Privatisers on parade

Privatisation And Economic Performance
October 26, 1995

The privatisations of the 1980s represent one of the most significant changes in postwar British economic life. Other countries have taken their lead from the Thatcher government but few have pursued the policy as single-mindedly, across the entire public sector, as the British Conservative party.

This book attempts to evaluate systematically the privatisations that have been undertaken in the United Kingdom over the past 10 years. It describes what has happened, it reviews developments in the relevant economic literature and explains how and why the privatisations took the form they did in each of the sectors concerned.

The contributors analyse the electricity supply, water, gas, steel and rail industries as well as the privatisation of British Airways. There are chapters on issues as diverse as competitive tendering in refuse collection, popular capitalism and the comparative costs of floating public sector companies in France and the UK.

A number of chapters are rather dated, with some written in 1986, while others add little to the overall goal of evaluating the economic and industrial consequences of the privatisation programme. None the less, there is sufficient focus on the theoretical, empirical and sector-specific issues involved to make it required reading for students, policy makers and practitioners in this increasingly contentious field.

The real strength of the book lies in its breadth. Taking a historical as much as an economic approach, it highlights the full range of financial and political decisions which shaped the privatisation programme. There are particularly rich rewarding insights into the operational, technical and market processes in each of the sectors reviewed.

The book is persuasive on the benefits of privatisation. Regulation of price, quality and environmental standards is now explicit and progress against targets can be publicly monitored. Business strategies on tariffs, investment and future direction are no longer subject to the vagaries of the political cycle or to short-term party interests. In some sectors, too, markets have been liberalised. These are changes which would have been inconceivable if the industries had remained bound by Treasury financial constraints.

Less convincing is the generally benign view taken of capital market pressures. The editors believe that the incentive effects of share prices and managerial stock options, and the threat of bankruptcy and take-over, spurs efficiency improvements even if there is little or no competition.

A criticism of the book is its general failure to evaluate the social and distributional aspects of privatisation: the impact of tariff re-balancing between individual and business consumers; the effects on the size of the social railway; and the long-term effects of conservation of energy privatisation.

Michael Beesley and Stephen Littlechild's seminal Lloyds Bank Review article in 1983 on priorities for privatisation (helpfully reprinted here) warned that privatisation schemes needed to be designed with careful thought to noncommercial obligations. The Post Office and British Rail, two of their early candidates for privatisation, have arguably met most resistance in practice precisely because the distributional costs and benefits were inadequately addressed by the privatisation proposals.

Private shareholders will give less weight to noneconomic factors than the government as shareholder, and the effects on economic efficiency and social costs need to be part of the overall evaluation. Christopher Foster's book Privatisation, Public Ownership and the Regulation of Natural Monopolies (1992) provides a more comprehensive and satisfactory analysis of these issues.

The privatisation case studies demonstrate that the benefits of flotation lie not in the transfer of shares but in the range of accompanying measures. Catherine Price on gas, Simon Cowan on water and George Yarrow on the electricity supply industry conclude that privatisation only benefits consumers to the extent that firms are restructured; regulators have substantial influence over the conduct of incumbent monopolies; and actual (not yardstick) competition is introduced.

From a theoretical perspective, too, Simon Domberger and John Piggott conclude that privatisation without liberalisation is "likely to do more harm than good". And Beesley and Littlechild argue that if competition cannot be introduced in certain industries (or parts thereof) privatisation should be ruled out as simply not in the interests of consumers.

The UK government seems to have learnt this lesson and more recent privatisations have been driven by the search for competition. It is unfortunate, therefore, that John Dodgson in his review of rail privatisation is sceptical about the "practicality" of a complete separation of infrastructure from operations and wonders whether market mechanisms will yield satisfactory outcomes in terms of safety and service.

Indeed, for Bishop, Kay and Mayer the main failure of privatisations in the UK has been the failure to identify sufficiently precisely the areas where natural monopolies existed, to separate those from the rest of the industry and to introduce competition elsewhere.

In this context, the book provides only a cursory evaluation of the regulatory regimes so essential to the success or otherwise of particular privatisations. There is a general conclusion that regulatory control is inefficient, ineffective and unduly expensive but no review of how the regulatory regimes may need to evolve, particularly in sectors where competition remains weak.

Perhaps it is a little too early to evaluate fully the benefits and effects of privatisation. We are only just beginning to see the privatised utilities combine, vertically integrate and be taken over. The impact on consumers, regulation and transparency is hard to predict. This collection will, however, help the reader to understand and anticipate how events may unfold.

The book is a clearly written economic survey of privatisation from both a theoretical and empirical perspective. It will be particularly useful for the insights it provides on the operational characteristics, cost structures and demand conditions of the industries concerned and the way these have shaped privatisation and subsequent performance. It is a valuable addition to the literature.

Tim Walsh is director of strategic planning, Royal Mail International.

Privatisation And Economic Performance

Editor - Matthew Bishop, John Kay and Colin Mayer
ISBN - 0 19 877343 9 and 877344
Publisher - Oxford University Press
Price - £40.00 and £14.95
Pages - 378

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