Margaret Goes to Market

Large chunks of Britain's corporate state are being returned to the private sector.


The battle between the "Wets" (comparable to liberal Republicans in the United States) and the "Drys" (conservative Republicans) for control of the next Conservative Party election platform in Britain has commenced. With the election anything from a few months to at most 16 months away and the Thatcher administration confident of victory, senior Tory politicians will spend much of the coming year making "keynote" addresses that attempt to mold the final printed program.

Transferring the provision of goods and services from the public to the private sector has long been a key plank of Tory rhetoric. It was highlighted in the Edward Heath campaign of 1970, but his victory led to a massive increase in state holdings and the sale of only a government-owned travel agency and a brewery.

Privatization continued to be a feature of the '79 election promises and, if the opening shots in the current battle are at all indicative, the main fight between leading Drys such as Sir Geoffrey Howe and leading Wets such as Sir Ian Gilmour will be over how much emphasis should again be placed on privatization and how much trust can be placed in the market to perform.

While it can be faulted on many fronts, the Thatcher administration has, without a shadow of a doubt, outperformed previous governments in this area. Even the sternest and most severe of free-enterprise critics cannot but welcome a number of her initiatives and admit that she is one of the few leading British politicians—possibly the only one—with both the commitment and the ability to restore the discipline of the market in at least a few areas.

What are these "socially damaging" (as the unions call them) moves to restore competition?

Until the 1980 Transport Act, it was illegal for the owner of a coach or bus to operate a regular scheduled service. A coach operator in Manchester could provide a local social club with a vehicle to transport its members to London on a private outing, but it could not advertise a regular scheduled service to the public. The latter was the monopoly of a state-owned coach company—National Express.

The 1980 act legalized such alternative services, and both National Express and state-owned British Rail have since found fierce competition from a host of private operators. With private coach journeys taking only slightly longer than rail journeys, with fares anything from one-half to one-eighth lower than rail fares, and with British Rail racked by strikes and a national reputation for disgusting service, the private coach operators are on a good wicket.

Also on the road, the formerly state-owned National Freight Corporation has gone completely private. In the biggest operation of its kind in British history, its managers and workers recently raised $100 million to buy out the government and go private.

A start has even been made at the notorious British Rail with sales of hotels and of such assets as the cross-Channel service and other peripheral activities. The huge catering wing remains in state hands, though, and continues to serve the worst possible food in the rudest possible way.

In the air, the hopes of the Thatcher government have had a rough ride. Fifty-one percent of British Aerospace has been sold for $300 million, but plans to float off British Airways have been postponed. B.A. has been forced to shed 15,000 workers, however, and appears headed for profit by the end of '83. Should Thatcher be reelected, it will be sold in '84/'85. In the meantime its major subsidiary, International Aeradio, is being sold for over $100 million.

On the industrial front, in addition to the sale of 51 percent of British Aerospace and of the National Freight Corporation, Amersham International (a biotechnology firm) and Cable & Wireless have also been sold, the former's shares being oversubscribed 23 times. Next on the privatization list of the Drys are a series of huge industries that have lost billions of dollars of taxpayers' money. Like British Airways, the problem with British Steel, British Leyland, British Shipbuilders, British Telecomm, and Rolls Royce is that they have to be forced into a more viable position before ministers can hope to realize a decent price. Fortunately, five are either heading out of the red or are well into the black—after drastic butchery—and could be in private hands within two to three years. Two other candidates that could reach the market even sooner are the British Transport Docks Board and an oil field currently owned by British Gas.

The Oil and Gas (Enterprise) Act was passed by Parliament in 1982, breaking the previous legal monopoly on the supply of natural gas. Private companies can now supply gas to large consumers. A major setback occurred, however, when plans to sell a government-owned nationwide chain of "Gas Showrooms"—retail outlets where customers can pay their bills, handle problems, and also purchase gas-fueled appliances—were shelved.

By this summer, the legal monopoly on the supply of electricity is to go also. New legislation will make it legal not only to generate electricity for yourself and then sell the surplus (now allowed) but also to set up an electricity-generating business.

On the oil front, Energy Secretary Nigel Lawson's aim is to sell all state-owned oil fields—the largest single transfer of state assets. In August 1982, Britoil was set up by the Thatcher government to take over the production and exploration assets of the government's British National Oil Corporation. Then in November, 51 percent of Britoil was sold to private investors through tender offers. Other oil assets are also due to hit the market in the not-too-distant future.

In education, the wheels of change are moving more slowly. A devotee of free-market economists Friedrich Hayek and Milton Friedman, Sir Keith Joseph is secretary of state for education. Despite his philosophical commitment and his support in the cabinet for all the measures described here, one can credit him personally with very little. This low score is even more surprising when one notes that his leading junior minister is the noted free-market exponent Dr. Rhodes Boyson.

Since their advent to office, they have been stuck at the planning stage, and the best that one can say is that some form of student loans and some form of voucher scheme might see the light of day in the next few years. Boyson, however, spits out ideas faster than a machine gun. Parental choice is his "aircraft carrier," and his ideas are "helicopters," he says. His latest chopper is that parents should be allowed to contract out of the state education system and get a tax rebate with which to fund the private institutions of their choice. Whether anything will actually be done to implement this idea is, however, another matter.

In local government, a small wave of privatization is starting to form and could become a breaker. When Prime Minister Thatcher entered 10 Downing Street, examples of local governments contracting for services from the private sector could fit on the back of a post card: the cleaning of public lavatories at a few seaside resorts and refuse collection in a tiny country town in Essex.

Under Thatcher's leadership, however, and backed by works by the two leading free-market think tanks, the Institute for Economic Affairs and the Adam Smith Institute, the list grows longer each month. The city of Southend has privatized garbage pickup, and massive Birmingham, along with other communities, are following suit. Wandsworth is cleaning its streets with private contractors, Hampshire and Westminster maintaining their road signs, and Sutton pruning its trees. Even Liberal-controlled Liverpool is planning to put housing management and repairs in private hands.

Some legal, architectural, and accounting work is also moving out of directly employed labor's control. New rules govern all local building departments, making them compete with private firms on more realistic terms and forcing them to keep and publish full accounts of their finances. And if they sustain a "loss," they can now be closed down by the central government.

It is on the housing front, however, that the greatest inroads have been made. One-third of all British houses are "Council" houses, owned by the local authorities and rented out to local residents for very low rents.

The economics of such housing is startling. A local authority, with say 50,000 houses and apartments, will probably be paying out $20 million per year on repairs, $25 million on management, and as much as $50 million in interest charges on the money borrowed to buy or build these properties—a total of $95 million a year. Gross income, on the other hand, will be of the order of $20 million. So the net cost of providing this service is $75 million in our example. It would be cheaper to give the property away by mailing the deeds to current tenants. Such an operation would save $45 million on repairs and management, compared to the forgone "income" of $20 million. The net cost per year would drop from $75 million to $50 million, namely, the interest payments only.

Thatcher's approach has been to give public housing tenants the "right to buy" the property they rent at a discounted price. As soon as you have been a tenant for three years you are entitled to buy your home at 33 percent off the market value. For each extra year over and above these three years you gain an extra 1 percent discount up to a maximum of 17 years.

In many ways, President Reagan's plans for selling off federally owned land are a trans-Atlantic mirror of Prime Minister Thatcher's now well-established house sales program. Unlike Reagan, however, Thatcher can already claim a remarkable success on this score—500,000 homes, amounting to 7.5 percent of public housing when she took office, will have been transferred to private ownership by the next general election if Thatcher stays in for a full five-year term.

Why has the British government not moved more quickly on privatization across the board? In a nutshell: such policies do not have universal support even throughout the Tory party, and the civil servants, local government officers, trade unions, and the large number of Labour Party—controlled local authorities range from being neutral to being actively hostile to such moves.

Should Thatcher gain a second term—and with the Labour Party in disarray and the Liberal/Social Democrat bubble well and truly burst, she probably will—this wave will continue to roll. The Drys, being conservatives, want to let markets and competition get to work only because they see it as advantageous, not for the individual, but rather for "the nation." A renewed mandate would considerably strengthen the hand of the Drys and drastically weaken party, union, and bureaucratic opposition to privatization. And, whatever the conservatives' motives, that is all to the benefit of the individual.

John Blundell is a graduate of the London School of Economics and a former member of the Lambeth Borough Council in South London. He is currently director of public affairs at the Institute for Humane Studies in Menlo Park, California.

Airports, Inc.
"Socialist airport policies have failed the nation. It is time we adopted Conservative ones." Those are the concluding lines from "Airports UK," a June 1982 report from the Center for Policy Studies, the Tory party's think tank. Written by MPs Michael Colvin and Graham Bright and historian Christopher Thompson, the report argues for the privatization of most of Britain's commercial airports.

The 46-page report first makes the case that there is little to recommend continued government ownership of the airports. That policy has led to shortages of capacity in the London area, surplus capacity elsewhere, extensive taxpayer subsidy, and monopolistic pricing policies. The report also points out the irony of a government policy that seeks to privatize the national airline (British Airways) but would keep the airports in government hands.

In the London area, notes the report, the simplistic solution would be to sell to investors the existing British Airports Authority (which operates Heathrow, Gatwick, and Stansted). But this would continue the existence of monopoly structure. Instead, the authors recommend the creation of competing private companies to run those three airports plus the municipally run Luton airport north of London (which caters to charter operations). Shares would be offered first to airport employees and local residents and later to other investors. Municipal airports would be sold off in a similar manner.

One important feature of the proposed privatization would be authorization for the airport companies to issue bonds to pay for expansion, as is common in the United States. British airports currently finance expansion on a pay-as-you-go basis, resulting in extremely high landing fees and concession charges. Because of the special problems of some of the country's regional airports, the report suggests that their bonds be made tax-exempt. It also suggests continued government operation of Scotland's airports.

Although it is not a call for pure laissez-faire, the report goes considerably beyond Adam Smith, who did, after all, accept government ownership of certain public works. But then, who knows what he would have thought of airports.