In the City

Privatisation is not enough

Jock Bruce-Gardyne

Three years ago Sir Geoffrey Howe provoked incredulity — even ridicule — by producing a public spending White Paper which forecast that the nationalised industries, having been lent or given £3,000 million in 1979-80, would by this year be repaying loans to Whitehall at a rate of £550 million a year, thereby almost cancell- ing out the cost of grants to finance their `social' operations. The incredulity was, alas, well founded: at the latest count (this spring's White Paper) they were expected to need £1,100 million in loans and so-called `public dividend capital', and £1,700 million in grants, before the current finan- cial year is out. Nevertheless things have moved further in the right direction than the sceptics of 1980 would have thought possible. Leave aside the Coal Board and British Shipbuilders, and there has been quite a turn-around.

British Aerospace and Britoil have long left the bosom of the public sector borrow- ing requirement to take their chance upon the market. British Airways has come swift- ly back to profit after the horrors of 1981-2. British Steel claims it would be in the black if it were not, for the government-imposed obligation to maintain Ravenscraig. British Rail reckons to be breaking even. As for the Gas, Electricity and Telecom, their profits have become so impressive as to require cloaking in the decent obscurity of accoun- tants' language.

Hardly surprisingly, therefore, the heat is on to get them back to private ownership. British Telecom is scheduled to go next year, and British Airways wants to join it. British Gas is edging to the slipway, and so are the warship yards of British Ship- builders and the Royal Ordnance Factories; while only its incestuous relationship with the Coal Board holds the CEGB back from the same brink.

All this is excellent news in principle. Back in the 1960s I had a revealing conver- sation with the late Lord Melchett, shortly after he had left the City to take charge of the British Steel Corporation. How, I asked him, was he going to find the transition from private enterprise to the state sector? `Oh,' was the confident reply, 'I don't think the name in the share register makes much difference. In one case you have perhaps thousands of small shareholders; in the other you have HMG. Either is perfectly entitled to sack you if you fall down on the job. Meantime it's your job, not theirs, to manage.'

We all learn. Four years later, shortly before his untimely death, I ran into Lord Melchett again, and ventured to recall our earlier conversation. 'Well yes,' he said, 'I still think that's how it ought to be. But I readily admit it isn't.' Of course it isn't. Governments can, and all too often do, perpetrate all sorts of interference in the management of private business. They regulate dividends, prices, and wages. They bar investment at X, and bribe investment at Y. But in general the rules at least are known and of universal application. Those who run a public corporation, by contrast, are liable to have their investment decisions and their prices tinkered with in the imag- ined interests of wider economic manage- ment. They are liable to be made to sustain operations that ought to be dispensed with (and occasionally to dispense with opera- tions that ought to be retained). Above all, they cannot believably confront the threat of bankruptcy; and all too often they enjoy a captive market.

Hence it has always been the purest wishful thinking to imagine that the public corporations can be induced to behave like private businesses. if that is how we want them to behave, then we must return them to the private sector first. However, privatisation, like patriotism and monetarism, is not necessarily enough. Let me recount another moral tale.

Many years ago I represented a consti- tuency on the eastern coast of Scotland. A number of my constituents grew sugar beet, which they sold to the British Sugar Cor- poration. In those days the Sugar Corpora- tion was a strange sort of hybrid. Like BP, it was a publicly quoted company in which the government held an effectively controll- ing interest. Unlike BP it enjoyed a statutory monopoly: no one else was allow- ed to process sugar beet. Suddenly the management of the Sugar Corporation decided to close its one and only Scottish factory. Commercially, there was no gain- saying decision: the factory lost money, and 'never stood a chance of making any. But it meant the end of sugar beet for my consti- tuents.

So of course we called on government to Take Steps. Which government tried its damnedest to do. Only to be confronted with an insurmountable obstacle. The

management of the Sugar Corporation said that, in its collective judgment, an instruc-

tion from the government to retain its Scot' tish factory would constitute oppression of its minority shareholders, in breach of the Companies Acts. It would therefore resign — and wish the government joy in rustling up replacements. Which taught me two lessons. First, that there is no better safeguard of managerial autonomy than private shareholding. But second, that such autonomy is not easily reconcilable with statutory monopoly.

Sir Denis Rooke, chairman of the British Gas Corporation, is, we read, much

happier with his new Energy Secretary,

Peter Walker, and well disposed towards the plans to take his business to the market.

I am not at all surprised. For Sir Denis 15 nothing if not a dedicated monopolist: and by all accounts what is to be taken to the market is a comprehensive gas monopoly. Now let us consider the implications of that proposition. Supposing British Gas had been taken to the market in 1980.

Would it subsequently have been divested of its North Sea oilfields and its Wych Farm find in Dorset? I take leave to doubt it. For Sir Denis could have used the Sugar Cor- poration defence — and it is very long Odds that he would have done so. Fortunately British Gas should be out of oil well before it gets a quote. But the dif-

ficulties do not stop there. For it is also of

the essence of a private business that its customers should have a choice. Otherwise you do not diminish the controversial nature either of its prices or its profits. No amount of public regulation can provide a proper substitute.

Now it may be that, for a variety nf,, weighty reasons, the partial monopoly 01

British Telecom, or the comprehensive

monopoly of British Gas, must be preserv- ed 'in the public interest' — though per- sonally I doubt it. But if that is the case then we do have to look long and hard at the other aspects of the case for privatisa- tion.

The Treasury interest in getting public corporations off the books is many-faceted.

It achieves a once-for-all reduction in the size of the PSBR. But by the same token, to the extent that those who buy the shares

sold by the Government are institutions or individuals who would otherwise be buying gilts, it does not help with public funding 01 the control of the money supply. Where privatisation does help the Treasury, of course, is that it gets the

capital requirments of the public corpora'

tions concerned off the PSBR for the future. But even that could prove

something of a snare and a delusion. For It

all depends how the investing institutions classify the new arrivals. Rights issues from businesses like Britoil or British Aerospace create no problem, since they have to corn: pete like any other private enterprise quoted company, and may succeed or fail. Au' British Telecom, or a fortiori British Gas,:, Could they credibly face the risk of failure. If not, then future investment in them

would still be very much akin to — and therefore a substitute for — buying gilts. (Which is why the currently fashionable schemes for raising market cash for retain- ed public corporations also need careful scrutiny. Would the markets really treat an offering of performance bonds in the London-Gatwick rail link as an alternative to an offering from ICI? Notwithstanding the fact that some future government might impose a freeze on train fares, or enable British Rail to make a pay settlement that the Gatwick rail link could not sustain? Yet unless the City was prepared to face those risks unaided, treating any money raised as outside the PSBR would be a fraud upon the public.) Then there is the insidious temptation to use the proceeds of asset sales to finance current consumption in the public sector. All very wicked, no doubt, in accountancy terms, conjuring up charges of seed-corn consumption. But hardly worth losing too much sleep over. For the difference bet- ween using the proceeds of a sale of shares in British Telecom to pay the wages in an exhausted pit maintained to keep Mr Scargill quiet, and using the proceeds of a tap stock for the same purpose, is largely in the eye of the beholder.

'Privatisation' remains an eminently respectable purpose if we want to ensure as we should — that investment goes where it will earn the best return by consumer satisfaction. But, from every angle, what emerges is that when it takes a form that Sir Denis Rooke finds tolerable, it needs another look.