60 MINUTES
The Preachers of
PrivatisationCall 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 |
Name:
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. |
Name:
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.
|