Business Today
   

Politics
Business
Entertainment and the Arts
PeopleBusiness Today Home

Cover Story

Trends
Interactives
Archives
Tools
Exclusives
Debates

People
Business Today Home

What's New
About Us


60 MINUTES

The Preachers of Privatisation

Call it disinvestment. Call it privatisation. Fact is, it isn't easy. David Jeffries and Harry Bush, key players in the UK's privatisation initiatives, were in India recently. BT's Seetha caught up with both for an exclusive tête-à-tête. Excerpts.

 

The Person

Harry BushName: Harry Bush
Age: 46 years
Designation: Deputy Director, Finance Regulation, HM Treasury
BT interviewed him because: He's been promoting Britain's expertise in privatisation since 1993.
David JeffriesName: David Jeffries
Age: 65 years
Designation: Co-chairman, Indo British Partnership
BT interviewed him because: He has mid-wifed the UK electricity sector through the privatisation.

Q. What was the objective behind privatisation in Britain? Was it a realisation that the government should get out of business or was it to shore up government finances?

David Jeffries: There were many reasons. In the case of the electricity sector, the government's key consideration was to provide choice to the customers. Also, it wanted to introduce competition because it thought that the move would yield far greater efficiencies. The government also realised that by privatising the businesses, it would no longer be financially responsible for new investments that would have to be made in these industries.

In the other industries, the prime motive was to improve performance. Close behind that was the thought that a lot of money could be raised from the sale of the assets.

Between large-scale flotation of shares and strategic sales, which works better?

Jeffries: Basically, you can look at trade sales in the case of small businesses which may benefit from other companies bringing in new technologies and new management. But in the case of the very big utilities, the government also wanted to use privatisation to increase share ownership among the public. People take much greater interest in the performance of companies that they invest in.

In the few cases of strategic sales, did you negotiate deals or conduct open auctions?

Harry Bush: We have always tried to get a competitive process going in the case of trade sales because you need to demonstrate that you're transparent. You also need to ensure that you get the proper price, and the only way to do that is to have competition. Tenders were invited, and then negotiations were conducted with the preferred bidder. But we tried to maintain competitive tension throughout the process. So, even when you have a single preferred bidder, you try and ensure that you have a fall-back.

Was valuation of shares a problem? Was there criticism that State enterprises had been undervalued?

Bush: There was, and, looking back, I think a lot of the assets were sold too cheaply. Now, this is partly because, when Britain undertook the sale of these assets, it was difficult to benchmark (prices). Nobody had sold telecom and electricity companies before. I think we also made the mistake of selling too many of these in one go instead of doing it in tranches. Doing it in tranches enables you to establish a base-price, see how the industry performs in the private sector, and then sell the second and third tranches. And in the cases where we did so (for instance, the generating companies and British Telecom), we achieved much more than we would have done had we sold the whole thing at once.

However, when you do things in tranches, you've got to be wary that you don't use the fact that the State has significant ownership to exert control.

Jeffries: There was a commitment that over a couple of years, we would get out of the business and, in order to capture the value, we would sell 40 per cent initially, and put a new management in charge. And we would empower this private sector management to manage the company. In another year's time, we would sell another tranche of shares. By that mechanism, as the efficiencies improve and the costs come down, it is possible to actually get more money.

If you look at some of the ways to increase value, there is a lot to be said for restructuring businesses before you sell them. In the electricity sector, long before we sold any of the businesses, we restructured them so that generation, transmission, and supply were separate entities; we got the companies into shape before we sold them. In this manner, we also got managements that were focused on the businesses. These factors influence shareholder perspective. So, people viewed these businesses as being good, and were prepared to pay more money for them. Restructuring is necessary, and is an important precursor to doing anything.

Bush: It also depends on how easy it is going to be. Do it only if it is clear that it can be run through quickly and can raise value. There is a distinction between restructuring the industry and restructuring within a company. The former is always worth doing to stimulate competition between companies. The problem with long drawn-out internal restructuring is that, often, it can be an excuse for not proceeding with privatisation. Governments have to be careful of the argument that they should always wait for internal restructuring to take place.

In effect, the valuation wasn't really a problem in the selling-in-tranches route...

Jeffries: Absolutely. That's the key. It's not the bits and pieces; it's a declared plan that is done in phases to capture value.

Bush: You have to maintain a track-record. That's an important thing about privatisation. In the UK, clear undertakings were given in the prospectus. If you don't abide by them, it will have a great impact on later sales.

So, the government retaining control didn't dampen investor interest?

Bush: But we never retained government control. What we did was retain an element of ownership, but, in all those cases, the government made it clear it would not intervene in the industries. And, to the extent there was government influence, it was through independent regulation to protect the consumers.

Britain developed this concept of a golden share. How did it work?

Jeffries: The golden share was used where the government felt that a particular business was of significant importance to the country for it to maintain an interest in it. The golden share was purely nominal. It didn't really have a value. When selling the businesses, the government made it clear in the prospectus that, in certain circumstances the government would have to be consulted and its agreement sought. And there was no understanding that they would agree; they could oppose it.

The government took golden shares in a number of utilities but never put anyone on the board-never got involved in the management. When the government no longer felt that it was imperative to own the share and it was happy that the privatisation had gone well, the golden share was removed.

Bush: Most of the special shares have lapsed. In cases like defence and some key infrastructure areas, more permanent special shares have been retained. But the powers under them are minimal and they don't have anything to do with the running of the businesses.

It didn't affect value at all...

Jeffries: Let's be very clear. Businesses sold totally unencumbered will normally fetch more money than those that even have a golden share on it. But I think the government was happy to accept that it was a small price to pay because that left them protecting the public interest in some of the key strategic industries.

In sectors where these public enterprises faced competition from the private sector, was there any fear that competitors would buy into the company, leading to the creation of a monopoly? And did you put in any safeguards to prevent that?

Jeffries: That was never really an issue, because we did have a strong competition law in place. You (India) are just introducing this.

Was there resistance from bureaucrats and politicians about giving up control over state enterprises?

Jeffries: No. The government had made the line it was going to take quite clear. The civil service went along totally. If the government is wishy-washy and not very clear, it gives bureaucrats a lot of opportunity to play one against the other.

How was the actual process of disinvestment handled?

Bush: All our sales were conducted by individual departments, but there was a strong role for the treasury-both relating to individual sales and in establishing the roadmap or the ground rules. But if we were to learn a lesson from our experience, we would have centralised the sale process more than we did.

Why do you say that?

Bush: Because it is important to make the civil service and the ministers experts in the area. Privatisation is a very specialised task and best done when individuals who have done one privatisation do another one afterwards. We did that a bit by moving people around departments, but if you could establish a centre of expertise, it would make dealing with advisors and industries much easier.

To what use were the privatisation proceeds put? Was it to retire public debt, plug the deficit, or was it put into a separate fund, to be recycled for restructuring other state enterprises?

Bush: The proceeds were put into the government's general coffers. You can argue that this was not the right approach, because we failed to demonstrate to the people what had happened to the proceeds. At the end of the process, there was £90 billion raised and people asked where all the money had gone. And much clearer accounting for those proceeds-did they repay the national debt or go into fresh investment?-would have been more effective, which was not done.

That's one of the lessons. If you want to carry people with you in the privatisation process, you have to have a much clearer story to tell than we did on what's happened to the proceeds. You have to ensure that the proceeds are part of the long-term story of economic improvement, which means repaying the national debt or putting the proceeds into investment.

How was the problem of opposition to privatisation tackled?

Jeffries: What the government did was to cleverly pick some obvious winners. It privatised companies like British Airways, the motor-car industry, and all those industries which were naturally in competition within Britain and outside. By doing that, and by simultaneously extending the arrangements for the stockmarket and so on, it began to create a climate whereby it was seen as building up efficiencies and offering more job opportunities.

Was protecting employees' interests ever an issue written into the shareholders' agreement?

Jeffries: It was never put into the shareholder agreement. But if someone said, before you retrench people we'd expect you to spend money to help them retrain, that would be a perfectly reasonable thing to ask a new employer. It will marginally lower the price that you will get, but it's actually quite a good way of trying to get this momentum going and giving people the confidence that some good things will come from privatisation. In the end, people can see that if they want good standards of living for their kids and they want to see the country move forward, you can't have these out-of-date, archaic practices.

 

India Today Group Online

Top

Issue Contents  Write to us   Subscriptions   Syndication 

INDIA TODAYINDIA TODAY PLUS | COMPUTERS TODAY
TEENS TODAY | NEWS TODAY | MUSIC TODAY |
ART TODAY

© Living Media India Ltd

Back Forward