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Last Updated: Friday, 3 December, 2004, 09:37 GMT
How privatisation has changed Britain
By Professor James Foreman-Peck
Cardiff Business School

BT launch on London Stock Exchange
More than 2 million members of the public became shareholders overnight

Twenty years ago this week, privatisation as we know it was invented. British Telecom became the first major state flotation, paving the way for what became a torrent of mass-market sell-offs, in the UK and around the world. How did it come about and what were the lasting effects?

Oddly, de-nationalisation seems to have been largely an accident - or, at best, a policy emerging by trial and error.

Elected in 1979, the Conservative government led by Margaret Thatcher favoured increasing competition. At the same time, ministers were obliged to address the problem of government budget deficits.

But in the late 1970s, the notion of privatisation was scarcely even a gleam in a minister's eye.

Joseph's conversion

Sir Keith Joseph, Mrs Thatcher's close adviser and Minister for Trade and Industry, had become impressed by the liberating impact on technology of deregulation of telecoms in the United States.

He was also keen to remove from public-sector unions the power to throttle the nation's communications.

Yet the fundamental driver of privatisation proved to be the incompatibility of funding investment in the nationalised industry and the government's target for public sector borrowing. BT was profitable, but the investment necessary to maintain this position counted as public borrowing so long as the business was owned by the state.

Amidst massive publicity, the issue of 20 November 1984 was greatly over-subscribed. On 1 December about 2.1 million members of the public were allocated almost two-fifths of the shares, to ensure wider ownership, and British financial institutions bought nearly one-half. When dealing began on 3 December, BT shares traded at an unexpectedly high premium.

Bandwagon gathers pace

After this there was no looking back. By 1990 42 major businesses employing almost 900,000 people had been sold off, with large privatisations planned to continue into the middle of the decade.

Even apparently implausible candidates - coal, railways and nuclear energy - passed into the private sector between 1994 and 1997.

A former prime minister, Harold Macmillan, famously grumbled about "selling the family silver", and had the Labour Party been elected in 1987, they would have reversed the process.

Yet the privatised 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, once the industry regulator cracked his whip.

Expedient proves eternal

The regulator was only an interim measure before full competition was unleashed by the market, according to Stephen Littlechild, the author of the two fundamental reports on regulating privatised industries.

BT flotation promotional phone
BT has certainly cleaned up its act since privatisation
Meanwhile this official would ensure the industry adhered to a price control rule, known as RPI-X.

The rule, which also proved a popular export, allowed BT to increase prices by no more than than the rise in the retail price index less a specified percentage for an agreed period.

Despite Mr Littlechild's hopes, however, the principal elements of the regulatory regime established in 1984 have proved remarkably durable.

Getting better

Until 1991 competition was fairly muted; only Mercury could compete with BT.

Thereafter as pressure increased, BT shed jobs and substituted bought-in supplies for in-house production.

Labour productivity continued to grow, as did profits. The company successfully moved into newer hi-tech markets so that earnings per share in the last couple of years have risen while broadband charges fell.

Many now find it difficult to believe that a monopoly state industry could have provided the same innovative services at comparable prices.

'Safe with Labour'

Most spectacular among these converts has been the Labour Party itself.

Clause IV of the party's constitution, a commitment to "the common ownership of the means of production", required a Labour government to reverse privatisations.

In 1995, under Tony Blair's leadership, the party voted to amend the clause and the face of British politics for a century was changed.

Two years later New Labour was in power, successfully establishing a reputation for sound finance and an ability to manage a predominantly market-based economy that had eluded other Labour governments for most of their periods of office.

At least some of the Conservative's thunder was stolen. Privatised industries, and their novel system of regulation, were safe with Labour.

James Foreman-Peck
Director of the Welsh Institute for Research in Economics and Development and former President of the European Historical Economics Society, James Foreman-Peck has been a Treasury adviser and held academic posts at the University of Hull, the University of California and St Antony's College, Oxford.

His books include A History of the World Economy: International Economic Relations since 1850; Public and Private Ownership of British Industry 1820-1990 (with R Millward); and most recently European Industrial Policy: The Twentieth Century Experience (edited with G Federico).

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