The British Council


The Evolution and Performance of UK Privatization

Paul Cook, Senior Lecturer in Economics
Institute for Development Policy and Management, University of Manchester

Introduction

Prior to 1979, the UK possessed one of the largest public enterprise sectors in Europe. In the years since then the Conservative Government has undertaken an extensive privatization programme. Between 1979 and 1995 in excess of 50 billions of state assets (excluding proceeds from the sale of government owned housing) have been sold to the private sector and the share of employment accounted for by publicly-owned industries has fallen from 7.2 per cent to under 2 per cent.

Despite the size and speed of the privatization programme in the 1980s, large scale privatization had not been a part of the Government's economic policy when it was elected in 1979. Nevertheless, the economic and political motives which underlay the original nationalisation programme were much weaker by the late 1970s and public opinion seemed less convinced of the merits of public enterprises. A MORI opinion poll had revealed in the 1970s that a growing number of people believed that private enterprises were more efficient than nationalised industries (Heald 1988).

In defining the issue of privatization a distinction is made between the public market sector, ie the public or state-owned enterprises, and the public non-market sector, commonly referred to as the welfare state. Generally the distinction relates to institutions, reflecting past political choices about financing, and the characteristics of the goods and services supplied (Heald 1988). However, goods and services in the public non-market sector, such as health care, can be considered marketable even if they are not at present marketed to any large extent. There are few technical reasons why they could not be privatised.

Clearly, in the UK context, there has been considerable support (or little resistance) to privatization in the public market sector dominated by a perception, at least, that public enterprises are inherently less efficient than their counterparts in the private sector. In contrast, a significant proportion of the public non-market sector commands popular support from the general public. This is particularly the case with the National Health Service.

The privatization programme which began in 1979 has evolved through several phases. In the first phase of privatization, which occurred between 1979 and 1983, the government sold public sector assets and public enterprises that were small and largely operated in competitive markets (Bishop and Kay 1989). In this phase the sale of publicly-owned property was more significant than the sale of shares. In this period over one million publicly-owned houses, fetching 15 billion, were sold under the 'right to buy' scheme.

The second phase of the privatization programme concerned the extension of denationalization into the public utility sector. This consisted of a mixture of attempts to liberalise monopoly markets and denationalize the large public sector monopolies. It began with the sale of British Telecom, and continues today with privatization of the railway industry. This phase is distinguished from the first because separate regulatory offices have been established for each of the major privatised utilities.

The third phase overlaps the second but represented a new direction for the privatization programme. It gained momentum when a significant number of publicly-owned companies had already been sold and those remaining were proving to be difficult to sell or were unlikely to generate large sums of revenue. Faced with this situation the government switched attention to new areas for privatization which principally involved contracting out, the imposition of user charges, and the introduction of consumer-driven initiatives to simulate market controls on state-owned bodies (Curwen 1995). It also involved to a much greater extent new in-roads into the public non-market sector.

Publicly-owned enterprises

Importance of Nationalised Industries

Prior to 1979 government policy favoured keeping enterprises under public ownership. This trend was sharply reversed in the 1980s. Although it was the Labour Government which created most of the larger public enterprises between 1945-51, successive governments of either political complexion continued to nationalise, including the steel, automotive, shipbuilding and aircraft industries.

The importance of the nationalised industries in the UK in 1979 is shown in table 1. This table shows only production from public corporations and excludes the goods and services provided by other public sector organisations such as local authorities and the National Health Service (NHS). It indicates that public enterprises have been relatively more capital-intensive than other sectors of the economy, capital accounting for a larger share of national totals than output, while the employment share has been relatively low.

Table 1
Public Corporations in 1979

  Number Amount () billion % of UK total
Number of public enterprises 47    
Gross domestic product   18.0 10.5
Numbers employed   2.1 8.1
Net capital stock   104.0 17.2
Gross domestic capital formation   5.6 15.2

Source: National Income and Expenditure (1984 edn), cited in Vickers and Yarrow 1988.

Performance of public enterprises

Overall, the financial performance of public corporations prior to 1979 has been weak. Rates of return for public corporations have been substantially below their private sector counterparts. Detailed analyses of pricing behaviour of individual nationalised industries have indicated that efficiency objectives have not been met and this has been attributed to a combination of over-investment and internal inefficiencies. With respect to the measurement of internal efficiency, comparative approaches have been adopted: comparing public corporation performance to other UK industries and to firms abroad. Efficiency audits have also been conducted by bodies such as the Monopolies and Mergers Commission. In general, results have not been favourable for the UK public corporations. Performance assessment has been complicated by methodological difficulties of choosing appropriate indicators of performance, finding appropriate benchmarks against which to compare performance, and in assessing the importance of market structure as a determining factor for performance.

The lack of clearly defined objectives remains a major reason why there was a perception that public enterprises had failed in the 1970s. It was not clear to what extent managers should reduce costs, promote regional development, maintain employment and fight inflation.

This article is online: http://www.britcoun.org/governance/briefing/iss2int.htm


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