SWP 40/91 PRIVATISATION TEN YEARS ON: A CRITICAL

SWP 40/91 PRIVATISATION TEN YEARS ON: A CRITICAL

SWP 40/91
PRIVATISATION
TEN YEARS ON: A CRITICAL
ANALYSIS OF ITS RATIONALE
AND RESULTS
DAVID PARKER
Senior Lecturer
Finance, Economics and Accounting Group
Cranfield School of Management
Cranfield I~t~~e;~
Technology
bedford MK43 OAL
(Tel: 0234 751122)
Copyright: Parker, 1991
Abstract
Privatisation
SUPPlY
side
reviews
the
has
featured
reforms
policy
since
and its
as a major
1979.
achievements.
part
This
of
the
article
Government's
critically
Introduction
Just
as the
the
1980s
It
1940s
will
therefore
is
be remembered
seems
privatisation
timely
(1)
the
(2)
introduction
monopolised
sale
however,
the
attention
and which
Table
1
lists
Table
2
the
is
all
of
the
raised
has sold
almost
state
a major
stake
namely
aerospace,
rail,
telecommunications,
state
only
the
Three
1 & 2 around
broad
date
in
and
total
In
the
1979 the
most
important
aero
engines,
air
and
most
paper.
assets.
vehicles,
and the
the
to
UK's
is,
travel,
water.
railways
oil,
By
remain
i99i,
in
the
(1)
monopolies;
terms
(2)
of
here.)
reasons
privatisation:
profit
It
sale;
the
gas
industry
previously
sector.
(Tables
in
coal
of this
haulage,
electricity,
main
and
captured
state
of
motor
the
two
areas
has
each
bn of
road
of
had
privatisations
many
steel,
coal,
however,
in
achievements
(liberalisation).
from
f40
privatisation.
has
focus
major
of
into
which
primary
nationalisation,
(denationalisation),
competition
the
amounts
industries,
the
assets
programme
Government
had
decade
owned suppliers
former
of
programme
state
of
era
review
The
of
by state
as the
as the
to
programme.
strands:
the
remembered
have
it
raises
it
widens
raising
public
making;
and
(3)
been
it
share
put
efficiency
ownership
sympathy
provides
forward
for
useful
in
in
with
private
funds
support
of
sleepy
state
important
gains
enterprise
and
to
the
augment
coffers
Exchequer's
dictates
In
a reduction
this
assessed
made to
in the
of
the
in
light
of
a decade's
the
its
upon
privatisation
to
The
the
property
rights
neoclassical
improve
An attempt
has
the
performance
rationale,
contentious,
and the
is
privatisation
first
the
paper
expecting
for
grounds
and drew
theories.
Both
economics
and the
to
public
servants
available
data
on
sponsoring
in
earlier
disinterested
employees
are
According
to
state
strongly
one
of
1970s
choice
and
are
rooted
in
the
boards
of
rational
Weber
and
utility
had
by
exponents,
other
in
people.
popularised
pursuing
their
industries,
politicians
to
argued
theory
leading
state
different
officials
motivated
its
no
century
choice
public
interest",
of
the
public
theories
departments
are
the
on the
in
in some detail.
theory,
Parliament
ownership
concept
reviewing
choice
in
and
state
right"
"new
According
of
most
against
and are worth
notion
since
critically
changes.
maximiser
Whereas
extent
theoretical
argument
came from
government
experience.
what
the
is
Argument
economic
civil
is
the
performance
The Efficiency
to
rationale
However,
argument,
concentrates
above
question,
objectives?
efficiency
actual
PSBR.
each
the
policy
macroeconomic
when
time
a
paper
answer
achieved
the
at
the
that
the
"public
government
own self-interest.
Niskanen
(1971),
-
this
translates
the
into
office,
public
bureau,
ease
bureau".
For
chances
votes
of
of
making
politicians
remaining
any
even
tax
payers.
In
this
that
become
and
influence
of
manning
and
were
Property
rights
critique.
This
of
efficiency
industries.
from
the
industries
in
public
state
State
tax
assets,
They do not
out
in
it
would
fall
under
seeking
the
the
trades
both
over-
view
UK. In
sector
the
1970s
lagged
net
of
well
of
state
1981).
source
and
loans
The
has
on
inconsistent
and profits
of
the
public
choice
the
differing
levels
private
industries
payers.
burdens
suffer
nationalised
the
by
"public
pessimistic
complemented
that
the
gain
and
rent
This
(Pryke,
to
industries
would
sector
the
considered
would
be born
maximise
in
shifting
notably
private
the
being
the
the
policies
state
of
investment.
the
to
of
managing
considerable
industries
argued
government,
tlowns'l
the
theory
through
directly
face
in
in
economists
the
negative
market.
in
of
groups,
the
capital
as
choice
seemed to
in
policy
of
output
ease
shaping
resultes
the
growth
growth
by
management
wasteful
ownership
subsidies
of
that
Consequently,
behind
kind
pressure
productivity
attempting
office
in
unions.
public
it
means
perquisites
patronage,
and
in
the
'@...salary,
power,
public
demoralised
objectives
of
changes,
one which
atmosphere,
inevitable
pursuit
regulation,
justifying
interest",
the
sectors
raised
with
no formal
own tradeable
external
state
public,
lay
property
in
rights
or have
the
funding
guarantees,
which
shares
in
or
principle
in
the
rights
to
and
shares
sell
them
- buying
run,
hence
raising
are
considered
to
of
vital
the
Inefficient
managerial
this
in
leads
the
sum,
idea
operating
control
and making
east,
on the
is
(Figure
.The
1 around
public
popularised
in
is
the
which
private
sector.
public
to
take
over.
attenuation
the
inevitably
of
of
leads
to
civil
servants
relationship
that
based
firms
rely
on the
in
Figure
1 by
capital
it
lower
the
in
of resources.
was
direct
and
bid.
in
immune
intentions
early.'1980s
efficiency
away from
private
a waste
firms
takeover
the
agent-principal
the
illustrated
i.e.
good
in
by new management
are
sector
well-
price
theorists,
in
and
are
them
share
held
buy
which
hostile
perspective,
the
to
in
improve
This
missing
public
to
efficiency
industries
the
sector
a
takeover
is
the
politicians,
companies
rights
spur
No matter
efficiency.
to
to
free
the
censure
AGMs are
and selling
property
to
are
deflating
exposed
rights
rights
in
price,
thus
to
property
property
In
share
nationalised
a
public
shares
to,
sector
shares
companies
and
enterprises
and
the
company
vulnerability
From
further
according
private
of
firms
the
of
the
Owners
traded.
be failing,
the
Ultimately,
is
in
By contrast,
management.
leaving
meetings
general
annual
attend
privatisation
would
on removing
private
capital
a movement
political
control
property
rights
political
from
towards
market.
west
to
reliance
market.
here.)
choice
and
the
UX by the
Institute
of
literature
Economic
Affairs
was
and
the
Adam Smith
on thinking
and
it
about
early
is
not
from
openness
There
to
is
emphasis
take
with
USA .where
capital
well-being.
bids
market
It
is
threat
the
as
high
the
considered
Aerospace
which
led
to
of
of
Rolls
to
Ford's
belated
recognition
thinking
about
the
the
the
this,
thus
and
are
rare
UX and the
Of
course,
but
at
capital
notion
share
the
least
market
strategic
The
is
of
contradiction
of
Jaguar
precisely
of takeovers.
the
may
with
a number
importance,
of
desirability
in
takeovers
removal
takeover
efficiency,
share"
takeover
the
the
was introduced
foreign)
Royce.
of
managerial
a ttgolden
(especially
and
over-
Japan
bids
common place.
for
The golden
be
an
of
War than
an open
an
investment,
hostile
that
motivator
unwelcome
to
economies
for
with
beneficial.
lead
a reason
the
demonstrated
shares
long-term
the
square
retention
firms.
prevent
to
key
in
of
efficiency.
difficult
Government's
privatised
be
However,
economically
which
more
demonstrates
for
also
in
not
might
The
since
are
may not
experience
necessarv
it
over
markets
have
is
1970s
studies
market
bids
the
Party.
particular,
that
much better
such
not
over
profits
capital
performed
In
influence
in
Conservative
active
suggestion
economic
Germany
the
sectors
markets
more
on short-term
lowering
their
a
hostile
some
in
capital
that
had a major
and private
problems.
private
conclusively
undoubtedly
public
notably
free
of
It
the
198Os,
operation
have
Institute.
of
to
of
companies
eg.
British
golden
share
be
seen
as
in
government
a
Turning
to
heart
of
working
motivation
the
of
public
is
went
with
an enthusiasm
which
number
competition
in
creating
to
Parker,
in
the
product
neoclassical
models
of
Leibenstein
(1966)
has
competition
are
competition
north
to
markets.
south,
and
arguments,
markets
that
is
the
are
an ownership
square
of
the
self-interested
the
in
with
civil
the
the
1980s
idea
of
1989)
will
is
therefore
not
cut.
have
argued
is
enterprises
efficiently
perfect
has
competition
emphasised
the
way
the
of
and
competition
central
to
and monopoly.
link
of
necessary
(Millward
course,
of
increasing
reliable
The role
1986).
clear
that
a more
management
between
the
Also,
product
and ttx-efficiencytt.
x-efficiency
illustrated
i.e.
in
from
Figure
capital
the
for
gains
which
Q
1 by
leads
from
increasing
a movement
from
towards
more
competitive
market
and
competition
notion
economic
efficiency
change
gains
monopoly
the
accepting
beneficial
largest
studies
levels
which
combining
By
the
privatisation
is,
and
allocative
The
at
example,
and Hood,
market
efficiency
of
lies
that
Kay and Thompson,
allocative
market
in
operate
1983;
to
(Dunsire
efficiency
an environment
incentives
hard
economists
some
Indeed,
idea
For
believing
for
raise
necessarily
the
own manning
is
one"
case
economic
The
that
its
which
detailed
caricature.
cutting
after
sector,
literature,
crude
a
public
suggest
about
"looking
the
choice
government
individuals
service
in
that
performance,
can be expected
to
both
capital
private
more
it
where
appears
there
competition
and more reliance
on private
north-west
to
The actual
movement
plotted
south-east
in
the
privatisations
movement
in
competition.
while
the
in
a number
Figure.
It
the
state
same
the
now
before
than
but
1991,
the
the
have
Commission
permit
increased
present
time,
promise
of
competition
even
more
British
Airways
where
competition
to
report
in
takeover
is
compete
cent
as
of
before.
monopolies,
in
competition
competition
from
cable
from
and PCNs,
still
retains
Gas remains
gas,
though,
following
the
it
is
being
industrial
declined
its
which
British
Also,
there
(a
south
market
to
At
the
offers
is
a
to
highly
regulated,
a
rival
within
reservation
about
the
efficiency,
the
only
case
north
power,
in
the
a
forced
market.
already
major
10 per
generation
competition.
strengthened
(NFC),
than
faces
1988,
in
an increase
market.
electricity
actually
with
privatisation,
domestic
competition
has
allowed
after
of
word,
future
UK telecommunications
supplier
significant
no more open to
the
few
a
State
BT
been
with
to
cars.
has
very
Freight
continued
are
firms
that
had less
Jaguar
years
from
seen
National
always
and in
seven
monopoly
Monopolies
other
privatisation.
Communications
95% of
as
industry,
Mercury
in
be
such
to
water
.can
- in
market,
particular
privatised
south
sector
applies
of
associated
to
- a movement
1.
been
Firms
UK haulage
The
of
north
markets
in Figure
have
from
capital
a
where
move).
an industry
when
it
was
UK,
British
the
capital
Caledonian.
Given
market
the
in
earlier
ensuring
fact
role
of
that
the
opportunity
was not
the
taken
to
inject
time
of
privatisation
it
is
worth
Also,
step
necessary
created
later
bus services,
the
privatisation
Share
to
BT,
at
regret.
was
The
not
a
legislation
liberalised
any energy
relevant
of
privatisation.
coach
supplier
to
and
utilise
preceded
systems,
distribution
electricity
the
of
decline
recent
industries.
shares
has
at
the
grown
giving
priority
assets,
the
from
around
have
been
vouchers
There
7 to
are
has
time
been
supportive
privatised
of
cent
since
their
telephone
owning
have
hinted
firms
that
hold
the
of
the
War,
investors
share
ownership.
when
selling
shares
1979.
Small
advertising
offer
of
the
By
state
has
trebled
shareholders
campaigns
bonus
of
shares
or
and gas bills.
gains
"property
goals
by
has been a
institutional
owning
expensive
political
Since
shareholder
and
the
ownership
individual
variety,
also
large
adults
through
suggested
of
of
25 per
obvious
a
by the
small
proportion
against
to
the
share
Governments.
held
to
Sid"
fostering
individual
expense
enticed
'@Tell
in
Conservative
of
of
as a rival
firms
source
competition.
and enabled
proportion
It
that
a
state
Ownership
goal
time
into
remain
increasing
of the
Reversing
the
must
Mercury
and
gas
competition
recalling
in
which
more
for
the
Conservatives
democracy@@, but
at
a possible
private
shares,
economic
shareholders
capitalism.
ministers
Also,
and employees
will
in
from
dividend.
be more
where
employees
have
been given
preference
in
share
now have
a direct
companies.
The
strike
This
a
only
that
true
argued
that
financial
health
of
they
work
harder
been
will
the
arguably
they
their
and
large
because
stake
it
in
its
and consequent
benefits.
Rather,
is
institutional
firm.
brokers
actively
detailed
an
investors
Similarly,
because
small
charges,
in
the
shares,
the
ones to be courted
It
is
flotations
also
easy
on the
to
a lot
of
thus
it
during
is
less
the
large
a takeover
bid.
exaggerate
composition
are
the
of
impact
share
This
only
a
and effort
of
continuous
far
outweigh
the
and
industries
the
funds
transactions
shareholders
by a
time
for
more
is
dominated
costs
proposition
who have
operation
little
of
is
literature
who has
scrutiny
economic
rights
will
small
following
a person
dealing
to
market
investors.
The
share
of
many small
invest
performance.
numbers
market
for
to
appears
efficient
a capital
can
There
capital
property
than
economic
industries
promotes
rational
monitoring
managements
the
rather
an enterprise
monitoring
in
with
is
the
efficient
market
shareholders
large
that
one
contradictions
privatisation.
more
consistent
than
instrument,
argument
capital
more
follows
the
more
creating
The mechanism
which
pursue
of
between
producing
privatisation.
small
been
and
in
to
one policy
contradiction
important
a
has
the
is
attempt
has
shareholders
in
in
implication
using
arise.
few
interest
governments
objective
by
it
less.
When
be
flotations,
at
large
stake
costs,
likely
of
ownership
notably
to
investors
trade
who are
privatisation
in
in
Britain.
The Government
of
adults
shares
holding
in
than
four
reversed
the
investors
fell
market
is
an
private
Raising
Just
but
only
the
of
the
financial
their
constraint
this
more
has
nor
it,
the
as it
of
the
institutional
shareholdings
of
share
whose
insofar
of
as the
on management
may be a desirable
in
power
proportion
investor,
hold
Privatisation
in
20%. However,
important
shares
deeoened
1980s
proportion
investors
17% have
not
private
30% to
the
54% of
1991).
the
raise
in
has
growth
to
rise
the
capital
behaviour
in
development.
Funds
there
objective
funds
is
of
for
wealth
the
shares
opening
been
market
sold
value
reducing
the
provided
windfall
the
have
on the
funds
capital
(as
with
priority
number
been
though
potential
general
the
between
and
a conflict
If
simply
has raised
in
also
maximising
could
have
This
is
conflict
shareholding
Exchequer.
through
shares
an. apparent
promoting
there
efficiency,
payers
it
During
sector,
as
the
1979,
and
but
relentless
from
the
(HM Treasury,
ownership
expense
market
the
since
company
continued
the
l
one
institutions.
City
emphasise
enterprises
share
2)
to
shares
only
widened
at
likes
given
usually
first
at
day
of
for
the
Exchequer
spread
of
share
gains
Figure
to
the
of
policy
promoting
goal
of
been
raising
to
spread
small
shareholders,
away.
Instead,
far
less
trading
but
ownership.
ttstagstt
2 illustrates,
10
that
had
of
the
at
the
than
(see
at
the
the
It
a cost
their
Figure
cost
has
to
of
also
tax
Government's
ability
set
to
a
valuation
does
(Figure
2 around
Figure
3 illustrates
the
not
price
appear
the
effect
spending
under
UK public
reduce
the
Although
privatisation
in
much
fact
positive
PSBR into
receipts
have
play
have
only
in
a
ltmassagedtt
government
finances
supported.
In
years
(Figure
the
of
the
been
look
1987-88,
At
but
share
financial
of
did
best,
of
small
the
way
public
they
turn
supplement
have
way cannot
spending
in
a
to
receipts
public
points
the
privatisation
some dramatic
1.5
negative
convention
of
privatisation
in
by
as
made
the
useful
percentage
treated
on
in
1988-89,
be
GDP,
but
in
by less.
the
problem
of
We saw earlier
coupled
terms
has
the
revenues
3 aound here.)
Assessing
operating
market
experience).
government's
repayment.
that
other
true
accounting
the
one year,
a debt
provided
are
improved
Suggestion
reduced
with
sector
of
taxation.
they
the
privatisation
revenues
size
receipts
finances,
the
of
The
deficit.
to
here.)
1980.
thus
close
to be improving
PSBR since
public
and
flotation
Efficiency
some empirical
results
and
regulation
that
efficiency
with
Argument:
more
privatisation
of
the
competition
is
enterprises
in
the
most
likely
to
concerned
product
raise
when
market.
the
it
is
We now
turn
to
consider
privatisation
some of
the
available
at
Figure
the
1
efficiency
raised
the
Since
most
early
to
change
that
approached
impact
of
by looking
at
reviewing
research
York
east
into
the
shifts
considering
the
the
data
need
relating
to
recently
effects
in
terms
in
ownership.
The
of
the
for
some
for
recent
on-going
issues
regulation
of
make conclusive
judgments
of
per
industries
in
the
most
profitable
Steel
an
the
enterprises
in the
8th
indicator
state
have
sector.
ownership
been
date
4 former
generally
of
from
just
is
tells
too
say
is
mixed.
companies
in
A
terms
nationalised
were
followed
one year
resulting
would
of
(Manaaement
inadequate
enterprise
impact
performers
is
in
still
to
position,
and BT.
level
is
What we can
placed
profitability
and the
in
1990,
The star
20.
British
efficiency,
remained
Britain's
top
it
concerned.
firms
in
1983,
on the
privatised
in
be
after
of
employee
However,
trends
companies
Authority
companies,
to
the
experience
profits
p.55).
so far
occurred
study
Airports
results
privatisations
on many of
the.
these
by
on
and financial
of
by
is
by
to
date
monopolies.
Privatisation:
own
and
west
of
concludes
natural
This
University
discussion
to
economic
companies
undertaken
of
evidence
on efficiency.
privatised
of
the
the
by
British
5
water
Today,
May 1991,
considered
on
gains
in
us nothing
its
economic
about
privatisation.
Perhaps
as profitable
had they
Table
a
3 gives
a series
selection
apparent
have
of
at
the
British
indicator)
per
improved
most
dramatically
in
Rolls
Royce
and
leads
to
are
begun
the
really
The
idea
in
performance
(Table
4).
total
factor
raises
the
productivity
firms
they
to
privatizationtt.
After
than
and Kay in
studied
to
that
in Table
also
practices
cases
1989
have
a percentage
productivity
privatised
at
privatisation
Of
question,
faster
Bishop
declined
of
BT has
appeared
many of
occurred
before
was privatisation
of
industries
GDP and
private
1979
also
sector
and
ttwholly
accounting
observed:
also
course,
1988 concluded
between
studying
3, they
the
British
declined,
nationalised
as
the
reproduced
since
may
not
employment
redundancies).
profitability
the
in
(though
cars
but
working
the
badly
demand
Ports
that
where
Interestingly,
their
growth
rose
of
this
increased
1980s
Ports,
in
the
productivity
actually
as wasteful
some support
programme
but
their
labour
in
adverse
British
Oil.
necessary?
raised
Associated
always
Jaguar
crude
Enterprise
of
and
by
(a
not
has declined
affected
it
employment
privatisation,
marginally
employee
British
improvements
improved
Oil
is
salaries
has
Enterprise
at
manager
Royce but
for
It
performance
has
were
receives
a major
top
and
Associated
elsewhere
while
firms,
a shake-out
Gas and
that,
other
the
terminated
but
firms
Sales
movements).
privatisation.
Ports,
two
latter
their
BT and Rolls
British
indicators
since
on capital
Gas,
Associated
performance
improved
The return
of
(the
figures
impressively,
resulted.
case
financial
companies
from
risen
of
that
in
the
1988
unrelated
data
similar
in
'#The
overall
picture
substantial
have
increased,
relationship
of
privatization
not
privatized
growing
causation
and
immediately
more
runs
privatization,
has
from
growth
rather
than
the
fact
from
the
to
it
and
other
But
the
tended
of
grown,
declined.
apparent
but
one
have
to
have
profitable,
is
profits
changes
industries
and
.....
employment
these
is
emerge
output
change.
margins
The
to
of
data.
be
seems
the
faster
that
the
profitability
to
way round.**
(pp.40-
41)
(Tables
3 and 4 around
The York
research
The research
and
and
in
of
the
a study
of
the
nationalisation)
the
the
author
the
public
had
independence,
and a reduction
in
operations.
day-to-day
of
the
more
in
ownership
the
Thatcher
National
other
effects
of
ownership
Freight
cases
changes
for
British
were
the
effects
included;
of
had
(privatisation
of
and
status
the
financial
involvement
studied
in
or
involved
political
summarised
privatisations,
involved,
on economic
of status
direct
1986
studied
management
in
are
was
changes
The organisations
Corporation,
test
major
commercial
status
between
organisations
boundary
These
of
two
paper
undergone
sector.
York
this
public-private
or
of
of
The
introduction
changes
University
performance.'
crossed
within
at
which
financial
either
oroiect
undertaken
1990,
consisted
here.)
and their
Figure
4.
Aerospace
but
a Figure
Only
and the
since
all
of
1 west
to
the
movement,
east
discussion
4 around
employment
efficiency
(2)
function,
(3)
in
through
The
ratios.
to
product
productivity
ensure
that
the
of productivity
5 summarises
that
a
was
organisations
the
change),
privatisation
of
ltprivatisationtt
a
services
changes
observed
5 around
What the
results
improve
in the
the
Royal
British
Aerospace.
However,
the
of
the
Ordnance
improves
out
of
the
and
includes
both
for
failed
and
the
of
Rolls
performance
performance
ten
Transport
Airways
results
postal
the
hypothesis
The
HMSO, London
hypothesis,
and
cases
six
This
the
simply
economy.
British
Freight,
not
national
control
in
Mint,
accounting
with
were
study.
supported
- the
Royal
compared
macro
of
productivity
standard
political
from
National
in 'the
of
were
generally
cases.
and the
a basket
of
terms
employment
factor
results
nationalisation,
as expected
and total
results
contradicted
following
of
away
studied
consistently
labour
in
established
an
trends
movement
performance
may
of
an analysis
Table
(Table
using
terms
(1)
ways:
three
measured
was
(1984
to
here.)
Performance
trends
relevance
general
of privatisation.
(Figure
and
have
results
the
Royce
improved
to
improve
telecommunication
Factories.
here.)
imply
performance,
is
that
a Figure
but
that
this
1 west
to
improvement
east
shift
is
not
guaranteed.
Performance
factors
and
than
ownership.
performance
caution.
other
with
of
in
that
that
supported
by
international
and
of
Schneider,
studies
is
relevant
natural
the
terms
may
of
the
on
in
the
changes
in
and
that
owned
theory.
factors,
with
the
firms
our
Where
most
markets
production
and
(for
Pommerhene
the
efficiency
What
product
of
enhanced
earlier
by
both
is
in
the
and
these
market
publicly
rivalry.
discussion
competition
especially
and
more
1983).
in
efficiency
profits
Borcherding,
is
always
higher
Parker,
one,
similar
of
many
publicly
are
costs
competition
with
accords
same or
record
be
of
firms
of
e.g.
Millward
is
the
upon
relative
Studies
usually
see
privately
monopoly
only
private
variable,
economic
status
that
evidence
which
depends
in
they
a key
conclusion
focus
performance.
performance
operating
though
1982;
and
and
enterprises.
in
do suggest
often
owned
private
especially
productivity,
reviews
management,
improved
some
be associated
competition
studies
demonstrated
efficient,
to
greater
encourage
ownership
owned firms
not
with
needs
may or may not
other
ownership
treated
research
in
upon
about
and
- namely,
economic
which
have
depend
of Reaulation
of
privately
future
which
factors,
public
qualified
improvements
The .conclusion
of
may
propositions
which
ownership
contracts
The Problem
be
efficiency
market,
employment
to
implies
sources
changes
Simple
need
This
product
improvement
A
of
precluded
electricity,
the
by
gas
and
cost
A
water
industries,
production
in the
regulate
private
between
dynamic
but
monopolies,
both
cases,
some
form
of
this
is
to
likely
economic
this
suppliers.
In
protect
consumers
government
regulation
public
which
in
to
utility
runs
out
the
the
supply
calls.
for
terms
water
The
impact
which
rural
the
the
largely
into
now regulated
BT,
which
has
an
and
as
the
utility
must
call
boxes
This
by terms
was
their
the
first
license
and which
sets
operate,
including
and
emergency
999
formula
by
the
by
structure
and
operating
instance,
policed
(OFTEL).
public
as well
regulation
regulated
is
In
mechanism
political
first
services,
are
Telecommunications
example,
in
Under
legislation
privatised,
system
regulatory
gas,
be
under
of
are
privatisation
For
state
and structured.
monopolies
25 years
Prices
and
the
Office
has been
copied
.of
for
and electricity.
of
on managerial
suppliers
more visible
not
exploitation
exist.
pushes
is
to
monopoly.
monopoly
to
need
choice
state
bureaucratic
Privatisation
licences.
lower
and sleepy
or
must
and reactive
their
the
firms
from
within.the
privatised
of
the
in
words,
monopoly
pressures.
operating
other
private
hidden
cases
lies
between
be flexible
down
result
private
is
UK the
reported
sector.
of
open and makes it
the
are
and competitive
to
ownership
laid
public
explanation
likely
In
there
of
a regulatory
behaviour.
electricity,
system
In
gas
the
depends
USA,
and water
upon
where
have
its
influence
private
monopoly
existed
for
many
years,
the
regulatory
and commercial
the
of
broad
and
lengthy
rent
agencies
in
supplier
American
operations.
been
the
consumer.
been
preserving
a
suggests
where
incentive
exists
investment
-
to
the
the
so-called
regulatory
siding
with
date
up in
the
the
UK
independence,
the
capturetl
is
monopolies
a
view
of
return
to
have
achieving
on
costs
an
exist
prices
is
base
Averch-Johnson
effect
But
exists,
reduced
capital
or
capital.
on capital
control
extend
the
Thirdly,
return
to
used
to
regulated
of
US. Firstly,
are
"regulatory
1971).
to
of
price
the
and
through
an
more
(Averch
control
introduced
extended
to
the
other
Figure
5.
It
was
and
subsequently
monopolies,
is
summarised
the
minus
permitting
for
Although
rate
privatised,
"RPI
and
and
1962).
The method
overcome
alia,
many opportunities
Secondly,
with
management
the
resources
private
rate
in
commendable
Stigler,
on the
for
inter
considerations
too
that
"satisfactory"
incentive
litigation
control,
criticised
shown
regulated
a ceiling
Johnson,
have
1976;
generally
where
US have
threat
(Peltzman,
given
seeking
experience
present
has
Consequently,
bodies
confusion,
been experienced
lawyers.
against
to
UK.
system
the
regulatory
led
environmental
have
quasi-judicial
lobbyists
ever
service,
problems
has
The regulations
much as in the
Three
the
disaster.
level
pricing,
system
distortionary
X1' formula
increased
in
effects
was
profits
in
of
intended
the
UK when BT was
US style
to
resulting
control
from
privatised
designed
regulation.
prices
lower
to
The
while
costs.
However,
despite
control,
it
precisely
the
(Figure
5 around
The
flaw
could
its
does
inflation
contain
in
its
the
was 7% the
to
reduce
profits
shareholders.
to
savings
are
reviewed.
In
tNtoo high"
is
lose
other
to
of
increasing
to
6.25%
five
with
1991.
set
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gas supplies.
expressed
more
to
when
time
that
and the
"Xl'
but
from
cost
formula
profits
is
are
factor
shareholders
the
time
price
'IX** factor
view
to
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rate
return
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of
of
the
formula
is
of
that
around
indeed
to
In
gas prices
5 to
of Water
growth
of
body
the
4.5% in
General
Office
being
regulatory
profit.
Director
he considers
is
the
IrXtl was raised
James McKinnon,
about
if
that
when the
the
In May 1991 the
concern
only
for
boosting
work
pricing
benefit
rise
incentive
only
drive,
when
years.
BT's
of
will
BT
could
3% thereby
OFTEL decides
the
a
that
an
the
can gain
initally
formula
than
this
be a "satisfactory@'
known
earn
lead
therefore
3%,
leave
to
consumers
-
appears
has made it
to
if
to
profits,
in
return
can
example,
by the
a BT efficiency
- at most,
renewal
by
words,
improvement
considers
of
regulation.
less
covered
back
Thus shareholders
at
RPI
However,
out.
it
the
costs
increased
practice,
which
For
designed
therefore
renewed
set
was
following
efficiency
In
by
clawed
not
factor.
charges
management
to
flaw
rate
as US style
"Xl*
tariffs
This
up
major
direct
here.)
4%.
by
a
same inefficiencies
lies
raise
over
advantages
profits
face
1989 and
of
OFGAS,
should
be
7% on regulated
Supplies
in
(OFWAT)
the
water
industry,
which
is
ahead
of
estimates
made
at
the
time
of
privatisation.
Profits
But
gained
through
threatening
'regulator,
monopoly
noises
made about
especially
destroy
managerial
become more
efficient.
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the
firm's
to
risk
of
a change
cost
of
capital.
prevent
unduly
in
lowering
quality
Gas that
being
penalty.
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the
distortionary
American
in
and
facilitate
the
service
privatisation,
calls
monitoring
new entry.
the
by
the
by the
raises
the
bodies
have
prices
formula
or
by
OfGAS informed
quality
might
this
and
account
by raising
the
the
costs
this
Recently,
in
of
take
pricing
that
be
way,
of
service
raised
as
however,
a
risks
purpose.
Xl*
formula
on resource
there
future
regulation.
OFTEL
has
been
associated
is
no
sign
the
quite
the
drawn
interconnection
gas
overcome
removing
Indeed,
has
not
allocation
Also,
forseeable
industrial
reduce
regulatory
**X** factor
minus
and
to
profits
**X** factor
its
profits
**X** factor,
service.
regulation.
international
into
"RPI
style
pricing
of
effects
competition
the
of
as investors
discovered
the
The use of
blurring
Since
it
the
unacceptable.
by an up-grading
increasing
of
if
the
covered
sacrificed,
a further
growth
insofar
Moreover,
not
are
incentives
.in
monopolies
services
the
British
was
the
the
when accompanied
*@X**factor,
of
exploitation
into
charges,
pricing,
the
with
of
new
need
for
reverse.
regulating
and
precisely
OFGAS
to
Conclusions
The
,
UK
now
experiment,
much
been surrounded
now are
like
able
to
its
conclusions
suggest
themselves:
have
been
better
reducing
the
PSBR led
theoretical
enterprise.
.
At
it
'present
conclusions
relies
the
is
upon
of
sector,
optimistic
management
of
same time,
the
on
organisations
have
broad
and
in policy;
there
for
no
a policy
sector
sure
are
to
which
of
private
of
these
case
for
privatisation
pessimistic
view
of
motivation
in
consider
an
effect
on
what
view
the
to
available
privatisation
three
ownership
share
be
could
The theoretical
alongside
exposure
pursue
public
to
possible
policy
principle,
the
Only
theoretical
the
underpinnings
possible
correct.
to
has
Two
conflicts
empirical
not
its
but
attempt
in
and
research.
effects.
inevitable
a particularly
public
overly
is
analyse
widening
chunks
large
to
defective
or
(Hemming
privatisation
principle
- the
to
is
transferring
in
efficiency,
privatisation
sound
sound
executed
increasing
goals:
(2)
is
world
objective
actual
alongside
privatisation
the
than
begin
rationale
(1)
privatisation
nationalisation,
by more rhetoric
economists
a
to
around
copied
But
1988).
Mansoor,
subjected
was
1980s
the
in
of
the
operating
registered
disciplining
private
empirical
would
some
capital
evidence
efficiency
improved
market.
on the
is
At
effects
ambiguous.
performance
the
of
Some
after
while
privatisation,
efficiency
gains
Economic
competition
a
(Parker,
cost
.the
1989
the
also
savings
gas
other
borne
the
into
new
than
*large
suggest
operating
UK's
experience
services
20% or more
has
British
were
Gas.
the
recorded
recognised
this.
industry
fields
end
an
during
generation
Sea
that
high
electricity
North
permitting
telecommunications,
by the
electricity
announced
government
out
Government
of
suppliers
ensuring
around
the
from
evidence
goverment
of
recorded
have
sector.
in
for
was injected
10% of
through
is
privatisation
competition
public
factor
key
Belatedly
.1990).
to
international
tendering
where
During
the
and this
competitive
198Os,
in the
and
is
efficiency,
of
while
theory
seem
others
Also,
and since
has
been
sold
in
March
1991
duopoly
in
the
to
some
new applications
to
run
trunk
networks.
In
at
public
least
the
utilities
immediate
will
After
7 years
of
still
controls
95% of
the
private
limited
the
water
a small
industry
dominant
competition
sector's
to
remain
the
from
in
their
Mercury
of
gas
amount
of
the
it
difficult
industries.
industrial
BT
market;
and electricity
to
privatised
Communications,
UK telecommunications
share
is
the
however,
future,
while
supplies
market.
is
In much of
see how competition
can
develop.
The
existence
creation
privatisation
of
of
privatised
a regulatory
has
altered
monopolies
structure
the
has
for
form
each
of
necessitated
the
industry.
regulation
Hence,
-
from
political
direction
to
operating
legislation,
the
pivotal
role
and
water
industries
how
any
their
present
threat
(the
regulatory
have
been
industry
from
of
to
Environment,
Mergers
Rivers
example,
the
chances
the
of
price
control.
remains
industry
an ever
of
muddle
appears
confusion
not
only
Agriculture,
the
Commission
to
- the
OFWAT, but
Department
the
European
the
it
regulatory
of
Pollution,
Ministry
Commission,
and
scrutiny
for
removed
of
there
maximise
of
the
terms
water
the
see
intervention,
the
to
to
responsibility
of
now subject
Given
difficult
political
in
of
electricity
has
capture
structure
designed
is
American
regulatory
Inspectorate
H.M.
direct
notably
on the
is
privatisation
distortions,
based
Moreover,
it
means
bodies.
gas,
abdicated
have
the
regulatory
economy,
while
resulting
introduced
the
could
But
by
telecommunications,
in
government
inefficiences
has
the
control
and
licenses
of
behaviour.
length
arm's
of
the
Monopolies
and
and
the
National
Authority!).
Consequently,.
the
the
form
extent
the
firms
without
and
1990s
behave.
of
or
surprising
to
privatisation.
If
costs,
prices,
rates
almost
managing
the
to
regulators
of
return
industries.
and
heated
its
the
whether
evidence
available
see
created
economic
the
to
regulation
as to
its
given
evidence
likely
The UK has
much 'thought
permanent
is
it
impact
is
to
This
on regulatory
government
involved
and
service
With
what
about
on the
regulatory
effects.
get
debate
structure
be temporary
is
particularly
failure
in
in
the
or
US
time
of
questions
of
the
at
way
quality,
consequences?
they
are
Footnote
1. The research
Council
(Project
included
as
no.
was funded
part
of
its
E0925006).
Professors
Keith
by the
Economic
Management
Other
Hartley
in
members
and Social
Government
of
and Andrew
the
Research
Initiative
research
Dunsire.
team
References
**Behaviour
of the firm under
L.L.,
American Economic Review, Vo1.52,
H. and Johnson,
Averch,
regulatory
constraint**,
1962, pp. 1052-69.
Does Privatization
J.A.,
Business
School:
London,
M. and Kay,
Bishop,
from the UK. London
Work? Lessons
(1988).
Borcherding,
T., Pommerhene, W. and Schneider,
F., **Comparing
the Efficiency
of Private
and Public
Production:
the evidence
Zeitschrift
fur Nationalokonomie,
from five countries**,
supplement
2, 1982.
Vo1.42,
A. and Hood, C.C., Cutback Management in Public
Dunsire,
Popular
theories
and observed
outcomes in
Bureaucracies:
Whitehall.
Cambridge University
Press: Cambridge,
(1989).
Hartley,
K., Parker,
D. and Martin,
status,
ownership
and productivity**,
No.2, May 1991, pp.46-60.
Hemming, R. and Mansoor,
International
Enterprises.
(198.8) .
Economic
HM Treasury,
KayI J.A.
search of
pp.18-32.
A.M., Privatization
Monetary
Fund,
Briefing,
and Thompson,
a rationale**,
S., *'Organisational
Fiscal
Studies,
No.2,
Today,
and Public
Occasional
Paper
May 1991,
May 1991,
pp.14-15.
versus x-efficiency**,
1966, pp.392-415.
p.55.
Enterprise:
Millward,
R. and Parker,
D., **Public and Private
comparative
behaviour
and relative
'efficiency*@,
in Millward,
R
Parker,
D., Rosenthal,
L., Sumner, M.T. and Topham,.N.,
(1983).
P&i.c
Sector Economics.
Longman: London,
Niskanen,
W.A., Jr.,
Government.
Aldine:
Parker,
D.,
competitive
pp.653-68.
56,
D.J.,
**Privatisation:
a policy
in
Economic Journal,
Vo1.96,
March 1986,
efficiency
Leibenstein,
H., @***Allocative
American Economic Review, Vo1.56,
June
Management
Vo1.12,
Bureaucracy
and Representative
Chicago,
(1971).
*@The 1988 Local Government
tendering**,
Urban Studies,
Act and compulsory
Vo1.27,
No.5, 1990,
status
and
D. and Hartley,
K., **Organisational
Parker,
the effects
on employment",
Applied
Economics,
performance:
1991, pp.403-16.
Vo1.23,
No.2, February
Parker,
D., Hartley,
K. and Martin,
S., *'DO Changes
Organisational
Status affect
Financial
Performance?**,
Strategic
ManagementJournal
(1991: forthcoming).
in
Peltzman,
S., **Towards a More General
Journal
of Law and Economics,
Vo1.19,
Pryke,
R.,
Performance
Theory
1976.
of Regulation**,
The Nationalised
Industries:
Policies
since 1968. Martin
Robertson:
London
Stigler,
G.,
of Economics
**The Theory of Economic
and Management Science,
Regulation**,
Vol.1,
1971.
and
(1981).
Bell
Journal
Questions
for
Discussion
1. To what extent
roots
in economic
does the
theory?
policy
of privatisation
have
2. Why did the Government consider
it important
to widen
? Was this economically
ownership
through
privatisation
sensible?
3. To what extent
does the Government's
retention
the mechanism by which the capital
share** inhibit
supposed to raise
efficiency?
firm
share
of a **golden
market is
4. Given that it does not appear from the evidence
that
privatising
enterprises
guarantees
efficiency
gains,
how might
coal and rail
be best privatised?
FIGURE
1: PRIVATISATION
: A SCHEMA
N
A
WATER
/ ELECTRICITY
BRITISH
*
DISTRIBUTION
-1 MONOPOLY
GAS
GENERATION
BRITISH
Al RPORTS
BRITISH
I
ROLLS
AUTHORITY
AEROSPACE
ROYCE
.
BRITISH
ASSOCIATED
JAGUAR
NCF
AIRWAYS
BRITISH
PORTS
/ ROVER
/ BRITISH
STEEL
~ PERFECT
COMPETITION
PUBLIC
/ POLITICAL
PRIVATE
v
S
CAPITAL
MARKET
Figure 2
PRIVATISATION
NEW ISSUES:
PREMIUM AFTER FIRST DAY’S TRADING
100
80
60 :
%
m
1.
2:
s
2
(P
z
3
1984
-
m
1.
2:
s
B
-.
i
sQ
1987
-
z=
0I
Yz
si
iiiT
2
Z
P
<
0
cc
c
5
s
63
-
Fd
b;
cc1
-Z
1987
1990
5
1987
1989
m
B
%
1
0
G
G,
5
%
c
z
u3
1.
2:
v,
r
G)
L:
1991
1986
.I
5
m
3
z
s
1.
:
0-.
1989
1984
F-.
Z!I
VI
r
v,
Figure 3
PRIVATISATION
: IMPACT ON THE PUBLIC
SECTOR BORROWING
REQUIREMENT
7
6
5
4
3
2
1
0
-1
-2
-3
-4
79 - 80
81 - 82
83 - 84
85 - 86
87 - 88
89 - 90
91 - 92
Forecast
Source:
H.M. Treasury, 1991, Financial
HMSO, London, p.67
Statement
and Budget
Report
1991 - 1992,
THE ORGANISATIONS
Date
Tvpe
I
of
Organisation
change
Movements within
the public
of change
sector
Royal Ordnance Factories
Royal Mint
HMSO
July 1974
April 1975
April 1980
Post Office Postal
Post Office Telecommunications
April
April
(c) Public cokporation
accountable to local government
London Transport
Janu;rry 1970
(d) Local government accountability
to normal public corporation
London Transport
June 1984
(a) Private to public
Rolls Royce
British Aerospace
February 1971
April 1977
(b) Public to private
(privatisation)
British Aerospace
National Freight
February 1981
February 1982
(c) Anticipating
British
1980-1987
(a) Government department to
tradingfund
_
(b)~&vernment department to
. .. .l..Ipublic
.
corporation
StatUS
1969
1969
U: Ownership chanse
privatisation
Airways
Figure 5
UK PRIVATISED
MONOPOLIES:
PRICE REGULATION
Organisation
Main Feature of
Price Regulation
Comment
British Telecom
(B-0
RPI-3% 1984-89
RPI-4.5% 1989-91
RPI-6.25% 1991-
Initially applied to around
one-half of turnover. Now
extended to 80 per cent of
turnover.
British Gas
RPI-2%
RPI-5%
Excludes input costs from North
Sea which can be passed through
to the consumer; applies to
domestic market only.
British Airports
Authority (BAA)
Maximum annual
revenue per passenger
Duty free shops franchised.
Water
RPI + k
“k” varies for each company and
reflects agreed future capital
investment programmes, eg to
improve water quality. Allowed to
pass through costs of complying
with new statutory obligations.
Electricity
Distribution
RPI-X
Allowed to pass through certain
generation costs (the “y” factor).
The initial value of X has been set
at zero for all the regional
electricity companies.
Scottish Electricity
Companies
RPI-X
1986-92
1992-
+ y
Generation, transmission and
distribution have separate “X”
factors.
Table
1
MAJOR UK PRIVATISATIONS
Sales of
holdings
British
Petroleum
National
Enterprise
Board
investments
British
Aerospace
Cable and Wireless
Amersham International
National
Freight
Corporation
' Britoil
British
Rail Hotels
Associated
British
Ports
British
Leyland
(Rover)
British
Telecom (BT)
Enterprise
Oil
Sealink
British
Shipbuilders
and
. naval dockyards
National
Bus Company
British
Gas
Rolls Royce
British
Airports
Authority
British
Airways
Royal Ordnance Factories
British
Steel
Water
Electricity
distribution
Electricity
generation
Note:
* planned.
Dates
government's
in
various
dates
various
dates
various
1987
1980 to 1986
1981 & 1984
1981, 1983 & 1985
1982
1982
1982 & 1985
1983
1983 & 1984
1984 to 1982
dates
1984 & 1991
1984
1984
from
from
first
1979 to
issue
1985
1986
1986
1987
1987
1987
1987
1988 & 1989
1989 & 1990
1990
1991
Table
2
PRIVATISATION
(fbn.)
PROCEEDS
Proceeds
Year
1979180
1980/81
1981182
1982/83
1983184
1984185
1985186
1986187
1987/88
1988189
1989/90
1990/91
1991192
Notes:
* planned.
Figures
rounded
to
0.4
0.2
0.5
0.5
1.1
2.1
2.7
4.5
5.1
7.1
4.2
5.3
5.5*
'
one decimal
Sources:
Cmnd. 1021 (1990);
and Budset Report,
1991-92,
place.
H.M. Treasury,
Financial
March 1991, HMSO, Table
Statement
5.1.
t
‘i:
a- .-
SO
2
w
4
@
CI
e
2
3
2
E
2
52
0 2.=
v=
D
-Q
WE
=#p:
02 -c2
z
z
3
r;
5:
‘=
.I
q
v
0
“.
u-l
94
8
s
m
ri
9
G
8
22
z
x
*
c
E
z!
LW
zg
22cd
a*
Table 4
PERFORMANCE
Year
Gross Trading Surplus
fbn
1979/80
1980/81
1981/82
1982/83
1983/84
1984/85
1985/86
1986/87
OF NATIONALISED
1.1
1.5
2.1
2.7
2.7
3.1
3.9
4.5
%GDP
0.5
0.6
0.8
1.0
0.9
0.9
1.1
1.2
INDUSTRIES
Labour Productivity
(annual O/ochange)
Nationalised
Industries
Whole
Economy
0.1
-0.5
6.5
2.4
7.2
6.0
9.6
6.2
0.7
-3.8
3.5
4.0
4.0
2.9
1.1
3.6
Manufacturing
0.9
-5.3
6.9
6.4
8.3
4.8
2.4
4.8
Source: Treasury, Economic Propress ReDort, No. 193, December 1987, p 5.
SUMMARY
OF THE YORK RESEARCH
Did Performance
RESULTS
Improve as Expected?
Performance
Measure
Organisation
Employment
Function
Labour
Productivity
Total Factor
Productivity
Financial
Ratios
Royal Mint
Confirmed
Confirmed
Confirmed
WA
London Transport
(1970 change)
Not confirmed
Not confirmed
Confirmed
Not confirmed
London Transport
(1984 change)
Mainly confirmed
Confirmed
Confirmed
Confirmed
British
Confirmed
Confirmed
Confirmed
Confirmed
British Aerospace
(nationalisation)
Mainly confirmed
Confirmed
Unclear
Not confirmed
British Aerospace
(privatisation)
Confirmed
Confirmed
Unclear
Confirmed
National
Confirmed
Confirmed
Confirmed
Confirmed
Not confirmed
Confirmed
Unclear
Confirmed
Post Office
Telecommunications
Mainly confirmed
Confirmed
Unclear
Unclear
HMSO
Confirmed
Unclear
Not confirmed
Confirmed
Royal Ordnance Factories
Not confirmed
Not confirmed
Unclear
Confirmed
Rolls Royce
Not confirmed
Not confirmed
Not confirmed
Not confirmed
Airways
Freight
Post Office
Postal
Notes:
N/A = not available
For financial ratios, “confirmed” applies to these cases where 40% or more of the results
supported the central hypothesis.
The research from which these results were derived was funded by the ESRC as part of its
Management in Government Initiative (project number E09250006).
For further details of the results see Parker and Hartley
(1991) and Parker, Hartley and Martin, (1991).
(1991), Hartley,
Parker and Martin