The growth of public enterprise in the UK and its decline in the 1980s has been described in Module 8. The case for transferring assets to the private sector is based on the proposition that property rights affect behaviour. Privatisation is usually concerned with turning a public enterprise into a regulated plc or (if the competitive environment is suitable) an unregulated plc. A change from public ownership to a plc will influence the constraints on managers and workers in the organisation. Monitoring by shareholders is encouraged, capital can be raised from commercial sources, the take-over threat becomes a reality, a bankruptcy constraint is introduced, and share prices may act as signals to the managerial labour market. Where productive efficiency is improved, however, it may be at the cost of certain social objectives. Regulation aimed at modifying business decisions may then weaken the incentives that privatisation was intended to create.
Privatisation does not necessarily have to take place by the sale of public assets. It is conceivable that a government could privatise assets simply by creating exchangeable rights and allocating them on the basis of some distributional criterion. Mass privatisation in the countries of Eastern Europe during the 1990s often involved the use of ‘vouchers’ which were issued to citizens and could be used to purchase shares in ‘voucher auctions’. In countries with smaller state-owned sectors and with more developed capital markets, governments have proceeded by means of private sales and public offerings of shares. Employees have sometimes been offered shares on favourable terms. Further, the objective of encouraging wider share ownership has been reflected in loyalty bonuses (e.g. one extra share for every ten held for a given number of years) and instalment payments (e.g. in the British Gas and British Telecom offers, payment was in three instalments).
| Year | Million |
| 1979–80 | 377 |
| 1980–81 | 210 |
| 1981–82 | 493 |
| 1982–83 | 455 |
| 1983–84 | 1139 |
| 1984–85 | 2050 |
| 1985–86 | 2706 |
| 1986–87 | 4458 |
| 1987–88 | 5140 |
| 1988–89 | 7069 |
| 1989–90 | 4225 |
| 1990–91 | 5347 |
| 1991–92 | 7925 |
| 1992–93 | 8184 |
| 1993–94 | 5460 |
| 1994–95 | 6300 |
| 1995–96 | 2400 |
| 1996–97 | 4400 |
| 1997–98 | 1800 |
Sources: HM Treasury (1990), Chapter 21, Table 21.5.13 and HM Treasury (1995), Table 5.6.
Table 9.1 records the proceeds from privatisation in the UK for the period 1979–98. UK government receipts from privatisation gradually rose during the early 1980s from £377 million in 1979–80 to £7069 million in 1988–89. Privatisation proceeds peaked at around £8000 million in the years 1991–92 and 1992–93 but then declined to £1800 million by the late 1990s. The figures exclude a number of private sales and management buy-outs of subsidiaries.
Table 9.2 provides a list in chronological order of the major share offers which shrank the size of the state-owned sector of the UK during this era. Again it should be remembered that the list does not include private sales (for example of the Rover Group to British Aerospace, and the earlier sales of parts of the Rover Group and the warship yards of British Shipbuilders by means of management buy-outs or direct sales). Neither does it include the sale to the private sector of British Coal in 1994.
Although the trend towards privatisation was first seen in the UK in the 1980s it has become a worldwide trend in the 1990s and early years of the 21st century. Recent OECD data show that global proceeds from privatisation were 100 billion US dollars in the year 2000. This figure was below the peak year of 1997 during which global proceeds from privatisation were 153 billion US dollars. Table 9.3 provides some international comparisons of privatisation trends.
| 1981 | British Aerospace (52%) |
| Cable and Wireless (49%) | |
| 1982 | Amersham International (100%) |
| Britoil (51%) | |
| 1983 | Associated British Ports (52%) |
| British Petroleum (7%) (Shares also sold in 1977 and 1979) Cable and Wireless (22%) | |
| 1984 | Associated British Ports (48%) |
| British Telecom (50.2%) | |
| Enterprise Oil (100%) | |
| Jaguar (99%) | |
| 1985 | British Aerospace (59%) |
| Britoil (48%) | |
| Cable and Wireless (31%) | |
| 1986 | British Gas (97%) |
| 1987 | British Airports Authority (100%) |
| British Airways (100%) | |
| British Petroleum (36.8%) | |
| Rolls Royce (100%) | |
| 1988 | British Steel |
| 1989 | Water plcs |
| 1990 | Electricity distribution plcs |
| 1991 | National Power/Powergen (60%) |
| Scottish Power/Hydro-electric | |
| 1992 | British Telecom |
| 1993 | Northern Ireland Electricity |
| 1996 | Railtrack |
Source: Up to 1987, from Howard Hyman (1989); post-1987 from HM Treasury (1995).
Table 9.3 illustrates clearly the significance of privatisation in recent years. The historical experience of each country varies, however, and there are different factors influencing developments across the world. As has been seen, the UK privatisation programme grew rapidly in the 1980s, peaked in the early 1990s and then began to tail off.
In France the Socialist Party came to power in 1981 and instituted a sweeping round of nationalisations. By a single law in 1982, the industrial public sector was doubled in size and included most large scale industry as well as the large commercial banks. A change of government occurred in 1986 and plans were made for a programme of privatisation that was to cover not only those industries nationalized in 1982 but also those nationalised by de Gaulle in the aftermath of World War II. This programme was halted after 1988 but was restarted in 1993. Thus the sums raised through the French privatisation programme became really large only in the second part of the 1990s.
In Italy, privatisation proceeds exceeded 25 billion US dollars in 1999 after reaching a similar level in 1997. Here the motivating force was not simply to achieve a more efficient industrial structure. Moves towards monetary union in Europe required countries to achieve various ‘convergence criteria’. These criteria included public finance criteria such as the achievement of a ratio of public debt to national income below a critical level. There were also restrictions on the size of any budget deficit that could be incurred by a national government. The need to keep public borrowing under control during this period and, if possible, to reduce the national debt was thus an encouragement to Italian politicians to privatise state assets
Poland is an example of a transition economy. As can be seen from the table, privatisation proceeds have grown steadily during the 1990s. The Polish programme of privatisation included mass-privatisation through the establishment of fifteen investment funds. Each Polish citizen was allocated one tradable share in each of these funds. The figures given in Table 9.3 relate to proceeds from sales and offerings of shares and obviously do not reflect the total overall size and impact of the privatisation programme as a whole.
| 1990 | 1996 | 1997 | 1998 | 1999 | 2000 | |
| Australia | 0.02 | 9.05 | 16.82 | 7.15 | 15.22 | 6.24 |
| France | – | 3.10 | 10.11 | 13.60 | 9.48 | 17.44 |
| Germany | – | 13.32 | 1.13 | 0.36 | 6.73 | – |
| Italy | – | 11.23 | 24.54 | 14.50 | 25.60 | 9.73 |
| Japan | – | 2.04 | – | 6.64 | 15.12 | – |
| Korea | – | 1.85 | 0.54 | 0.60 | 6.25 | 1.31 |
| Poland | 0.02 | 1.44 | 2.04 | 2.08 | 3.42 | 5.99 |
| Spain | 0.17 | 2.68 | 12.53 | 11.62 | 1.13 | 1.08 |
| UK | 12.91 | 6.70 | 4.54 | – | – | – |
| US | – | – | 3.65 | 3.10 | – | – |
| Total OECD | 24.72 | 68.25 | 96.18 | 94.01 | 104.78 | 65.06 |
| Global total | 33.22 | 89.74 | 153.27 | 139.16 | 141.89 | 100.06 |
Source: Taken from ‘Recent Privatisation Trends’, in Financial Market Trends, No. 79, June 2001, Table 1, p. 44.OECD.
Privatisation programmes vary according to the historical and political circumstances of the countries concerned. In some parts of the world whole economies are being transformed from reliance on state planning to the use of market processes. Even in OECD countries, however, there can be large differences in emphasis. In France, for example, financial institutions have figured significantly in privatisation plans whereas in Britain they were never nationalised. In Britain, privatisations have included industries with public utility or natural monopoly characteristics. This has meant that privatisation has been particularly associated with devising suitable regulatory institutions. Encouraging the forces of competition (liberalisation) has required regulation in addition to simple privatisation. As mentioned in Module 3 the problem is to isolate and regulate those aspects of a system which have true natural monopoly characteristics, while allowing competition to develop in those parts where it is feasible.
Telecommunications – equipment and service supply
The manufacture of telecommunications equipment is not a natural monopoly. The supply of communications services (the actual delivery of voice or data with ‘value added services’ such as messaging services, information on traffic conditions, flights and so forth) is subject to the usual economies as overheads are spread over larger numbers of users. Keeping open the possibility of new entry is an important competitive force, however, and regulators have tried to ensure that control of the network itself (the actual wires, switches and cables) does not confer the power to suppress competition in equipment supply or service provision. The competition authorities and industry regulators have therefore intervened in the structure of the industry and attempted to achieve a degree of ‘disintegration’.
Anti-trust action in the US in 1982 resulted in the restructuring of AT&T (Bell). Local operating companies were separated from AT&T and could purchase equipment from competing suppliers. They were no longer tied to Bell. In the UK, privatisation of British Telecom (BT) in the mid 1980s went ahead without significant restructuring of the industry. The regulators (OFTEL and DGFT) were charged with encouraging competition but they faced an integrated industry structure that made this a difficult objective to achieve. Ideally the regulators would like to ensure that competing suppliers of telecommunications services could gain access to the common carrier's network on non-discriminatory terms. To this end they have established ‘network charge controls’. The charges that BT can make for interconnection services that are not competitive were set at RPI minus 8 per cent between 1997 and 2001. To establish competition and remove the case for price regulation, further ‘disintegration’ of asset ownership is required. Local loop unbundling effectively permits operators other than BT to control the connection between a customer's premises and the local exchange (usually a loop of two copper wires). This would permit customers to choose whether they preferred BT or some other supplier of services. Such unbundling requires that competitors can gain access to local exchanges and can install their own equipment.
Electricity supply
Unlike British Telecom and British Gas, which were privatised without substantial structural changes, the privatisation of the electricity industry introduced a measure of vertical disintegration. Generation, transmission and distribution functions were separated. The Area Boards became twelve regional electricity distribution companies (RECs) and were privatized as separate entities with joint rights in a national grid company (NGC) responsible for transmission. The supply (i.e. retailing) of electricity was liberalised so that customers were not limited to buying power from their local REC. Three main electricity generation companies were created and two were privatized in England and Wales – Powergen and National Power. In Scotland the electricity companies remained vertically integrated.
Considerable further restructuring has occurred since privatisation. The regional companies have been able to compete as suppliers (retailers) out of area – providing billing and meter reading services and contracting with the local distributor for the power delivered. Some companies have moved into the supply of other services such as gas to gain economies of scope. Mergers between electricity, gas, water and telecommunications suppliers are seen as less destructive of competition than vertical or horizontal mergers. Some RECs have been taken over by foreign utilities companies. The NGC has become an independent regulated public company floated on the stock market. The generation companies have gradually faced competition from new entrants; they have expanded overseas; and, as competition has developed, the regulators have been prepared to tolerate a degree of vertical re-integration. National Power plc demerged in October 2000 into International Power plc and Innogy Holdings plc. The latter has generating plant, substantial energy trading expertise and, having acquired Yorkshire Electricity (one of the RECs) in 2001, acts as a significant electricity supplier. Complex mechanisms have been developed to enable competing generators and suppliers to use the national grid while balancing the system as a whole. New electricity trading arrangements (NET A) were introduced in 2001 to make it more difficult for the major generators to rig the market in electricity. Generators and suppliers can trade bulk electricity on forward markets. Central mechanisms to ensure second by second balance of the system as a whole and to arrange settlement for any surpluses or shortfalls are managed by a separate company (Elexon). All customers in the UK have been free to choose their electricity supplier since 1998.
