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.
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