Silviase/jgov_v1.4_full_ann huggingface dataset:
1. Baxter, Lester and Eric Hirst, Estimating Potential Stranded Commitments for U.S. Investor Owned Electric Utilities, Oak Ridge National Laboratory, ORNL/CON-406, January 1995.

2. Robert W. Crandall, After the Breakup: U.S. Telecommunications in a More Competitive Era, The Brookings Institution, 1991

3. Crandall, Robert W. and Kenneth Flamm, eds., Changing the Rules: Technological Change International Competition, and Regulation in Communications, The Brookings Institution, 1989.

4. Davis, Vivian Witkind, Breaking Away from Franchises and Rate Cases: A Perspective on the Evolution of State Telecommunications Policy, The National Regulatory Research Institute, NRRI 95-06, February 1995.

5. Edison Electric Institute, Capacity and Generation of Non-Utility Sources of Energy, 1993 and 1985 editions.

6. Electric Power Research Institute, 1993 Technical Assessment Guide, 1993.

7. Edison Electric Industry, Statistical Yearbook of the Electric Utility Industry, 1992.

8. Federal Communications Commission, Monitoring Report, CC Docket No. 87-339, January 1992.

9. Federal Communications Commission, Statistics of Communications Common Carriers, 1990 and 1991 Editions

10. Foltz, David A., J. Robert Malko, Gregory J. Punilla and Thomas J. Purvenas, “Purchased Power Is Not a Riskless Strategy,” The Electricity Journal, Vol. 7, No. 10, December 1994.

11. Gas Research Institute, Baseline Projection Data Book, 1995 Edition.

12. Kahn, Alfred E., The Economics of Regulation, The MIT Press, 1988.

13. Kiss, Frank, Economic Models of Telecommunications Firms: A Survey, Bell Communications Research, October 28, 1986.

14. Levine, Michael E., “Airline Competition in Deregulated Markets: Theory, Firm Strategy and Public Policy,” Yale Journal of Regulation, Vol. 4, No. 2, Spring 1987.

15. Meyer, John R., Clinton V. Oster, Jr., Ivor P. Morgan, Benjamin A. Berman and Diane L. Strassmann, Airline Deregulation: The Early Experience, Auburn House Publishing Company, 1981.

16. Organization for Economic Co-Operation and Development, International Energy Agency, Energy Prices and Taxes, First Quarter 1995, 1995.

17. Pfeffer, Lindsay & Associates, Inc, Emerging Policy Issues in PURPA Implementation, Prepared for the U.S. Department of Energy by DOE/PE/70404--H1, March 1986.

18. National Independent Energy Producers, Negotiating Risk: Efficiency and Risk Sharing in Electric Power Markets, September 1992, Washington, DC.)
19. Pierce, Richard, “The Advantages of De-Integrating the Electricity Industry,” The Electricity Journal, Vol. 7, No. 9, November 1994.

20. Ruff, Larry, “Stop Wheeling and Start Dealing: Resolving the Transmission Dilemma”, The Electricity Journal, Vol. 7, No. 5, June 1994.

21. U.S. Department of Energy, Energy Information Administration, Financial Statistics of Major Investor Owned Utilities, 1992.

22. U.S. Department of Energy, Energy Information Administration, Monthly Energy Review, January 1992.

23. Vietor, Richard H.K., “AT&T and the Public Good: Regulation and Competition in Telecommunications, 1910-1987,” in Future Competition in Telecommunications, Stephen P. Bradley and Jerry A. Hausman, eds., Harvard Business School Press, 1989.
ii) United Kingdom

# PRIVATIZATION AND DEREGULATION IN THE UK: BACKGROUND AND OVERVIEW

George YARROW

Regulatory Policy Research Centre

Hertford College, Oxford
### 1. Introduction

The late 1970s and 1980s saw the introduction of a number of radical new policies in Britain at both the macroeconomic and microeconomic levels. In microeconomic policy the flagship policy was privatization of assets owned by central government and local government. Transfer of ownership was, however, only one strand of a relatively varied mix of policies which also contained elements of deregulation, liberalization, industrial restructuring and regulatory reform.

In the UK context, deregulation is usually taken to mean the removal of government imposed restrictions on market behaviour, whereas liberalization refers to the process of elimination of entry barriers into markets. Clearly, there can be a large overlap between the two policies. They can, however, also differ. To illustrate, removal of government imposed restrictions on entry into a market is unambiguously a form of deregulation but, if other substantial barriers to entry remain, the market will not have been liberalized. Liberalization in such cases may require an activist anti-trust policy -- itself a form of regulation -- to reduce strategic entry barriers erected by incumbent firms.

The paper that follows provides an outline of the operation of the various strands of UK microeconomic policy associated with privatization at the level of central (national) government over the period since 1979. Before considering issues of privatization, competition and regulation, however, it will be useful to look briefly first at the structure of the British state-owned enterprise (SOE) sector as it was in 1979 when the first Thatcher administration came to power, and secondly at the performance record of that sector.

### 2. The state-owned sector in 1979

In 1979 the state-owned enterprise sector of the economy accounted for around 10.5% of gross domestic product, 8% of the labour force, 17% of the industrial capital stock and 15% of gross investment. The main industries and enterprises in the sector at that date are shown in Table 1, classified by the principal industry/enterprise characteristic or policy goal that was responsible for their incorporation into the public sector. As can be seen, the principal motives for public ownership of industries were varied, but were chiefly of a pragmatic rather than an ideological character, in keeping with other aspects of economic policy in the period up to 1979.

The greater part of the assets of SOEs was accounted for by the first column of the table. Thus, as in other western economies, public ownership was most closely associated with industries where two aspects of private sector performance tend to invite intervention, these being:

i) a tendency toward monopoly.

ii) a tendency toward wide spatial variations in prices due to economies of density. In respect of industries in the first column, successive UK governments generally sought to hold price levels down and to suppress spatial price differences (for equity or for simple political
(reasons). For example, there was a single tariff for domestic gas supplies throughout the country, despite the fact that there were significant differences in the costs of transporting natural gas to different locations. Since it is very difficult to allow any form of competition -- even the threat of new entry -- whilst following a policy of suppressing price differentials, public ownership was typically accompanied by regulation to restrict competition. That is, incumbent state corporations in the network industries were granted monopoly rights.

Enterprises appearing in the other columns of Table 1 operated in product markets that either were or could easily be made reasonably competitive. This is particularly true of the fourth column, which contains enterprises that were being driven into bankruptcy by market forces before the state intervened. Thus, while the greater part of public enterprise output came from state monopolies in industries such as telecommunications, gas, electricity, water, rail transport and postal services, major SOEs also existed in competitive or potentially competitive industries such as steel, coal, oil, and motor vehicle manufacture.
Table 1. Nationalised industries and firms in 1979.

MONOPOLY NETWORKS	NATIONAL SECURITY	INDUSTRIAL STRATEGY	DECLINE/ FAILURE
ENERGY	Electricity Boards	British Petroleum	British National Oil Corporation	British Coal
British Gas
COMMUNICATIONS	Postal service	Cable and Wireless
Telecoms
TRANSPORT	British Rail	National Freight Corporation
National Bus
Airports	British Airways
WATER	Water Authorities
OTHER	British Sugar	National Enterprise Board	British Leyland (vehicles)
British Aerospace	British Shipbuilders
British Steel	Rolls-Royce
### 3. The performance of the SOE sector

Studies of the performance of the SOE sector during the 1960s and 1970s found numerous specific examples of inefficiencies in resource allocation, but overall productivity growth in SOEs was broadly in line with that in the British private sector. The SOE sector did, however, have a substantial, persistent financial deficit in the pre-privatization period. Taking account of subsidies, this deficit amounted to over 20% of the SOEs' contribution to GDP in 1979, which itself was down from a high of over 35% in 1975 (see Table 2, which also indicates the tendency for financial support to the SOE sector to rise in years when there is a general election (1974 and 1979)).

The fall in the financial deficit of the SOE sector between 1975 and 1979 in large part reflects changes in public policy that placed much greater stress on the financial performance of public enterprises. These policy changes were in turn stimulated by a crisis in a macroeconomic policy in 1976, at which point much more restrictive monetary and fiscal policies were adopted by the Government. The shift in policy priorities for SOEs was set out formally a little later in a Government White Paper on the nationalized industries, published in 1978.

Table 2. The financial deficit of the SOE sector (including subsidies) as a percentage of contribution to GDP.

Year	Percentage
1979	20.9
1978	13.7
1977	16.7
1976	25.4
1975	37.5
1974	36.2
1973	22.7
1972	21.1
1971	25.6
1970	22.4

Hence, a type of regulatory reform of the SOE sector was well underway at the beginning of the privatization programme, and the emphasis on financial objectives was increased further by the Conservative Government that came to power in 1979. Indeed, it can be noted that privatization was barely mentioned in the Conservative Party manifesto of that year, which placed much greater stress on the general need for the maintenance of strict monetary and financial
disciplines throughout the economy.

### 4. The British privatization programme

Privatization in Britain has involved different types of policy at different levels of government (national and local). An early and major example was the commencement of a programme of sales of public sector housing stock in the early 1980s. Contracting out of services at local government level and in organizations such as the National Health Service has also been a major feature of the privatization process. The discussion below, however, is directed at the transfer to private ownership of SOEs, which is the aspect of the public policy that has attracted most international attention.

The programme of privatization of state-owned enterprises commenced in 1979 with the sale of a tranche of stock in British Petroleum (BP), a company that was already in part privately owned. This sale followed a precedent that had been set by the previous Labour administration which had likewise sold a tranche of stock in the company, largely as a funding exercise stimulated by what at the time was a relatively large public sector fiscal deficit. However, from 1979 onwards, privatization of state-owned enterprises was quickly established as a major component of the Government's economic policy and a whole series of flotations followed the BP issue. The major asset sales to date (including those planned for 1995 and 1996) are summarised in Table 3.

The privatization programme -- together with associated measures of deregulation, liberalization, industrial restructuring and regulatory reform -- divides naturally into phases defined by national elections (1979-83, 1983-87, 1987-92, 1992-). The key policy elements in each phase will be discussed in more detail in section 6 below, but the following broad features of the changing policy mix can be noted immediately.

Until 1984 the firms transferred to the private sector were typically the smaller state-owned enterprises and/or were operating in reasonably competitive product markets. Transfer of ownership therefore tended not to be accompanied by major measures of deregulation or regulatory reform. On the other hand a number of significant Acts of Parliament were introduced which were designed partially to deregulate and to liberalize transport, telecoms and energy markets, independently of any prospective changes in ownership.

From the British Telecom privatization onwards, however, the flotations have, on average, realised much higher sales proceeds and in a number of cases -- most notably British Telecom itself, British Gas, the British Airports Authority, the water companies and the electricity companies -- have involved the transfer to the private sector of firms with substantial degrees of market power. In these latter cases, therefore, privatization has been accompanied by the establishment of new regulatory bodies which, among other things, operate systems of price controls that apply to certain of the relevant company's outputs.

It is important to note, however, that even the flotations of smaller and/or less
monopolistic enterprises were sometimes accompanied by some interventionist measures (i.e. there was not full and immediate deregulation). Typically, the Government either retained a “golden share” -- which carried rights that enabled politicians to block takeovers -- or placed upper limits on the permitted sizes of individual shareholdings in the companies. The purpose of these measures was to provide incumbent managements with temporary protection against changes in control (i.e. to give managers time to adjust to the new environment).

Whatever the merits of these arrangements -- and it can be argued that they were simply a side-payment to incumbent managements to buy their cooperation in the privatization process -- the net result has been that newly privatised firms did not immediately have to confront the full rigors of competition in the market for corporate control, and that political discretion was, at least in part, replaced by managerial discretion. Moreover, managerial discretion was further strengthened by the tendency of Government to use the flotations as a means of promoting wider share ownership. Thus, many of the companies ended up with very large numbers of very small investors on their share registers.

Whereas the flotations of British Telecom and British Gas did not involve any major prior restructurings of the SOEs concerned, the later phases of utility privatization have seen a rather different emphasis. In the case of water, those activities of the regional water authorities which were concerned chiefly with environmental and regulatory matters were separated from the more business-like functions of water supply and waste disposal, and only the latter were privatized. In the case of electricity, a series of restructuring measures radically changed the shape of the industry before transfer to the private sector, and a similar approach involving the separation of infrastructure and operations is being pursued in relation to the privatization of British Rail.
Table 3. Principal asset sales, 1979-95.

Company	Year(s) of first sales
British Petroleum	1979
British Aerospace	1981
Cable and Wireless	1981
National Freight Corporation	1982
Britoil	1982
Associated British Ports	1983
Enterprise Oil	1984
Jaguar	1984
British Telecom	1984
Trustee Savings Bank	1986
British Gas	1986
National Bus	1986
British Airways	1987
Royal Ordnance	1987
Rolls Royce	1987
British Airports Authority	1987
Rover Group	1988
British Steel	1988
Regional water companies	1989
Electricity distribution companies	1990
Electricity generation companies	1991
British Coal	1994
British Rail	1995/6(?)
Nuclear Electric	1996(?)

### 5. Policy objectives

Sir Alan Walters, former personal economic adviser to Prime Minister Thatcher, has identified two “underlying motives” for privatization:

reduction in the politicisation of economic decision making, and

increasing net wealth (by improving the economic efficiency of the enterprises and markets concerned).
It is clear from the record, however, that a number of different policy goals have been pursued by British governments since 1979 and that the relative weights given to these goals have varied over time.

One important objective has been the promotion of competition in previously monopolised areas of economic activity, and this has given rise to a range of measures intended to secure deregulation and liberalization of markets. Promotion of competition is largely derivative from Walters's second underlying motive -- increasing net wealth -- although it has arguably sometimes been pursued as an end in itself (rather than as a means to an end).

The competition objective has not, however, always been given a high priority, particularly in the process of privatizing major utilities. Indeed, a number of other objectives can be identified which, in practice, have tended to be given greater priority. These include:

- raising revenue for central government (the fiscal objective), and

- gaining political advantage by means of transfers of wealth (the distributional objective).

Broadly speaking, the first of these two additional objectives was particularly important in the first and second phases of policy (1979-83, 1983-7) while the second was particularly important in the second and third phases (1983-7 and 1987-92). Deregulation and liberalization were given high priorities in the early 1980s but had less of an impact in the middle of the decade. More emphasis on measures to promote competition did, however, reappear later in the cases of electricity and rail privatization.

### 6. The phases of policy

### 6.1 Phase 1, 1979-83

At least three distinct strands can be identified in this first period of Conservative government:

the maintenance and reinforcement of strict financial controls and disciplines on state-owned enterprises, together with the associated introduction into the SOE sector of more financially-oriented, senior managers from the private sector,

the introduction of a series of measures of deregulation and liberalization in road transport. telecoms, gas and electricity, and

- privatization of a number of SOEs which did not operate in utility sectors of the economy.

#### 6.1.1 Financial controls

The stricter budget constraints placed on SOEs and the increased emphasis on financial performance represented a continuation of the previous Labour Government's post-1976 policies. The driving motivation was a desire to reduce the impact of the SOE sector on the UK's overall
fiscal deficit, and there is evidence to suggest that in had significant success in this respect. In steel and airlines (and later in coal) the increased focus on financial objectives was accompanied by the introduction of new managements.

The changes that occurred in the SOE sector were most dramatic in the case of British Steel. The Corporation had some modern, high productivity plants, but a substantial proportion of the workforce was attached to outdated and low productivity steel making plants. Trade unions were strong and, despite some limited protection afforded by domestic and EC policies,

British Steel was making very heavy losses at the end of the 1970s. It was not, therefore, an attractive candidate for privatization.

Following the appointment of Sir Ian MacGregor as Chairman, British Steel began a period of major restructuring. Older plants were closed in the face of trade union resistance (which was only overcome after a major national strike). The subsequent productivity and unit cost improvements were, however, spectacular (see Table 4): from a unit-cost position near the bottom of the West European league table, British Steel was one of the lowest cost steel producers in the world at the end of the decade.

British Airways was a rather different case in that, although overmanned, its initial financial position was somewhat better than British Steel. Thus, in principle it would have been possible to privatize the enterprise very much earlier, leaving more of the task of increasing productivity and cutting costs to the new private company. In practice, factors such as outstanding litigation in respect of North Atlantic routes delayed privatization, and, under a new management team headed by Lord King (appointed in 1981), major restructuring, accompanied by rapid improvements in profitability, occurred before flotation.

The greater emphasis on financial objective in the early 1980s had a substantial effect on the performance of the SOE sector as a whole. The financial deficit plus subsidies of the sector as a percentage of the its contribution to GDP fell from a high of 20.9% in 1979 to a low of 11.3% in 1983 (although it subsequently increased somewhat again in the following years). Evidence on the productivity performance of SOEs other than British Steel also tends to suggest the stricter budget constraints had a positive effect on SOE performance from around 1982 onwards. Figure 1 illustrates this in the case of British Gas: there is a strong, short-term (positive) correlation between labour productivity growth and output growth in the industry but, as can be seen from Figure 1, the pre-1982 observations lie clearly below the later relationship.

#### 6.1.2 Deregulation and liberalization

Between 1979 and 1983 deregulation and liberalization initiatives were pursued in several areas of economic policy making and included the following measures:

The Transport Act 1980 was the first step in the deregulation of the markets for coach and bus services. As well as providing for the privatization of the National Freight Corporation (the state owned road haulage operator), the Act