Privatisation

A Global Perspective

V. V. Ramanadham

• Publisher: Routledge
• Year: 2003
• Print ISBN: 9780415075664
• eBook ISBN: 9781134903870
• Topic: Business
• Subtopic: Business General
• Index: Business

Documents the recent developments in privatisation through 25 country case-studies. The studies outline the varying privatisation programmes, comparing them with material from developed, developing and former communist countries.

1

Privatization in the UK

Deregulatory reform and public enterprise performance

Matthew Bishop and David Thompson

INTRODUCTION

At the end of the 1970s the nationalized industries in the UK accounted for nearly 10 per cent of gross domestic product (GDP) and employed nearly 10 per cent of all workers. Government-owned monopolies dominated transport (buses, rail and aviation), communications (postal services and telecoms) and the energy sector. Services provided by local government (such as refuse collection) and by the National Health Service accounted for a further important slice of enonomic activity. Nor was this picture unique to the UK as other contributions to this volume will show.

By the end of the 1980s this picture had been transformed. In the UK, telecoms, gas, electricity, aviation, steel production and water supply had all become largely—or wholly—private sector activities. Privatization of British Rail, British Coal and London Transport were all at various stages of preparation at the turn of the decade; whilst reforms in local government and the health service had started to change the role of these organizations from producers of services to suppliers of services produced by others.

The causes, and policy objectives of these reforms, and the policy objectives which they serve, have been both multiple and shifting over time (see Bishop and Kay 1988). They include a concern to limit the power and influence of the public sector trades unions, a concern to reduce the role of government, to promote a wider spread of shareownership amongst the population at large and to realize the proceeds from the sale of state assets for the government's finances. Perhaps the most important factor, however, has been a concern to improve the efficiency of the public enterprise sector. Thus, outlining his objectives for the (then) new policy, in 1983, the Treasury Minister responsible concluded that: ‘our main objective is to promote competition and improve efficiency’. Our purpose in this paper is to examine whether performance has indeed improved following the reforms of the 1980s. The plan of the paper is as follows.

In the second section we outline the main features of the regulatory reforms. Whilst popularly associated with privatization, these reforms have also included important changes to the regulation of enterprises which have remained in public ownership as well as policies to increase competition both through the deregulation of state monopoly activities and through the competitive tendering of publicly-provided services. In the third section we look at the consequences of these policies to increase competition. We examine several sectors—in particular buses and aviation—where deregulation of state monopoly has been followed by significant changes to prices and product quality. We also consider some of the issues for competition policy which have arisen. Our assessment of tendering shows that this has been an effective policy instrument in some sectors but we also identify transitional problems which have been encountered in others.

In the fourth section we look at sectors where the introduction of competition is more problematic—that is, industries which have elements of natural monopoly. We examine measures of financial performance—in particular profitability. But for firms holding significant market power, such financial ratios are likely to give only an imperfect measure of efficiency. For this reason, we also examine measures of productivity and we show that a significant upturn has taken place during the 1980s. In the final section we draw together some concluding thoughts.

REGULATORY REFORM IN THE UK

To understand how the reforms of the 1980s changed the incentives and controls faced by the (then) public enterprises, we first need to examine how these enterprises were regulated beforehand. The control framework was established in a government White Paper, introduced in 1967, which specified guidelines for the setting of prices and investment levels. These guidelines were drawn from the standard allocative rules suggested by economic theory; prices were to be set in relation to marginal cost and investment was to be undertaken in projects whose discounted benefits exceeded the discounted present value of their costs. In addition the non-commercial responsibilities of the enterprises—for example, operating lightly-trafficked, unprofitable railway lines—were to be accounted for separately and subsidized by government. Industries were also required to achieve a targeted level of financial performance, usually specified as a rate of return on assets, after crediting any grants from government.

One observation frequently made by economists on this framework of control related to the potential inconsistency between the various rules. In practice, questions of consistency proved to be hypothetical; the pricing and investment rules proved to be unenforceable in the face of significant information asymmetries between the monopoly enter prises and government regulators. A government review in 1976 commented that

it is doubtful whether (the pricing and investment rules) have made a material contribution to improving the allocation and effective use of resources.

(National Economic Development Office 1976)

Furthermore, the financial targets were largely abandoned in the early 1970s as industries were required to hold down the overall level of their prices as part of the then government's counter-inflation strategy. Although problems of internal consistency between the various controls were not, therefore, a practical concern, a number of serious weaknesses with the control framework have been identified. As we have already noted, the guidelines on pricing and investment proved to be unmonitorable. More seriously, the control framework proved equally weak in securing the achievement of productive efficiency. Measures of financial performance, which could be monitored, were always of second order importance to the pricing and investment rules and were, in any event, rapidly abandoned. And the rather loosely-defined relationship between industries and the ministries responsible for their control provided opportunities for piecemeal intervention by politicians in enterprises’ affairs when the conduct of these impinged on politically sensitive issues (the closure of a rural railway line, for example).

The performance of the nationalized industries reflected this pessimistic assessment. In a memorable phrase the performance of the nationalized industries in the 1970s has been described as ‘generally third rate with one or two exceptions of first rate performance’ (Pryke 1981). The upshot was a change to the framework of control in a White Paper introduced in 1978. This asserted the primacy of profit targets over pricing and investment rules and introduced cost performance targets to ensure that profits were not boosted by the exercise of market power in setting prices. The financial controls were underpinned by the introduction of ex...

Table of contents

• Front Cover
• Privatization
• Title Page
• Copyright
• Dedication
• Contents
• Figures
• Tables
• Notes on contributors
• Foreword
• Preface
• 1 Privatization in the UK: deregulatory reform and public enterprise performance
• 2 Privatization in Greece
• 3 Privatization in Turkey
• 4 Privatization in the USSR
• 5 Privatization in Poland
• 6 Privatization in Hungary: regulatory reform and public enterprise performance
• 7 Privatization in Czechoslovakia
• 8 Privatization in East Germany: regulatory reform and public enterprise performance
• 9 Privatization in Bulgaria
• 10 Privatization in Yugoslavia
• 11 Privatization in Canada
• 12 Privatization in Chile
• 13 Privatization in Guyana
• 14 Privatization in Morocco
• 15 Privatization in Algeria
• 16 Privatization in Egypt
• 17 Privatization in Nigeria
• 18 Privatization in Zambia
• 19 Privatization in Uganda
• 20 Privatization in Israel
• 21 Privatization in Bangladesh
• 22 Privatization in Vietnam
• 23 Privatization in Australasia
• 24 The privatization processes in Japan in the 1980s
• 25 Concluding review
• Index