Thatcher/Major privatisations: organised rip-offs

 Thanks to Jonathan Calder for putting us on to Jonathan Portes' insider's view of one of the iconic privatisations of the 1980s. Although, as a trainee administrator, he was privy only to the privatisation of water in England and Wales, the latter standing out now as a prime example of the dire effects of selling off a natural monopoly to the private corporate sector, what he says applies to virtually all the privatisations of the Thatcher/Major years. (It was later repeated in the sale of Royal Mail by Osborne and his chums under the supposed stewardship of Vince Cable. The only difference was that much less of the stock was available to the general public.)

Long before anyone talked about “magic money trees”, the Thatcher government offered one: this was free money to anyone who filled in the application form. [...]: the shares were sold well below their value so taxpayers lost out, and consumers have paid through the nose ever since. But this is not just hindsight. We knew what was going on, because water privatisation was never really about efficiency. In the short term, the overriding political priority was a “successful” sale – one where demand for shares was high – and where those who applied and who had, from previous privatisations, already come to expect a large premium, were not disappointed.

[...]

Paradoxically, while the underpricing of the water and sewage companies helped fulfil Thatcher’s short-term goal of a successful sale that was lucrative for those who bought shares, it fatally undermined her long-term goal, which was to create a “shareholding democracy” that would parallel the way right-to-buy created a “property-owning democracy”. The problem was that few small shareholders could resist the temptation to cash out their large profits.

Those of us with longer memories could have predicted this.  ICI, a progressive company before it became prey to corporate raiders in the 1980s, would offer shares to its employees, the majority of which were cashed in when ready cash was required. 

So, as they sold their shares, the companies were bought up, mostly by private equity, institutional investors and large infrastructure firms from abroad. These investors spotted the combination of large investment programmes, effectively guaranteed returns, and a supine and underpowered regulator that lacked access to high-powered economic consultants and lawyers. The result is that companies have been loaded with debt that has permitted huge returns for shareholders. Meanwhile, regulators have allowed returns that have been high or higher than an average risky private company, yet investors have been exposed to no more risk than government bonds. As the Financial Times puts it, 30 years on, “water privatisation looks like little more than an organised rip-off”. 

 One wonders how much Thatcher planned this or whether she really believed in her own rhetoric of a share-holding democracy. I tend to the view that she was unconsciously manipulated by people who played on her prejudices against the state, given Enoch Powell's testimony that she never really understood the monetary policies that she and Geoffrey Howe pursued from 1979 onwards.