Saturday, 16 July 2011

UK privatisation – proceeds of over £100 billion up for grabs

This is the heading of a post at the IEA blog in which Nigel Hawkins talks the future of privatisation in the U.K. He writes,
In recent decades, the IEA has been in the vanguard of those advocating widespread privatisation.

This stance bore fruit during the 18 years of Conservative Government (1979-97) when large swathes of state-owned businesses were privatised, including telecoms, gas, water, electricity and many forms of transport.

However, as the IEA’s latest publication - Sharper Axes, Lower Taxes - makes clear, the privatisation cupboard is far from being bare.

Indeed, over £100 billion of proceeds could accrue if a renewed programme of privatisation were undertaken.

A substantial part of these putative proceeds arise from the government’s two major bank shareholdings – an 84% stake in Royal Bank of Scotland – the recipient of an unbelievable £45.5 billion of taxpayers’ money – and a 41% stake in Lloyds, which received over £20 billion of public funding.

With the worsening EU financial crisis, shares in both banks are currently weak so immediate action to reduce these stakes is unlikely.

However, when their share prices recover, a progressive selling down of the government’s bank shareholdings should be undertaken.

Aside from these shareholdings, there is a raft of other major businesses that should be transferred to the private sector. Prominent amongst this category are Network Rail, the Royal Mail and Scottish Water.

Furthermore, many smaller state-owned businesses would benefit from the disciplines of the private sector.

Importantly, there remains considerable scope for the government to sell off parts of its vast property estate, which could raise a considerable sum.

In particular, the Ministry of Defence owns an extensive portfolio of land and building assets, some of which are outside its core operations – and could be readily sold off.

Whilst the raising of funds from privatisation is a major benefit of the policy, it is not the only one.
The point I wish to argue here isn't that privatisation shouldn't be carried out, it should, the problem is thinking about privatisation in terms of the money raised. The reasons for privatisation can hold even if you get nothing from the privatisation programme. Talking about maximising the return from privatisation misses the whole point of privatisation which is to improve the efficient and productivity of the economy. If we just worry about how much we will get for the sale of assets then we should sell all of the state assets with the firms being monopolists. But that's unlikely to do much for welfare.

The point to note is that the advantage of privatisation is that it will depoliticise the firm. The aim is to have the greatest possible "distance" between the government and the firm. Government interference in the running of a firm is impossible to eliminate completely but a good privatisation plan will result in a situation where any government interference is as obvious and politically costly as possible.

For successful privatisation it is more important to get the regulatory environment right so that competition can breakout in the industry than it is to maximise the price for which the asset is sold. Basically I'm arguing we should have lexicographic preferences, with price low on the list. Worrying about whether or not the ‘family silver’ was sold too cheaply misses the point, the price received can only be see as too high or low relative to the market structure the firm finds itself it. Just arguing that a higher price could be obtained with a different market structure is only useful if the new market structure improves welfare.

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