The electricity industry was better handled. Power generation was split into two main companies, National Power and Power Gen where shares were sold. Nuclear power resided in a third company. A National Grid company was established. 12 regional electricity companies were also sold. The generating system was competitive, with companies having to bid in their power availability. The grid drew power from the next cheapest as demand rose. Privatisation confirmed the dash for gas, as the industry gave up on new large coal fired power stations. Thermal efficiency was much greater and burning gas was much cleaner, providing a good cheaper supply of energy and a big environmental leap forward.

  

 

Rail  was complex. I sat on the Ministerial  Committee to work up proposals, I favoured the minority proposal to keep track and trains together, to privatise regional companies and licence competition over regional tracks.The proposal adopted created a monopoly track,stations and signals company which did not perform that well. It was renationalised with its successor under government control also performing badly and causing many delays for train operating companies. In the first few years of privatisation the railways went through a renaissance thanks to new ideas and investment by the new train operating companies. . They reversed the decline of passenger  numbers and introduced  new trains.  More recently the Regulators have stifled innovation and taken over control of many fares and of timetables blunting most possible gains from private sector better management.

 

 

 

The new Conservative  government began slowly, still heavily influenced by civil service thinking. They sold some more BP shares in 1979  as Labour had done in response to the IMF crisis. They went on to sell smaller concerns including Amersham, British Aerospace, Cable and Wireless and Britoil. There was still resistance to undertaking a major privatisation of a big utility.

After the election victory in 1983  I was invited to Downing street to hear the Prime Minister say she was now ready to undertake a larger programme of disposals and wanted me to join her to assist. She approved a Cabinet paper setting out a larger programme, appointed John Moore as the first privatisation Minister in the Treasury and agreed British  Telecom should be the first large sale. The aim was to take privatisation from under £1bn of sales a year to several multiples of that. Sales hit £4.3bn in 1984 and £9 bn in 1987. More important than the proceeds was always the possible transformation of these crucial industries, and lifting their growth and investment rates with access to private capital.

 

The work we did on BT shaped the rest of the programme. Each major industry had its own Bill setting out what was being sold and how, putting in place regulation and  sometimes promoting competition. Some were sold whole, some were split up to create more competition. The Treasury was keen to sell BT as a monopoly. From the US experience of breaking their monopoly provider I was sure competition was needed. A compromise was struck with one  competitor, Cable and Wireless, allowed for the business market. Competition for the domestic market was only allowed some years later.

 

The Treasury wanted to maximise valuations in the short term. Those of us who favoured competition expected faster growth and a larger tax base from early introduction of competition. Given the need for large capital spending programmes for the extra capacity and wider range of  telephony services  competition looked the better path. The UK monopoly kept people waiting to put in a new phone line, only allowed you to rent from a very limited range of phones and struggled with other uses of phone lines. Without major changes nationalised telecoms  were going to impede the data revolution hitting business which needed more line capacity for transmission.

 

Stephen Littlechild  had produced a paper on the need for regulation. I agreed with his view that the regulation should be time limited, to be replaced by competition. He proposed a simple monopoly price control for the early years using a price cap of RPI – x. This was adopted for several privatisations. In each case a simple but effective formula was gradually complicated, supplemented or replaced  by complex rate of return formulae and detailed Regulator  analysis  of budgets and capital programmes.These did not improve matters.

 

The City when I took the early plans for BT to them were disappointing. Many of them harked  back  to the idea of Busby bonds. Some wanted BT and other large nationalised corporations to raise their own debt capital in markets. This was a bad idea  as they would have been made to pay more for it than simply being given cash from cheaper government borrowing, yet there would have been relentless  pressure for the state to always bail them out to avoid a nationalised bankruptcy. The Treasury may have accounted for it as non state borrowing, but outsiders were more likely to see it as a liability of the state.

 

Some in the City claimed the BT issue would be too big for markets, as it was many times the biggest share sale to that date. I initiated work to cut the volume of  shares City institutions had to buy, We decided on a three part sale. There would be a sale of some shares to foreign buyers. There would be a popular issue to the public through the post and the conventional offer for sale to City institutions. I knew that would mean City investors could not collectively buy the average weighting of the  new share in the index. To make it easier we decided to only sell a bit over half in the first offer for sale. It meant the institutions  were short of shares in the biggest ever offer for sale, and helped ensure the shares went to a premium in early dealings. The sale raised a new record £3.9bn with the issue heavily oversubscribed. The City had just become a larger and more successful share market and found new liquidity from the retail share buyers who bought direct.

 

British Gas followed in a similar way in 1986, followed by British Airways and others in 1987.

The water privatisation in 1989 was disappointing, as the government accepted the argument that water was a natural monopoly. In practice it is a monopoly created by Statute, confirmed by the privatisation legislation. It is quite possible to have competing water suppliers using common carrier pipes as with gas. It is possible to allow challenger suppliers to take on new developments with new pipes or put in new pipes in existing areas. Water competition was introduced  for business in Scotland. The privatisation of the water monopolies left a very regulated industry with continuing arguments over the pace of modernising and enlarging  pipe networks and the prices to be charged to cover those costs. 

 

 

 

 

 

 

 

The case for privatisation

 

It seemed obvious in the mid 1970s looking at poor technically backward  bankrupt U.K. seeking loans from the IMF that we needed big changes. As an investment analyst I looked enviously at large profitable competitive US companies in important sectors like telecoms and energy and saw how far ahead of our nationalised industries they were. 

 

The U.K. state owned and ran the railways, the postal and phone systems, gas , electricity, coal, shipbuilding, aero engines, steel, weapons manufacture, some car assembly, some oil, water and waste water, refuse collection and much else. Many of these industries were starved of capital investment, made major strategic misjudgements and often generated losses. They added to state deficits and the overall state debt burden. Why not free the state of the heavy financial demands and free the businesses of the heavy hand of state control? 

 

I set out in books and articles how the UK’s post war big nationalisations like coal,rail and steel had led to many lost jobs, to large losses for taxpayers, and higher prices for customers. Privatisation could lift much of the financial burden, cut the chances of job loss and improve the quality and value for money of the goods and services. 

 

As soon as industry was privatised all its investment spending dropped out of the state budget. No longer was an improved telephone exchange or a renewed blast furnace competing with money for the NHS. The industries could increase their investment if  they could satisfy markets it was a profitable venture. 

 

Out of state control their losses no longer fell to taxpayers to meet. In the private sector they were more likely to be profitable so they would contribute more by way of business tax. The sale itself would generate a one off capital receipt which appeared as negative public spending in government accounts. 

 

The performance of privatised industries usually improved substantially after sale. Managers were paid bigger bonuses for better results. Many employees became shareholders or were given bonuses to align their interests with success of the company. 

 

As the state privatised it could introduce competition into monopoly services. Competition is the best regulator. As many critics of privatisation feared bad conduct once in private ownership the larger monopolistic businesses also could be given industry  specific regulators to preserve services or features people claimed to value. 

 

The battle of ideas in the 1970 s

 

Most establishment and academic opinion in the 1970s believed the great nationalisations of the mid century were the right way to proceed. There was little analysis of them as trading businesses and an unwillingness to contrast  them with private enterprise  comparators in the USA. I sought with the CPS and others to set out just what had gone wrong and how the state,the employees and the customers were suffering.

Our steel industry had attracted large public investment to put in five big modern integrated plants only to spend the 1970 s and 1980 s seeking customers to justify the large potential  production. Political debate was all about progressive closures under Labour and Conservatives. 

Our telecoms industry was still putting in electro mechanical switching from a British produced system  the telecoms monopoly wanted which did not sell abroad. The US was well advanced with electronic switching. 

The water industry had a network of ageing pipes for a smaller Victorian population. It could not get the large sums needed to expand and renew its networks. 

The electricity industry depended heavily on coal power stations that posed air plllution issues and were only 32% thermally efficient.The rail industry was in retreat, losing much of its freight business as well as experiencing declining passenger travel. The coal industry was constantly closing puts claiming they were no longer economic. With the advent of North Sea gas it lost market share rapidly. 

All this needed explaining to counter the nationalisation bias and optimism. The nationalisers where they did accept problems usually blamed a shortage of subsidy and investment money from the government. It was remarked at the time we did not own the nationalised industries, they controlled us. The Chairmen were in a powerful position to demand the state covered their losses as they could threaten cuts or big price rises in crucial services.  Most  were not in a strong enough position with clear enough plans to implement large scale modernisation investment.  

By 1979 the CPS  had plans a plenty to sell assets, spin off businesses, privatise whole concerns, introduce competition and raise expectations. I produced a grid of all the nationalised industries, setting out their financial results, their investment needs, the assets they could sell, the opportunities to sell all or part of the business, the way employee shareholdings could be introduced and the main issues a privatisation would arouse.