Private parts…

The term ‘privatisation’ was originally coined by management guru, Peter Drucker. In the UK, privatisation is commonly associated with the sale of nationalised industries to the private sector – a process that began in the 1970’s and one that still continues today – as evidenced by the proposed sale of Royal Mail, and more recently – the frankly bonkers scheme to sell off publicly owned woodland in the UK.

Privatisation gained dominance in liberal market economies such as the UK and the US, because the growth in private sector ownership of former state-owned enterprise coincided with regulatory shifts in the existing institutional framework for corporate governance in these countries. This changed both the way the capital markets and investors behaved.

In the UK, the process began with deregulation that removed statutory restrictions on competition in both the public and private sectors. Huge flotations of public utilities such as Water, Electricity and Rail were subsequently legitimised by the proposition that private ownership was a more efficient option, because market discipline can provide the primary regulatory mechanism that reduces agency costs and increases competition.

The ‘market’ is usually cited as the primary justification for privatisation programmes. Increasing efficiency is nearly always viewed as the primary objective for governments pursuing privatisation. The UK government of the early 1980s saw privatisation as an important means to raise state revenues and bridge fiscal deficit. But it is fair to say that other criteria such as the reduction of government interference in the economy to promote competition or encourage wider share ownership are also factors here. For exponents of privatisation, such programmes have many benefits. Competition created by privatisation is seen as driving development and innovation, creating growth and cost efficiencies.

But pursing this policy has not always been successful. Railtrack, the company responsible for the running of the UK’s railway system is a prime example of the failure of privatisation. Not only was there a mass exodus of senior staff as a direct result of the sell-off, the loss of skills and subsequent fragmentation of work led to uncontrollable costs, and a decline in safety standards that caused several fatal accidents and the ultimate re-nationalisation of the company a mere 5 years after it had floated on the London Stock Exchange.

But was privatisation to blame? To my mind, the events which unfolded at Railtrack prove the falsehood that large and complex public utilities can be managed like private sector companies, in other words by putting the profit motive first. By the same token, we cannot assume that innovation, adaptability, productivity and cost control – seen as characteristic of private sector enterprise – will automatically embed into the organisational psyche when transferring ownership of public sector utilities into private hands. Care needs to be taken in setting appropriate governance structure and balancing the tension which inevitably arises between short term profit and long term sustainability. 

This blog is an excerpt from a larger case study on privatisation. If you would like to know more, please contact Lisa Bondesio via lisa@chiridion.com

2 thoughts on “Private parts…”

  1. Rail privatization was bungled in this country because Malcolm Rifkind operated to a flawed model of privatization dreamt up by Sir Christopher Foster ,then of Coopers and Lybrand.The then Conservative administration was warned by people such as the Japanese who understood how to privatize a railway, that there were 58 areas of deficiency with Sir Christopher,s model and that these needed to be put right.The Treasury and Malcolm Rifkind ignored these warnings and the result is the diseconomy of scale that we have now plus infrastructure and signalling separate from train operation.All successful privatization models for trains had integrated train companies which owned their own rolling stock,track and signalling.I suspect it was done in the way that it was to create more consulting man hours to devise the access agreements for goods vehicles and to undertake more work for what were originally 98 train operating companies.The other reason was to help raise money for the Treasury from commuters at a time when the number of old people had created a huge health care bill for the NHS ,so large that it is now funded by petroleum revenue tax with NI contributions paying for dole and incapacity benefit.

  2. Hi John, Thanks for commenting. All the points you raise are valid. Actually, the idea of rail privatisation was first suggested by the Labour government who preceded the Conservatives – had they stayed in power, perhaps the debacle that was Railtrack would still have occurred because the underlying structure & governance model for Rail Privatisation was flawed. I recommend Christian Wolmar's book 'Off the Rails' whioh tells the story of UK rail privatisation in an engaging and interesting way.

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