Lecture 1 – Privatisation:

Definitions of Privatisation:

Beesley and Littlechild (1994):

 “Formation of a Company Act company and the subsequent sale of at least 50% of its shares
to private shareholders”

Bel (2010):

 Transfer of government-owned firms and assets to the private sector

 Delegation to private sector of delivery of services
 Removal of state direction and greater reliance on free market

Vickers and Wright (1989):

 A wide range of policies designed to reduce the scope, limit the functions and weaken the
influence of the public sector

Privatisation can take many forms:

 Abolishing or curtailing public services: Relying on private sector to fill the gap.

 Reducing state funding to organisations: Inducing them to seek private funding.

 Increasing the financial contribution of consumers for public goods: University education,
toll roads, healthcare.

 Transferring public policy responsibilities or contracting out public services to the private
sector: Cameron’s “Big Society”.

 Encouraging private finance to build and operate public works: New Labour’s PFI projects,
nuclear power.
 Introducing private sector personnel, notions of efficiency and management techniques into
public sector.

 Private sector competition with public sector through liberalisation and deregulation.

 Selling publicly owned land and housing stock.

How do privatisations happen?

 Stock market flotation: Royal Mail, BT, BP

 Trade sale: Rover to BAe
 Public tender for services: Railways, Tube Lines
How much was privatised in the UK?

 During the Thatcher years, 46 major businesses were sold: These firms employed almost a
million people.

Rationale for privatisation:

 According to Vickers and Wright (1989), there were multiple rationales for privatisation in
the UK in the Thatcher years.

 Scepticism with state intervention: Perceived failure of nationalisation in areas such as rail,
coal and steel.

 Technological advances weakening certain natural monopolies: Telecom, gas, electric.

 High inflation, taxation and public debt: Questions raised about efficacy of post-war policies

 Raise money: Proceeds from sale would improve government's weak fiscal position

 Increasing internationalisation in product and financial markets: Economies of scale no

longer at national level, but European and global.

 Industrial decisions influenced by political considerations seen as hindering flexibility and

growth.

International state ownership:

 In 1980, state ownership levels in industry were relatively high across Europe:
o West German government held at least a 25 per cent stake in 958 companies in
1982. (Note: Levels in North America and Japan much lower).

International State Ownership (Viva Italia):

Italian government had significant ownership stakes, frequently held in industrial holding companies
such as IRI and ENI.

 100% of the production of cast iron.

 66% of special steels.
 22% of gelato.
 18% of peeled tomatoes.

Note:

 The Istituto per la Ricostruzione Industriale (English: "Institute for Industrial Reconstruction")
was an Italian public holding company established in 1933 by the Fascist regime to rescue,
restructure and finance banks and private companies. (Wikipidea).
 ENI is an Italian multinational oil and gas company headquartered in Rome.
International state ownership (UK vs. European countries):

 Despite high levels of state ownership, many European countries did not follow Thatcher
and pursue privatisation efforts in 1980s.

 France under Mitterrand went the other direction, as did Portugal.

 UK under Thatcher aggressively pursued privatisation.

 As did the former Soviet states (from a much different starting point).

How successful has it been in the UK?

Economists often use a sector by sector analysis to make comparative assessments of performance.

Better to analyse based on type of economic activity.

Types of economic activity:

Competitive firms (e.g. BA).

Monopolies:

 Public tenders (e.g. Local council services, railways).

 Operated as monopolies (e.g. BAA [British Airport Authority]).
 Natural monopolies (e.g. Water).
How successful has it been in the UK? (Competitive firms/environments):

BA, British Steel and Jaguar have performed better under private ownership.

How successful has it been in the UK? (Tenders – local services):

Local council services:

 Rubbish/recycling collection.
 School cleaning.
 Catering.

Generally, quite successful; improved value for money.

How successful has it been in the UK? (Tenders – railways):

 Government offers the right to run trains on a particular route.

 Awarded to highest bidder, subject to an acceptable business plan.
 Limited risk transfer: If revenues lower than expected, shortfall eventually shared with
government.
 Very big growth in passengers and passenger miles since privatisation:
o Less clear evidence on value for money
 If companies get terms/pricing wrong they can walk away (e.g. East Coast Main Line in 2007,
2009 and 2018).
 Not proper risk transfer.

How successful has it been in the UK? (Monopolies):

 BAA – was the owner of Heathrow, Gatwick and Stansted – privatised as a single firm.
 Not clear why the same firm should have owned all three.
 Run as a natural monopoly.
 Broken up under Blair government.

How successful has it been in the UK? (Natural Monopolies):

 An industry in which multi-firm production has higher costs than a single firm:
o High fixed costs (i.e. infrastructure) limit market opportunity for other firms.
o High barriers to entry.
 Examples: Water, electricity.
 Regulating a natural monopoly:
o Rate of return-based approach.
o Firm allowed to earn x% on capital employed.
o However, this gives firms incentive to employ more capital than may be necessary.
o Developed in US but not used in UK.
UK approach to regulating natural monopolies (RPI-x%):

 Invented by Stephen Littlechild, Professor of Economics at Birmingham.

 Regulators set a price (RPI-x%) for the next n years.
 If the firm cuts costs faster than x, they make profits.
 After n years, the regulator resets x.
 Mimics the market: cost cutting encourages rivals to follow suit; competition forces prices
down
 Potential risk that firms will cut quality.
 Big issue for regulators is deciding on x.

Privatisation Case Study – Royal Mail:

Royal Mail privatisation:

 Leading provider of postal and delivery services in the UK, with significant operations in
continental Europe.
 Origins date back 500 years to the time of King Henry VIII.
 Core business - collection, sorting, transportation and delivery of parcels and letters in the
UK.
 UK’s designated universal postal service provider.
 Delivers a “one price goes anywhere” service in the UK to over 29 million separate
addresses.
 Substantial business: On eve of IPO, Royal Mail Group handled 17.4 billion letters and 1.4
billion parcels across all of its networks.

Why did Royal Mail privatise?

 The internet is boosting parcel deliveries through growing online sales (i.e. Amazon).
 “E-substitution” (e.g. Email’s).
 Company needed more capital to compete with international competitors in parcel business.
 Government did not have that capital.
 Chancellor George Osborne was also happy to have an extra £3 bn for his very tight budget
in 2014.

Royal Mail Controversy 1 – Unions opposed the sale:

 Communication Workers Union, which represents majority of Royal Mail workers, argued
that privatisation would lead to a deterioration in services and harm working conditions for
its members.
 Agreed that company needed more capital but wanted it to come from the state.

Royal Mail Controversy 2: Was it sold too cheap?

  Royal Mail floated at an initial valuation of £3.3 bn, with Government selling approximately
60% of the shares.
 Stock initially traded up more than 80% from its initial price of 330p.
 Reached almost 600p in 2014 and 2018, now trading around 340p.
 Government sold remaining stake over time in 2014-2015, with aggregate proceeds
equalling initial value of £3.3 bn.
 Government commission headed by Lord Myners concluded that IPO pricing could have
been up to 9% higher (roughly £180 million in proceeds).

Conclusion:
 Privatisation can take many forms.

 Fundamentally involves the transfer of ownership and/or management of publicly provided

goods and services to private sector.

 Many rationales for privatisation:

o Scepticism regarding state intervention.
o Concerns about high levels of inflation, taxation and public debt.
o Technological advances.
o Increasing internationalisation in product and financial markets.

 In the UK, government had many objectives with respect to privatisation:

o Raising money.
o Reducing size/role of the state.
o Improving productivity and competitiveness.

 European countries had relatively high levels of state ownership:

o But not all embraced privatisation.
o And some moved towards even greater state control.

 Financial results of privatisation have been mixed in the UK:

o Some privatised industries have had structural problems (i.e. railways).
o Change in ownership has not always had much impact.

 Hard to dispute benefits to consumers of increased competition.

 But some of these benefits also result from liberalisation and improved regulation.

 Debates about merits of privatisation continues to this day.