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Privatization: Lessons from the British experience
Privatization: Lessons from the British Experience Ah
N. Miller
P
RWATIZATION’ IS NOT MERELY a domestic issue. It is an integral part of the strategic renaissance which is taking place in many Eastern and Western European countries and in countries on other continents as well.‘+ It has already had a profound impact on the social, political, macroeconomic, and managerial dimensions of governments, government owned enterprises, and newly privatized firms. This impact is certain to increase and become even more widespread as governments further their efforts in this area and as other governments join the privatization movement.7 Worldwide interest in privatization has increased recently for several reasons. These include: 1. the collapse of communism in the former Soviet Union and its Eastern European allies and the emerging governments’ determination to transform state owned enterprises into private sector entities ; 2. the desire of a growing number of political leaders and their constituents to reduce the size and scope of local and national government; 3. the problem of how governments can continue to provide adequate public services given the reluctance of many citizens to fund regular tax increases ; 4. the commitment of some governments to increase public enterprises’ efficiency, productivity, and responsiveness to customer needs; and 5. the desire of many nations to promote free market principles and to establish an enterprise culture. It is likely that other forces, including the need for governments to reduce their debt, promote competition in their nations’ key industries, and encourage entrepreneurial activity, will sustain the keen international interest in privatization through the turn of this century. The literature on privatization is extensive. Since 1986 over 1100 articles on the subject have appeared in journals from various fields. In addition, several books Pergamon 0024-6301(94)00060-3
The privatization programme in the United Kingdom is the oldest and largest endeavour of its kind in the world. This article examines it in detail, beginning with a brief description of the background and criticisms of nationalized industries in the UK. The social, political, macro-economic and managerial reasonsfor and results of privatization’in the UK are then analysed. This analysis includes details of the major privatizations to date, special arrangements made to encourage employees and small investors to become shareholders, the performance of privatized firms, net proceeds received by the governmentfrom the sale of public corporations, and the effect privatization has had on encouraging wider share ownership among the general population. This article also notes the different methods of privatization used in the UK, including trade sales, private placements, public flotations, and employee and/or management buyouts. The typical steps in each stage of the privatization process are then explained. Finally, a model of the privatization process is developed from an examination of the British privatization experience. This model may be useful to governments and their advisors in transforming publicly owned enterprises into privately owned enterprises and to increase understanding of the strategic issues of privatization among academics, business practitioners, consultants, government officials, etc,
have been written about privatization.* Virtually all of this literature can be categorized as either academic (e.g. the use of economic theories to support the concept of privatization), political (e.g. arguments which espouse the idea that smaller government is better), or anecdotal (e.g. descriptions of individual privatizations). At present, the literature lacks a Long Range Planning Vol. 27, No 6, pp. 125-136, 1994 Copyright 0 1994 Elsevier Science Printed in Great Britain. All rights reserved 0024-6301/94 $7.00+.00
comprehensive, detailed description of a single nation’s privatization programme and an analysis of its results. Also lacking is a viable strategic model to guide governments and their advisors (e.g., attorneys, auditors, stockbrokers and underwriters) in transforming government owned enterprises into privately owned enterprises. The privatization programme in the United Kingdom (UK) is the oldest and largest endeavor of its kind in the world. Under the leadership of former Prime Minister Margaret Thatcher, Britain’s government promised ‘to roll back the frontiers of the State’.g In 1979 privatization became an important element of the British government’s economic strategy of involving the private sector in activities previously carried out by the public sector in order to reduce the size of the latter. The philosophy underlying the government’s privatization programme was explained by Sir Keith Joseph, the UK’s former Secretary of State for Industry: came to office convinced that the structure of the nationalized industries contributed to the national malaise . . . in all too many cases, particularly when the nationalized industry commanded a monopoly, those concerned did not see themselves as living under the healthy necessity of satisfying the customer in order to survive; they had no incentive to cut costs to beat competitors; they were free of the risk of liquidation . . . Such was our diagnosis; what was our aim? Our aim is to abate inflation and to create a prospering social market economy-that is, a mainly free enterprise economy (p. l).'O We
Surveys conducted in the UK from Summer 1973 to Autumn 1980 by Market and Opinion Research International show that the public attitude toward privatization supported the Thatcher initiative (see Figure 1). Even today the British Labour Party maintains that it would not renationalize the companies which were privatized by the Conservative Party since 1979.” Privatization is, of course, only one element of the British government’s policy of reducing the size of the state-owned sector of the economy. The contracting out of certain public services to firms and the sale of public housing units to tenants12 are other elements of this policy. Discussion of these is, however, beyond the scope of this article. The author examines the British privatization programme in detail, beginning with a brief discussion of the background and criticisms of nationalized industries in the UK (including their total return on capital invested, their record on prices, their productivity and manpower costs, and customer Privatization:
Lessons from the British Experience
support nationalization
2;;;::
‘_I_ :::,:r,:: .,:,& i’;iZ$ _.__ ,’ ’
FIGURE 1. Public support for privatization vqsy nationalizatioti in the United Ki‘ngjdgm,1973iT980::.
satisfaction with their services and products) and analyses the social, political, macro-economic and managerial reasons for and results of privatization. This analysis includes details of the major privatizations to date, special arrangements made to encourage employees and small investors to become shareholders, the performance of privatized firms (e.g. profit performance before and after privatization), net proceeds received by the government from the sale of public corporations, and the effect privatization has had on encouraging wider share ownership among the general population in order to give people a direct stake in the success of British industry. The research also notes the different methods of privatization used in the UK and explains the typical steps in each stage of the privatization process. Finally, a universal strategic model of the privatization process is developed from this examination of the British privatization experi-
ence. This model may be used to guide governments and their advisors in transforming publicly owned enterprises into privately owned enterprises and to increase understanding of the strategic issues of privatization among academics, business practitioners, consultants, government officials, etc.
Nationalized Industries Although some state owned industries had existed in the UK for many years, shortly after World War II ended the British government initiated a widespread programme of nationalization.‘3 Founded on the tenets of socialism, nationalization’s goals were to promote greater equality of income, increase the distribution of wealth, and create prosperity throughout the nation. (Interestingly, these goals are similar to the goals of the UK’s privatization programme.) According to Morrison,14 the benefits of nationalization included: 2. a decrease in the price of goods and services provided, 2. an increase in the quality of customer service, and 3. higher efficiency and productivity in firms which were nationalized. He and others believed that employees of state owned enterprises would work for the public good and that their decisions and behaviors would reflect what was best for the nation. It was assumed that by appropriating large businesses (many of which were founded by the Victorian entrepreneurs) the state would be able to apply the powers of socialism to redress the abuses which occurred under capitalism. The supporters of nationalization had such great faith in the enterprises they created that many were given monopoly power. It was thought that the interest of the public was best served by having a single supplier. Competition was considered costly and wasteful to consumers and taxpayers. When Margaret Thatcher and her Conservative party came to power in 1979, nationalized industries were a major factor in the UK’s economy and its performance. The industries accounted for about 10 per cent each of the UK’s Gross Domestic Product and Retail Price Index and for about 14 per cent of total investment in the economy. They employed around 1.5 million people and dominated the communications, energy, ship building, steel, and transportation sectors of the economy.15 The nationalized industries’ actions affected virtually every citizen and business in the UK. The post war nationalization programme proved to be a disappointing failure which severely damaged the
British economy. From the mid-1960s through 1989, for example, nationalized industries’ total return on capital invested was always significantly less than the private sectors. The industries’ total return on capital was close to zero from the early 1970s. Historical comparisons show that the prices of goods and services provided by nationalized industries regularly increased faster than the Retail Price Index. During the years 1970-1983, employment costs per employee in the large nationalized industries increased faster than the national average, without equivalent increases in productivity. For example, employment costs per employee in the gas, coal, electricity, and telecommunications industries increased 38, 21, 18, and 18 per cent respectively, more than the national average. Contributing to this was the fact that trade unions which represented employees in public sector monopolies were very successful in securing significant pay raises for their members, although worker productivity barely increased.15-17 Customer satisfaction with the services and products of nationalized industries was often low, as a survey conducted in 1981 by the National Consumer Council unveiled. The survey found that customers were discontent with rising prices and declining standards and that their expectations were not being met.15 Anecdotes about the poor service provided by nationalized industries are ubiquitous. For example, before British Telecom was privatized in 1984, it is said that many customers had to wait up to two years to have a telephone installed in their residence.l’ Many factors are believed to cause the poor performance of nationalized industries.‘3*‘5~‘8 Firstly, because social and commercial objectives are often intertwined in firms which have been nationalized, managers find it difficult to prioritize goals and develop strategies to attain them. Secondly, managers of nationalized industries face regular interference from government bureaucrats and politicians. Thirdly, nationalized industries’ financing is constrained by the government which, at times, must subordinate the needs of individual state industries to macro-economic requirements. Thus, the needs of state owned industries-which may be commercially justifiable-must always be compared to the needs of all other public programmes. Finally, employees of nationalized industries know that because their firms’ financial position is underwritten by the State, survival is not dependent on success. Long Range Planning Vol. 27
December 1994
Privatization
in the UK
Whatever the causes of poor performance in the nationalized industries, the long-term results of the nationalization programme in the UK are quite clear: lack of competition in important segments of the economy, limited choices for consumers, higher prices for goods and services sold by nationalized firms (which fueled inflation nationwide), customer dissatisfaction, low employee morale and productivity, political manoeuvering, management indecision, and economic stagnation. To deal with the poor performance of nationalized industries both the Labour and Conservative Parties have, over the years, imposed standards and controls to provide an environment similar to a free market. Although these attempts sometimes were successful, they did not yield long-term solutions. Attempting to control the industries’ behaviour by imposing surrogate market forces simply does not deal with the fundamental problem of State ownership. The privatization programme which was initiated by the Thatcher government was a direct strategy to deal with the poor performance of the nationalized firms and with the social, political, macro-economic, and managerial problems associated with them. For the Thatcher government, privatization involved more than the transfer of state owned businesses to the private sector. It was part of an overall plan to create a truly free market economy in the UK. The reasons for and goals of the privatization programme were to : 2. give consumers more choices, better service, and lower prices ; 2. encourage more equal distribution of wealth by promoting greater ownership of corporate stock among employees and the general population; 3. decrease government control of business and lessen political interference in the management decision making process ; 4. lower the national government’s debt; 5. generate new tax revenues from privatized firms ; 6. free government funds to be used in sectors of the economy other than state owned businesses ; 7. reduce the size of government; 8. benefit the economy through higher returns on capital in the privatized industries ; 9. stimulate managers to be more responsive to customer demands and to be more innovative in developing new products and services ; 10. give employee shareholders a greater stake in their organizations, resulting in increased motivation and productivity; 12. enable managers to set organizational goals which are independent of the government’s goals ; and Privatization : Lessons from the British Experience
12. allow competition to spur the efforts of managers and employees. Privatization has long been advocated as a means of achieving some of the aforementioned goals. In The Wealth of Nations,lg for example, Adam Smith noted that in all the great monarchies of Europe, there are still many large tracts of land which belong to the crown. . . Sale of the crown lands would produce a very large sum of money, which . . . would deliver greater revenue than any which those lands have ever afforded to the crown . . When the crown lands had become private property, they would, in the course of a few years, become well improved and well cultivated. (p. 223)
noted that privatization’s More recently, Moore” goals are to improve the performance of privatized firms, broaden ownership, and place more emphasis on the government’s role as regulator rather than the owner of industry. In 1991, Goodman and Loveman” suggested that privatization increases the efficiency and quality of remaining government activities, reduces taxes, and decreases the size of government. Finally, King concluded that privatization positively affects employee attitudes and motivation.13
Net Proceeds Received by the Government The privatization programme in the UK began rather modestly in October 1979 with the sale of five per cent of the shares of British Petroleum (a major oil company). When Prime Minister Thatcher left office in November 1990 almost half the stock of public assets (by value) had been sold to the private sector. Under Prime Minister John Major the privatization programme has continued, with a total of about 60 per cent of state owned businesses having now been privatized. At the end of 1991, sales from the privatization programme in the UK amounted to about E29 billion.15*” Future major privatizations will include British Coal and Northern Ireland Electricity Service, and possibly British Rail and the British Post Cffice~‘5~22~23 The privatizations which have been completed to date have involved : Z. the sale of all of a company’s shares at one offering, 2. the sale of all of a company’s shares at several separate offerings (which usually took place over a period of years), 3. the sale of some of a company’s shares (with the government retaining a residual shareholding), and 4. the sale of either all or part of a company’s subsidiary or of a major asset owned by the company. Table 1 provides information
about the industries involved the sale dates, the percentage of shares retained by the government, and the net proceeds from the major privatizations which have taken place in the UKbetween 1979-1991. It is clear that businesses from virtually all industries (e.g. aerospace, automobile manufacturing, electricity generation, natural gas supply, oil exploration and production, and water supply) have been privatized. The proceeds from the sale of these firms range from E4 million-E5,138 million. Total proceeds now exceed E29 billion.” In most cases the government has chosen not to retain any shareholdings (except, in some cases, for one special share) in the companies it has privatized. The government solicits professional advice from its financial advisers and considers the needs of taxpayers and investors in determining the price of shares for each business it privatizes. The task of setting an appropriate price is complicated by the fact that the shares of state owned companies have never been traded before. Often, the share price is set low in order to encourage sales. Although selling shares at a lower than optimum price has been criticized because this undervalues the worth of the companies and decreases the government’s revenue (which may be used to reduce its debt), these are incidental to the privatization programme’s primary goals of generating new tax revenues from privatized firms, freeing government funds so they can be used in sectors of the economy other than state owned businesses, and reducing the size of government.15 The one-time positive effect on the government’s treasury of selling nationalized industries for their full value is less important than achieving these goals. The government also maintains that selling shares in companies for only their full value is a short-sighted policy because only companies which are profitable could be sold. When a monopoly in a particular industry is privatized, regulatory arrangements are made by the government to prevent extreme increases in prices and to ensure good customer service. For example, when British Telecom (BT) was sold to the private sector in 1984, a government regulatory agency (the Office of Telecommunications-OFTEL) was established to prevent BT from exploiting its monopoly position in the telecommunications industry. Furthermore, the government licensed Mercury Communications Ltd., a new telecommunications company, to compete with BT.” Seven years after BT was privatized, a study by the International Telecomm User Group found that despite competition from Mercury, BT still held a 95
per cent market share.24 It was also discovered that BT’s customers pay significantly more for phone service than their American counterparts. As a result, the UK government is now planning to license dozens of new telecommunications companies to offer local and long-distance phone service.25 The government anticipates that its latest strategy will greatly spur competition and thus lessen BT’s control of the market.
Perjformance of Privatized Firms The figures in Table 2 (from a 1988 study conducted by HM Treasury) show that after privatization, pre-tax profits in 10 out of 13 large formerly state-owned companies increased regularly. The profits of most of the companies which have been in the private sector the longest (e.g., British Aerospace, Cable and Wireless, Amersham International, and National Freight Consortium) have increased significantly. Associated British Ports, after a loss of E7 million due to the effects of a major coal strike the year following its privatization, more than doubled its profits in two years. British Telecom saw its profits more than double three years after it was sold by the government. On the other hand, Britoil, Enterprise Oil, and Jaguar all had downturns in their profits after being privatized. In fact, by 1989 Jaguar was so strapped for cash that in order to survive, its management and stockholders agreed to allow the firm to be acquired by the Ford Motor Company. Of course, profitability is not the only measure of the performance of firms which have been privatized in the UK. Newly privatized firms’ responsiveness to consumers must be evaluated as well. The evidence in this area is mostly anecdotal but suggests that the firms’ responsiveness to consumers has, for the most part, been positive. For example, British Telecom has increased its range of services and products. BT has also responded to customer complaints and requests for telephone installations more quickly. British Airways has changed its reputation from being a poor service provider to being one of the world’s best airlines. The National Freight Company opened several major new distribution centres to better service its customers. The British experience with privatization seems to show that exposing industries to the financial disciplines of the marketplace generally creates better managed companies that produce higher quality goods and services and provide enhanced value to their customers. As noted earlier, surveys conducted in the UK between 1973 and 1980 consistently revealed Long Range Planning Vol. 27
December 1994
TABLE
1.
Sale dates, shares retained by government, and net proceeds of major, privatizations in the United
Kingdom. Industry
Company
1.
British Petroleum
Oil
Sale Date(s)
1 O/79,6/81,
Residual Government Shareholding (%) 10
Net Proceeds (sm) 4,684
g/83,1 O/87 2.
British Aerospace
Aerospace
2/81,5/85
0
390
3.
British Sugar Corporation
Sugar Refining
7181
0
44
4.
Cable and Wireless
0’
1,021
5.
Amersham international
International
1 O/81,12/83.
Telecommunications
12185
International
2182
0’
64
Radiochemicals 6. 7.
National Freight Company
Freight Carrier
2182
0
5
Britoil
Oil Exploration and
1 l/82,8/85
0’
1,053
Production 8.
Associated British Ports
Seaports
2183.4184
0
97
9.
International Aeradio (subsidiary
Aviation Communications
3183
0
60
Hotel
3183
0
45
Oil
5184
0
82
Oil Exploration
6184
0
384
of British Airways) 10.
British Rail Hotels (subsidiary of British Rail)
11.
British Gas Corporation (BGC), Onshore Oil Assets (Wytch Farm Oil Field) (subsidiary of RGC)
12.
Enterprise Oil
and Production 13.
Sealink (subsidiary of British Rail)
Ferry Service
7184
0’
40
14.
Jaguar (subsidiary of British
Automobile Manufacturing
7184
0’
297
British Telecom
UKTelecommunications
11/84.12/91,7/93
1.1’
12,529
British Shipbuilders (BS)
Shipbuilding and
2f84.5185.6188
0
54
War Ships, Shiprepair Yards,
Shiprepairers
Helicopter Transportation
9186
0
14
Leyland 15. 16.
and 5 Other Companies (subsidiaries of BS) 17.
British Airways Helicopters (subsidiary of British Airways)
18.
British Gas
Natural Gas Supply
12/86,7/90
0’
5,286
19.
British Airways
International Air
l/87
0’
854
4187
0
187
5187
0’
1,029
7187
0’
1,275
7186
0
36
Transportation 20.
Royal Ordnance
Artillery, Ammunition, Explosives, Ordnance, Small Arms, &Rocket Motor Manufacturing
21.
Rolls- Royce
Airplane Engine Manufacturing
22.
British Airports Authority
International Airport Owners and Operators
23
National Bus Company
BusTransportation in England and Wales
Privatization:
Lessons from the British Experience
24.
Sale Date(s)
Industry
Company
Unipart (subsidiary of Rover Group)
Residual Government Shareholding (%)
Net Proceeds (sm)
1 I87
0
52
Bus Manufacturing
l/87
0
4
Parts and Accessories for Rover Vehicles
25.
Leyland Bus (subsidiary of Rover Group)
26.
lstel (subsidiary of Rover Group)
Information Technology
6187
0
48
27.
Leyland Truck & Freight Rover
Truck Van Manufacturing
4187
40 (retained by
NA
Motor Vehicle
8188
0
Rover Group)
(subsidiary of Rover Group) 28.
Rover Group
150
Manufacturing 29.
British Steel
Steel Manufacturing
12188
0’
2,425
30.
General Practice Finance
Loans to Pysiciansfor
3189
0
67
31.
Corporation
Medical Equipment
International Computers Ltd.
Computer Manufacturing
12179
75 (retained by BTG)
NA
Specialized Engineering
6180
0
NA
NA
(subsidiary of British Technology Group, BTG) 32.
Fairey (subsidiary of BTG)
Technology 33.
Ferranti (subsidiary of BTG)
Electrical Engineering
7180
50 (retained by BTG)
34.
lnmos (subsidiary of BTG)
Silicon Chip Manufacturing
8184
25 (retained by BTG)
NA
35.
Water Holding Companies
Water Supply &
12189
0
3,395
(Anglian Water, Northumbrian
Sewerage in the UK
12190
NA
9,648
Water Group, North West Water Group, Severn Trent, Southern Water, South West Water, Thames Water, Welsh Water, Wessex Water, and Yorkshire Water) Central Electricity Generating
Electricity Generation &
Board
Transmission in the UK
37.
North Sea Oil Licenses
Oil Fields
1980-l 985
NA
349
38.
Miscellaneous*
2
1979-l 991
NA
568
36.
(through 1993) ‘The government retained one special (or ‘golden’) share in the company.ln order for the government to be able to control the future ownership of a newly privatized company so it can protect national interest or guarantee the company’s independence during its first years of operation, the government may retain one special share. The special share does not, however, allow the government to intervene in the company’s daily operations. ‘Includes the sale of Professional and Executive Recruitment, sales by New Towns Development Corporation, sales of oil and commodity stockpiles, Forestry Commission Land, and Crown Agents Holding Board property. Sources: Guide to the UK Privatisation Programme, 1993; Mini Prospectus: The Water Share Offers, 1989; Newman, 1986; Privatisation in the UK, 1989.
widespread support among the population for the government’s privatization programme. Since then support for privatization has declined somewhat. Contributing to the decline is the public’s perception that privatization has not always increased competition and brought lower prices. For example, in the case of British Gas, accusations of profiteering have brought
censure
from its regulatory
body.
Telephone
users
have also expressed dissatisfaction with high charges by British Telecom, despite its phenomenal profits. Nonetheless, there is still considerable support for privatization. Recently, for example, the British government revealed its plan ‘to sell some or all of its remaining 21.8 per cent, E5.35 billion stake in British Long Range Planning Vol. 27
December
1994
TABLE2, Rti-tax profit (loss) of 13 privdized companies in the UK Company (Year of Privatization)
1981 (Em)
British Aerospace (1981) Cable and Wireless (1981) Amersham International (1982) National Freight Company (1982) Britoil (1982) Associated British Ports (1983) Enterprise Oil (1984) Jaguar (1984) British Telecom (1984) British Gas (1986) British Airways (1987) Rolls-Royce (1987) British Airports ’ ’
Effects of a Nine month
Source:
Authority
(1987)
1982
1983
1984
1985
1986
1987
84.7 89.2 8.5 10.1
82.3 156.7 11.7 11.8
120.2 190.1 13.7 16.9
150.5 245.2 17.1 27.2
182.2 287.3 17.6 37.0
161 340.5 22.1 47.4
236 356.1 25.3 67.1
423.1 (10.3)
486.3 5.5
(31.7) 570
9.6 936 430
550.4 14.5 83.2’ 50.0 1,031 803
730.9 17.2 111.1 121.3 1,480 712 191 81
134.0 29.3 2.9 120.8 1,810 782 195 120
403.9 38.1 72.5 97.0 2,067 1,058 162 156
47.5 2,292 1,008 228 168
70.6 64.1 4.8 4.3
T141) _
(108) (93)
42
43
(1::) 30
650.4 (7.0)’ 138.5 91.5 990 909 185 26 48
72
84
90
1988
_
136
major coal strike. figure.
Privatisation
in the UK, 1989.
Telecom . . . News of the sale . . . was greeted by London financial analysts as likely to prove an even bigger hit with investors than the two previous government sales of BT stock, in 1984 and 1991’.26 Even the Labour Party, although not strongly in favour of privatization, accepts that undoing it would cause greater problems than leaving it alone. It has, therefore, dropped renationalization from its manifesto.”
Encouraging
Wider Share Ownership
A primary goal of the UK’s privatization programme is to distribute wealth more equally among the population by increasingthe number of people who own stock in British businesses. Owning stock gives an employee a direct stake in the success of his or her company, generally increases his or her motivation, and removes the distinction between owners and workers. Non-employee shareholders are more likely to be concerned about how well the firms they have invested in are operated. Special arrangements are made to encourage employees to become shareholders when a majority of the shares in the firm they work for are sold by a public flotation on the stock exchange. These special arrangements include : Z. an offer of a limited number of free shares, 2. an offer of a limited number of shares provided free when an employee purchases a certain number of shares, 3. a ten per cent discount on the Privatization : Lessons from the British Experience
purchase of a limited number of shares, and 4. giving employees priority over other investors to purchase shares. Over the years several employee and/or management buyouts (e.g. National Freight Company, Unipart, Leyland Bus, Istel, and the War Shipbuilding Division of British Shipbuilders) have also increased the number of employee shareholders in the UK. For the most part, the special arrangements have been quite successful at encouraging employees to purchase stock in their firms. Table 3 shows the percentage of employees who participated in share purchase programmes when the companies they worked for were privatized. In 1989, about 750,000 employees purchased shares in their newly privatized firms.15 The special arrangements made by the government to encourage stock purchases by small investors during public flotations include : I. extensive marketing campaigns (including TV and newspaper advertising) to promote awareness of the sale among the general population, 2. wide distribution of information regarding the sale (e.g., information sheets, registration cards, mini-prospectuses, and applications), 3. priority over large investors to purchase shares when an offer is oversubscribed, 4. allowing payment for shares to be made in installments, 5. awarding free bonus shares when an investor holds the shares he or she has purchased for a given number of years, and 6.
TABLE 3. Employee participation
in UK share
purchase programmes. Maximum
Company
Value Per
Employee of Free or Matching
Share
Percent of Eigible Employees Who Purchased
Offers and Discounts
Shares
British Petroleum
f 500.00
50
British Aerospace
f499.20
74
Cable and Wireless
f300.00
99
Amersham
f46.70
99
f 200 interest
36
National
International Freight
free loan for share
Company
purchase f457.95
72
f311.36
90
Enterprise Oil
none
71
Jaguar
none
19
British Telecom
f478.40’
96
British Gas
f649.45’
99
British Airways
f595.00’
90
Rolls-Royce
f 595.30’
96
British Airports Authority
f502.25
91
British Steel
f644.00
94
Britoil Associated
British Ports
’ Includes a 10 per cent discount on shares applied for up to a maximum value of f2.000. Source: Privatisation in the UK, 1989.
providing investors with vouchers to help them pay for services they purchase from a newly privatized firm (e.g. some investors in British Telecom were issued vouchers to help pay their phone bills). In addition, customers of the businesses being privatized may be given special incentives to buy shares. For example, certain customers of each of the ten Water Service Companies which were privatized in 1989 were eligible for the following special incentives :27 1. preference over other members of the general public in the allocation of shares if demand for the shares was heavy and 2. the choice of either receiving free bonus shares or paying a lower price for shares purchased. These special arrangements have been very successful at encouraging small investors to buy shares in privatized businesses. At the end of the first ten years of the privatization programme, small investor shareownership had tripled. A study by the London Stock Exchange found that the number of people in the UK who own shares increased from two million in 1980 to 11 million in 1991.'lToday, more than 20 per cent of the adult population owns shares in privatized companies. Many of these people had never owned shares before the privatization programme began.15
Methods of Privatization Principally, four methods have been used to privatize state owned businesses in the UK : 3. public flotations on the Stock Exchange, either by a fixed price offer or by a tender offer with a minimum price ; 2. employee and/or management buyouts ; 3. private placements with a group of investors ; and 4. trade sales, in which a company is sold to a single firm or to a group of firms. Of the major privatizations which have occurred in the UK to date, about 40.4 per cent have been public flotations, 22.8 per cent employee and/or management buyouts, 7.0 per cent private placements, and 29.8 per cent trade sales. Together, public flotations and employee and/or management buyouts comprise more than 63 per cent of all privatizations. Obviously, these methods are used frequently in order to widen share ownership and, thereby, encourage more equal distribution of wealth. On the other hand, private sector placements (which do little to widen share ownership) are seldom used. Trade sales may indirectly widen share ownership when the company being privatized is sold to a publicly owned firm. Although there is no single correct method to use when privatizing a state owned business, it is necessary to select the method which best accomplishes theprivatization programme’s goals, as the effects of privatization are greatly influenced by the methods used to privatize.”
Steps in the Privatization
Process
The government of the UK has spent more than a dozen years privatizing nationalized industries valued at over E29 billion. This has given it extensive experience in developing a process that works extraordinarily well. The process itself is intricate and lengthy, taking up to several years to complete. Its objectives include not only selling state owned businesses, but increasing each business’ efficiency through competition, encouraging more equal distribution of wealth, and strengthening the UK’s economy and its position in international markets. The process has been used to privatize different size businesses from diverse industries. An examination of the process reveals that many of its individual steps may have universal value. In a world where no less than 35 countries are now actively involved in selling off state owned businesses,4 it is likely that the British process may serve as a strategic model for at least Long Range Planning Vol.
27
December 1994
some fledgling privatization programmes. Presented below is an outline of the privatization process used in the UK. Hopefully, it will be useful to some governments and their advisors in helping transform their state owned businesses into private enterprises. It may also be helpful to academics, business practitioners, consultants and others who wish to increase their understanding of the mechanics of privatization. The privatization process used in the UK involves twelve steps :
8. When the company has been strengthened
as much as possible (e.g., it has a commercially oriented managementteaminplace, asound debt/equityratio, itsmonopolypowerhas beenreduced, etc.), advisers (merchant bank brokers, solicitors, etc.) are selected (or reselected) for the sale.
9.
1. A study is carried out by the government
and/or its advisors to determine the feasibility of privatizating a particular publicly owned business.
on the study, a report is presented to the appropriate government officials describing the options available for and prerequisites of the proposed privatization.
(a) The
government decides how many shares of the business to sell, whether to underwrite the sale, where to sell, and how to fit the sale in with other sales of nationalized businesses.
(4
Produce a prospectus
for the sale.
(cl
Initiate an advertising business’s image.
campaign
2. Based
3. Government
officials decide whether or not to proceed with the proposed privatization. If their decision is affirmative, they determine which method of privatization to use. (For this example we will assume that 100 per cent of the business will be sold in a single, fixed price public flotation on the stock exchange.)
4. The
Merchant bank advisors are selected provide advice to the government on the sale.
5.
(4
to
Prepare the business for sale by strengthening its management team and by introducing private sector methods and attitudes.
(b) Prepare
business
legislation to sell the nationalized and to create a private corporation.
(c) Consider
what needs to be done to regulate the business if it is a monopoly. Prepare approestablish a government priate legislation, regulatory agency, etc.
6.
Determine if the business has improved financially, as a result of the measures taken. If necessary, make additional changes to strengthen its position.
(b) Pass
the legislation required, giving the government the power to sell and regulate the business and to create a private corporation.
7. Review
the business’ balance sheet, income statement, etc. Strengthen these if necessary by taking appropriate management action.
Privatization : Lessons from the British Experience
10.
(4
to build the
Decide on the share price.
(b) Review
all plans for the sale. Make changes necessary.
(4
if
Give the final go-ahead on all plans.
11. Begin the sale on a pre-determined
date.
12. Transfer
of ownership from public to private sector is completed.
The steps in the privatization process outlined above are those actually used by the UK government.15 They can, of course, be modified to meet the needs of different governments. Clearly, the UK model of privaization will not work equally well in all countries. It works best where there is a sophisticated capital market and a large private sector to absorb the state businesses. Since it is a lengthy process, it may not be appropriate for use in Eastern European nations or republics of the former Soviet Union which must privatize thousands of businesses. Some countries which can use the model include France (which recently announced the possible privatization of Renault) ; Denmark, the Netherlands, and Germany (which are planning to privatize their state telephone companies) ; Sweden (whose new non-socialist government is committed to privatization); Italy; Canada; and the United States.26*2g*30 The model should be useful in many other countries as well. Aclaowledgements-This research was funded, in part, by a grant from the First Interstate Bank Institute for Business Leadership, College of Business and Economics, University of Nevada, Las Vegas.
Notes (1) Although privatization usually refers to the total or partial transfer of state owned assets to private ownership, it may also mean contracting with privately owned organizations to supply goods or services previously supplied by government owned organizations.
(2) E. A. Cardoso, Privatization Fever in Latin America,
Challenge, September-October, 35-41
(1991).
(3)
A. Ignatius, Russia Goes Private: It’s Fun, It’s Now, It’s an Ad on N, Al and A10 (1992).
September 23,
(4)
R. Lord, Privatisation-The
(5)
Privatisation in Eastern Europe: Everything Must Go, The Economist, 17 November, 88 (1990).
(6)
S. Tully, Europe Goes Wild Over Privatization, Fortune, 2 March, 6870
(7)
R. Lord, Selling State Trophies, Globalfinance,
Wa//StreetJourna/,
Boom Goes On, MuninationalBusiness,
Autumn, l-7 (1991).
(1987).
March, 36-38 (1991).
(8)
For example, L. K. Finley (Ed.), Public Sector Privatization: Alternative Approaches to Service Delivery, Quorum Books, New York (1989); C. A. Kent, Entiepreneurship andthe Pdvatizing of Government, Quorum Books, New York (1987); K. Newman, The Selling of British Telecom, St. Martin’s Press, New York (1986).
(9)
F. Burink, Entrepreneurship (1987).
andthe
Privatizing of Government,
p. 163, Quorum Books, New York
(10)
K. Newman, The Selling of British Telecom, St. Martin’s Press, New York (1986).
(11)
C. Forman, P. Revzin and T. Carrington, Britons Consider Putting Trust in Labor, Wa//StreetJouma/, April, Al 0 (1992).
(12)
To date, more than 1.25 million housing units have been sold. Sales are to residents who have lived in public housing for a minimum of two years. The sales price is discounted 3@-60 per cent below market value for buyers who do not resell within a specified time period. This programme has allowed the government to divest unprofitable properties, eliminate operating costs, generate income, and make homeowners out of renters.
(13)
L. King, Lessons of Privatization, Long Range Planning 20 (6). 18-22
(1987).
(14)
H. Morrison, Socialization of Transport, Constable, London (1933).
(15)
Privatisation in the United Kingdom,
(16)
R. Pryke, The Comparative Performance of Public and Private Enterprise, FiscalStudies (1982).
(17)
2
Her Majesty’s Treasury, London (1989). 3 (2), 68-81
J. P. Van Oudenhoven, Privatization in Europe, In L. K. Finley (Ed.), PublicSectorPrivatization: to Service Delivery, pp. 163-l 80, Quorum Books, New York (1989).
Alternative Approaches (18)
J. Moore, British Privatization-Taking February, 115-l 24 (1992).
Capitalism to the People, HawardBusinessReview,
January/
(19)
A. Smith, The Wealth of Nations (Part Three), P. F. Collier and Son, New York (1905).
(20)
J. B. Goodman and G. W. Loveman, Does Privatization Serve the Public Interest?, HarvardBusiness Review, November/December, 26-38 (1991).
(21)
J. Lawless, The Sale of the CentmY, InternationalManagement,
(22)
How to Sell the Railways, The Economist, 30 November, 57-59 (1991).
(23)
Sorting Out the Men of Letters, The Economist, 15 December, 59-60 (1990).
(24)
R. Underwood, Storm Warnings Fly Over Outsourcing, Market Competition, Communications July,34-35 (1991).
(25)
S. Saunders, U.K. Telecom: Free to Choose, Data Communications,
(26)
R. L. Hudson, Britain Reveals Plans to Sell More BT Shares, WallStreetJoumal, (1992).
(27)
A customer was defined as ‘an individual who is a member of a [residential] household to which the Water Service Company. . . supplies water or provides sewerage services’. MiniProspectus: The Water Share Offers, p. 29, Her Majesty’s Treasun/, London (1989).
(28)
R. J. Luders, Massive Divestiture and Privatization: Lessons from Chile, Contemporary Policylssues, October, 1-19 (1991).
December, 35 and 37 (1991).
News,
June, 86-90 (1992). 19 November, Al 2
Long Range Planning Vol. 27
December 1994
29. J. Burton, Selling Off from Strength, International Management,
December, 47 (1991).
30. R. Cohen, Renault to Appear on French ‘For Sale’ List, New York Times, 26 May, Dl and D4 (1993).
Further reading Guide to the UK Privatisation Programme,
Privatization
Her Majesty’s Treasury, London (1993).
: Lessons from the British Experience
N. Miller
P
RWATIZATION’ IS NOT MERELY a domestic issue. It is an integral part of the strategic renaissance which is taking place in many Eastern and Western European countries and in countries on other continents as well.‘+ It has already had a profound impact on the social, political, macroeconomic, and managerial dimensions of governments, government owned enterprises, and newly privatized firms. This impact is certain to increase and become even more widespread as governments further their efforts in this area and as other governments join the privatization movement.7 Worldwide interest in privatization has increased recently for several reasons. These include: 1. the collapse of communism in the former Soviet Union and its Eastern European allies and the emerging governments’ determination to transform state owned enterprises into private sector entities ; 2. the desire of a growing number of political leaders and their constituents to reduce the size and scope of local and national government; 3. the problem of how governments can continue to provide adequate public services given the reluctance of many citizens to fund regular tax increases ; 4. the commitment of some governments to increase public enterprises’ efficiency, productivity, and responsiveness to customer needs; and 5. the desire of many nations to promote free market principles and to establish an enterprise culture. It is likely that other forces, including the need for governments to reduce their debt, promote competition in their nations’ key industries, and encourage entrepreneurial activity, will sustain the keen international interest in privatization through the turn of this century. The literature on privatization is extensive. Since 1986 over 1100 articles on the subject have appeared in journals from various fields. In addition, several books Pergamon 0024-6301(94)00060-3
The privatization programme in the United Kingdom is the oldest and largest endeavour of its kind in the world. This article examines it in detail, beginning with a brief description of the background and criticisms of nationalized industries in the UK. The social, political, macro-economic and managerial reasonsfor and results of privatization’in the UK are then analysed. This analysis includes details of the major privatizations to date, special arrangements made to encourage employees and small investors to become shareholders, the performance of privatized firms, net proceeds received by the governmentfrom the sale of public corporations, and the effect privatization has had on encouraging wider share ownership among the general population. This article also notes the different methods of privatization used in the UK, including trade sales, private placements, public flotations, and employee and/or management buyouts. The typical steps in each stage of the privatization process are then explained. Finally, a model of the privatization process is developed from an examination of the British privatization experience. This model may be useful to governments and their advisors in transforming publicly owned enterprises into privately owned enterprises and to increase understanding of the strategic issues of privatization among academics, business practitioners, consultants, government officials, etc,
have been written about privatization.* Virtually all of this literature can be categorized as either academic (e.g. the use of economic theories to support the concept of privatization), political (e.g. arguments which espouse the idea that smaller government is better), or anecdotal (e.g. descriptions of individual privatizations). At present, the literature lacks a Long Range Planning Vol. 27, No 6, pp. 125-136, 1994 Copyright 0 1994 Elsevier Science Printed in Great Britain. All rights reserved 0024-6301/94 $7.00+.00
comprehensive, detailed description of a single nation’s privatization programme and an analysis of its results. Also lacking is a viable strategic model to guide governments and their advisors (e.g., attorneys, auditors, stockbrokers and underwriters) in transforming government owned enterprises into privately owned enterprises. The privatization programme in the United Kingdom (UK) is the oldest and largest endeavor of its kind in the world. Under the leadership of former Prime Minister Margaret Thatcher, Britain’s government promised ‘to roll back the frontiers of the State’.g In 1979 privatization became an important element of the British government’s economic strategy of involving the private sector in activities previously carried out by the public sector in order to reduce the size of the latter. The philosophy underlying the government’s privatization programme was explained by Sir Keith Joseph, the UK’s former Secretary of State for Industry: came to office convinced that the structure of the nationalized industries contributed to the national malaise . . . in all too many cases, particularly when the nationalized industry commanded a monopoly, those concerned did not see themselves as living under the healthy necessity of satisfying the customer in order to survive; they had no incentive to cut costs to beat competitors; they were free of the risk of liquidation . . . Such was our diagnosis; what was our aim? Our aim is to abate inflation and to create a prospering social market economy-that is, a mainly free enterprise economy (p. l).'O We
Surveys conducted in the UK from Summer 1973 to Autumn 1980 by Market and Opinion Research International show that the public attitude toward privatization supported the Thatcher initiative (see Figure 1). Even today the British Labour Party maintains that it would not renationalize the companies which were privatized by the Conservative Party since 1979.” Privatization is, of course, only one element of the British government’s policy of reducing the size of the state-owned sector of the economy. The contracting out of certain public services to firms and the sale of public housing units to tenants12 are other elements of this policy. Discussion of these is, however, beyond the scope of this article. The author examines the British privatization programme in detail, beginning with a brief discussion of the background and criticisms of nationalized industries in the UK (including their total return on capital invested, their record on prices, their productivity and manpower costs, and customer Privatization:
Lessons from the British Experience
support nationalization
2;;;::
‘_I_ :::,:r,:: .,:,& i’;iZ$ _.__ ,’ ’
FIGURE 1. Public support for privatization vqsy nationalizatioti in the United Ki‘ngjdgm,1973iT980::.
satisfaction with their services and products) and analyses the social, political, macro-economic and managerial reasons for and results of privatization. This analysis includes details of the major privatizations to date, special arrangements made to encourage employees and small investors to become shareholders, the performance of privatized firms (e.g. profit performance before and after privatization), net proceeds received by the government from the sale of public corporations, and the effect privatization has had on encouraging wider share ownership among the general population in order to give people a direct stake in the success of British industry. The research also notes the different methods of privatization used in the UK and explains the typical steps in each stage of the privatization process. Finally, a universal strategic model of the privatization process is developed from this examination of the British privatization experi-
ence. This model may be used to guide governments and their advisors in transforming publicly owned enterprises into privately owned enterprises and to increase understanding of the strategic issues of privatization among academics, business practitioners, consultants, government officials, etc.
Nationalized Industries Although some state owned industries had existed in the UK for many years, shortly after World War II ended the British government initiated a widespread programme of nationalization.‘3 Founded on the tenets of socialism, nationalization’s goals were to promote greater equality of income, increase the distribution of wealth, and create prosperity throughout the nation. (Interestingly, these goals are similar to the goals of the UK’s privatization programme.) According to Morrison,14 the benefits of nationalization included: 2. a decrease in the price of goods and services provided, 2. an increase in the quality of customer service, and 3. higher efficiency and productivity in firms which were nationalized. He and others believed that employees of state owned enterprises would work for the public good and that their decisions and behaviors would reflect what was best for the nation. It was assumed that by appropriating large businesses (many of which were founded by the Victorian entrepreneurs) the state would be able to apply the powers of socialism to redress the abuses which occurred under capitalism. The supporters of nationalization had such great faith in the enterprises they created that many were given monopoly power. It was thought that the interest of the public was best served by having a single supplier. Competition was considered costly and wasteful to consumers and taxpayers. When Margaret Thatcher and her Conservative party came to power in 1979, nationalized industries were a major factor in the UK’s economy and its performance. The industries accounted for about 10 per cent each of the UK’s Gross Domestic Product and Retail Price Index and for about 14 per cent of total investment in the economy. They employed around 1.5 million people and dominated the communications, energy, ship building, steel, and transportation sectors of the economy.15 The nationalized industries’ actions affected virtually every citizen and business in the UK. The post war nationalization programme proved to be a disappointing failure which severely damaged the
British economy. From the mid-1960s through 1989, for example, nationalized industries’ total return on capital invested was always significantly less than the private sectors. The industries’ total return on capital was close to zero from the early 1970s. Historical comparisons show that the prices of goods and services provided by nationalized industries regularly increased faster than the Retail Price Index. During the years 1970-1983, employment costs per employee in the large nationalized industries increased faster than the national average, without equivalent increases in productivity. For example, employment costs per employee in the gas, coal, electricity, and telecommunications industries increased 38, 21, 18, and 18 per cent respectively, more than the national average. Contributing to this was the fact that trade unions which represented employees in public sector monopolies were very successful in securing significant pay raises for their members, although worker productivity barely increased.15-17 Customer satisfaction with the services and products of nationalized industries was often low, as a survey conducted in 1981 by the National Consumer Council unveiled. The survey found that customers were discontent with rising prices and declining standards and that their expectations were not being met.15 Anecdotes about the poor service provided by nationalized industries are ubiquitous. For example, before British Telecom was privatized in 1984, it is said that many customers had to wait up to two years to have a telephone installed in their residence.l’ Many factors are believed to cause the poor performance of nationalized industries.‘3*‘5~‘8 Firstly, because social and commercial objectives are often intertwined in firms which have been nationalized, managers find it difficult to prioritize goals and develop strategies to attain them. Secondly, managers of nationalized industries face regular interference from government bureaucrats and politicians. Thirdly, nationalized industries’ financing is constrained by the government which, at times, must subordinate the needs of individual state industries to macro-economic requirements. Thus, the needs of state owned industries-which may be commercially justifiable-must always be compared to the needs of all other public programmes. Finally, employees of nationalized industries know that because their firms’ financial position is underwritten by the State, survival is not dependent on success. Long Range Planning Vol. 27
December 1994
Privatization
in the UK
Whatever the causes of poor performance in the nationalized industries, the long-term results of the nationalization programme in the UK are quite clear: lack of competition in important segments of the economy, limited choices for consumers, higher prices for goods and services sold by nationalized firms (which fueled inflation nationwide), customer dissatisfaction, low employee morale and productivity, political manoeuvering, management indecision, and economic stagnation. To deal with the poor performance of nationalized industries both the Labour and Conservative Parties have, over the years, imposed standards and controls to provide an environment similar to a free market. Although these attempts sometimes were successful, they did not yield long-term solutions. Attempting to control the industries’ behaviour by imposing surrogate market forces simply does not deal with the fundamental problem of State ownership. The privatization programme which was initiated by the Thatcher government was a direct strategy to deal with the poor performance of the nationalized firms and with the social, political, macro-economic, and managerial problems associated with them. For the Thatcher government, privatization involved more than the transfer of state owned businesses to the private sector. It was part of an overall plan to create a truly free market economy in the UK. The reasons for and goals of the privatization programme were to : 2. give consumers more choices, better service, and lower prices ; 2. encourage more equal distribution of wealth by promoting greater ownership of corporate stock among employees and the general population; 3. decrease government control of business and lessen political interference in the management decision making process ; 4. lower the national government’s debt; 5. generate new tax revenues from privatized firms ; 6. free government funds to be used in sectors of the economy other than state owned businesses ; 7. reduce the size of government; 8. benefit the economy through higher returns on capital in the privatized industries ; 9. stimulate managers to be more responsive to customer demands and to be more innovative in developing new products and services ; 10. give employee shareholders a greater stake in their organizations, resulting in increased motivation and productivity; 12. enable managers to set organizational goals which are independent of the government’s goals ; and Privatization : Lessons from the British Experience
12. allow competition to spur the efforts of managers and employees. Privatization has long been advocated as a means of achieving some of the aforementioned goals. In The Wealth of Nations,lg for example, Adam Smith noted that in all the great monarchies of Europe, there are still many large tracts of land which belong to the crown. . . Sale of the crown lands would produce a very large sum of money, which . . . would deliver greater revenue than any which those lands have ever afforded to the crown . . When the crown lands had become private property, they would, in the course of a few years, become well improved and well cultivated. (p. 223)
noted that privatization’s More recently, Moore” goals are to improve the performance of privatized firms, broaden ownership, and place more emphasis on the government’s role as regulator rather than the owner of industry. In 1991, Goodman and Loveman” suggested that privatization increases the efficiency and quality of remaining government activities, reduces taxes, and decreases the size of government. Finally, King concluded that privatization positively affects employee attitudes and motivation.13
Net Proceeds Received by the Government The privatization programme in the UK began rather modestly in October 1979 with the sale of five per cent of the shares of British Petroleum (a major oil company). When Prime Minister Thatcher left office in November 1990 almost half the stock of public assets (by value) had been sold to the private sector. Under Prime Minister John Major the privatization programme has continued, with a total of about 60 per cent of state owned businesses having now been privatized. At the end of 1991, sales from the privatization programme in the UK amounted to about E29 billion.15*” Future major privatizations will include British Coal and Northern Ireland Electricity Service, and possibly British Rail and the British Post Cffice~‘5~22~23 The privatizations which have been completed to date have involved : Z. the sale of all of a company’s shares at one offering, 2. the sale of all of a company’s shares at several separate offerings (which usually took place over a period of years), 3. the sale of some of a company’s shares (with the government retaining a residual shareholding), and 4. the sale of either all or part of a company’s subsidiary or of a major asset owned by the company. Table 1 provides information
about the industries involved the sale dates, the percentage of shares retained by the government, and the net proceeds from the major privatizations which have taken place in the UKbetween 1979-1991. It is clear that businesses from virtually all industries (e.g. aerospace, automobile manufacturing, electricity generation, natural gas supply, oil exploration and production, and water supply) have been privatized. The proceeds from the sale of these firms range from E4 million-E5,138 million. Total proceeds now exceed E29 billion.” In most cases the government has chosen not to retain any shareholdings (except, in some cases, for one special share) in the companies it has privatized. The government solicits professional advice from its financial advisers and considers the needs of taxpayers and investors in determining the price of shares for each business it privatizes. The task of setting an appropriate price is complicated by the fact that the shares of state owned companies have never been traded before. Often, the share price is set low in order to encourage sales. Although selling shares at a lower than optimum price has been criticized because this undervalues the worth of the companies and decreases the government’s revenue (which may be used to reduce its debt), these are incidental to the privatization programme’s primary goals of generating new tax revenues from privatized firms, freeing government funds so they can be used in sectors of the economy other than state owned businesses, and reducing the size of government.15 The one-time positive effect on the government’s treasury of selling nationalized industries for their full value is less important than achieving these goals. The government also maintains that selling shares in companies for only their full value is a short-sighted policy because only companies which are profitable could be sold. When a monopoly in a particular industry is privatized, regulatory arrangements are made by the government to prevent extreme increases in prices and to ensure good customer service. For example, when British Telecom (BT) was sold to the private sector in 1984, a government regulatory agency (the Office of Telecommunications-OFTEL) was established to prevent BT from exploiting its monopoly position in the telecommunications industry. Furthermore, the government licensed Mercury Communications Ltd., a new telecommunications company, to compete with BT.” Seven years after BT was privatized, a study by the International Telecomm User Group found that despite competition from Mercury, BT still held a 95
per cent market share.24 It was also discovered that BT’s customers pay significantly more for phone service than their American counterparts. As a result, the UK government is now planning to license dozens of new telecommunications companies to offer local and long-distance phone service.25 The government anticipates that its latest strategy will greatly spur competition and thus lessen BT’s control of the market.
Perjformance of Privatized Firms The figures in Table 2 (from a 1988 study conducted by HM Treasury) show that after privatization, pre-tax profits in 10 out of 13 large formerly state-owned companies increased regularly. The profits of most of the companies which have been in the private sector the longest (e.g., British Aerospace, Cable and Wireless, Amersham International, and National Freight Consortium) have increased significantly. Associated British Ports, after a loss of E7 million due to the effects of a major coal strike the year following its privatization, more than doubled its profits in two years. British Telecom saw its profits more than double three years after it was sold by the government. On the other hand, Britoil, Enterprise Oil, and Jaguar all had downturns in their profits after being privatized. In fact, by 1989 Jaguar was so strapped for cash that in order to survive, its management and stockholders agreed to allow the firm to be acquired by the Ford Motor Company. Of course, profitability is not the only measure of the performance of firms which have been privatized in the UK. Newly privatized firms’ responsiveness to consumers must be evaluated as well. The evidence in this area is mostly anecdotal but suggests that the firms’ responsiveness to consumers has, for the most part, been positive. For example, British Telecom has increased its range of services and products. BT has also responded to customer complaints and requests for telephone installations more quickly. British Airways has changed its reputation from being a poor service provider to being one of the world’s best airlines. The National Freight Company opened several major new distribution centres to better service its customers. The British experience with privatization seems to show that exposing industries to the financial disciplines of the marketplace generally creates better managed companies that produce higher quality goods and services and provide enhanced value to their customers. As noted earlier, surveys conducted in the UK between 1973 and 1980 consistently revealed Long Range Planning Vol. 27
December 1994
TABLE
1.
Sale dates, shares retained by government, and net proceeds of major, privatizations in the United
Kingdom. Industry
Company
1.
British Petroleum
Oil
Sale Date(s)
1 O/79,6/81,
Residual Government Shareholding (%) 10
Net Proceeds (sm) 4,684
g/83,1 O/87 2.
British Aerospace
Aerospace
2/81,5/85
0
390
3.
British Sugar Corporation
Sugar Refining
7181
0
44
4.
Cable and Wireless
0’
1,021
5.
Amersham international
International
1 O/81,12/83.
Telecommunications
12185
International
2182
0’
64
Radiochemicals 6. 7.
National Freight Company
Freight Carrier
2182
0
5
Britoil
Oil Exploration and
1 l/82,8/85
0’
1,053
Production 8.
Associated British Ports
Seaports
2183.4184
0
97
9.
International Aeradio (subsidiary
Aviation Communications
3183
0
60
Hotel
3183
0
45
Oil
5184
0
82
Oil Exploration
6184
0
384
of British Airways) 10.
British Rail Hotels (subsidiary of British Rail)
11.
British Gas Corporation (BGC), Onshore Oil Assets (Wytch Farm Oil Field) (subsidiary of RGC)
12.
Enterprise Oil
and Production 13.
Sealink (subsidiary of British Rail)
Ferry Service
7184
0’
40
14.
Jaguar (subsidiary of British
Automobile Manufacturing
7184
0’
297
British Telecom
UKTelecommunications
11/84.12/91,7/93
1.1’
12,529
British Shipbuilders (BS)
Shipbuilding and
2f84.5185.6188
0
54
War Ships, Shiprepair Yards,
Shiprepairers
Helicopter Transportation
9186
0
14
Leyland 15. 16.
and 5 Other Companies (subsidiaries of BS) 17.
British Airways Helicopters (subsidiary of British Airways)
18.
British Gas
Natural Gas Supply
12/86,7/90
0’
5,286
19.
British Airways
International Air
l/87
0’
854
4187
0
187
5187
0’
1,029
7187
0’
1,275
7186
0
36
Transportation 20.
Royal Ordnance
Artillery, Ammunition, Explosives, Ordnance, Small Arms, &Rocket Motor Manufacturing
21.
Rolls- Royce
Airplane Engine Manufacturing
22.
British Airports Authority
International Airport Owners and Operators
23
National Bus Company
BusTransportation in England and Wales
Privatization:
Lessons from the British Experience
24.
Sale Date(s)
Industry
Company
Unipart (subsidiary of Rover Group)
Residual Government Shareholding (%)
Net Proceeds (sm)
1 I87
0
52
Bus Manufacturing
l/87
0
4
Parts and Accessories for Rover Vehicles
25.
Leyland Bus (subsidiary of Rover Group)
26.
lstel (subsidiary of Rover Group)
Information Technology
6187
0
48
27.
Leyland Truck & Freight Rover
Truck Van Manufacturing
4187
40 (retained by
NA
Motor Vehicle
8188
0
Rover Group)
(subsidiary of Rover Group) 28.
Rover Group
150
Manufacturing 29.
British Steel
Steel Manufacturing
12188
0’
2,425
30.
General Practice Finance
Loans to Pysiciansfor
3189
0
67
31.
Corporation
Medical Equipment
International Computers Ltd.
Computer Manufacturing
12179
75 (retained by BTG)
NA
Specialized Engineering
6180
0
NA
NA
(subsidiary of British Technology Group, BTG) 32.
Fairey (subsidiary of BTG)
Technology 33.
Ferranti (subsidiary of BTG)
Electrical Engineering
7180
50 (retained by BTG)
34.
lnmos (subsidiary of BTG)
Silicon Chip Manufacturing
8184
25 (retained by BTG)
NA
35.
Water Holding Companies
Water Supply &
12189
0
3,395
(Anglian Water, Northumbrian
Sewerage in the UK
12190
NA
9,648
Water Group, North West Water Group, Severn Trent, Southern Water, South West Water, Thames Water, Welsh Water, Wessex Water, and Yorkshire Water) Central Electricity Generating
Electricity Generation &
Board
Transmission in the UK
37.
North Sea Oil Licenses
Oil Fields
1980-l 985
NA
349
38.
Miscellaneous*
2
1979-l 991
NA
568
36.
(through 1993) ‘The government retained one special (or ‘golden’) share in the company.ln order for the government to be able to control the future ownership of a newly privatized company so it can protect national interest or guarantee the company’s independence during its first years of operation, the government may retain one special share. The special share does not, however, allow the government to intervene in the company’s daily operations. ‘Includes the sale of Professional and Executive Recruitment, sales by New Towns Development Corporation, sales of oil and commodity stockpiles, Forestry Commission Land, and Crown Agents Holding Board property. Sources: Guide to the UK Privatisation Programme, 1993; Mini Prospectus: The Water Share Offers, 1989; Newman, 1986; Privatisation in the UK, 1989.
widespread support among the population for the government’s privatization programme. Since then support for privatization has declined somewhat. Contributing to the decline is the public’s perception that privatization has not always increased competition and brought lower prices. For example, in the case of British Gas, accusations of profiteering have brought
censure
from its regulatory
body.
Telephone
users
have also expressed dissatisfaction with high charges by British Telecom, despite its phenomenal profits. Nonetheless, there is still considerable support for privatization. Recently, for example, the British government revealed its plan ‘to sell some or all of its remaining 21.8 per cent, E5.35 billion stake in British Long Range Planning Vol. 27
December
1994
TABLE2, Rti-tax profit (loss) of 13 privdized companies in the UK Company (Year of Privatization)
1981 (Em)
British Aerospace (1981) Cable and Wireless (1981) Amersham International (1982) National Freight Company (1982) Britoil (1982) Associated British Ports (1983) Enterprise Oil (1984) Jaguar (1984) British Telecom (1984) British Gas (1986) British Airways (1987) Rolls-Royce (1987) British Airports ’ ’
Effects of a Nine month
Source:
Authority
(1987)
1982
1983
1984
1985
1986
1987
84.7 89.2 8.5 10.1
82.3 156.7 11.7 11.8
120.2 190.1 13.7 16.9
150.5 245.2 17.1 27.2
182.2 287.3 17.6 37.0
161 340.5 22.1 47.4
236 356.1 25.3 67.1
423.1 (10.3)
486.3 5.5
(31.7) 570
9.6 936 430
550.4 14.5 83.2’ 50.0 1,031 803
730.9 17.2 111.1 121.3 1,480 712 191 81
134.0 29.3 2.9 120.8 1,810 782 195 120
403.9 38.1 72.5 97.0 2,067 1,058 162 156
47.5 2,292 1,008 228 168
70.6 64.1 4.8 4.3
T141) _
(108) (93)
42
43
(1::) 30
650.4 (7.0)’ 138.5 91.5 990 909 185 26 48
72
84
90
1988
_
136
major coal strike. figure.
Privatisation
in the UK, 1989.
Telecom . . . News of the sale . . . was greeted by London financial analysts as likely to prove an even bigger hit with investors than the two previous government sales of BT stock, in 1984 and 1991’.26 Even the Labour Party, although not strongly in favour of privatization, accepts that undoing it would cause greater problems than leaving it alone. It has, therefore, dropped renationalization from its manifesto.”
Encouraging
Wider Share Ownership
A primary goal of the UK’s privatization programme is to distribute wealth more equally among the population by increasingthe number of people who own stock in British businesses. Owning stock gives an employee a direct stake in the success of his or her company, generally increases his or her motivation, and removes the distinction between owners and workers. Non-employee shareholders are more likely to be concerned about how well the firms they have invested in are operated. Special arrangements are made to encourage employees to become shareholders when a majority of the shares in the firm they work for are sold by a public flotation on the stock exchange. These special arrangements include : Z. an offer of a limited number of free shares, 2. an offer of a limited number of shares provided free when an employee purchases a certain number of shares, 3. a ten per cent discount on the Privatization : Lessons from the British Experience
purchase of a limited number of shares, and 4. giving employees priority over other investors to purchase shares. Over the years several employee and/or management buyouts (e.g. National Freight Company, Unipart, Leyland Bus, Istel, and the War Shipbuilding Division of British Shipbuilders) have also increased the number of employee shareholders in the UK. For the most part, the special arrangements have been quite successful at encouraging employees to purchase stock in their firms. Table 3 shows the percentage of employees who participated in share purchase programmes when the companies they worked for were privatized. In 1989, about 750,000 employees purchased shares in their newly privatized firms.15 The special arrangements made by the government to encourage stock purchases by small investors during public flotations include : I. extensive marketing campaigns (including TV and newspaper advertising) to promote awareness of the sale among the general population, 2. wide distribution of information regarding the sale (e.g., information sheets, registration cards, mini-prospectuses, and applications), 3. priority over large investors to purchase shares when an offer is oversubscribed, 4. allowing payment for shares to be made in installments, 5. awarding free bonus shares when an investor holds the shares he or she has purchased for a given number of years, and 6.
TABLE 3. Employee participation
in UK share
purchase programmes. Maximum
Company
Value Per
Employee of Free or Matching
Share
Percent of Eigible Employees Who Purchased
Offers and Discounts
Shares
British Petroleum
f 500.00
50
British Aerospace
f499.20
74
Cable and Wireless
f300.00
99
Amersham
f46.70
99
f 200 interest
36
National
International Freight
free loan for share
Company
purchase f457.95
72
f311.36
90
Enterprise Oil
none
71
Jaguar
none
19
British Telecom
f478.40’
96
British Gas
f649.45’
99
British Airways
f595.00’
90
Rolls-Royce
f 595.30’
96
British Airports Authority
f502.25
91
British Steel
f644.00
94
Britoil Associated
British Ports
’ Includes a 10 per cent discount on shares applied for up to a maximum value of f2.000. Source: Privatisation in the UK, 1989.
providing investors with vouchers to help them pay for services they purchase from a newly privatized firm (e.g. some investors in British Telecom were issued vouchers to help pay their phone bills). In addition, customers of the businesses being privatized may be given special incentives to buy shares. For example, certain customers of each of the ten Water Service Companies which were privatized in 1989 were eligible for the following special incentives :27 1. preference over other members of the general public in the allocation of shares if demand for the shares was heavy and 2. the choice of either receiving free bonus shares or paying a lower price for shares purchased. These special arrangements have been very successful at encouraging small investors to buy shares in privatized businesses. At the end of the first ten years of the privatization programme, small investor shareownership had tripled. A study by the London Stock Exchange found that the number of people in the UK who own shares increased from two million in 1980 to 11 million in 1991.'lToday, more than 20 per cent of the adult population owns shares in privatized companies. Many of these people had never owned shares before the privatization programme began.15
Methods of Privatization Principally, four methods have been used to privatize state owned businesses in the UK : 3. public flotations on the Stock Exchange, either by a fixed price offer or by a tender offer with a minimum price ; 2. employee and/or management buyouts ; 3. private placements with a group of investors ; and 4. trade sales, in which a company is sold to a single firm or to a group of firms. Of the major privatizations which have occurred in the UK to date, about 40.4 per cent have been public flotations, 22.8 per cent employee and/or management buyouts, 7.0 per cent private placements, and 29.8 per cent trade sales. Together, public flotations and employee and/or management buyouts comprise more than 63 per cent of all privatizations. Obviously, these methods are used frequently in order to widen share ownership and, thereby, encourage more equal distribution of wealth. On the other hand, private sector placements (which do little to widen share ownership) are seldom used. Trade sales may indirectly widen share ownership when the company being privatized is sold to a publicly owned firm. Although there is no single correct method to use when privatizing a state owned business, it is necessary to select the method which best accomplishes theprivatization programme’s goals, as the effects of privatization are greatly influenced by the methods used to privatize.”
Steps in the Privatization
Process
The government of the UK has spent more than a dozen years privatizing nationalized industries valued at over E29 billion. This has given it extensive experience in developing a process that works extraordinarily well. The process itself is intricate and lengthy, taking up to several years to complete. Its objectives include not only selling state owned businesses, but increasing each business’ efficiency through competition, encouraging more equal distribution of wealth, and strengthening the UK’s economy and its position in international markets. The process has been used to privatize different size businesses from diverse industries. An examination of the process reveals that many of its individual steps may have universal value. In a world where no less than 35 countries are now actively involved in selling off state owned businesses,4 it is likely that the British process may serve as a strategic model for at least Long Range Planning Vol.
27
December 1994
some fledgling privatization programmes. Presented below is an outline of the privatization process used in the UK. Hopefully, it will be useful to some governments and their advisors in helping transform their state owned businesses into private enterprises. It may also be helpful to academics, business practitioners, consultants and others who wish to increase their understanding of the mechanics of privatization. The privatization process used in the UK involves twelve steps :
8. When the company has been strengthened
as much as possible (e.g., it has a commercially oriented managementteaminplace, asound debt/equityratio, itsmonopolypowerhas beenreduced, etc.), advisers (merchant bank brokers, solicitors, etc.) are selected (or reselected) for the sale.
9.
1. A study is carried out by the government
and/or its advisors to determine the feasibility of privatizating a particular publicly owned business.
on the study, a report is presented to the appropriate government officials describing the options available for and prerequisites of the proposed privatization.
(a) The
government decides how many shares of the business to sell, whether to underwrite the sale, where to sell, and how to fit the sale in with other sales of nationalized businesses.
(4
Produce a prospectus
for the sale.
(cl
Initiate an advertising business’s image.
campaign
2. Based
3. Government
officials decide whether or not to proceed with the proposed privatization. If their decision is affirmative, they determine which method of privatization to use. (For this example we will assume that 100 per cent of the business will be sold in a single, fixed price public flotation on the stock exchange.)
4. The
Merchant bank advisors are selected provide advice to the government on the sale.
5.
(4
to
Prepare the business for sale by strengthening its management team and by introducing private sector methods and attitudes.
(b) Prepare
business
legislation to sell the nationalized and to create a private corporation.
(c) Consider
what needs to be done to regulate the business if it is a monopoly. Prepare approestablish a government priate legislation, regulatory agency, etc.
6.
Determine if the business has improved financially, as a result of the measures taken. If necessary, make additional changes to strengthen its position.
(b) Pass
the legislation required, giving the government the power to sell and regulate the business and to create a private corporation.
7. Review
the business’ balance sheet, income statement, etc. Strengthen these if necessary by taking appropriate management action.
Privatization : Lessons from the British Experience
10.
(4
to build the
Decide on the share price.
(b) Review
all plans for the sale. Make changes necessary.
(4
if
Give the final go-ahead on all plans.
11. Begin the sale on a pre-determined
date.
12. Transfer
of ownership from public to private sector is completed.
The steps in the privatization process outlined above are those actually used by the UK government.15 They can, of course, be modified to meet the needs of different governments. Clearly, the UK model of privaization will not work equally well in all countries. It works best where there is a sophisticated capital market and a large private sector to absorb the state businesses. Since it is a lengthy process, it may not be appropriate for use in Eastern European nations or republics of the former Soviet Union which must privatize thousands of businesses. Some countries which can use the model include France (which recently announced the possible privatization of Renault) ; Denmark, the Netherlands, and Germany (which are planning to privatize their state telephone companies) ; Sweden (whose new non-socialist government is committed to privatization); Italy; Canada; and the United States.26*2g*30 The model should be useful in many other countries as well. Aclaowledgements-This research was funded, in part, by a grant from the First Interstate Bank Institute for Business Leadership, College of Business and Economics, University of Nevada, Las Vegas.
Notes (1) Although privatization usually refers to the total or partial transfer of state owned assets to private ownership, it may also mean contracting with privately owned organizations to supply goods or services previously supplied by government owned organizations.
(2) E. A. Cardoso, Privatization Fever in Latin America,
Challenge, September-October, 35-41
(1991).
(3)
A. Ignatius, Russia Goes Private: It’s Fun, It’s Now, It’s an Ad on N, Al and A10 (1992).
September 23,
(4)
R. Lord, Privatisation-The
(5)
Privatisation in Eastern Europe: Everything Must Go, The Economist, 17 November, 88 (1990).
(6)
S. Tully, Europe Goes Wild Over Privatization, Fortune, 2 March, 6870
(7)
R. Lord, Selling State Trophies, Globalfinance,
Wa//StreetJourna/,
Boom Goes On, MuninationalBusiness,
Autumn, l-7 (1991).
(1987).
March, 36-38 (1991).
(8)
For example, L. K. Finley (Ed.), Public Sector Privatization: Alternative Approaches to Service Delivery, Quorum Books, New York (1989); C. A. Kent, Entiepreneurship andthe Pdvatizing of Government, Quorum Books, New York (1987); K. Newman, The Selling of British Telecom, St. Martin’s Press, New York (1986).
(9)
F. Burink, Entrepreneurship (1987).
andthe
Privatizing of Government,
p. 163, Quorum Books, New York
(10)
K. Newman, The Selling of British Telecom, St. Martin’s Press, New York (1986).
(11)
C. Forman, P. Revzin and T. Carrington, Britons Consider Putting Trust in Labor, Wa//StreetJouma/, April, Al 0 (1992).
(12)
To date, more than 1.25 million housing units have been sold. Sales are to residents who have lived in public housing for a minimum of two years. The sales price is discounted 3@-60 per cent below market value for buyers who do not resell within a specified time period. This programme has allowed the government to divest unprofitable properties, eliminate operating costs, generate income, and make homeowners out of renters.
(13)
L. King, Lessons of Privatization, Long Range Planning 20 (6). 18-22
(1987).
(14)
H. Morrison, Socialization of Transport, Constable, London (1933).
(15)
Privatisation in the United Kingdom,
(16)
R. Pryke, The Comparative Performance of Public and Private Enterprise, FiscalStudies (1982).
(17)
2
Her Majesty’s Treasury, London (1989). 3 (2), 68-81
J. P. Van Oudenhoven, Privatization in Europe, In L. K. Finley (Ed.), PublicSectorPrivatization: to Service Delivery, pp. 163-l 80, Quorum Books, New York (1989).
Alternative Approaches (18)
J. Moore, British Privatization-Taking February, 115-l 24 (1992).
Capitalism to the People, HawardBusinessReview,
January/
(19)
A. Smith, The Wealth of Nations (Part Three), P. F. Collier and Son, New York (1905).
(20)
J. B. Goodman and G. W. Loveman, Does Privatization Serve the Public Interest?, HarvardBusiness Review, November/December, 26-38 (1991).
(21)
J. Lawless, The Sale of the CentmY, InternationalManagement,
(22)
How to Sell the Railways, The Economist, 30 November, 57-59 (1991).
(23)
Sorting Out the Men of Letters, The Economist, 15 December, 59-60 (1990).
(24)
R. Underwood, Storm Warnings Fly Over Outsourcing, Market Competition, Communications July,34-35 (1991).
(25)
S. Saunders, U.K. Telecom: Free to Choose, Data Communications,
(26)
R. L. Hudson, Britain Reveals Plans to Sell More BT Shares, WallStreetJoumal, (1992).
(27)
A customer was defined as ‘an individual who is a member of a [residential] household to which the Water Service Company. . . supplies water or provides sewerage services’. MiniProspectus: The Water Share Offers, p. 29, Her Majesty’s Treasun/, London (1989).
(28)
R. J. Luders, Massive Divestiture and Privatization: Lessons from Chile, Contemporary Policylssues, October, 1-19 (1991).
December, 35 and 37 (1991).
News,
June, 86-90 (1992). 19 November, Al 2
Long Range Planning Vol. 27
December 1994
29. J. Burton, Selling Off from Strength, International Management,
December, 47 (1991).
30. R. Cohen, Renault to Appear on French ‘For Sale’ List, New York Times, 26 May, Dl and D4 (1993).
Further reading Guide to the UK Privatisation Programme,
Privatization
Her Majesty’s Treasury, London (1993).
: Lessons from the British Experience