Margaret Thatcher: The Authorized Biography, Volume 2

by Charles Moore

  It did not follow from any of this that Mrs Thatcher was either the most expert or the most confident member of her own government where privatization was concerned. The successes of the first term notwithstanding (see Chapter 2), she continued to harbour many doubts and fears. She worried that opinion polls suggested it would be electorally unpopular. She was immensely conscious of market and political difficulty, and the possible relation between the two. In the view of John Redwood, even into her second term Mrs Thatcher was almost a slow learner, failing to recognize ‘my central point’ that privatization would ‘unlock the cornucopia at once’ because it would give the businesses ‘instant access to ready cash’.45 She was ‘ready for it’, he thought, ‘but not an evangelist for it’. She liked to ask, ‘That’s all very well, but how do we do it?’ As Redwood saw his role, ‘I arrived in No. 10 to create a programme out of thin air.’46 He was greatly exaggerating – Lawson had already thought the issue through much more than had Mrs Thatcher. It was a year, after all, since Geoffrey Howe had persuaded Mrs Thatcher to send out the personal memo driving forward privatization candidates for the next Parliament. But it was true that Mrs Thatcher was not leading the pack and had not organized any timetable. On the whole, this was to the good. David Willetts, who, at the Policy Unit, observed her methods closely, recalled that she was always ‘very wary of grand strategy’ and ‘brilliant at moving between strategy and tactics’.47 She had a way, ‘rather like a camera in a film, of drawing back to get a panning shot and then focusing right in on a tiny detail’. The strategy was ‘implicit in day-to-day decisions’ rather than rigidly imposed. Instead of crushing objections unthinkingly, she listened carefully. She stuck to one of her favourite maxims – ‘Time spent in reconnaissance is never wasted’ – and proved its truth.

  Mrs Thatcher’s landslide victory in June 1983 naturally improved her confidence and made her keen to get on with things which had been impossible before it. It turned privatization from an experimental affair into something politically central and industrially and financially momentous. The government, regretted John Moore, had ‘done the easy bits first’.48 Rather than making the radical case for a massive shift of industrial power away from the state and the breaking up of monopolies, it had dealt with problems at the margins. As Nigel Lawson wrote to Mrs Thatcher in July 1983,

  Hitherto the companies we have sold have mainly been profitable and operating in competitive environments. Preparing them for privatisation … has involved relatively little change to their structure. But from now on we are increasingly working in the heartland of the public trading sector, where we shall have to deal both with the giant utilities and unprofitable companies.49

  He called for a programme and timetable for each privatization.* She swung into action.

  The Redwood–Moore combination spent much of the summer and autumn acting upon this call to arms, touring government ministries. ‘We went round from department to department,’ Moore recalled, ‘but they all said, “It’s a political disaster.” ’50 In October, Lawson summarized colleagues’ responses: ‘We cannot be satisfied with the overall picture that they show. Many of the candidates have been under consideration for much of the last Parliament. Yet, in several cases, points of principle still need to be resolved. We must accelerate the programme.’51 He set out again why privatization mattered. There was ‘a clear benefit to the PSBR’ in the short term. ‘But the major advantages to the economy as a whole arise if privatisation increases competition, improves resource allocation and helps eliminate inefficiencies.’ Mrs Thatcher underlined all this approvingly. Lawson added that the government was not paying enough attention to getting rid of monopolies – an implied criticism of Peter Walker, at the Department of Energy, who wanted neither gas nor electricity broken up. After BT had taken up the first half of the Parliament, gas and electricity would be next, Lawson said. ‘It is therefore vitally important that early decisions are taken about the future of these two industries.’

  On cue, Ferdinand Mount (at this stage still running the Policy Unit) wrote to Mrs Thatcher to commend Lawson’s paper and urge her: ‘It is now essential for you to put your full authority behind the privatisation programme.’52 Less oblique than Lawson felt he could be, on paper, about a Cabinet colleague, Mount wrote: ‘We cannot allow Peter Walker and others to get out of this exercise … We cannot agree a coordinated programme which omits the energy industries.’ Mount attached an even franker memo from John Redwood, describing the DTI submission on the car manufacturer British Leyland as ‘woefully inadequate’. Redwood urged that the whole of Jaguar (the elite car marque) should be sold in 1984. The prospectus, which envisaged a sale of Austin Rover (the volume car-maker) to investors after 1990, was ‘bogus’. Both the DTI and BL itself showed ‘a lack of commitment to the policy’, and the dangers of delay were visible: ‘We are heading for the worst trading year on record, and there is no sign of any relief.’53 Here the unit’s unnamed villain was Norman Tebbit who, despite his closeness to Mrs Thatcher, was thought to be suffering from ‘producer capture’54 in his love of British car production at a punitive rate of subsidy (estimated at £200 million in 1983).

  Ministers felt the pressure. By Christmas, Walker had permitted himself to be nudged forward a little. He wrote to Mrs Thatcher saying that the privatization of gas should come before that of electricity in the queue because it was easier and would create fewer problems with Arthur Scargill.55 This did not buy off the watchful Redwood, however, who still believed that Walker was playing for time: ‘The whole programme without firm decisions on the energy industries is like Hamlet without the Prince.’56

  In mid-January, Lawson sent Mrs Thatcher the full programme of privatizations, with dates. There were twenty-three enterprises mentioned, including all those promised in the manifesto, plus, among others, the British Gas Corporation, the National Coal Board and Electricity (England and Wales and Scottish Electricity Boards). It was one of the most ambitious plans for legislation ever laid before a British Cabinet.* As the junior minister doing the detailed work, John Moore was invited to attend the Cabinet sub-committee meeting which Mrs Thatcher chaired to discuss and agree the Lawson programme. According to Moore, Mrs Thatcher stared at the wall-chart of what would be sold when and said: ‘ “This is marvellous. Isn’t it? Isn’t it? Are there any questions?” There was complete and absolute silence. The chart became the policy.’57 Gerry Grimstone,† one of the main officials overseeing privatization, saw Mrs Thatcher’s role at this meeting, and subsequent similar ones, as crucial. Unlike in her first term, privatizations were now ‘intellectually conceptualized’58 by the government conducting them. Lawson was extremely important because ‘he understood markets’, but Mrs Thatcher was the only one with the power to maintain the pace: ‘She never saw herself as the captain of the team, but as the coachman flogging the horses.’ Redwood, he added, ‘put metal in the whips’.‡ Mrs Thatcher’s role as coachman was particularly important because the number of privatizations was so large and the detail so complicated. These gave endless opportunities for officials to slow the pace, so the Thatcher lash was often needed.

  British Telecom was the great test of the government’s resolve and capacity. The company had nearly 250,000 (unionized) employees, but, allegedly, only one proper accountant. It was about six times bigger in value than anything sold before. It provided a service which almost every citizen used. It was the principal – indeed, in the era before mobiles and emails, virtually the only – means of instant one-to-one communication (although liberalizing legislation in the first term had permitted the creation of one competitor, Mercury). Telecoms were also vital to the commercial and technological revolution which Mrs Thatcher sought to bring about, particularly in financial services, so the industry had to be properly capitalized and run. The company in its nationalized form could not keep pace with normal demand, let alone innovation.* If BT privatization succeeded, the way would lie open for virtually any other sale. If not, significant c
hange would become almost impossible. The one thing the sale could not do was flop.

  If it were not to flop, it was likely to err on the side of BT being sold as a monopoly. Mrs Thatcher had opposed this in the first term, but been forced to back down. The BT privatization Bill, which had fallen in 1983 for lack of time before the election, returned to the new House of Commons in 1984 unchanged in its essentials. The problem was crisply stated by Lord Cockfield. He wrote to Mrs Thatcher invoking the views of Lord Weinstock,† the great industrialist (and himself a shameless monopolist), ‘that what we are doing is selling a monopoly: to the extent that we restrict that monopoly we are reducing the proceeds of sale: that the Treasury requirement for money is regarded as paramount: and that therefore we are doing everything we can to maintain the monopoly’.59 In Cockfield’s view, ‘Weinstock’s argument is quite right. There is an inescapable conflict here between competition and the Treasury … We shall face exactly the same problem when we come to privatize other monopolies such as gas and electricity.’

  Mrs Thatcher and the relevant ministers were well aware of the problem. She had an uneasy conscience about it. Her scribbled interventions on memos about privatizations often complained about monopoly and its bad effects on prices and competition. In her approach to British Leyland, for instance, she consistently opposed a strategy of making BL a ‘national champion’ and trying to sell it off as one big thing – ‘She believed that the good apples were affected by the bad apples in the basket.’60 But the government had always to face both the need for money for the Exchequer and the rush of ‘Time’s wingèd chariot’. Something as complicated as privatization could be forever postponed if ministers let the best be the enemy of the good. Mrs Thatcher had already confronted this conundrum in the previous Parliament when she had resisted an attempt to refer BT to the Monopolies and Mergers Commission in 1982. ‘I take the view’, she wrote to Ferdinand Mount, ‘that denationalisation should not be jeopardised.’61 As Cecil Parkinson, the new Trade and Industry Secretary, explained to the House of Commons at the second reading of the post-election BT Bill, the quickest way to bring accountability to BT was to move it to the private sector: ‘That is one reason why I have decided against breaking up BT before offering it to the public. To do so would require a delay of many years in order to put British Telecom’s accounts into a form which would make piecemeal disposals possible.’62

  A similar pragmatism drove the notion that the reluctant senior executives of nationalized industries should be paid much more to take their businesses to market, even if these payments were not, in all cases, meritorious. When nationalizing health care in the 1940s, Aneurin Bevan had won over consultants by, as he later put it, having ‘stuffed their mouths with gold’.63 Now the Thatcher government used a similar method to achieve the reverse effect across a range of industries. It was important that ‘Most of the interests involved thought there was something in it for them.’64 In the case of BT, the chairman, Sir George Jefferson, saw his salary rise more than 70 per cent to £160,000 shortly after privatization.65

  Although she had capitulated in relation to BT, Mrs Thatcher still hoped to avoid future monopoly sales, especially of gas and electricity. In the same week as Cockfield sent his letter, the Financial Times reported that ‘It was agreed [by E Committee of the Cabinet] that British Gas should not be sold off as one block in its present form, though such a sale was urged by Sir Denis Rooke,* the British Gas chairman.’66 This provoked Peter Walker to a rage. He supported Rooke, the brilliant engineer and born monopolist who ran British Gas as his personal fiefdom, in selling off the company as a whole, if at all. Now, he suspected, he was being bounced into a policy he did not agree with by No. 10, via press briefings. He was ‘very shocked’ by the story, he wrote to Mrs Thatcher, which was ‘totally untrue’.67 The Cabinet had agreed nothing on the subject, he protested. Clearly implying that she could control such leaks, he went on, ‘I hope you will immediately inquire as to where these briefings were given, and point out the considerable damage that has been done.’ There was a certain piquancy in this complaint, since Walker was the Cabinet minister most likely to leak against Mrs Thatcher, and the chief reason why she disliked giving detailed information to full Cabinet. Andrew Turnbull, her private secretary, duly reported to her the source of the story (a Treasury briefing). He included a dig at Walker: the Secretary of State was, ‘of course, correct in saying that there has been no collective discussion on the privatisation of gas and electricity. D/En* have still to make proposals.’68

  To guard against the monopoly power which it had itself failed to break up in the case of BT, the government turned to regulation. Lawson argued strongly that a privatized monopoly was much better than a nationalized one because there was ‘a conflict of interest if the regulator and the business regulated is the same’.69 A privatized industry could be independently regulated. A state-owned agency, the Office of Telecommunications (OFTEL), was established. Part of its remit was to prevent excessive charging. This was done by a simple formula invented by Professor Stephen Littlechild, known as RPI – X, which would be used to determine future BT price rises. RPI was the Retail Price Index (the measure widely accepted as the rate of inflation) and X was the percentage decreed by OFTEL. This was eventually settled, after much argument, at 3 per cent. The idea was that these newly privatized industries should be able to achieve productivity growth at a faster rate than the economy as whole. Lower-than-inflation price rises could thus be afforded by efficiency gains: the customer must get more for less. It was also true that the more efficiently the companies operated, the more profit they would make (within the constraints imposed by the price limit). This was not supposed to be the ultimate answer to the monopoly problem, but was more of stop-gap measure until sufficient competition developed. As matters turned out, however, it stopped a great many gaps, and became a regulatory price model for other privatizations. Mrs Thatcher liked it for the added reason that it would, over time, help push the inflation rate figure down.

  Much of the challenge of the BT sale was its sheer size. It was, at the time, the biggest single equity issue anywhere in the world, ever. Partly for this reason, it had always been agreed that only 51 per cent would be sold in the first tranche. Even so, there was serious anxiety about whether the City could handle something so big. Redwood considered the scale of the task as an additional reason for making sure that shares were offered to the general public. ‘You won’t get so much criticism’, he told Mrs Thatcher, ‘if the public buy it.’70 He saw this as a chance to begin to create the ‘society of owners’ of which Mrs Thatcher increasingly spoke. He told her, ‘This is the new council house sales.’

  Enthusiasts in the City, such as Martin Jacomb* at Kleinwort Benson, which was handling the sale, saw the matter quite similarly. The sale of BT was ‘an analogue for the British economy as a whole – a way of participating in a successful company’,71 and of opening up markets to the wider world, especially American investors. In the autumn of 1983, a year before the sale was due to take place, there was great scepticism in the City as to whether there would be enough demand for the shares which had to be sold. It became ‘apparent that we couldn’t raise enough capital without going to the retail investor’.72 So there was a financial reason for seeking popular share ownership as well as an idealistic one. Indeed, the involvement of the retail investor was the answer, strongly driven by Redwood, to the threat from Kleinworts that the BT sale would have to start as a much more modest effort, offering much less than half of the business to investors, and therefore not constituting a true privatization.73 ‘It was only because we got personal investors in that we could sell so much,’ recalled David Willetts. ‘Besides, if we were selling only to City institutions, they had us over a barrel.’74 The presence of the retail investor had a further effect. It ensured Mrs Thatcher’s close involvement in the whole thing, because it was ‘politically out of the question to sell shares to the public and then see them collapse’.75
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br />   A virtuous circle was created. If the sale of BT mattered so much, it must be backed by all the resources of everyone involved. The workforce and pensioners of the company must be able to benefit. The price must not be so low that the shares would all be ‘stagged’† – sold on immediately after flotation for quick profits. Yet it was even more important that it should not be so high that the public either failed to take part or lost money on their investment. From this followed all sorts of marketing incentives, such as the voucher scheme which would discount telephone rental charges. The small investor was deliberately favoured in the allocation of shares, and was permitted to pay in instalments: as a broker in Chicago, Moore had learnt the ‘psychology of mass ownership’, and advocated a policy of ‘the less you put in for, the more you get’.76 A ‘bill stuffer’ went out with the quarterly bills in July 1984 announcing the pending sale. There were numerous public advertisements which avoided breaking stock market rules by not pushing the stock directly but promoted the idea of BT as a great telecommunications company (‘The power behind the button’). These were extremely important in an era where the sale of shares was an arcane procedure and most people simply had no idea how to buy them: the BT sale inaugurated a new age in which share applications could be made simply by filling out application forms from the national newspapers, including tabloids. Attention was also given to the unique problems of scale. David Clementi at Kleinworts, for example, realized that special warehouses would be needed to handle the public’s cheques in time. The building societies were warned to expect huge withdrawals as BT share-buyers drew on their savings. In all this, Jacomb worked with Mrs Thatcher. He observed her, and her co-operation with her Chancellor, very favourably: ‘She really was at the height of her power – confident enough to listen and take advice. She was absolutely in charge, but not running a dictatorship.’77