Tuesday, March 13, 2018

Margaret Thatcher Blazes the Trail



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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