In Britains privatisation programme in the 1980s and the first half of the 1990s, to what extent were the

potential gains from privatisation realised?

F.L. Chowdhury describes privatization as the incidence or process of transferring ownership of a business, enterprise, agency, public service or property from the public sector (the state or government) to the private sector (businesses that operate for a private profit) or to private non-profit organizations.1 In Britain, privatization has been there since the 18th century when the privatization of common lands occurred, commonly referred to as enclosure. In recent times, Winston Churchills government has been linked to the privatization of the British steel industry in the 1950s. However, it was under Margaret Thatchers government in the 1980s that privatization gained global momentum. Privatization changed the direction of British Industrial Policy. The state-owned industries that had been nationalized under Attwells government after World War II were given private ownership. Before 1979, Britain possessed one of the largest public enterprise sectors in Europe and between 1979 and 1995 more than 50 billion pounds of assets were sold to the private sector. The major privatizations in the UK include businesses like British Aerospace (1980), British Airways (1987), British Steel (1988), British Telecom (1984), etc. Randall Wood on why should governments privatize, says Privatization is widely thought to be a valuable policy instrument that leads to a greater good. Privatization of public resources injects new value into public assets and increases the privately-held capital base of a country. Governments that implement privatization as part of their reforms use it as a mechanism to pursue a variety of objectives, both macroeconomic and fiscal.9 The variety of objectives include economic efficiency and improving fiscal position of a government, encouraging competition, motivate workforce, utilize outside experience, separate ownership from regulation, etc. At the time of privatization in Britain, governments in several countries were against the limit of taxable capacity and were finding means to raise revenue without the use of taxation. Dr. Colin Robinson in one of his papers describes that privatization in Britain was a painless means of raising large revenues and applying the proceeds to the reduction of public borrowing and the lowering of interest rates which seemed very desirable political objectives, especially in the early- and mid-1980s.8 The total revenue raised by British privatization schemes since 1979 is nearly 70 billion pounds. On the other hand, nationalized Industries in UK suffered and due to several significant reasons. The management of nationalized industries failed and was subjected to political interference which resulted in sub-optimal pricing and investment decisions. Confrontational industrial relations were encouraged rather than co-operative. An example of political interference going wrong is best explained by looking at British Gas in the 1970s, when following the oil crises, BGC was required by government to keep prices steady to soften the blow of increased fuel prices for consumers. One of the biggest threats to success of stateowned corporations was the lack of competition as most of them were monopolies; the concept of state-ownership is that its owned collectively by the public for their benefit, when in fact it gave them a less than good deal but competition on the other hand will always act to keep prices down and privatization encourages competition. It is true that full competition cannot be achieved at the time of privatization, which brings in the role of regulation, but once the full level of competition is achieved, prices do go down. Price is always a dominant factor in consumer purchase decisions as well and to replicate the reality of market, the main

instrument used in the sector of public utility, was the imposition of price formulae through utility regulation. The formula took the form of RPI-X, where the regulators estimation of the extent to which cost savings could be achieved in the industry. Thomas OMalley explains, Over the years, the price formulae have usually been tightened for as long as the regulated utility has retained a near monopoly, and relaxed where competition has developed or where the regulator has required corporate restructuring which would otherwise have had a negative impact on shareholder value.11 The conservative government of Thatcher best known for its privatization policies when elected favored increasing competition and at the same time, ministers were obliged to address the government budget deficit problem. Privatization, at the time it came to power wasnt one of their objectives. Funding investment in the nationalized industry and governments target for public sector borrowing became one of the key drivers of privatization. Looking at the Telecom industry and BT in particular, despite its profitability, the investment necessary to maintain its position counted as public borrowing which lead to BT shares to be traded. The 1984 Telecommunications Act led to the flotation of a little more than 50% of BTs shares to the Stock market and the remainder was sold in two further tranches. BT had a monopoly in telecommunication services and equipment supplies in UK and in 1984 a fixed-line operator was licensed called Mercury Communications despite BTs protest on grounds of safety. OFTEL (Office of Telecommunications) was created after that, to protect consumers from monopoly abuse until competition developed. James Foreman-Peck describing the success of telecom industrys privatization says that the privatized telecom industry seemed to deliver; prices came down, waiting lists for telephone vanished in the early 1980s and never reappeared, most faults were cleared quickly, and even public telephones began to work.2 The success of BT privatization paved way for public utilities to be sold despite their size and OFTEL became a model for later regulatory offices for other utility industries. To this day, BT has contributed 11.3 billion pounds to the Exchequer in taxes since it was privatized in 1984. The impact of privatization in UK on economic performance has caused a number of empirical studies. Weyman-Jones and Burns concluded in a study in 1994, looking at the Electricity Supply Industry that the 12 regional electricity supply companies became more efficient after privatization. Domah and Pollitt concluded that the performance of regional electric companies in England and Wales caused a significant gain in social welfare while Newberry and Pollitt found substantial cost reductions in electricity generation. However, it is also true that the efficiency increases were also related to reduction in labour employed as employment in the Electric Industry fell from 127,300 at privatization to 66,000 by 1996/1997.6 The water industry on the other hand in the UK, where there is still very little competition for there are only two providers was found to have significant efficiency gains as well. Employment at the time of privatization was 45,863 and by 1993/1994, it had grown to 58,270. However, in the case of all privatizations, results may have been affected by technical change to some extent. This is the case in telecommunications and electricity generation where there have been technological improvements. Changes in prices for fuel have been an important factor for the sector of electricity.7 However, privatization has been a success story for the UK all in all as it has gained tremendously from it. Thomas OMalley in his 1998 study concluded that the subsidies for state-owned industries cost the taxpayer 50 million pounds a week and when these industries became privatized and profitable, they contributed 60 million pounds a week in corporation tax on their profits to the Exchequer by 1996. Privatization delivered lower prices for utility

customers as BT call charges were down by 59 percent in real terms, the real cost of gas has fallen by 32 percent and domestic electricity charges have been cut by 18 percent. Privatized firms have also been able to make up for years of under-investment by successive governments. 10 As mentioned above by James Foreman-Peck, by 1998 there were 50 percent more phone boxes, with over 95 percent working at all times when the number was 74 percent at the time of privatization and the waiting time had been reduced to few days, even hours for phone line installation when the wait was more than 2 months at the time of privatization. In terms of efficiency, the 1980s and 1990s have seen a transformation of British Industry. With being at the bottom of the productivity league, average annual improvements in UK productivity in the 1980s exceeded all major industrialized nations. Privatization also allowed public utilities to undertake significant investment. OMalleys report on UKs privatization programme defines the achievement of privatization in terms of investment by For the first time since they were nationalized, the utilities have been able to plan for the future with confidence. As well as reversing past under-investment in maintenance, companies have been able to invest in new technology or more environmentally-friendly processes. The massive investment programmes undertaken by privatized utilities over the past ten years have generated many thousands of jobs.12 Privatization has most certainly been advantageous to the UK. Some examples to further prove the point include, National Freight Corporation which had a long record of losses but after its privatization increased profit from 4 million pounds in 1982 to 90 million pounds in 1990 and British Steel which was privatized in 1988 and has become one of the most efficient steel producers in the world. According to a study in 199813, losses of 1.7 billion pounds in 1988 turned to profits of 733 million pounds in 1998 for British Steel. The gains from the privatization programme of 1980s and early 90s have truly been tremendous for the UK.

Bibliography:
1. Chowdhury, F.L. Corrupt Bureaucracy and Privatisation of Tax Enforcement. Dhaka: 2006. Print. 2. Foreman-Peck, James. "How Privatisation Has Changed Britain." BBC n.d., n. pag. Web. 13 Mar. 2012. <http://news.bbc.co.uk/1/hi/business/4061613.stm>. 3. Burns, P. and Weyman-Jones, T. (1994), Productive efficiency and the regulatory review of regional electricity companies in the UK, Regulatory Policy Research Centre, Discussion Paper no.1. 4. Domah, Preetum, and Michael Pollitt. "The Restructuring and Privatisation of the Electricity Distribution and Supply Businesses in England and Wales: A Social Cost Benefit Analysis." n. page. Web. 14 Mar. 2012. <http://www.econ.cam.ac.uk/dae/repec/cam/pdf/wp0007.pdf>. 5. Newberry, David, and Michael Pollitt. "The Restructuring and Privatisation of the CEGB Was It Worth It."Restructuring and Privatisation of the CEGB - Was It Worth It. n. page. Web. 14 Mar. 2012. <http://www.essex.ac.uk/jindec/supps/newbery/newbery.htm>. 6. Parker, David. "The UKs Privatisation Experiment: The Passage of Time Permits a Sober Assessment."CESifo. n. page. Web. 13 Mar. 2012. <http://www.cesifogroup.de/portal/page/portal/ifoContent/N/neucesifo/CONFERENCES/SC_CONF_19992006/PRI03/PRI03_PAPERS_PART2/PRI03-PARKER_B.PDF>. 7. Shaoul, J. A Critical Financial Analysis of the Performance of Privatised Industries: The Case of the Water Industry in England and Wales, 8. Critical Perspectives on Accounting, Vol. 8, 1997a, pages 479-505Robinson, Dr. Colin. "PRESSURE GROUPS AND POLITICAL FORCES IN BRITAINS PRIVATISATION PROGRAMME." n. page. Web. 13 Mar. 2012. <http://www.surrey.ac.uk/economics/files/apaperspdf/SEED 91.pdf>. 9. Wood, Randall. "The Privatization of Public Utilities: What are the Gains? Why the Popular Opposition?." n. page. Web. 13 Mar. 2012. <http://therandymon.com/papers/privatization.pdf>. 10. O'Malley, Thomas. "Privatisation: A UK Success Story." Free Market Foundation. n. page. Print. 11. O'Malley, Thomas. "Privatisation: A UK Success Story." Free Market Foundation. n. page. Print. 12. O'Malley, Thomas. "Privatisation: A UK Success Story." Free Market Foundation. n. page. Print. 13. O'Malley, Thomas. "Privatisation: A UK Success Story." Free Market Foundation. n. page. Print.