organisation - public sector organisations
Richard Bowett describes the impact of privatisation on public sector organisations in the UK
What is Privatisation
This policy was a major change introduced from the 1980s onwards. It has been copied in many other countries, and the present Labour government has kept nearly all of them despite being bitterly opposed to them at the time.
Before privatisation huge areas of business and employment were under government ownership and control. As the years passed it became more and more obvious that this was a inefficient way to run these businesses. Why?
1. Instead of making a profit, many of these industries required subsidies which added to government spending.
2. All borrowing (which is something ordinary businesses do all the time) ended up counting as government borrowing, so they were pressured to reduce borrowing despite any commercial need and ended up under-investing and unable to compete.
3. Management became lazy and inefficient because they knew any failure would get sorted out by the government in the end; there were too many jobs at stake and too much political prestige at stake for the government to allow the businesses to fail as normally happens with badly managed businesses.
4. Trades Unions were very powerful. They pushed for wage rises not justified by productivity gains, and resisted attempts to improve productivity through reform of working practices and reducing the labour force (which was what private sector businesses were doing). The businesses became dominated by the interests of the employees and not the customers, with the obvious results. For example, workers were represented by half-a-dozen or so different Unions. Each of these would negotiate separately and undertake industrial action separately, so all the workers were ready to work except one group and the whole factory would have to stop. This meant very large numbers of days lost to production. Demarcation disputes between Unions (ie nothing to do with employers) were frequent eg the fitters would have to wait until a member of the bulb-changers’ union turned up to replace the bulb so they could see to work. If the fitters tried to replace the bulb themselves in order to get on with the job, there might be a strike. The whole of the UK, and especially the public sector, was plagued by industrial relations of almost incredible stupidity for the 1960s, 1970s and early 1980s.
There were a number of different methods of privatisation, of which the main one was public flotation on the Stock Market. Also important was de-regulation which meant removing the rules which allowed government to control which businesses could and couldn’t enter a market.
Benefits of Privatisation
To some extent, each privatisation has to be judged on its own merits. Each business and its market was different, and the precise arrangements for privatisation were different from one example to another; there was no standard pattern. However, some general comments can be made.
1. Privatisations meant huge sums of money going into the government. This improved the government’s budgetary position and allowed taxes to be cut.
2. Government lost responsibility for large areas of UK business and employment, and therefore lost the political need to interfere and spend money on sorting out other peoples’ problems.
3. The businesses became much more efficient. Prices fell, and quality of service to customers rose. One cost of this was massive, if overdue, job losses so unemployment rose in the short term.
4. Share ownership widened as many people used privatisation to buy shares for the first time in their lives. However, 20 years later many of these shares have been sold, and the permanent effect on wider share ownership has been modest.
5. These businesses became free to borrow and to invest.
6. They became free to innovate and enter new markets.
7. They became free to expand, to merge, to take over and be taken over. As a result of these factors, the face of the relevant markets has changed quite substantially.
Disadvantages of Privatisation
1. Privatisation is expensive and generates a lot of income in fees for specialist advisers such as banks.
2. Public monopolies have been turned into private monopolies with too little competition, so consumers have not benefited as much as had been hoped. This is the main reason why it has been necessary to create regulators (OFWAT, OFGAS etc). This is an important point. It partly depends on how the privatisation took place. For example, the railways were privatised in bit of a rush and there might have been other ways to do it so that more competition was created. It partly depends on the market. Some markets are ‘natural monopolies’ where competition is difficult. For example, it would be very wasteful and expensive to build two sets of track into Liverpool Street just to create some competition. Natural monopolies create a special justification for public ownership in the general public interest.
3. The nationalised industries were sold off too quickly and too cheaply. With patience a better price could have been had with more beneficial results on the government’s revenue. In almost all cases the share prices rose sharply as soon as dealing began after privatisation.
4. The privatised businesses have sold off or closed down unprofitable parts of the business (as businesses normally do) and so services eg transport in rural areas have got worse.
5. Wider share ownership did not really happen as many small investors took their profits and didn’t buy anything else.
Regulation of Privatised Business
Normal businesses do not need regulation over and above the general laws of the land. Almost all of the privatised businesses have had to be regulated, mainly because of concerns over a lack of competition, and poor service with high prices for consumers. The Regulator is a QUANGO with legal powers over the privatised business(es). BT has OFCOM. The water businesses have OFWAT. The electricity generation businesses have OFGEN. And so on. The regulator controls pricing, usually though a RPI-X formula. This means price rises have to be below the rate of inflation so the only way the business can create more profit is to be very efficient and ruthless with costs of which wages are usually the largest component, so huge job losses have occurred. The regulator also sets targets for quality of service and investment. The regulator can also force competition. For example, BT has been forced to allow competitors access to its network in the interests of speeding up UK access to broadband.
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