Sid Gets Lucky: the Privatization Years
There is a popular belief that the Thatcher governments never really intended to privatize very much, and that they stumbled upon an easy way of raising cash by selling off assets almost by accident. If so, it was one heck of a stumble. During the decade £29 bn was raised in sales of land and businesses and £18 bn from the sale to their tenants of 1.24 million council homes. The gas that cooked meals and warmed houses, oil coming ashore, aircraft taking businessmen and holiday-makers, and the airports they flew from, the phones and phone-lines used to communicate, cars, engines, steel and the water pipes and filtration systems bringing the British their baths and tea – all would be affected by the greatest shift of assets from the State to private companies and individuals in the history of this country. By the 1992 election, forty-six businesses had left the public sector, carrying with them 900,000 people. The notion that this was accidental is wrong. The Conservatives had promised to sell off council houses to their tenants from the mid-seventies. Privatization of state corporations had not featured much in the 1979 manifesto only because the party’s plans were still sketchy and partly because its leader did not want to scare off the voters. But privatization had been long discussed on the right. In his first Budget speech Howe said he wanted to reduce the size of the public sector, that ‘the scope for the sale of assets is substantial’ and that this was ‘an essential part of our long-term programme’.
So it would prove. One of the influential economic writers about the Thatcher years said that coining the word privatization was ‘a master-stroke of public relations’ by the government, which put it into worldwide circulation. Privatization would become the major idea exported from Britain in modern times, though as it happens the word was not one Mrs Thatcher liked or much used. (‘De-nationalization’ was even uglier, however, and inaccurate, since some of the corporations and assets sold had never been nationalized in the first place.) It started tentatively, with small steps in 1981-2 including shares in BP, the scientific corporation Amersham, half of Cable & Wireless and then the British National Oil Corporation, discussed elsewhere. The motives were mixed. Early on, with a horrendous public sector borrowing requirement to fund, simply raising cash was important. Yet this was neither the origin of the idea, nor its real point. Howe and Lawson were making clear from 1980 onwards that creating a large bulwark of new shareholders was essential to the Tories’ political vision. Lawson would cite the fears of extending voting in the nineteenth century, allowing political power to people who had no stake in the country: ‘But the remedy is not to restrict the franchise to those who own property: it is to extend the ownership of property to the largest possible majority of those who have the vote. The widespread ownership of private property is crucial to the survival of freedom and democracy.’
Another way of putting it was that this was one part of the one-way ratchet, pulling Britain away from socialism. If Labour had been accused of creating a giant state sector whose employees depended on high public spending and could therefore be expected to become loyal Labour voting-fodder, then the Tories were intent on creating a ‘property-owning democracy’ of voters whose interests were entirely different. The despair of Labour politicians as they watched it working was obvious. There was now to be a large and immovably pro-private sector Britain of share-owners and home-owners, probably working in private companies and increasingly un-unionized. The cost of renationalizing the industries made Labour pledges about it increasingly hollow. Twenty years later the idea of reversing privatization is something discussed only on the very margins of politics. The proportion of adults holding shares rose from 7 per cent when Labour left office, to 25 per cent when Thatcher did. Thanks to the ‘right to buy’ policy, more than a million families purchased their council houses, repainting and refurbishing them and watching their value shoot up, particularly since they had been sold them at a discount of between 33 and 50 per cent. The proportion of owner-occupied homes rose from 55 per cent of the total in 1979 to 67 per cent a decade later. And people did indeed become much wealthier, overall, during the Tory years. In real terms, total personal wealth rose by 80 per cent in the eighties, entirely changing the terms of trade of ordinary politics. Old Labour was killed off not in the Commons but in the shopping centre and the estate agents’ office.
Yet if we look a little below the surface, the story is more blurred. Of that huge rise in wealth, relatively little was accounted for by shares. An increase in earnings and the first house-price boom were much more important. And the boom in shareholding was fuelled more by the prospect of a bargain than by any deep change in culture. Clearly, there was always a potential conflict between the government’s need to raise money quickly, and its hopes of spreading share ownership – both of them intensely political, since the former affected tax levels and the latter the size of the property-holding electorate. Again and again, from the grossly undervalued Amersham sale, to the later and greater privatizations, ministers erred on the side of getting the maximum spread of ownership, rather than the maximum price. The breakthrough privatization was that of 52 per cent of British Telecom in November 1984, which raised an unheard-of £3.9 bn. It was the first to be accompanied by a ballyhoo of television and press advertising. It was easily oversubscribed.
In the event 2 million people, or 5 per cent of the adult population, bought BT shares, almost doubling the number of people who owned shares in a single day. After this came British Gas. Natural gas fields had been supplying Britain from the North Sea since the late sixties, pumping ashore at Yarmouth and Hull, and replacing the old ‘town gas’ system of coal-produced gas, which had long given so many neighbourhoods their distinctive architecture and smell. With its national pipe network and showrooms it had become the country’s favourite source of domestic energy and was, in most respects, a straightforwardly monopolistic business. Its chairman Sir Dennis Rooke fought a riotously aggressive private campaign to avoid British Gas being broken up before the sale, and was successful. Again, the government and its advisers prepared for the sale with a TV campaign featuring an anonymous neighbour who had to be kept away from a good thing – ‘Don’t Tell Sid’ – and then, when the issue details were finally announced, ‘Tell Sid’. This raised £5.4 bn, the biggest single privatization of all.
Yet there was something about the very name that fell oddly on the ear. Does ‘Sid’ perhaps have a half-echo of ‘spiv’? Was someone in the advertising team subconsciously sending a message? For the truth was that the huge oversubscribing of shares reflected a general and accurate belief that something was being given away for nothing, that this was a one-way bet. Sid knew which side his bread was buttered on, but this did not necessarily make him a kitchen capitalist. With the equally bargain-price shares offered to members of building societies, such as Abbey National, when they demutualized and turned themselves into banks, Britain developed a ‘thank you very much’ class of one-off shareholders. In the early years of the twenty-first century, the Office of National Statistics looked back at the privatization story and found that the proportion of stockmarket wealth held by private shareholders had fallen from 20 per cent in 1994 to 14 per cent. ‘Many shareholders’, they said, ‘have clearly subsequently disposed of their holdings rather than become long-term stockmarket investors as was once hoped.’ Of the 22 per cent of adults holding stocks or shares, more than half only had their old privatization or building society ones. The UK Shareholders’ Association concluded that ‘there are enormous number of shareholders in the UK (about 10m perhaps) but the vast majority hold only a few shares, and many of those will have come from privatisations, demutualisations or former employments. Such shares are rarely traded.’
The failure to get a shareholding democracy properly rooted, despite endless Treasury initiatives to nurture it, is a more telling criticism of privatization than the one most commonly heard at the time, which was that the assets were being sold off too cheaply. They were – to the tune in total of some £2.5 bn, according to the National Audit Office. But in part this was deliberate – ‘wider share ownership was an important policy objective and we were prepared to pay a price for it,’ said Lawson. Second, as the government and its advisers learned from each privatization, the pricing grew shrewder. Third, the price critics would not have sold the companies anyway. What the stultified share ownership pattern showed was that, below the level of political rhetoric, there were limits to the Thatcher revolution.
The other great question is whether privatization increased the efficiency and responsiveness of the corporations being sold. This was supposed to happen not because public sector managers were inherently lazy but because they lacked the spur and whip of a stockmarket price and the possibility of going out of business. Yet the impetus of being in the private sector would be much less if the business was still a monopoly. The most successful privatizations in that sense were the ones where the company was pushed instantly into full competition, as British Airways was, or Rolls-Royce, or British Aerospace. But the utilities – gas, electricity, water – were always different. It was hard to envisage rival North Sea natural gas companies competing in every part of the country with their own system of pipes and storage. It was hard to imagine many different energy companies with their own grids. Yet without competition, where would the efficiency gains come from? The technical and political argument behind these privatizations was how to break up the state monopolies to create competition, without infuriating and discommoding the consumer.
In the heyday of the Thatcher privatizations, it was more common for public corporations to be sold as single entities than broken up. British Telecom made the case that to compete in international markets, it must stay as a single unit, able to make the big investments needed for the telecommunications revolution. British Gas, under its pugnacious boss, managed to play the Whitehall power game sufficiently well to stay single. The water and electricity industries were split up, but to create local monopolies, with power generation being split into just two mega-companies, National Power and Powergen. (The railway industry would prove one of the most intellectually demanding and least successful of all, though this story comes later.) In essence, what ministers did was to replace competition by regulation and the growth of new public bodies, such as the National Rivers Authority. Oftel, Ofcom, Ofgas, Ofwat were all given detailed targets and penalty systems to oversee the newly privatized utilities. Only much later would some of them, such as British Gas, be further broken up in the private sector, generally by government diktat through new competition policies, and exposed to more realistic market pressures. Soon, foreign firms would begin to move in and buy up the fragmented privatized utilities, causing remarkably little public protest, except when years of poor investment or management meant a service was patently failing, such as the leaking pipe systems of German-owned Thames Water.
Politicians learned two things. The first was that outside the Westminster village, few British people seemed to care at all who owned the companies and services they depended upon, so long as the service was acceptable. This was becoming a much less ideological country. The second thing they learned was that politics could not step back and wash its hands of what the privatized companies then did. Ministers, not simply chief executives, would still be the target of public anger and held responsible for any failings. This was becoming a more aggressively consumerist country. The result was that, while hundreds of thousands of employees left the public sector to work for newly private corporations, the State grew in other ways, through the quangos, regulatory bodies and bureaucrats now found necessary to regulate and oversee the privatized services.