Privatising the UK’s nationalised industries in the1980s

The initiative

The government decided to begin a programme of privatisation, transferring nationalised entities from the public sector into private ownership and operation.

Despite the fact that its 1979 election manifesto promised only to “sell back to private ownership the recently nationalised aerospace and shipbuilding concerns”, the Conservative government of 1979-1983 “did privatise several other assets as well as British Aerospace (BAe), including the nuclear research company Amersham International and half of Cable and Wireless”. [2]

When the Tories were re-elected in 1983, the programme was stepped up and more state-owned businesses were privatised, including major utilities such as British Telecom (1984) and British Aerospace (1986), and organisation such as Rolls-Royce and British Airways (both 1987).

The objectives of privatisation were to:

• Make the privatised firms more efficient.

Increase labour productivity and proper regulation of the industries.

Increase share ownership in society.

The challenge

In July 1945, after the Second World War had ended, a Labour Government was elected and Clement Attlee became prime minister. A programme of nationalisation began. “This resulted in state ownership of the major utilities, heavy industries and the transport industries, notably the railways. The ‘post-war consensus' between the political parties supporting state involvement in industry remained until the 1970s.” [1]

When Margaret Thatcher's Conservatives won the 1979 general election, nationalised industries represented 10% of the economy and 14% of capital investment. After the recent ‘winter of discontent', the Conservatives were concerned that strong trade unions and public ownership were hampering productivity and profitability.

The public impact

By the time Margaret Thatcher was ousted from office in 1990, more than 40 UK state-owned businesses employing 600,000 workers had been privatised. “Over GBP60 billion of state assets were sold, and the share of employment accounted for by nationalised industries fell from 9% to under 2%." [3]

There was a rise in shareholding in the UK. According to Kenneth Baker, a government minister at the time. “This changed popular perceptions of the accessibility of share ownership: ‘When we came into office, there were about three million people who owned shares in Britain. By the end of the Thatcher years, there were 12 to 15 million shareholders'.” [4] It is thought that the figure in 2015 was roughly 12 million.

The impact can also be measured by looking specifically at the privatisations of major companies such as British Telecom (BT). "The story of the BT privatisation, and the subsequent impact on British Gas privatisation, also highlights one other factor in the policy success - that of building an external consensus and bv perception of what would be acceptable, if not highly desired, policy in this area.” [5]

Stakeholder engagement

The main internal stakeholders were the Conservative government, particularly the Department of Trade and Industry (DTI).

The main external stakeholders were those who became shareholders in the privatised companies:

• Employees, who were given the opportunity to becomes stakeholders by buying shares in newly privatised businesses - “in the privatisation of BT in 1984, up to 10% of shares were reserved for employees and 96% of employees bought shares”. [6]
• The general public also engaged with privatisation, buying shares in much greater numbers than before.

However, the trade unions and the Labour party were strongly opposed to privatisation as were the Liberals and the Social Democratic Party (SDP).

The management of the nationalised industries were not always engaged either. “While the government wanted to put as high a value on the company as was consistent with a successful share sale, the management (with their own merchant banking advisers) had a personal interest in talking down the value to ensure maximum upside for their share options. Indeed, in the later electricity privatisations, John Wakeham had to fire two chairmen due to their obstructive tactics.” [7]

Political commitment

Margaret Thatcher strongly supported the initiative, as did the majority of her government, and considered it as a fundamental to improve the economic performance. “As she explained in her memoirs, [she] saw privatisation as ‘fundamental to improving Britain's economic performance'. But it also chimed with her political ideology.” [8]

This level of commitment was reflected in the concessions the government made in order to make the nationalised industries more saleable. "The government wrote off all the debts of the water companies before privatisation, worth over GBP5 billion … The government also offered the companies for sale at a substantial discount, which has been assessed as equal to 22% of the undertakings' market value, measured as the difference between the issue price of the water companies' shares and the share price after the first week of trading." [9]

The strength of the government's commitment was essentially ideological. "Although empirical evidence for the efficiency benefits of private versus public ownership were inconclusive, not least because the public sector often carried out some non-commercial activities, the government remained steadfast in its determination that privatisation would improve economic performance.” [10]

Public confidence

Opinion polls from the time demonstrate that public opinion about Thatcher's government was polarised.  “On average during Mrs Thatcher's premiership, 40% of the public were satisfied with the way she was doing her job while 54% were dissatisfied. But at the peak of her popularity (in June 1982, after the recapture of the Falklands), 59% were satisfied with her performance, while her rating fell as low as 20% satisfied (in March 1990, the month in which there were riots in London against the introduction of the ‘poll tax').” [11]

The degree of polarisation is demonstrated by a 1989 Ipsos MORI poll which showed that 18% of British people considered privatisation the worst thing that Thatcher's government had done, in competition with widely unpopular policies such as the poll tax and cuts to the NHS.

It is difficult to draw conclusions about public confidence in privatisation from these statistics or from the increase in share owning, which was effectively a gift of money to citizens. However, despite this divided public opinion, the Conservatives won three consecutive general elections under Thatcher's leadership.

Clarity of objectives

Strength of evidence

Feasibility

There was no measurement of the constraints that might arise while implementing the plan (see Strength of evidence above). “In the words of one Treasury official, ‘it was not that privatisation was not desirable, but that we were not sure that it was possible'.” [13]

However, the legal feasibility was addressed by enabling legislation, such as the Telecommunications Act 1984, which set up the regulatory framework for the new telecommunications market, creating the regulator, the Office of Telecommunications (Oftel, later Ofcom), and setting out its powers. The short-term financial feasibility was implicit in the sale of the nationalised entities, which generated a large amount of money.

Management

There were two main aspects to the management of privatisation, that which took place before privatisation, which principally involved the civil service and the City, and the post-privatisation regulation. “While the Treasury oversaw the process, there was a premium on rapid ministerial decision-making and mechanisms were developed to drive delivery including the establishment of the E(DL) Cabinet Sub-Committee. As the programme developed, there was a good degree of continuity among the ministers involved in different roles, among the civil servants ... and among the advisers ... Although civil servants were outside their comfort zone, the perception that privatisation was an exciting policy area to work on, with regular ministerial exposure, attracted in high calibre people.”

Post-privatisation, “the system was to be administered by professional regulators, drawn from outside the civil service, independent of government, and supported by small offices of experts”. [14] For the water industry, “The privatisation process created three regulators: the Drinking Water Inspectorate monitoring water quality; the National Rivers Authority (now the Environment Agency) for monitoring river and environmental pollution; and OFWAT, to set the price regime that companies follow." [15]

Alignment

The main actors in the privatisation process collaborated effectively:

• The government and the civil servants (see Management above).
• The investment banks, law firms and civil servants, during the flotation process.
• The regulators and the government after privatisation.
• The investors who supported the flotations, including many members of the public, although they were in any case accorded a guaranteed initial profit.

There was no cooperation between the government and either the opposition parties or the trade unions (see Stakeholder engagement above). There was also some degree of resistance from the existing management of the nationalised industries and utilities.

Bibliography

Privatisation, Chris Rhodes, David Hough, Louise Butcher, 20 November 2014, RESEARCH PAPER 14/61, House of Commons Library

Margaret Thatcher (1925-2013): Public opinion trends, 8 April 2013, Ipsos MORI

UK Water privatisation - a briefing, Emanuele Lobina and David Hall, February 2001, Public Services International Research Unit (PSIRU)

Margaret Thatcher: one policy that led to more than 50 companies being sold or privatised, Alistair Osborne, 8 April 2013, The Daily Telegraph

The Thatcher privatisation legacy: not quite what she planned? Mike Toms, May 2013, Oxera

The Privatisation of British Telecom (1984), The Institute for Government