State-owned industries are often inefficient, costly and unresponsive to consumer demands. They are weighed down by political intervention, have unclear and inconsistent goals to guide good management, and are subject to capture by special interest groups, such as particular suppliers and the trade unions. Bluntly, too often their corporate governance is 'not fit for purpose'. By contrast, private sector businesses have clearer objectives and management are responsible to the owners or shareholders for their actions. On the face of it, there is a weighty case for privatisation. Governments seem to think so, in 2010 worldwide privatisation receipts totalled US$213.6bn.
At the same time, as demonstrated in my Official History of Privatisation in the UK, the act of privatisation changes very little unless it is accompanied by a set of supporting institutional, organisational and managerial reforms. Commissioned by the Prime Minister in 2004, I was given privileged access to internal government papers not yet released for public scrutiny under the normal 30 year rule. I also interviewed over 120 former government ministers, civil servants managers, bankers and others involved in the various privatisations while writing the history. The Official History is divided into two volumes, the first covering the period down to 1987 and the second the decade between 1987 and 1997. During these years something around £60bn. of business assets were transferred from the state to the private sector, alongside over £20bn. of state housing and other properties. In addition, a large number of government functions were subject to compulsory competitive tendering exercises, and the 1990s also saw the start of extensive public private partnership arrangements in the form of the Private Finance Initiative (PFI).
What started as an unplanned and tentative programme after the election of a Conservative Government under Prime Minister Margaret Thatcher in May 1979, by 1991 the wholesale disposal of the state owned telecommunications, gas, electricity and water suppliers had been achieved. The years 1993 to 1996 saw the sell-off of the loss making railways, although this proved to be especially troublesome sale because of its complexity and the industry's continued reliance on large state subsidies. Also, major enterprises such as British Aerospace, British Shipbuilding, British Airways, British Steel and Rolls-Royce were transferred to the private sector.
In all cases the privatisations were preceded by careful restructuring of the businesses where this was necessary to make them attractive to private investors. This sometimes included management changes, plant closures and redundancies, and in a number of cases financial restructuring, including debt write offs. The intention was to give the enterprises the best possible start in the private sector.
However, mistakes were made. The UK was the first industrialised country to undertake a systematic disposal of its state owned industries and in particular it took time for the civil service to build up sufficient capacity and knowledge so as successfully to challenge advice from the City of London. Each sale involved the government appointing financial advisors from the City, who arguably under-priced sales, especially a number of the early share offers. This resulted in some substantial and hard to justify gains to investors. For example, those fortunate enough to buy shares in British Telecom when privatised in December 1984 saw a potential return on their investment of some 84% in the first year. The same City banks advising the Government also had investment arms that benefited from such gains. Later the sale process was tightened up to avoid 'conflicts of interest'. However, to be fair to the City, the banks too were on a sharp learning curve. It remains controversial to what extent the City purposely pulled the wool over the government's eyes.
The Official History provides important lessons for countries such as Greece currently contemplating extensive privatisations; as well as other governments which at some time over the next few years decide to privatise. The principal lessons are:
The need for clarity about the purpose of privatisation. Raising economic efficiency, spreading share ownership, reducing the power of the trade unions, developing the domestic capital market, and raising money for stretched public finances are the usual reasons why privatisation is pursued. But each may require a different structuring of the privatisation including a different form of sale. This was true in the UK.
The need to review the different methods of privatisation. Privatisation can take many forms, from public private partnerships to outright sales. Each has its advantages and pitfalls. Where a full sale is the decision, even then there needs to be careful consideration of the different forms this can take, such as a share flotation, a private sale of the assets to another business or investment group, a management buy-out or even perhaps a worker-owned enterprise. Different forms were adopted for the privatisations in the UK, as described in detail in the Official History.
The extent of the sale. Where governments wish to maintain some control over management, for example in the case of strategic industries, one possibility is for the government to retain a large share holding. This was the approach adopted in the UK in the very early 1980s, although this soon changed to the government retaining a 'special share', so that the government could veto, for example, unwelcome ownership changes in the future.
Recognising constraints. The UK government had to address a number of legal and political constraints, including international agreements, when planning some privatisations. These took time to address. For instance, in the case of British Airways the decision to sell was taken as early as the summer of 1979, but the sale was not achieved until February 1987. To head off union opposition and strike action, generous share schemes were provided for employees in the privatised firms, and pensions for existing employees were usually protected.
Finding a buyer. The UK was fortunate in having one of the world's largest capital markets. Even so, there was real concern in the lead up to especially the sales of British Telecom and British Gas (at the time the largest initial public offerings in history) that they would swamp the capital market. This meant careful planning of the nature and timing of the share sales. In other countries with much smaller domestic capital markets, difficult decisions may need to be made about locating suitable buyers and addressing the extent to which businesses should be transferred to foreign ownership. While the UK government allowed foreign shareholdings at privatisation, the primary buyers were always British.
Getting businesses ready for sale. This may require a new organisational structure for the industry, plant rationalisation and new management input. Each privatisation in the UK involved an extensive review of the structure and management of the business.
All of the above emphasise the need for careful planning of privatisations. Rushed privatisations are likely to be bad privatisations, as illustrated by the 'wild east' mentality that existed in Russia in the 1990s. As a result of the botched privatisation process, Russia has been left with a distorted economic structure and a warped politics.
As part of the bail out of Greece,
the Greeks are planning to privatise some €11bn. of state assets by the end of 2016. It will be important that these privatisations are carefully designed and executed. Some are pressurising Greece to achieve a larger target, but if they were sensible and concerned with Greece's long-term economic future rather than a quick fix to the currency crisis, perhaps they would be wise to adopt a more measured approach.