More brickbats than bouquets

244

Despite the great optimism at the time, privatisation did not remove all the problems of the former state-owned enterprises. On the whole the performance of the privatised companies has been disappointing. A closer examination of these firms and industries can help to shed light on these problems and the challenges for policy-makers.

2001 has not been a good year for privatised companies. As you sit

in a Railtrack delayed train, you can read about the redundancies at

Corus and the travails of BT. You will learn that Welsh Water has

become the first privatised company to deprivatise itself. There is a

simple, single common theme to all these events. Privatised

businesses have not, in general, been successful as private

businesses.

There are twenty- three quoted companies today that are still broadly recognisable as organisations that were once publicly owned. If Sid had been a regular buyer of privatisation stocks, he would not have done badly. Even some of the businesses that have had a tough time recently, such as Railtrack and water companies, have outperformed the all share index since their market debut. And Sid would have made nice profits from selling some of his water shares and regional electricity companies at fancy prices to foreign buyers.

But this picture changes in a startling way if you divide the period since flotation in two. For the table I chose a point of division two years after the first offering of shares. This distinguishes the period immediately after flotation from the longer haul which begins two years after flotation and continues to the end of 2000. Of the twenty-three privatised companies, twenty-one outperformed the market in the immediate post flotation period. But twenty-two have underperformed the market since then. There are only two exceptions to the general rule of short term wins and long term losses. One is Enterprise Oil – its shares follow the price of oil. The other is Corus, or British Steel, which has been a terrible investment almost regardless of when you bought it. The long term record of privatised businesses in creating shareholder value is poor. They have been a good investment only because the government priced them very cheaply.

The companies which initially appeared to be major successes of privatisation – such as Cable and Wireless, BT, British Airways and British Steel itself – ran out of steam as the race became more extended. Cable and Wireless lost strategic direction while BT and BA devoted much time and effort to insufficiently productive international alliances.

Managers of privatised companies might put the blame for the poor

performance of their businesses on overbearing regulation. Certainly

regulation has limited gains to investors in some industries. But

that is why it was imposed, and anyone who bought shares two years

after flotation knew that such regulation was in place. It may be

that analysts naively imagined that regulators would not insist that

future efficiency gains were shared with customers. And the companies

themselves said that growth in earnings from new businesses would

compensate for the slow growth of regulated revenues. In the end, the

resulting diversifications accounted for a high proportion of

management effort, a smaller proportion of turnover, and a very small

proportion of profit.

But regulation is not the main culprit.

The pattern of underperformance is true of privatised firms in

unregulated industries as well as in regulated industries, in

competitive activities as well as in monopoly ones, in growing

markets as well as in declining ones. The pattern is too general for

there to be any doubt that the problem lies at the heart of the

process of privatisation itself.

For many companies, privatisation was a superficial change.

Introducing a few private sector managers did not alter the

fundamental culture of the organisation. Giving nationalised industry

bosses the titles, salaries and share options of directors of major

international companies did not always make them more effective

managers.

But the real issue is more fundamental. Few of these organisations were ever designed to be private sector companies. Their functions and their structures came from their public sector histories. British Telecom had once been part of a government department with a stranglehold on all telecommunications activities in the UK. The privatised company included a large utility business which employed tens of thousands of engineers to install and maintain outdoor cables. It had a retail supply business which had traditionally treated its users as supplicants – subscribers – rather than as customers. BT also had a fine, but not particularly commercial, research capability.

We should not blame BT management for failing to create from these

disparate activities a business with the coherence and vitality of

the best private sector companies. We should instead congratulate

them for making a reasonable stab at an impossible job. BT’s

transatlantic rival, AT & T, encountered similar problems in

making the transition from regulated monopoly to competitive

business.

Still, perhaps the real congratulations should be directed to the

management of British Gas. At first they believed – quite mistakenly – that they had won a famous victory by preserving the public sector organisation of the business intact when gas was privatised in 1985. But they came to see that a successful future of the company involved breaking itself up into units which could focus on the very different skills involved in exploration and production, utility management, and customer service. Somewhat belatedly, BT is coming to a similar view.

Privatisation was not, as many people believe, the end of a story.

Rather it was the beginning of a new chapter in the organisation of

major British industries and in the relationship between those

industries and the government and community. And we are still near

the beginning of that chapter Anyone who thought that the flotation

of British Steel ended the government’s involvement in the

British steel industry has not been reading the newspapers

recently.

Share price performance of privatised companies

(% gain or loss relative to FT all share index)

Since

privatisation

First two

years

Subsequent

British Aerospace

-74 %

+ 5 %

-76 %

Cable and Wirless

– 40 %

+ 14 %

– 47 %

Nycomed Amersham

– 60 %

+ 9 %

– 63 %

Associated British

Ports

– 60 %

+ 43 %

– 72 %

Enterprise Oil

– 52 %

– 60 %

+ 19 %

British Telecom

– 4 %

+ 4 %

– 7 %

British Airways

NIL

+ 40 %

– 29 %

Rolls-Royce

– 59 %

+ 13 %

– 64 %

BAA

– 3 %

+ 52 %

– 36 %

British Steel (Corus

Group)

– 83 %

– 14 %

– 80 %

Severn Trent

+ 13 %

+ 30 %

– 13 %

Anglian Water (AWG)

– 9 %

+ 45 %

– 37 %

United Utilities

+ 8 %

+ 42 %

– 24%

Yorkshire Water (Kelda

Group)

– 41 %

+ 52 %

– 61 %

International Power

– 45 %

+ 62 %

– 66%

PowerGen

+ 29 %

+ 63 %

– 20 %

Scottish Power

– 18 %

+ 14 %

– 28 %

Scottish and

Southern

+ 2 %

+ 20 %

– 15 %

Forth Ports

+ 131 %

+ 230 %

– 30 %

Northern Ireland

Electricity

+ 42 %

+ 45 %

– 2 %

Railtrack

+ 57 %

+ 108 %

– 24 %

British Energy

– 27 %

+ 74 %

– 58 %

AEA Technology

– 33 %

+ 105 %

– 67 %

Average of

23

– 14

%

+ 43

%

– 39

%

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