The Downing Street Years
Page 90
The fact that the return of inflation and then recession obscured the benefits of the tax changes Nigel Lawson’s budgets made does not mean that those benefits had evaporated. Inflation distorts; but, once tamed again, it turns out not to have destroyed the improvements in economic performance which lower and simpler taxes bring. Only one thing can undermine these supply side benefits: that is letting public expenditure get out of control, which puts up borrowing and which eventually requires tax increases that destroy incentives. When I left office both public spending and borrowing were under tight control. Indeed, we were still budgeting for a surplus. And during my period of office public spending fell as a share of GDP from 44 per cent in 1979–80 to 40.5 per cent in 1990–91. It has since risen to 45.5 per cent of GDP (1993–4) and public sector borrowing to around £50 billion, some 8 per cent of GDP. These figures bring strange echoes of the past. In politics there are no final victories.
PRIVATIZATION
Privatization, no less than the tax structure, was fundamental to improving Britain’s economic performance. But for me it was also far more than that: it was one of the central means of reversing the corrosive and corrupting effects of socialism. Ownership by the state is just that — ownership by an impersonal legal entity: it amounts to control by politicians and civil servants; and it is a misnomer to describe nationalization, as the Labour Party did, as ‘public ownership’. But through privatization — particularly the kind of privatization which leads to the widest possible share ownership by members of the public — the state’s power is reduced and the power of the people enhanced. Just as nationalization was at the heart of the collectivist programme by which Labour Governments sought to remodel British society, so privatization is at the centre of any programme of reclaiming territory for freedom. Whatever arguments there may — and should — be about means of sale, the competitive structures or the regulatory frameworks adopted in different cases, this fundamental purpose of privatization must not be overlooked. That consideration was of practical relevance. For it meant that in some cases if it was a choice between having the ideal circumstances for privatization, which might take years to achieve, and going for a sale within a particular politically determined timescale, the second was the preferable option.
But, of course, the narrower economic arguments for privatization were also overwhelming. The state should not be in business. State ownership effectively removes — or at least radically reduces — the threat of bankruptcy which is a discipline on privately owned firms. Investment in state-owned industries is regarded as just another call on the Exchequer, competing for money with schools or roads. As a result, decisions about investment are made according to criteria quite different from those which would apply to a business in the private sector. Nor, in spite of valiant attempts to do so (not least under Conservative governments) can one find an even moderately satisfactory framework for making decisions about the future of state-owned industries. Targets can be set; warnings given; performance monitored; new chairmen appointed. These things help. But state-owned businesses can never function as proper businesses. The very fact that the state is ultimately accountable for them to Parliament rather than management to the shareholders means that they cannot be. The spur is just not there.
Privatization itself does not solve every problem; though, as I shall show, it certainly exposed hidden problems which could thus be tackled. Monopolies or quasi-monopolies which are transferred to the private sector need careful regulation to ensure against abuses of market power, whether at the expense of competitors (if there are such) or of customers. But on regulatory grounds there are good arguments for private ownership as well: regulation which had, when in the public sector, been covert now had to be overt and specific. This provides a clearer and better discipline. And more generally, of course, the evidence of the lamentable performance of government in running any business — or indeed administering any service — is so overwhelming that the onus should always be on statists to demonstrate why government should perform a particular function rather than why the private sector should not.
Now that almost universal lip service is paid to the case for privatization it is difficult to recall just how revolutionary — how all but unthinkable — it seemed at the end of the 1970s. Our 1979 manifesto had been quite cautious on the subject, promising: ‘to sell back to private ownership the recently nationalized aerospace and shipbuilding concerns, giving their employees the opportunity to purchase shares’ and selling ‘shares in the National Freight Corporation to the general public’.
The depth of the recession meant that there was not much prospect of successful privatization in the early years, due to low market confidence and large nationalized industry losses. But, for all that, by the time of the 1983 election British Aerospace and the (now) National Freight Consortium were flourishing in the private sector, the latter after a spectacularly successful management and worker buy-out; Cable and Wireless, Associated British Ports, Britoil (a nationalized North Sea oil exploration and production company set up by Labour in 1975), British Rail Hotels and Amersham International (which manufactured radioactive materials for industrial, medical and research uses) had also in whole or in part been moved back to private ownership.
The huge losses of British Shipbuilding and the massive restructuring required of British Airways prevented their sale for the moment; though in both cases the prospect of privatization was an important factor in asserting tighter financial discipline and attracting good management. The British Telecom Bill — to privatize BT — had only fallen with the old Parliament and would be introduced with the new. The 1983 manifesto mentioned all of these as candidates for privatization as well as Rolls-Royce, substantial parts of British Steel and of British Leyland and Britain’s airports. Substantial private capital would also be introduced into the National Bus Company. And there was the repeated promise of shares offered to employees in the companies concerned. Perhaps the most far-reaching pledge, though, was that we would seek to ‘increase competition in, and [attract] private capital into the gas and electricity industries’. Gas was indeed privatized in 1986. The more complicated and ambitious privatization of electricity had to wait for the next Parliament.* In the 1987 manifesto both electricity and the water industry were the main candidates for privatization. So over these years privatization had leapt from fairly low down to somewhere near the top of our political and economic agenda. This continued to be so for the rest of my time in office. Why?
One reason I have already touched upon. Economic conditions improved and the prospects for privatization improved with them. But there is a further reason. Our privatization programme was constantly breaking new ground. Each industry posed its own special problems. Each flotation or trade sale raised separate issues. It is one of the disadvantages of being in the vanguard of reform — as the British who pioneered the industrial revolution know well — that the only experience you can learn from is your own. Gradually, the general emphasis switched from privatization of industries whose nationalization was justified only by socialist dogma, to that of public utilities where the arguments were more complex.
I was always especially pleased to see businesses which had absorbed huge sums of taxpayers’ money and been regarded as synonyms for Britain’s industrial failure pass out of state ownership and thrive in the private sector. The very prospect of privatization compelled such companies to make themselves competitive and profitable. Lord King turned round British Airways by a bold policy of slimming it down, improving its service to the customer and giving its employees a stake in success. It was sold as a thriving concern in 1987. British Steel, which had absorbed vast subsidies in the 1970s and early ’80s, re-entered the private sector as a profitable company in 1988. But it was perhaps BL (now known as the Rover Group) whose return to private ownership caused me most satisfaction — in spite of the almost endless arguments about how much its private sector purchaser, the once state-owned British Aerospace, had received.
Rover had by now a superb Chairman in Graham Day who had been making great efforts to do what I had always hoped would be done — dispose of surplus assets and increase the drive for higher productivity. But that did not mean that I was happy with the sort of figures the company’s Corporate Plans contained. It retained an apparently insatiable appetite for cash — it had absorbed £2.9 billion of public money in total since we came to office in 1979 — and the Government’s liabilities under the Varley-Marshall assurances remained at some £1.6 billion. The earlier anti-American hysteria about takeovers by foreign companies of our British car production meant that the prospects for sale of the main car business did not look promising,* though both Ford and Volkswagen continued to express some interest.
This was the position when, just before Christmas 1987, there were signs that British Aerospace might be interested in acquiring Rover. I was not immediately clear that British Aerospace’s was a serious offer. But it soon turned out that it was. There was an industrial logic in the acquisition, for the car business — if relieved of its burden of debt and provided with a substantial injection of new investment — would complement the rest of BAe’s business. Aerospace depends on gaining a few huge contracts at inevitably irregular intervals; cars satisfy a steadier market. And, of course, the sale to BAe would have one marked political advantage: the company would stay British.
David Young was subsequently heavily criticized for the way in which the deal was struck. In fact, he played a difficult hand with great aplomb. The special financial provisions of the deal only reflected the poor state of BL after years of state ownership and wasted investment. That the terms had to be revised reflected the new interest of the European Commission in probing the details of state aid to industry, rather than being a reflection on the basic soundness of the deal itself.
Only satisfied customers can ultimately guarantee the future of a business or the jobs depending on it and Rover could not be an exception to that rule. But the effects of the disastrous socialist experiment to which the company had been subject had now been overcome; and Rover was back in the private sector where it belonged.
PRIVATIZATION OF PUBLIC UTILITIES
British Telecom was the first utility to be privatized. Its sale did more than anything else to lay the basis for a share-owning popular capitalism in Britain. Some two million people bought shares, about half of whom had never been shareholders before. But the relationship between privatization and liberalization — that is opening up telecommunications to wider competition — was a complex one. The first steps of liberalization had begun under Keith Joseph who split British Telecom from the Post Office, removed its monopoly over telephone sales and licensed Mercury to provide a competing network. Further liberalization took place at the time of privatization.
But if we had wanted to go further and break up BT into separate businesses, which would have been better on competition grounds, we would have had to wait many years before privatization could take place. This was because its accounting and management sytems were, by modern standards, almost nonexistent. There was no way in which the sort of figures which investors would want to see could have been speedily or reliably produced. So I was well satisfied when, after the delay which had been caused by the need to withdraw the original bill with the advent of the 1983 general election, British Telecom was eventually successfully privatized in November 1984.
At the same time, a system of regulation was established under the control of an Office of Telecommunications (OFTEL) with the result that BT had to keep its price increases at a fixed level below the rate of inflation for a number of years. This was a quite new and — as it has turned out — influential departure. Not only did the ‘RPI minus x’ formula become the model for dealing with public utility privatizations in Britain: it has since been adopted overseas, for example in the United States.
The consequences of privatization for BT were seen in a doubling of its level of investment, now no longer constrained by the Treasury rules applying in the public sector. The consequences for customers were just as good. Prices fell sharply in real terms, the waiting list for telephones shrank and the number of telephone boxes in operation at any particular time increased. It was a convincing demonstration that utilities were better run in the private sector.
Many of the same issues arose in the privatization of British Gas, which had been a nationalized industry for nearly forty years. BGC had five main businesses. These were: the purchase of gas from the oil companies which produced it; the supply of gas, involving the transmission and distribution of gas from the beach-head landing points to the customer; its own exploration for and production of gas, mostly from offshore fields; the sale of gas appliances through its showrooms; and the installation and servicing of those appliances. Of these functions only the second — the supply of gas to consumers — could be described as a natural monopoly. But there were a number of considerations which argued against fundamentally restructuring or breaking up the business. The most important of these, curiously enough, was lack of parliamentary time. Consideration of privatization had inevitably been held up by the miners’ strike of 1984–5. Both the BGC and Energy Secretary, Peter Walker, were determined to privatize BGC as a whole and their full co-operation was essential if it were to be achieved as I wanted during our second term. There was much to be said for using the model of British Telecom rather than trying to come up with a fundamentally different one under these conditions.
Accordingly, at a meeting I held with Peter Walker, Nigel Lawson and John Moore on Tuesday 26 March 1985 I agreed that we should go for a sale of the whole business. The formula for regulation and the issue of liberalizing imports and exports of gas became the focus of much argument between Peter Walker who was prepared to accept a degree of monopoly as the price of early privatization on the one hand, and the Treasury and the DTI on the other who would have preferred stronger competition from the first. We were able to liberalize gas exports but I went along with most of Peter Walker’s arguments in order to achieve privatization in the available timescale. I still think I was right to do so because the privatization was a resounding success. (The problems of the monopoly power of British Gas are now being investigated by the Monopolies and Mergers Commission.) Four and a half million people invested in the shares, including almost all of the company’s 130,000 employees.
The privatization of the water industry was a more politically sensitive issue. Much emotive nonsense was talked along the lines of, ‘look, she’s even privatizing the rain which falls from the heavens.’ I used to retort that the rain may come from the Almighty but he did not send the pipes, plumbing and engineering to go with it. The Opposition’s case was even weaker than this, for about a quarter of the water industry in England and Wales had long been in the private sector. Of more significance was the fact that the water authorities did not just supply water: they also safeguarded the quality of rivers, controlled water pollution and had important responsibilities for fisheries, conservation, recreation and navigation. It was Nick Ridley — a countryman with a natural feel for environmental issues — who, when he became Environment Secretary, grasped that what was wrong was that the water authorities combined both regulatory and supply functions. It made no sense that those who were responsible for the treatment and disposal of sewage, for example, should also be responsible for regulating pollution. So the bill which Nick introduced also established a new National Rivers Authority. Privatization also meant that the companies would be able to raise money from capital markets for the investment needed to improve the water quality.
The most technically and politically difficult privatization — and the one which went furthest in combining transfer of a public utility to the private sector with radical restructuring — was that of the Electricity Supply Industry. The industry had two main components. First, there was the Central Electricity Generating Board (CEGB) which ran the power stations and the National Grid (the transmission system). Second
, there were the twelve Area Boards which distributed the power to customers. (In Scotland there were two companies running the industry — the South of Scotland Electricity Board and the North of Scotland Hydro Board.) Some attempt had been made in Nigel Lawson’s 1983 Energy Act to introduce competition into the system. But it had had no practical effect. As a result the whole of the industry was based on monopoly. The CEGB had a monopoly nationally and the Area Boards monopolies regionally. The challenge for us would be to privatize as much as possible of the industry while introducing the maximum amount of competition.
I had an initial discussion about electricity privatization with Peter Walker and Nigel Lawson on the eve of the 1987 general election. I did not intend to keep Peter at Energy so there was no point in going into detail. But we did agree that the pledge of privatization should be included in the manifesto and be given effect in the next Parliament.
When Cecil Parkinson took over as Energy Secretary after the election he found that the department’s thinking had been strongly influenced by Peter Walker’s corporatist instincts — and by their recognition that Walter Marshall would be passionately opposed to the break-up of the CEGB of which he was chairman. The prevailing idea seemed to be that the CEGB and the National Grid would be floated as one company and the twelve Area Boards would be combined into another. This would have done no more than change a monopoly into a duopoly; but Cecil changed all this. He was subsequently the butt of much malicious and unjust criticism because of the changes which his successor, John Wakeham, had to make in his original privatization strategy, particularly in connection with the nuclear power stations. In fact, it was Cecil who took the bold and right decision to reject both corporatist thinking and vested interests by breaking up the CEGB and — most crucially — removing from its control the National Grid. The grid would now be owned jointly by the twelve distribution companies created from the old Area Boards rather than by the CEGB. Whereas under the old system the controller of the grid was also its near monopoly supplier, control would now be with those who had the strongest interest in ensuring that as much competition as possible be allowed to develop in power generation. These two decisions meant that competition became effective.