THE COSTS AND RETURNS OF THE PRIVATIZATION OF NATIONALIZED INDUSTRIES
| Author | ROGER BUCKLAND |
| Published date | 01 September 1987 |
| DOI | http://doi.org/10.1111/j.1467-9299.1987.tb00660.x |
| Date | 01 September 1987 |
THE COSTS
AND
RE"S
OF
THE
PRIVATIZATION
OF
NATIONALIZED
INDUSTRIES
ROGER
BUCKLAND
The sale
of
public
sector
industry has become
a
central plank
of
UK
public policy. This
paper concentrates upon the most contentious area of the opportunity cost
of
share sales.
The nature
of
these costs is related to the revealed objectives
of
the policy, and the extent
to
which they differ from expected costs is identified. The nature
of
the benefits forecast
for privatization is explod and
questions
posed concerning the
balance
of costs and benefits
in current policy. Particular attention is paid to the distribution
of
returns on the share
issues in privatized businesses and parallels are drawn with issues in the private sector.
The sale of businesses within the public sector has become a major strand of the
present government's attempts to shift the boundary between public and private
sector activity.
This
shift is being effected through three interlocking mechanisms:
by a
shift
in the traditional
boundaries
between contracted-out
and
in-house activity
within the public sector: by a largescale transfer of property ownership, particularly
in development and forestry land and
in
subsidized owner-occupation of domestic
housing; and by sales
of
shares
in
the public
sector's
nationalized industries. Over
the last seven years the vigorous pursuit
of
these policies has substantially shifted
the normal division
of
public from private sector within the
UK.
Privatizing activity
provokes
issues of objectives and control: for
a
recent
dis-
cussion
see
Dunleavy
(1986).
Transferring ownership of
firms
raises those issues
also, but
these
policies
also
carry
important implications for both public and private
finance. At the level of control over public spendmg and monetary aggregates,
council house and other property
sales
have generated several billions of pounds,
used mostly to reduce local government borrowing requirements; and as a result
local govenunent have since
1982
been net lenders to the other sectors of the
economy (see column
3
of Table
1).
Central government has continued to be a
substantial borrower, however, and especially when the 'negative spending' of the
Roger Buckland
is
Lecturer
in
Finance at the Management Centre, Aston University. The research
reported here is supported by a grant from the Economic and Social Research Council held by the
author and Professor
Edward
W.
Davis at Aston University. Material
from
this paper was presented
at the First
Annual
Congress of the European Economic Association, Vienna, August
19%.
Thanks
are due to anonymous referees
for
their valuable comments.
Public Administration Vol.
65
Autumn
1987 (241-257)
0
Royal Institute
of
Public Administration
ISSN
0033-3298
$3.00
242
ROGER
BUCKLAND
proceeds from special sales of assets is considered. One illogical quirk of public
sector accounts is the practice whereby sales proceeds from, say,
BP
shares are
not added to capital receipts, but instead are deducted from the planned expen-
diture total. Hence the bigger are the state’s sales of its assets and businesses, the
less it appears to be spending. The growing scale of sales has therefore distorted
the figure for net ’expenditure‘: it makes the Public Sector Borrowing Requirement
(PSBR)
seem
to
be
lower than it otherwise would
be.
Furtlyr, the transfer of owner-
ship shifts nationalized industries’ borrowings out of the
PSBR
(for a discussion
see
Steel and Heald 1984). Table
1
documents the nature and the increasmgly s&cant
scale of the impact which share sales are having upon the government’s presenta-
tion of
fiscal
policy. Notwithstanding the predictions in the
Medium
Term Financial
Strategy that the
PSBR
must decline from the 1979/80 level of 4.75 per cent of
GDP
to
1.5
per cent by 1983/84, the
PSBR
gross
of
des
proceeds continues at over
3
per cent per year and
will
persist at that level, with share
sales
proceeds accounting
for one half or more of the reported outtum in the next
two
financial years.’
Column
4
of Table 1, the proceeds from equity sales, documents the scale of
the disposal of publicly-owned businesses. Relatively minor sums in 1979 have
grown to major transfers in the present: some 24.75 billions in each fiscal year
1986/87 and 1987/88. There will be more substantial sales now that the Govern-
ment has been re-elected for a third term. Their impact upon
PSBR
accounting is
clear: they also, however,
affect
private markets in equities and investors’ behaviour
in these markets. Disposals have made use of equity issue markets to achieve the
double objectives
of
floating the businesses as quoted joint-stock companies, and
of
realizing the value of their equity through a sale of shares to the private sector.
From analysis of these markets we can build up a cost-benefit analysis of the sales
policy. Thus in this paper, the privatization issues are analysed to uncover the
costs which are incurred through the use of the markets and the returns which
have been experienced by investors. Both the costs of using markets and the returns
offered are central to assessment of whether the objectives of policy are being met.
It
is of some importance, therefore, to follow the development of these objectives.
SPECIAL
SALES
AND
THE
OBJECTIVES
OF
POLICY
Policy initially concentrated upon the
disposal
of the equity holdmgs of the pre-1979
National Enterprise Board, rationalization of some of the core nationalized
businesses and reductions of holdings in quoted, private business. Holdings in
rescued companies such as Ferranti and
ICL
were disposed of together with sales
of businesses such as British Transport Hotels, Sealink, International Aeradio,
Amersham International, Enterprise Oil or the Wytch Farm oilfield. Gradually,
however, emphasis shifted to competition policy objectives. The burden of the
argument was that productive efficiency was hindered by governmental interference
in the management
of
the nationalized industries and that the financial framework
established by successive White Papers was inferior to ’free market’ discipline as
a form of control.2 It is this level of argument which underlies the ‘middle period
of sales in 1981 to 1984. Businesses were to be freed in order that society should
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