From: martin.baines@uk.sun.com (Martin Baines - Sun UK - SE Manager Cambridge)
Newsgroups: soc.culture.british
Subject: Re: Privatisation snippets
Date: 8 Oct 92 17:28:26 GMT
Reply-To: martin.baines@uk.sun.com
Organization: Sun Microsystems Ltd
NNTP-Posting-Host: bottomdog.uk.sun.com

In article 6689@bristol.ac.uk, smee@bristol.ac.uk (Paul Smee) writes:
>A few interesting (well, I thought they were) privatisation anecdotes:
>
>British Rail -- the government are looking into selling it off, in
>pieces.  There is a strong rumour that SNCF (the French Railway, in
>essence government owned) are looking into buying bits of it.  (The
>government denies this, but on the other hand government statements of
>economic-policy intent don't feature highly on my credibility list this
>week.)  Would be wonderfully ironic if we were to end up with a
>'nationalised' railway system, but run by (and with profits going to)
>the French nation.  Very 'Euro', at least.

What profits? At the moment BR as a whole loses big money. Even
Intercity is only marginally profitable at the moment. If
SNCF think they can make decent profits by running bits of
BR that's fine by me: the tresury will get its 33% Corporation
Tax on the profits, rather than them disappearing into
invisible cross subsidy.

>Scottish water -- being discussed.  One reader (presumably a Scot)
>points out to me that this isn't 'nationally' owned, but rather is
>owned by the individual local government units, and that one of the
>difficulties that the government is having with working out the
>privatisation is that the money would, therefore, go to them, except
>that the government is also trying to figure out how to eliminate them
>as a tier of government.  This confuses things.  Never mind that.

This was also an argument when the "parts of the English water
industry that were not already private" was privatise. In the
1974 local government re-org the Water Authorities were created
from the assets of the old local aunthorities. They used
exactly the same argument and didn't get anywhere.

>Was a letter on the subject in one of the Scottish papers last I was up
>visiting there.  Missed the beginnings of the exchange, but it was
>possible to work out the whole thing from this letter.  It appears that
>one of the local Scottish councils had taken a stand against the
>privatisation of Scottish water.

See above: I don't think they will get very far.

>Another reader had written to the paper, suggesting that it was very
>hypocritical of them to take that attitude, when they had, as an
>investment, bought shares in the English water companies when they were
>privatised.  The letter I saw pointed out that this was only sensible.
>'If the English want to give money away, it is only proper canny Scots
>practice that we should have some of it.  That does not mean that we
>have to be enthusiastic about giving our money to them.'
>
>Finally -- It occurs to me that no one has yet mentioned what I see as
>the only strong argument against government ownership of industry, and
>that is the fact (and method) of the privatisations themselves.  Any
>sensible private company that wanted to dispose of bits of itself would
>KEEP the profitable bits, and flog off the unprofitable ones --
>precisely the reverse of government methodology.  AND, they would sell
>it at full market value, rather than artificially setting a give-away
>price.  QED.

Sometimes companies sell off assets (parts of themselves) for reasons
other than being unprofitable: in fact selling unprofitable parts
of your company is often impossible except to asset strippers!

Companies may sell bits for strategic reasons (e.g. they no longer
represent core business) or just to raise operating cash to
get over a short term cash flow problem (e.g. Macdougal Douglas
recently selling its computer business). In any case the requirement
is to "maximise shareholder worth": if a business is worth more
on the open market than its return on assets to the parent
corporation it is a good argument to sell it. This does *not*
mean profitable bits are never sold, just the reverse.

The government is in a very similar position: if they think that
they can use the money they get from selling a business better
than having the capital tied up they can (I would say should)
sell it. Also remember profit is *not* equal to the net amount
of cash the business has to give to the government, rather it
is a measure of the amount the total assets of the business has
grown. Also remember that if the privatised asset is then
run profitably the government makes money from corporation
tax; if the privatised industry makes a loss the government
doesn't need to foot the bill. Add in the fact that borrowing
to run the business no longer counts in the national debt
and the fact that the management of the business gets the
government out of its hair and you have a win, win situation.
QED.

Finally the argument about "full market price" is a red herring:
the fair market value is what the markets will pay. The
government can't win in the eyes of the left: if the share
issue was over subscribed they get critised for the price
being to low (e.g. the BT privatisation) if the offer
is under subscribed they get panned as well (e.g the
BP privatisation). In fact the situation is identical
to you selling your house: if you accept an offer and
are happy with it at the time that is the "full market
value". Period. If someone later comes up and says
"you could have got more for that" so what? You had the
choice of selling or waiting, you were happy at the
time, why worry? The government is in the same position:
the "full market value" is the price at which the asset
is sold, and all parties to the sale are happy on the
day. Period.

Martin

---
----------------------------------------------------------------------------
"You might say that, but I couldn't possibly comment"

Martin Baines, Sales Support Manager,
Sun Microsystems Ltd, 306 Science Park, Cambridge, CB4 4WG, UK
Phone: +44 223 420421                 Fax: +44 223 420257
JANET:     Martin.Baines@uk.co.sun    Other UK:  Martin.Baines@sun.co.uk
Internet:  Martin.Baines@UK.sun.com
X.400:     g=martin s=baines prmd=sunir admd=mci c=us