service in Kingston-upon-Hull, where the municipality mounted a successful campaign against central government control). At the outbreak of the First World War, in 1914, the then First Lord of the Admiralty, Winston Churchill, took the Anglo-Persian oil company into state hands to protect oil supplies for the Royal Navy. Later renamed British Petroleum (BP), some of the company’s shares would be sold off by government in 1977 to raise revenue for the Exchequer, anticipating the start of large-scale privatisation in Britain after the General Election of 1979.

In the years between the two World Wars economic recession and the resulting unemployment led to mounting criticism of private enterprise. This period saw significant lobbying for nationalisation. For example, there were critical reports on the running of the coal mines in 1919 and electricity in 1926. These led to recommendations to establish bigger undertakings to replace the numerous private sector collieries and private and municipal electricity providers, respectively. Before the Sankey Commission in 1919 the miners’ union proposed the transfer of the ownership of the mines and mineral rights to a Mining Council, a half of the membership of which would be appointed by the Crown and a half by the union.¹⁰ The Commission only narrowly rejected the introduction of state ownership. In 1926 the Government established a state-owned national grid under a new Central Electricity Board to rationalise and develop electricity transmission across the country, thereby beginning the nationalisation of electricity supply. In the same year public wireless broadcasting was effectively nationalised with the establishment of the British Broadcasting Corporation (BBC). This was followed, in 1933, by the setting up of the London Passenger Transport Board (LPTB) in a bid to rationalise and improve public transport in the capital. Commercial air travel also came under state influence during the interwar years. In 1924 the Government encouraged the creation of Imperial Airways out of four private airlines and in 1935 British Airways was established. Imperial Airways and British Airways were nationalised in 1939 and the state-owned British Overseas Airways Corporation (BOAC) was created.¹¹

The public corporation

The Labour politician Herbert Morrison was the chief architect of the LPTB and would play a prominent role in the nationalisations after 1945 by the post-war Labour Government. In his book Socialisation and Transport published in 1933, Morrison set out his vision for state enterprise: “We are seeking a combination of public ownership, public accountability, and business management for public ends.”¹² In this vision the boards of the state enterprises would be independent of government, in the sense that Ministers would not interfere in their decision making except on matters where specific legal duties were imposed on them. This was intended to address the criticism that politicians and government departments were not appropriate managers of commercial enterprises. Later the role of Ministers would be restricted in the nationalisation statutes largely to powers to give “general directions” to the boards on matters that affected the national interest. In effect, the board of the public corporation would be the state sector equivalent of the board of a private sector joint stock company. The boards would have a high degree of independence, subject to being accountable not to shareholders but to the public through Ministers for the operation of their businesses.

In 1918, the young Labour Party had adopted a new constitution including Clause 4. Clause 4 pledged the Party to “the common ownership of the means of production, distribution and exchange”. This commitment anticipated the socialisation of the economy: however it was unclear at the time what precise form “common ownership” should take. During the second half of the nineteenth century the nascent labour movement had supported the spread of municipal enterprises. The early part of the twentieth century saw the left wing of the labour movement flirt with syndicalism and control of industry through worker councils, especially around the time of the First World War. But in the interwar years the majority of the labour movement, including the major trade unions, backed away from such radical ideas in favour of the public corporation.¹³ In part this was because of concerns about the impact on economic efficiency of worker control and in part because of the unions’ anxiety about the possible effect on their role. The trade unions had been set up to negotiate pay and working conditions with employers rather than manage industries. What would be their raison d’être if workers actually ran the enterprises? In further part it arose because of the economic advantages of controlling industries such as electricity and the railways nationally rather than at the local or small-scale level. Worker-controlled enterprises, like municipal undertakings, were likely to remain small in size. They were unlikely to tackle the rationalisation of industries such as coal, gas and electricity, as recommended in the reports of various official inquiries in the interwar years.

The public board appeared to offer an alternative to bureaucratic control of industry by government departments. Whereas civil servants had little or no training in, or experience of, running businesses and Ministers rarely stayed long enough in one department to build up expertise in the activities of any industry, the boards would be filled with professionals with a long-term interest in their industries. During the drafting of the London Passenger Transport Bill it had been suggested that the Board should contain representatives of the former shareholders, of local government and of the workers. Morrison had successfully resisted this, stressing instead the case for appointments solely on the basis of ability. Professional, experienced management on public boards would mirror the professional management increasingly in control of companies in the private sector.

There was some concern at the time that representation of the labour movement in the running of state enterprises might be lost. Nevertheless, the appointment to state enterprises of management according to ability and experience rather than to represent sectional interests was endorsed by a Trades Union Congress (TUC) report in 1932; although the report did go on to suggest that Advisory Committees should be created alongside the boards to represent particular interests, including the trade unions. A subsequent joint statement by the General Council of the TUC and the Executive Committee of the Labour Party confirmed that day-to-day administration of businesses was a matter for “trained business administrators”.¹⁴ This and other Labour Party and TUC reports in the 1930s recommended that trade unions should remain independent of the management of public corporations, so as to be able to continue to undertake their traditional role of representing workers in negotiations over pay and working conditions. While this was not considered to rule out some board representation for the unions, the stance taken meant that there was to be no union or worker control of state industries. In 1945 a report of the TUC General Council confirmed that both the Labour Party and the TUC desired public control of industry but not workers’ control, and that board appointments should be on the basis of ability so as to promote the efficient working of the industries.¹⁵

In a book extolling the virtues of the public corporation published in 1938, Lincoln Gordon of Harvard University wrote: “Perhaps no feature in recent thought in applied economics in this country is more striking than the rapidity with which it [the public corporation] has gained favour among almost all sections of opinion.”¹⁶ In the USA the Emergency Housing Corporation, the Electric Home and Farm Authority, the Inland Waterways Corporation and, best known of all, the Tennessee Valley Authority were just some of a number of public corporations created in the interwar years. In other words, the growing popularity in Britain of the public corporation form of state ownership mirrored a wider, international development.

By 1945 state ownership of a number of major industries in the form of the public corporation was accepted Labour Party policy and only the extent to which the trade unions should be represented on public boards remained to be settled.¹⁷ Nor in Britain was the public corporation simply Labour Party policy; by 1945 it had won considerable cross-party support. The public board had been endorsed by an Industrial Inquiry for the Liberal Party in 1928¹⁸ and by leading interwar economists such as A.C. Pigou and J.M. Keynes, the inspiration for post-war Keynesian economics. The Conservatives had created the Central Electricity Board and the BBC in the mid-1920s as public corporations.

Also, there was cross-party agreement that a number of the industries that were nationalised after 1945 needed major restructuring. The successful development of a national electricity grid in the late 1920s and 1930s by the Central Electricity Board seemed to vind...