Foundation stone of Thatcher era crumbles

By Ian Fraser

Published: Sunday Herald

Date: October 14th, 2001

Prime Minister Margaret Thatcher, image courtesy of Daily Mail MARGARET Thatcher had a dream. As she embarked on her ambitious plan to roll back the frontiers of the state, she believed that she could also transform Britain into a “shareholding democracy” and thereby keep Labour out of office for a generation or more.

If the Tories could somehow present working-class people — the traditional Labour voters patronisingly referred to as “Sids” during the 1986 British Gas privatisation — with the chance to reap more of the rewards of capitalism, surely they would show their gratitude by voting for the Tories at future general elections?

Thatcher also believed that once state-owned assets were shifted into the private sector, it was inevitable that they would become more efficient, providing attractive returns to investors as well as better value and improved services to consumers.

She probably thought it would lead to a capitalist nirvana in which Labour — a party which was after all led by the hard-left leader Michael Foot — would remain unelectable for years. Oh, and the privatisations would also have the useful spin- off of flooding the Treasury’s coffers with cash to help support vote-winning tax cuts.

Millions of consumers were given the incentive to buy into a string of juicy privatisation share issues, often through the use of mass-market television advertising campaigns between 1981 and 1996.

Many of the companies concerned, and especially the English and Welsh water and electricity companies, were substantially under-priced, at least in retrospect, partly because the government wanted to be sure it shifted the stock. In many cases, the Tory privatisations were massively over-subscribed. This enabled early investors to make healthy initial gains following huge leaps in profitability stemming from widespread redundancy programmes.

The process got into gear soon after the Conservatives took office, with the sell-off of 49% of the government’s stake in telecoms group Cable & Wireless. Hard on its heels came the privatisations of life sciences group Amersham International and Associated British Ports.

By 1984 the Tories were into their stride. In December of that year, they orchestrated the UK’s first really major privatisation, the sell-off of 50% of British Telecom. This massive offering spawned a whole new privatisation industry. Stockbrokers, investment bankers, lawyers and PR executives circled around the honeypot, each seeking to get their hands on a lucrative contract to do their bit in warming up the markets.

Twelve years later, the gravy train started to slow in its tracks when Thatcher’s successor John Major privatised both British Energy and Railtrack. There have been a few minor deals since then, and the number of retail investors has quadrupled from three million in 1980 to around 12 million today. But as furious investors berate the government over its handling of Railtrack, it seems the privatisation bandwagon has now well and truly hit the buffers. In each privatisation, “Sids” were offered “sweeteners”, in the shape of, say, money off their water bills and bonus shares if they held onto their shares for a fixed period of years.

For a while, life seemed sweet for “Sid”. As shares in, for example, British Telecom, British Gas or National Power soared inexorably upwards, he was able to dream of a much more comfortable retirement. The formula seemed to be working politically too. Despite all the flak about executive greed and mass lay-offs, the Tories were returned to 10 Downing Street for a further three terms.

It was only with the botched privatisation of the rail industry — sold off by the Major government at the fag end of the Tory years — that things started to turn really sour. The ensuing transport chaos has, amazingly, caused consumers to yearn for a return to the days of British Rail, and to wonder whether state ownership isn’t so bad.

This was followed last week by the government’s harsh and seemingly naive treatment of Railtrack shareholders, which some senior figures in the Square Mile believe will prove to be the final nail in privatisation’s coffin. At the very least, the privatisation rulebook will now have to be rewritten, with the investment community demanding firmer guarantees from government that it will not reoffend by seeking to renationalise other privatised assets by the back door. Plans for the privatisation of Consignia, National Air Traffic Services and the London Underground may have to be put on hold.

Shares in Railtrack, which took ownership of all British Rail’s tracks and stations in 1996, got off to a roaring start. After being issued at 380p they rapidly climbed to a high point of £17.88 in 1998.

One reason for this superb early performance was that the Tories had been forced to price them low, because Labour played on investors’ fears that they might renationalise the company should it regain office. But after a series of fatal train crashes, some blamed on poor maintenance by Railtrack, Transport Secretary Stephen Byers forced the track and maintenance company into receivership last Sunday, destroying all value for the group’s shareholders at a stroke.

But how good have other privatised UK companies been at creating value for their shareholders? All telecoms stocks have suffered severe downturns in the wake of last year’s dot.com correction, but investors in BT probably have greater reason to be gloomy than most. Having initially floated at 130p in 1984, BT shares soared to a high of over £15 in late 1999 only to sink back to 375p today.

British Steel was privatised in late 1988, with the shares issued at 125p. But following thousands of redundancies, overcapacity in the industry and a merger with Dutch steel company Koninklijke Hoogovens, the company now called Corus saw its shares slide 65%. They are now worth just 43.5p.

It has not all been bad news for investors in privatisations, however. Those who bought into Associated British Ports in February 1983, when an initial tranche of shares was sold by the government at 14p, have seen their shares soar by over 3500%. Forth Ports has been another strong performer. Despite the furore about last year’s bid by Duke Street Capital, shares in the port operator have risen by 500% from 110p when they were introduced in 1992 to 675p today. Early investors in Cable & Wireless, floated at 28p in 1981, have also done well with their shares rising by more than 1000% to 294p.

Likewise, early investors in the 22 English and Welsh water and electricity companies, which were privatised in the late 1980s, have made substantial gains. Investors in ScottishPower have done rather less well, with the shares rising from 240p in 1991 to 403p today. But this is not necessarily because of bad management at the former South of Scotland Electricity Board. It may be more because ScottishPower was less attractively priced than some of its English rivals at privatisation.

The Thatcher government was slated for selling off the English regional electricity companies cheaply and did not want to face the same accusations again.

Copyright SMG Sunday Newspapers Ltd 2001

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