Margaret
Thatcher was elected Conservative Party leader in the United Kingdom in 1975,
and her party gained a majority in parliament in 1979. Prime Minister Thatcher
came into office promising to "denationalize" the
government-dominated economy. However, Thatcher faced numerous crises her
first few years in office that limited her privatization efforts, including a
deep recession, high inflation, labor union strife, and the Falklands War.
At
first, Thatcher and the Conservatives did not have a detailed agenda for
privatization. They were cautious, but they learned as they went, and the early
successes generated momentum for further reforms. One important early reform
was the popular "Right to Buy" law, which allowed people to buy the
government-owned "council" houses that they lived in. With that
successful reform, the share of British households in council housing plunged
from 31 percent in 1981 to just 7 percent today.
With
the economy recovering in the early 1980s and with Thatcher reelected with a
large majority in 1983, the British privatization program kicked into high
gear. Campaigning in 1983, the Conservatives promised wide-scale
privatizations, and that created a strong mandate for them to move boldly after
their landslide election victory.
Thatcher
had a strong personal belief in privatization. Privatization was crucial for
"reversing the corrosive and corrupting effects of socialism," she
said, and central to "reclaiming territory for freedom." The
purpose of privatization was to ensure "the state's power is reduced and
the power of the people enhanced." Thatcher was heavily influenced by
economist F. A. Hayek and by her key adviser, Keith Joseph.
Thatcher
blazed the trail, but there were some international precedents for her reforms.
In the 1950s, the British Conservatives privatized some activities — including
the steel industry — that had been nationalized by the previous Labor
government. And in the 1950s and 1960s, West German political leaders Konrad
Adenauer and Ludwig Erhard began "denationalizing" industries to
improve efficiency and broaden public share ownership. The German government,
for example, sold a majority stake in Volkswagen in a public share offering in
1961.
Another
influence on Thatcher's government was a Canadian privatization effort. Some of
Thatcher's key advisers, including Alan Walters, were familiar with the privatization
of a huge resources company in British Columbia in 1979. That process
included a distribution of free shares to all citizens in the largest share
offering in Canadian history to that date. A 1980 book describing that reform
was the first with the word privatization in
its title.
Numerous
privatization methods have been used in the United Kingdom and other developed
nations. The dominant method has been share issue privatizations. The
government proceeds with an initial public offering (IPO) of all or a portion
of company shares, usually followed with the later sale of remaining shares.
British Aerospace was privatized in 1981 with an IPO of 52 percent of its
shares, with remaining shares unloaded in later years.
The
British Telecom (BT) IPO in 1984 was a mass share offering, which "did
more than anything else to lay the basis for a share-owning popular capitalism
in Britain," said Thatcher. The government ran high-profile
television ads to encourage the purchase of BT shares, and more than two million
citizens participated in the largest share offering in world history to that
date.
Selling
the 250,000-worker BT was a bold decision, and its success generated momentum
for further reforms. The OECD called the BT privatization "the harbinger
of the launch of large-scale privatizations" internationally. In the
years following, the British government proceeded with huge public share
offerings in British Gas, British Steel, electric utilities, and other
companies. In the gas privatization, two million individuals who bought shares
had never held corporate equities before.
A
second privatization method is a direct sale or trade sale, which involves the
sale of a company to an existing private company through negotiations or
competitive bidding. For example, the British government sold Rover automobiles
and Royal Ordnance to British Aerospace. Other privatizations through direct
sale included British Shipbuilders,
Sealink Ferries, and The Tote.
A
third privatization method is an employee or management buyout. The United
Kingdom's National Freight Corporation was sold to company employees in 1982,
and London's bus services were sold to company managers and employees in 1994.
Management and employee buyouts were also popular in Eastern Europe after the
fall of communism. The mass issuance to citizens of free or low-cost share
vouchers was also a popular privatization method in Eastern Europe.
In
most cases, British privatizations went hand-in-hand with reforms of regulatory
structures. The government understood that privatization should be combined
with open competition when possible. British Telecom, for example, was
split from the U.K. post office and set up as an arm's-length government
corporation before shares were sold to the public. Then, over time, the
government opened up BT to competition.
The
British government opened up intercity bus services to competition beginning in
1980. That move was followed by the privatization of state-owned bus lines,
such as National Express. British seaports were privatized during the 1980s,
and the government also reformed labor union laws that had stifled performance
in the industry.
Studies
in the United Kingdom and elsewhere have found that opening industries to
competition is important to maximizing productivity gains from
privatization. When possible, privatization should be paired with the
removal of entry barriers — open competition is preferable to either government
or private monopolies. However, the British experience also shows that even
when industries have natural monopoly elements, privatization combined with
improved regulatory oversight spurs gains to efficiency and transparency.
British
privatization has been a big success. Entrepreneurs and competition have
transformed the British economy. Bloated workforces at many formerly
state-owned firms were slashed. Employment in the electricity and gas
industries was cut in half between the mid-1980s (before privatization) and
mid-1990s (after privatization). Privatization has typically generated
large improvements in labor productivity, particularly for firms in competitive
industries, such as British Steel, British Coal, British Telecom, British
Airways, and Associated British Ports.
Just
knowing that privatization was coming spurred efficiency reforms in many
companies, as Thatcher herself had predicted in a 1981 speech. British
Steel hugely chopped its workforce and improved its productivity leading up to
its 1988 privatization, as did British Airways before its 1987 privatization.
After privatization, with revenues and profitability rising, British Airways
increased its employment to serve expanding markets. That pattern of cost
cutting, increased efficiency, and then growth is common among privatized
firms.
British
consumers benefited as privatization and competition reduced prices and
improved service quality. A British Treasury study found that real prices after
a decade of privatization had fallen 50 percent for telecommunications, 50
percent for industrial gas, and 25 percent for residential gas. A decade
after electricity privatization, real prices were down more than 25
percent. The environment gained from the latter privatization as well, as
the privatized electricity industry moved rapidly to adopt natural gas as a
fuel and replace coal.
The
Treasury study found that "most indicators of service quality have
improved" in privatized businesses. Economist David Parker found, "There is no
substantial evidence that lower manning and price reductions in the public
utilities have been at the expense of service quality." The share of
British Telecom service calls completed within eight days soared from 59
percent to 97 percent in the decade after privatization. Before privatization,
it had taken months and sometimes a bribe to get a new telephone line. By
various measures, safety also improved in the privatized industries, including
gas, electricity, and water.
Millions
of British savers gained from investing in the privatized companies. The
government made share offerings appealing to small retail investors, which fit
with Thatcher's belief in "popular capitalism." She wanted to create
a "capital-owning democracy . . . a state in which people own houses,
shares, and have a stake in society, and in which they have wealth to pass on
to future generations." Under Thatcher, the share of British citizens
owning equities soared from 7 percent to 25 percent. Many middle-income
savers bought shares of companies such as British Gas, and they generally
earned solid returns.
The
government itself gained from privatization because money-losing companies,
such as British Steel, were removed from the budget. Also, the government
gained revenues from the share offerings and direct sales, and from the taxes
paid by the newly privatized firms. The British government has raised more than
70 billion pounds (more than $100 billion) from privatization.
A
few British privatizations were particularly controversial. State-owned British
Rail had long consumed taxpayer subsidies, and it faced a long-term decline in
its transportation market share. In 1994 the government split up the company
and privatized separate pieces: Railtrack took control of tracks and stations;
3 firms took control of rail freight; and 25 firms received franchises to
operate passenger services. The British rail industry went from being
vertically integrated to being split into separate pieces.
In
the late 1990s, a few high-profile rail accidents raised concerns about the
industry's new structure. Some accidents may have been due to insufficient
track maintenance — in both the years before and the years after privatization.
Those problems led to the renationalization of Railtrack in 2002 as Network
Rail. Some experts believe that undoing the industry's vertical integration was
a mistake. Before nationalization in the 1940s, British passenger rail was
vertically integrated as four regional private rail firms owning both track and
rolling stock.
Despite
uncertainty about the optimal structure for the industry, British rail has
flourished since passenger services were privatized in the 1990s. Unlike
elsewhere in Europe, rail ridership in Great United Kingdom has soared. Total
passenger trips bottomed out in 1995 and then began rising. By 2014, total
passenger trips had more than doubled since privatization, from 740 million to
1.5 billion. Rail ridership is now hitting levels not seen since the early
1920s.
Despite
the rise in passengers, the on-time performance of British passenger rail
improved after privatization. Also, surveys find fairly high levels of
customer satisfaction with rail travel. And despite the few high-profile
accidents in the 1990s, the overall safety record of British rail has steadily
improved since privatization.
In
a 2013 study, the European Commission found that the United Kingdom's railways
were the "most improved" in all of Europe since the 1990s and were
second only to Finland's in customer satisfaction. In sum, British rail
reform has been a success, not the failure that some critics have claimed.
The
privatization of British water and sewer provision has also been criticized.
The government privatized 10 regional water and sewer agencies in 1989 and
created a new regulatory authority to oversee them. After the reforms, people
complained that water prices rose. But those increases stemmed from the private
firms' increased capital investment to modernize very old government
infrastructure and from increased European regulation. Privatization gave the
companies access to the capital they needed to upgrade. Put another way,
water prices had been kept artificially low under government ownership, which
led to underinvestment and inefficient overconsumption. After increases in the
first six years following privatization, British water prices have risen just 9
percent in real terms over the past two decades.
Furthermore,
water industry efficiency and service quality have increased. Wasteful leaks in
the British water system have fallen by one-third since privatization, supply
interruptions are down, and the number of customers with low water pressure has
plummeted. Drinking water quality has improved, and pollution has fallen.
In sum, the overall quality of the British water system has substantially
improved since privatization.
Norb
Leahy, Dunwoody GA Tea Party Leader
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