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. 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. 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. Monopolies or quasimonopolies which are transferred to the private sector need careful regulation to ensure against abuses of market power, whether at the expense of competitors 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.
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; 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.
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.
I was not immediately clear that British Aerospace’s offer just before Christmas 1987 was serious. But it soon turned out that it was. There was an industrial logic in the acquisition. 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.
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.
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 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 systems 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.
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. 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.
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 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. And 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 – 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 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.) 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. 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.
Cecil Parkinson was working towards this model over the summer of 1987 and in September we had a seminar at Chequers to look at the options. Cecil continued to work up the plans and discussed them again with me and other ministers in mid-December. No one was attracted by solutions which retained a monopoly of generation for the CEGB or its continued ownership of the grid. The real question was whether the CEGB should be divided up into just two or as many as four or five competing generating companies. Nigel Lawson favoured the more radical option. The trouble was that it was difficult to see any of these companies being large enough to keep up the very costly development of nuclear power, which I regarded as essential to ensure security of power supply and for environmental reasons.
There was also Walter Marshall to consider. Not only did I like and admire him. I also felt that we all owed him a great debt for having kept the power stations working during the miners’ strike. He might just be willing to go along with a two-way split in which the larger company retained the nuclear power stations. I could not, of course, allow his views to be decisive: nor did I do so. But I hoped to obtain his and his colleagues’ co-operation in the difficult transition to the new privatized and competitive system. So at a meeting in mid-January I came down on the side of the solution that Cecil favoured. But I added that this did not preclude moving at some future time to the more competitive model which Nigel Lawson would have preferred.
Later that month I agreed that the split in capacity between the two new proposed generating companies should be 70/30. This was the plan which I tried to sell to Walter Marshall. Walter – never averse to blunt speaking – did not conceal his disagreement with the approach we favoured. I agreed with him about the great importance of nuclear power. But I did not think that its prospects would be damaged by our plans. Again and again I insisted that whatever structure we created must provide genuine competition. I often found that straight talking pays dividends. On further consideration and after further discussions with Cecil, Walter Marshall said that though the CEGB would express regret at what we had decided he was prepared to make the system work. Cecil Parkinson’s plans were also strongly opposed by Peter Walker who suggested that it would take at least eight years before there was any chance of completing this competitive model of privatization. None of us was convinced by this. So on Thursday 25 February Cecil could make his statement to the House of Commons setting out how we intended to privatize electricity.
As always, the prospect of privatization meant that the finances of the industry were subject to searching scrutiny, and what came to light was extremely unwelcome. For environmental reasons and to ensure security of supply, I felt it was essential to keep up the development of nuclear power. But in the autumn of 1988 the figures for the cost of decommissioning the now ageing power stations were suddenly revised sharply upwards by the Department of Energy. These had been consistently underestimated or perhaps even concealed. And the more closely the figures were scrutinized the higher they appeared. By the summer of 1989 the whole prospect for privatizing the main generating company which would have the nuclear power stations started to look in jeopardy. So I agreed that the older Magnox power stations should remain under government control. This was one of Cecil’s last actions at Energy and it fell to his successor, John Wakeham, to deal with the rest of the nuclear problem.
Alan Walters had been urging from the previous autumn that all the nuclear power stations should be removed from the privatization. As so often, he turned out to be right. The figures for decommissioning the other power stations started to look uncertain and then to escalate, just as those for Magnox had done. John Wakeham recommended and I agreed that all nuclear power in England and Wales should be retained in state control. One consequence of this was that Walter Marshall, who naturally wanted to retain the nuclear provinces in his empire, decided to resign, about which I was very sad. But the other consequence was that privatization could now proceed, as it did, with great success, to the benefit of customers, shareholders and the Exchequer.
The result of Cecil Parkinson’s ingenious reorganization of that industry on competitive lines is that Britain now has perhaps the most efficient electricity supply industry in the world. And as a result of the t
ransparency required by privatization we also became the first country in the world to investigate the full costs of nuclear power – and then to make proper financial provision for them.
There was still much I would have liked to do. But by the time I left office, the state-owned sector of industry had been reduced by some 60 per cent. Around one in four of the population owned shares. Over six hundred thousand jobs had passed from the public to the private sector. It constituted the greatest shift of ownership and power away from the state to individuals and their families in any country outside the former communist bloc. Indeed, Britain set a worldwide trend in privatization. Some £400 billion of assets have been or are being privatized worldwide. And privatization is not only one of Britain’s most successful exports: it has re-established our reputation as a nation of innovators and entrepreneurs. Not a bad record for something we were constantly told was ‘just not on’.
* The earnings rule limited in the early years of retirement the amount a pensioner could earn without reducing his pension.
CHAPTER THIRTY-SIX
Floaters and Fixers
Monetary policy, interest rates and the exchange rate
A CORRECT ECONOMIC POLICY depends crucially upon a correct judgement of what activities properly fall to the state and what to people. After a long struggle during my first term, from 1979 to 1983, like-minded ministers and I had largely converted the Cabinet, the Conservative Party and opinion in the worlds of finance, business and even the media to a more restrictive view of what the state’s role in the economy should be. Moreover, as regards the regulatory framework within which business could run its affairs, there was a general understanding that lower taxes, fewer controls and less interference should be the goal. But as regards setting the overall financial framework there was less common ground. Whereas Nigel Lawson and I agreed strongly about the role of the state in general, we came sharply to differ about monetary and exchange rate policy.
Margaret Thatcher: The Autobiography Page 81