MR R. NUTTER
Following the death of Margaret Thatcher in April 2013 it seemed appropriate to re-examine privatisation, one of the former Prime Minister’s most important policies. Indeed it seemed quite likely then that a new round of privatisations was in the offing in the years ahead with Royal Mail the top of the ‘for sale’ list. Following her election in 1979 Margaret Thatcher’s government and John Major who followed her embarked on an unprecedented sale of state assets which included gas, water, electricity coal and rail. In addition British Airways, British Steel and British Telecom joined the private sector after years of state ownership. Most off these firms became public limited companies (PLCs) with their shares traded on the stock market. Although often seen as controversial at the time none of these privatised utilities were taken back into the state ownership by the subsequent the Blair and Brown Labour governments with the possible exception of Network Rail in 2003 which was created to replace Railtrack after a series of accidents and safety scares resulted in the latter being placed in administration.
What is privatisation and what motivated the Thatcher government to engage in such a massive realignment of ownership of key industries? Privatisation means the transfer of assets or economic activity from the public sector to the private sector. Privatisation is not merely the transfer of state owned nationalised industries into shareholder owning public limited companies, although that accounts for much of it. Privatisation also involves the contracting out to private companies of services previously run in-house by local authorities and the NHS such as refuse collection, hospital cleaning and catering as well as the running of prisons and prisoner transfers by companies such as G4S.
There were many reasons for privatisation. Obviously the sales of the nationalised firms such as British Gas raised money for the government which helped to reduce the budget/fiscal deficit. By placing these firms in the private sector it was felt that they would become more efficient raising their productivity now that they were answerable to shareholders and faced increased competition. They would no longer be able to rely on the state to protect them financially and because they had in the main become PLCs these privatised utilities as they became known were able to raise their finance more freely via banks and the Stock Exchange rather than being constrained by the Treasury and its borrowing limits. It was felt that the privatisation would lead to lower prices, greater choice and improved quality of service. In addition with shares in the companies available to the general public it meant that there would be wider share ownership with the general public able to own a stake in key industries.
However, many privatisations were controversial and meant that a state run monopoly was replaced, initially at least, by a private monopoly. A lack of competition meant that these firms had to be the subject of regulation to control prices and to also monitor the standard of service. Rail, water and energy have regulators with bodies such OFWAT regulating household water bills set by regional water monopolies such as Thames Water and Anglian Water. Even in the energy sector where there is supposedly competition between the ‘big six’ gas and electricity suppliers OFGEM monitors the extent to which these firms genuinely compete with one another which hints that they may avoid price competition via unspoken agreements called tacit collusion. Effective regulation is a prerequisite for privatised firms who have monopoly power to be kept in check so that they genuinely operate in the interests of all their stakeholders. Many industry analysts also feel that some activities are of such ‘strategic importance’ to the economy that they should not be in private hands for investors to make profits. Others believe that the way in which industries were privatised has caused serious problems in the long term for investment, performance and competition. Rail and energy are two sectors which come to mind in this context. Rail is seen by many as a natural monopoly and cannot function effectively in its current fragmented format which was created when it was privatised.
The contracting out of hospital catering and cleaning, prison security, refuse collection and care services for the elderly to private sector firms has always been seen officially as a way of providing services at a lower cost and at a higher quality than ‘in house’ in the public sector. Competitive tendering for contracts to perform these services should mean that competition drives costs down and quality up. However, the reason why private firms appear to be more competitive relates significantly to labour costs. ‘In house’ public sector provision of these services means employing workers on contracts of employment which provide generous final salary pensions, sick pay and adherence to national pay scales. Private sector firms carrying out the same services will not employ workers on such favourable terms, resulting in a significantly lower cost base in activities which are very labour intensive anyway.
The election of a Labour government in 1997 did not lead to any reversal of the privatisations carried out by the Conservatives apart from enforced state takeover of the railway infrastructure company Railtrack which was replaced by Network Rail 2002. Network Rail is state owned but as a limited liability company able to raise its own finance. In 2001 National Air Traffic Services (NATS) was part privatised with 51% of the company being sold which freed the company from Treasury control of its finances. The credit crunch in 2008-09 meant that some UK banks needed extensive recapitalisation by the government resulting in the creation of UK Finance Investments (UKFI), a company set up by the government to manage its shareholding in the banks.The government still owns 62.4% of RBS, Britain’s fourth-biggest bank by market value, which it rescued in 2008 with a £45.5 billion capital injection.It aims to sell its remaining stake by 2024. The government has already sold all of its stake in Lloyds Bank.
Privatisation was back on the agenda when the incoming coalition government in 2010 flagged up a number of state assets and services which could be suitable for sale to the private sector. For many years several governments had been trying to sell The Tote, a state-owned bookmaker, and finally it was bought by Betfred in 2011. Other candidates identified for privatisation included Channel 4 television, the Metrological Office, Ordinance Survey, the Royal Mint, BBC Worldwide, the Forestry Commission, British Waterways and most significantly the Royal Mail.
BBC Worldwide is a wholly owned commercial subsidiary of the BBC and with a profit of over £200m in 2017 could be sold as stand-alone company. The coalition did put forward proposals to sell or lease to private sector firms some of the vast areas of forest owned by the Forestry Commission in 2010 but after significant public protest this was abandoned for the time being. It was decided not privatise British Waterways, a statutory corporation which is responsible for the UK’s canal network. Instead its assets were transferred to the Canal and River Trust in 2012 which freed it from the Treasury’s financial constraints and allowed it to access charitable funding. With government borrowing and debt such a major issue in recent years, governments have been concerned to give commercial activities in the public sector greater financial freedom even if outright privatisation was not possible or practical.
It is the Royal Mail that has been the major privatisation in the last decade. Postal services have faced huge challenges in recent years due to increased competition. The arrival of private operators such as UK Mail and TNT now known as Whistl are a consequence of European Union directives which forcibly opened up postal services to competition across member states. Companies such as Whistl have taken significant shares of the bulk mail market in the UK. For example credit card companies such as Barclaycard send out vast quantities of mail to customers every day and private operators such as Whistl and UK Mail collect and sort bulk mail letters before giving them to the Royal Mail to deliver them via their postal workers to households. In addition the Royal Mail has suffered from the decline of the letter as means of communication; replaced by emails, texts and social networking sites.
The Postal Services Act (2011) enabled the government to privatise 90% of Royal Mail with 10% held by employees. There has been significant modernisation and restructuring in the Royal Mail in recent years and 2012 profits showed significant improvement prior to privatisation because of the increased prices for stamps and mail charges as well as the boom in internet shopping. In addition the government has took over the Royal Mail’s pension scheme which has a deficit of £9bn. Put simply a restructured, modernised, profitable Royal Mail relieved of its pension obligations was more attractive for investors to buy shares in.
The majority of the shares in Royal Mail were floated on the London Stock Exchange in 2013. The UK government initially retained a 30% stake in Royal Mail, but sold its remaining shares in 2015, ending 499 years of public ownership. The trade union representing postal workers, the Communication Workers Union, was very opposed to privatisation and wants any future Labour government to renationalise the business within three years of coming to power. The union was more interested in pay, conditions of work and pensions rather than shares in the business. Frances O’Grady the TUC General Secretary backed the postal workers union saying that the Royal Mail was now modernised and stable and did not need to be privatised. However, the privatisation went ahead although Post Office Counters Ltd which owns the post office branches and is responsible for selling stamps and banking services remained in state ownership.
The UK government is also keen to sell its 33% £3bn stake in the uranium enrichment company URENCO as well as disposing of the Student Loans Company.In 2013 the government sold off the state owned NHS blood plasma supplier, Plasma Resources UK (PRUK) to the US private equity firm Bain Capital for £230 million. There is also a possibility that the Highways England, responsible for the running and repair of motorways and trunk roads in England could be privatised. If technology allows effective road tolling to be carried out what is to stop the motorway network becoming a commercial infrastructure company similar to the National Grid which owns the gas and electricity network? A completely privatised motorway network is a plausible if controversial idea and at the very least a regulator would probably need to control the toll charges.
Within public services such as health, probation and social services privatisation is already being extended. Recent reforms in the NHS will allow Clinical Commissioning Groups (of GP practices) to purchase services for their patients from either NHS hospital trusts or from private health providers.Privatisation has also come to local authority social services with the creation of Optalis in Wokingham in 2011. This is a limited company wholly owned by Wokingham Borough Council offering both paid-for and free healthcare based on means testing of vulnerable adults with a disability and older people who need care and support. Some privatisations do fail badly however; a disastrous shake-up of the probation service occurred in 2014 when it was separated into a public sector organisation managing high-risk criminals and 21 private companies responsible for the supervision of 150,000 low- to medium-risk offenders. After much criticism it was decided by the government to bring all offender management under the National Probation Service (NPS) by spring 2021 – a renationalisation.
In the years ahead it is possible that further privatisations will go ahead although not all will follow the ‘PLC model’. In many respects any Conservative government wants to free any state owned assets from the financial restrictions of the state, particularly how and where they can raise finance as well as giving them more commercial freedom. Clearly much will depend upon who wins the general election in 2019 as anything other than an outright Conservative victory will more than likely shelve any further privatisation. Business models are changing in the public sector and any government will have to deal with the huge National Debt which could reach 90% of GDP. Selling assets and commercialising other activities may be unavoidable when it can be argued quite plausibly that the UK has a public sector that cannot be afforded from the tax revenues generated by its people and its businesses.
A Labour victory in the 2019 general election would see the renationalisation of rail, energy, water the telecoms infrastructure.
The first thing to understand is the motivation behind this policy. First is the belief that private utility owners have been overcharging customers of these natural monopolies by deceiving the regulators. The high dividends paid by many utilities to their shareholders have both given fuel to this contention and alienated the public. A second issue is the alleged failure of these privatised utilities to put in the investments that society needs — or that they do so only wastefully. This is the reason why Labour decided to include broadband into its election manifesto with the announcement that they would nationalise BT’s network-owning unit, Openreach. Despite a clear need for high speed broadband nationally rollout has proceeded fitfully, with much of the activity focused on economically attractive towns. This is clearly a constraint on economic growth. Another factor in Labour’s thinking on renationalisation is the increased stake by foreign firms in these key strategic industries.
The cost of these renationalisations has sparked controversy in that shareholders will be compensated by being given government bonds for their shareholding. Arguably this will not fully financially compensate them for the market value of their shares although many economists believed that these utilities were privatised on the cheap in the 1980s and 90s by shares being sold at a price below the value of the firm’s assets. Figures quoted for the cost of renationalising these firms have been at around £200bn which would add significantly to the national debt.The UK’s national debt stands at about 85% of GDP, and Labour’s nationalisation plans for water alone could add about 5% to this. Figures for the impact of nationalisation are highly disputed though. However, when Clement Attlee’s government undertook the great post-war nationalisations, the national debt stood at 245% of GDP. It is important to remember that nationalising the railways would be relatively cheap as the state already owns Network Rail which operates the rail infrastructure and the government could nationalise the operating services by not renewing the train operators’ franchises. In addition by bringing these key strategic industries into the state sector they add to the assets of the public sector which would hopefully generate income for the public finances. The key issue is whether renationalisation would improve the performance of these sectors in terms of productivity, investment, efficiency, quality and prices charged to customers. Could all these performance indicators be improved instead by better regulation?