Privatization in the European Union: Theory and Policy Perspectives (Industrial Economic Strategies for Europe) 9780415154697, 0415154693, 020305895X, 9780203058954, 9780203276679

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Privatisation in the European Union

Economic pressures and technological change are causing governments across Europe to reassess the role of the state in the economy. Privatisation and market liberalisation have been embraced by some European Union governments as a way of shaking up sleepy state monopolies, while providing useful government funding at a time when governments need to reduce budget deficits to meet the Maastricht fiscal criteria for a common currency in Europe. This volume features contributions by a selection of international experts on privatisation in the major European economies. The book considers the different perspectives on privatisation theory and policy in Europe and thereby identifies different national characteristics in terms of the motivation to privatise, the scale of privatisation and its consequences. In the opening chapters there is a detailed overview of the theoretical economic issues involved in privatisation and an assessment of privatisation across the EU. The remaining ten chapters contain national case studies of EU countries which review the history of state ownership and privatisation in each of these countries and evaluate the extent of privatisation. The role of European Commission directives in deregulating markets and stimulating privatisation is also examined. Privatisation in the European Union: Theory and Policy Perspectives provides a comprehensive study of privatisation in the EU. It will be of enormous value to academics, researchers, policy makers and professional practitioners with an interest in privatisation, market liberalisation and European studies. David Parker is Professor of Business Economics and Strategy at Aston University, UK. He is a consultant on privatisation and regulation to companies and governments in the UK and overseas. His most recently published works include The Impact of Privatisation: Ownership and Corporate Performance in the UK (Routledge, 1997).

Industrial economic strategies for Europe Series editors: Patrizio Bianchi, Keith Cowling and Roger Sugden

Europe is currently at a crucial stage in its economic, social and political development. This series addresses the challenges to European economic policy. It will explore the design of industrial economic strategies enabling European industries and regions to flourish and prosper as we begin the twenty-first century. Competitiveness, Subsidiarity and Industrial Policy Edited by Pat Devine, Yannis Katsoulacos and Roger Sugden Europe’s Economic Challenge Analyses of Industrial Strategy and Agenda for the 1990s Edited by Patrizio Bianchi, Keith Cowling and Roger Sugden The Impact of Privatisation Ownership and corporate performance in the UK Stephen Martin and David Parker Economics of Structural and Technological Change Edited by Gilberto Antonelli and Nicola De Liso Industrial Policies and Economic Integration Learning from European Experiences Patrizio Bianchi Latecomers in the Global Economy Edited by Michael Storper, Stavros B. Thomadakis and Lena J. Tsipouri Privatisation in the European Union Theory and Policy Perspectives Edited by David Parker

Privatisation in the European Union Theory and Policy Perspectives

Edited by David Parker

London and New York

First published 1998 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2002. Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 © 1998 Selection and editorial matter David Parker; individual chapters © their authors All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-415-15469-3 (Print Edition) ISBN 0-203-05895-X Master e-book ISBN ISBN 0-203-20880-3 (Glassbook Format)

Contents

List of figures List of tables List of contributors Preface 1

2

3

ix x xii xiv

Introduction David Parker

1

Themes and content Privatisation as industrial policy: some unanswered questions Note References

1 6 9 9

Privatisation in the European Union: an overview David Parker

10

Introduction Privatisation in the EU: history, trends and rationale Privatisation, liberalisation and EU policy Privatisation and market liberalisation assessed Privatisation, industrial policy and welfare Conclusion Notes References

10 12 20 30 38 42 43 45

Theoretical perspectives on privatisation: some outstanding issues Dieter Bös

49

Introduction Privatisation versus regulation (REGULASY-models) On changing welfare functions of regulators On changing utility functions of managers Privatisation and trade unions (TU-models) On the changing power of the trade unions Conclusion Notes References

49 51 54 57 60 63 65 66 68

vi Contents 4

5

6

7

The privatisation experiment in Austria Karl Aiginger

70

The specific experiment and its background The history and structure of public interference Some intermediate steps towards reform How to privatise firms: selling the majority of five large industrial firms How not to privatise a bank Lagging deregulation in Austria Conclusion Notes References

70 71 72 74 79 81 83 85 86

Privatisation in an industrial policy perspective: the case of France Jacques de Bandt

88

Introduction The nationalisations of 1982 The first wave of privatisation (1986–8) The second privatisation wave (from 1993 on) Some specific aspects and characteristics of privatisations in France The industrial policy implications Conclusion Notes References

88 89 92 93 93 96 98 98 100

Privatisation in Germany: symbolism in the social market economy? Josef Esser

101

Introduction Size and structure of the public sector in West Germany The politics of privatisation in West Germany Privatisation policy in East Germany Explanations and conclusion: the corporatist German model – but for how long? Note References

101 102 107 115 118 120 120

Privatisation in Greece

123

Nicholaos Haritakis and Christos Pitelis Introduction Theoretical considerations The case of Greece Conclusion Notes References

123 123 127 134 134 134

Contents

8

The importance of state enterprises in the Irish economy and the future for privatisation Sean Barrett Introduction Government and the economy – the historical background The Fitzgerald taxonomy of state enterprises in Ireland Disillusionment with state enterprise Case studies of privatisation in Ireland Conclusion References

9

10

11

vii

136

136 136 139 141 143 147 148

Privatisation in Italy: a tale of ‘capture’ Massimo Marrelli and Francesca Stroffolini

150

Introduction Public firms in Italy before 1990 Pressures to change The process of privatisation The regulatory structure A positive model of privatisation in Italy Conclusion Notes References

150 151 156 158 164 165 169 170 171

Privatisation in Finland, Sweden and Denmark: fashion or necessity? Johan Willner

172

Introduction Ownership and social objectives Public ownership and privatisation in Scandinavia The case for wider objectives Competition and behavioural motives for public owernship Conclusion Notes References

172 173 174 180 181 186 187 189

The privatisation of state enterprises in the Spanish economy Vicente José Montes Gan and Amadeo Petitbò Juan

191

Introduction The Spanish state enterprise sector Origins and development of the state enterprise sector in Spain up to 1995 The 1995 reorganisation of public sector industrial groups The state enterprise sector modernisation programme of 1996 The privatisation of state enterprises Privatisation and company control

191 196 197 202 204 206 208

viii Contents

12

13

Competition and privatisation Conclusion Notes References

211 213 214 216

Privatisation in the UK: policy and performance Paul Cook

218

Introduction Publicly owned enterprises UK privatisation Regulation and privatised utilities The case of telecommunications The case of electricity Performance under privatisation Conclusion Notes References

218 219 220 225 227 231 236 239 239 240

Privatisation and deregulation in the Netherlands Willem Hulsink and Hans Schenk

242

Introduction Background to industrial policy in the Netherlands Programmes for redefining the Dutch state Case 1: electricity regulation Case 2: gas regulation Case 3: telecommunications regulation Conclusion Notes References Index

242 243 245 249 251 252 255 256 256 258

Figures

1.1 Privatisation in economics: developmental stages 2.1 Utility ownership in 1995 2.2 Ownership, competition and performance: the standard argument 2.3 Context setting powers and enterprise control 3.1 Hierarchical tiers of the institutional settings 3.2 Scale factor and control costs 7.1 The privatisation process in Greece 7.2 The Greek privatisation model 9.1 Italy: employment and value added of publicly owned firms in Europe 9.2 Italy: state ownership and industrial sectors 9.3 Italy: the public enterprise sector before 1992 9.4 Italy: net profits as a % of value added in private and public enterprises, 1974–91 9.5 Italy: private and public enterprises – some performance comparisons, 1991 9.6 Italy: the public enterprise sector after corporatisation and privatisation 10.1 The case of a public monopoly 10.2 The impact of competition 10.3 Competition and integration 11.1 State enterprise reorganisation: organisational model, 1995 11.2 State enterprise modernisation programme: decision-making process, 1996 11.3 Shareholder hard cores in Spain: a few examples in the energy and telecommunications sectors, 1997

7 21 32 41 51 58 130 131 151 152 155 156 156 161 183 185 186 204 205 210

Tables

2.1 2.2 3.1 4.1 6.1 6.2 7.1 7.2 7.3 7.4 8.1 9.1 9.2 9.3 9.4 10.1 10.2 10.3 11.1 11.2 11.3 11.4 11.5 11.6 12.1 12.2

Numbers employed, value added and gross fixed capital formation in European public enterprises, 1991 Total privatisation receipts, 1985–95 Equilibrium values of wages Privatisation revenues in EU countries Germany: size of the federal industrial assets Germany: share of the industrial federal sector in different industries Greek state-owned industrial companies: major information The Greek privatisation programme Privatisation programme: early stages Job reductions in privatised and restructured state-owned holding groups in Greece Irish Sugar/Greencore: operating profits by class of business, 1990 and 1996 Italy: selected statistics on public enterprises Costs and tariffs of public utilities in Europe :Italy: privatisation laws and decrees Privatisations in Italy, 1992–5 Privatisation and remaining public ownership in Finland Privatisation and remaining public ownership in Sweden Privatisation and remaining public ownership in Denmark Composition of the state enterprise sector in Spain: invested groups and companies, 1997 State enterprises in Spain, 1993–4 Non-financial state enterprises in Spain: main economic variables by business sector, 1994 The financial position of Spanish state enterprises by sector, 1994 State contributions to public sector companies, 1983–95 Historical development of state-owned companies in Spain: industrial and energy sectors, 1941–96 UK: public corporations, 1979 Major enterprise sales in the UK

11 18 65 84 105 106 128 128 132 132 145 153 157 160 162 175 178 180 192 192 193 194 195 198 220 221

Tables

12.3 The scale of privatisation in OECD countries, 1979–91 12.4 UK regulatory watchdogs 12.5 UK: comparative productivity growth rates for the regional electricity companies, 1971–93 12.6 The performance of British Telecom, 1981–5 12.7 UK: employment in selected privatised enterprises

xi

222 226 235 237 238

Contributors

Karl Aiginger is Professor of Economics at the Austrian Institute of Economic Research, Vienna, Austria. Jacques de Bandt is Professor of Economics at LATAPSES (CNRS-Université de Nice Sophia Antipolis), Nice, France. Sean Barrett is a Fellow of Trinity College Dublin and Senior Lecturer in Economics. Dieter Bös is Professor of Economics in the Department of Economics, University of Bonn, Germany. Paul Cook is Reader in Economics at the Institute of Development Policy and Management, University of Manchester, UK. Josef Esser is Professor of Political Science at the Johann Wolfgang GoetheUniversität, Frankfurt am Main, Germany. Vicente José Montes Gan is an economist at the Técnico Comercial y Economista del Estado, Spain. Nicholaos Haritakis is Professor of Economics at the University of Athens. Willem Hulsink is Senior Lecturer of International Business and Strategic Management at the Rotterdam School of Management of Erasmus University, Rotterdam, the Netherlands. Amadeo Petitbò Juan is Professor of Applied Economics at the University of Barcelona, Spain. Massimo Marrelli is Professor of Economics at the Università degli Studi di Napoli “Federico II”, Naples, Italy. David Parker is Professor of Business Economics and Strategy at the Aston Business School, Aston University, UK. Christos Pitelis is the Barclays Bank Lecturer in Industrial and Business Strategy at the Judge Institute of Management Studies, University of Cambridge, and Director of Studies in Economics at Queens’ College, University of Cambridge, UK.

Contributors

xiii

Hans Schenk is Professor of Industrial Policy and Corporate Strategy at Tilburg University and chairman of GRASP at Erasmus University, Rotterdam, the Netherlands. Francesca Stroffolini is a researcher at the Università degli Studi di Napoli “Federico II”, Naples, Italy. Johan Willner is Professor of Economics in the Department of Economics, Åbo Akademi University, Finland.

Preface

In 1996 about 56 per cent of the privatisations in the world, measured in terms of financial receipts, took place in Western Europe. A total of around US$49.7 bn. The sale of shares in Deutsche Telekom in November 1996 was the continent’s largest ever sell off and was alone valued at US$13 bn. Major privatisation programmes have been pursued in the UK, Portugal and France in recent years. However, in some EU countries privatisation programmes have foundered on political opposition. For example, under political pressure the Italian government postponed the sale of Stet, the state-controlled telecoms group; while the programmes in Greece and Ireland have been modest to date. In certain cases privatisations have not involved public flotations of a majority of shares, as is common in the UK, but rather have been designed to favour particular shareholding groups or have involved the state in retaining, directly or indirectly, majority voting rights in the companies. Reviewing the arguments for privatisation, a mix of reasons surface across the EU and not all involve an expectation of economic efficiency gains. Recently the prospect of monetary union in Europe has led governments to seek out privatisation receipts to reduce the level of government debt. Another argument relates to a desire to develop and expand domestic capital markets. Also important have been directives of the European Commission aimed at liberalising markets previously dominated by state-owned enterprises in Europe, notably in telecommunications, transport, electricity and posts. This book brings together contributions from academics in universities across the EU. Each author was asked to review privatisation in his country and to account for trends and policy changes. Both theory and policy perspectives were encouraged. For reasons of space and because of the need to find willing authors, not all of the EU countries could be covered. Nevertheless, nine country chapters and one regional chapter (covering Scandinavia) are provided, as is an overview chapter reviewing privatisation across the EU and a theory chapter which explores the theoretical foundations of privatisation in economics. An introductory chapter summarises the contents of the book. The result is a reasonably comprehensive study of privatisation in the EU.

Preface

xv

The book is designed to be of interest to policy makers at national government and EU levels; to students of privatisation requiring European perspectives; and to lecturers in universities and colleges teaching courses on privatisation, deregulation, industrial policy and European studies at undergraduate and postgraduate levels. I would like to thank Vicky Bond and Denise Burgandy for magnificent help in editing the contributions and reducing them to a common format for publication and Megan and my children for their usual understanding and support during long hours of writing and editing. My final thanks go to Professor Roger Sugden of Birmingham University who helped plan the book. David Parker Aston Business School, Aston University, UK

1

Introduction David Parker

THEMES AND CONTENT In terms of the value of state assets sold the UK still leads the rest of Europe, but in recent years privatisation activity has intensified in the other member states of the EU. Interest in privatisation has been stimulated by the UK example, by technological change and by the European Single Market programme, which is concerned with removing non-tariff barriers to trade in the EU. Amongst other things, the Single Market programme has led to policies designed to open up state monopolies to competition, notably in telecommunications, energy, transport, posts, public procurement and financial services. More recently, the trend towards privatisation in the EU has been reinforced by the Maastricht Treaty ceilings on government debt and deficits in the runup to European Monetary Union. The sale of state industries offers one means of reducing the level of outstanding debt. Major industries including public utilities are being lined up for sale or have already been subject to share flotations in the EU. However, the EU consists of a diverse set of nations with each country’s precise attitude towards state ownership and privatisation dictated by a complex combination of historic, economic, social and cultural factors. The transfer of privatisation as policy across Europe involves, therefore, emulation but not exact copying of any one model. Emulation involves some adaptation in recognition of institutional and structural constraints on policy transfer. In some cases political divisions and trade union pressures reinforce policy inertia. As a consequence, creation of a horizontal, across industry, ‘EU policy’ on ownership is not occurring. Instead, policy is developing on a sectoral or vertical basis and reflects particular attitudes of member states. France and to a slightly lesser extent Italy have been more reluctant than the UK and Germany to see privatisation and associated liberalisation of markets extended into areas traditionally served by monopoly state providers, notably electricity, postal services and rail transport. Also, privatisation raises important questions about the direction of economic policy which extend beyond matters of immediate economic efficiency gains (static efficiency gains), to encompass issues to do with longer-term industrial performance (dynamic efficiency gains) and income distribution or welfare effects.

2 David Parker

Within the EU there are different views about whether privatisation can promote economic prosperity and maintain social cohesion. The purpose of this book is to provide a comprehensive review of privatisation in the EU member states and to consider different perspectives on privatisation within the EU. To this end privatisation experts in a number of the member states were asked to write about their country’s experience and to place privatisation within a wider historical and economic context. In the cases of the Nordic states it was decided to provide more of a regional perspective. Authors were encouraged to adopt their own approach to the content of their chapters. As one of the main aims of the book is to bring together different perspectives on privatisation, it was important not to attempt to restrict the content by imposing a heavy editorial hand. The result is a series of individual studies which can be read for comparative purposes or as self-contained discussions of privatisation in particular EU states. The chapters have differences in approach reflecting the different attitudes to privatisation within countries and the particular views of the authors. Some include a neoclassical perspective, while others are more institutionalist in nature or more within the tradition of political economy. Turning to each chapter in detail, chapters 2 and 3 provide a study of privatisation activity across the EU and a theoretical treatment of privatisation respectively. Both chapters are intended to provide a framework for the later country studies. Chapter 2 compares the history, rationale and levels of privatisation activity in each member state and considers EU Commission policy on ownership and market liberalisation. What is clear from this comparative perspective is, first, the extent to which privatisation has come to the fore in economic policy making in Europe in the 1980s and 1990s; second, how both the rationale for privatisation and the precise nature of the policies vary across Europe; and, third, how EU Commission policy is evolving and creating pressures on member states to liberalise markets, which in turn is leading to pressures to privatise long-established state activities. It is clear that the notion prevalent in the UK that privatisation raises economic efficiency strikes a cord in some member states but by no means all. Privatisation within the EU results from other forces including the ‘fashion’ to privatise, evident worldwide, and, more pragmatically, expediency. The latter is most obvious where countries are wrestling to meet the budgetary criteria for monetary union in Europe. Chapter 3, by Dieter Bös, looks particularly at agent–principal theory in economics and the way it has been used by mainstream, neoclassical economists to justify wide-scale privatisation. Most of the relevant economics comes from the USA and the UK and Bös identifies both strengths and weaknesses in the literature. In particular, he argues that ‘in my opinion, this neoclassical way of reasoning misses many facets of the most important changes in enterprises which are privatised’. He allows for a change in the regulator’s welfare function and for distributional effects and particularly takes account of the reduction in trade union power when firms are privatised. Whereas neoclassical theories on privatisation assume constant welfare and utility functions, Bös recognises that privatisation decisively changes these functions. While not rejecting neoclassical

Introduction

3

explanations of privatisation, he concludes that ‘these explanations should refrain from holding things constant whose change is central to the process of privatisation’. In chapter 4 Karl Aiginger discusses privatisation in Austria. The public sector has traditionally played an important role in the Austrian economy and by the 1980s the country had a peculiarly large share of public ownership of manufacturing industry. Aiginger catalogues the privatisations since the 1980s and emphasises how potential buyers were selected according to whether production capacity and management decision making would remain in Austria. As in the case of a number of the countries discussed in this book, Austria’s privatisation programme has not involved an unconditional acceptance of the omnipotence of competitive capital markets. Jacques de Bandt’s study of the French experience (chapter 5) stresses the extent to which the policy of privatisation is a reversal of the earlier period of nationalisation after 1981. In a study critical of the drift to privatisation, he shows that before the fall of the socialist government in 1986, industrial policy was in retreat. In this sense privatisation is a continuation of a move away from earlier state involvement in industrial restructuring and regeneration as part of state economic planning in France. State intervention is now on a case by case basis ‘aimed at solving immediate problems, reinforcing existing structures or defending national interests . . . and not within the framework of some well thought out national development strategy’. Yet, he points out that the French state still takes an active interest in its industry, of which the use of favoured groups of shareholders during privatisation sales, the so-called noyaux durs, is one manifestation. He concludes that privatisation in France involves ‘concentrating economic power and providing easy profits to the benefit of a small group of capitalists’. Bandt’s tone is one of scepticism about the rationale and likely outcome of the recent drive to sell state assets in France. In chapter 6 Josef Esser reviews privatisation in Germany in the light of the country’s ‘social market economy’ model. A model that seems to have been exceptionally successful for much of the postwar period. Esser concludes that so far privatisation in Germany (excluding the former East Germany) has affected no more than a few state-owned concerns and those which are profitable. He also concludes that the new pressures for privatisation and liberalisation may threaten the social consensus within Germany with consequences that are difficult to foresee. Overall he concludes that, unlike in a number of other EU member states, ‘a policy of privatisation was not, from an economic standpoint, of paramount importance in making sure that Germany remained competitive in world markets’. The German case underlines the importance of studying privatisation in the light of each country’s institutional and structural constraints. Privatisation in Greece is discussed in chapter 7 by Nicholaos Haritakis and Christos Pitelis. They firstly review the theories of state failure in economics prevalent in the 1980s, identifying strengths and weaknesses. Overall, they argue that neither theory nor practice lend unconditional support to what they call ‘privatisation mania’. In relation to the experience in Greece, they explain how privatisation policy has gone through three distinct phases where lessons

4 David Parker

have been learned and policy has evolved. However, as elsewhere, policy is driven by political considerations and constraints. In November 1993 a government favourable to privatisation was forced to resign after losing its parliamentary majority. Haritakis and Pitelis also identify some of the economic costs of privatisation in Greece, in terms of depressed economic activity and higher unemployment. Their study illustrates that higher resource utilisation and higher profits in privatised firms can come at a cost in both economic and social terms. Nevertheless, they conclude that a speeding up of privatisation in Greece is essential, especially of the loss-making state enterprises. The Irish case is reviewed by Sean Barrett in chapter 8. Barrett explains how Ireland since independence has built on a state interventionist tradition inherited from British administrations in Dublin. The political culture of Irish policy making from the 1920s encouraged the championing of state-owned enterprises, although a philosophy favouring public enterprises did not develop. Support for state enterprise was pragmatic and related to the perceived need to develop the Irish economy. This view was shared by all of the political parties in Ireland until the 1980s, when the consensus broke down in the face of mounting evidence of economic failure in a number of state enterprises. Barrett provides three case studies of privatisation in Ireland and identifies certain performance improvements. Yet by 1996 privatisation in Ireland had lost impetus in the face of political opposition. In their study of privatisation in Italy, in chapter 9, Massimo Marrelli and Francesca Stroffolini further underline the importance of studying privatisation in relation to the history and politics of the country. As they acknowledge: ‘To many foreign observers the Italian political economy model has always been something rather mysterious and somewhat incomprehensible.’ They go on to demonstrate that privatisation in Italy with its stop–go nature and contradictions can only be rationalised and explained once the peculiar characteristics of the Italian political system and institutions are recognised. They reinforce their study be proposing a political economy model which rationalises the choices being made. They build a model in which public ownership of firms allows the ruling party to extract private benefits from localisation and employment policies. The welfare outcomes of privatisation depend upon the effectiveness of liberalisation and regulatory processes. Chapter 10 is a regional study of privatisation in Scandinavia encompassing a comparative analysis of policy in Finland, Sweden and Denmark. Johan Willner explains that in spite of a reputation for welfarism and public intervention, these countries have been affected by the spirit of privatisation. In the past state-owned enterprises were fostered, not for ideological reasons, but to create companies that would not have existed under pure market conditions. State ownership was therefore an integral part of industrial policy with the objective of developing the countries’ economies. Willner concludes that a significant group of companies will remain in public ownership, in particular in Finland and Sweden. He also demonstrates through an economic model, where the state enterprise maximises a weighted sum of its profits and

Introduction

5

wages, that competition is not incompatible with wider objectives. Competition can make it easier for a company with wider objectives to break even. This flies in the face of the usual argument in Europe that liberalised markets reduce the scope for non-profit objectives. This finding is clearly controversial. Turning to chapter 11, Vincente J. Montes Gan and Amadeo Petitbò Juan look at privatisation in Spain. They review the structure of the Spanish state sector until the 1990s and consider the different approaches to privatisation adopted. Their chapter provides a detailed discussion of the 1995 reorganisation of public sector industrial groups and the state enterprise sector modernisation programme of 1996. They also explain the methods of privatisation used and emphasise the role of shareholder ‘hard cores’. Hard cores in Spain are comparable to the noyaux durs in France and are stable shareholder groups chosen to assume control of former state enterprises with the aim of maintaining them under national ownership. While Spain’s privatisation process has helped improve efficiency in the business sector and has reduced the public deficit, different routes have been pursued to achieve these ends. Some former stateowned firms operate freely in competitive markets, but in other cases the state has attempted to retain a degree of control through specific-rights shares or defined shareholder hard cores. Privatisation in the UK is discussed by Paul Cook in chapter 12. The UK’s experience has provided a model and indeed an inspiration for privatisation programmes elswhere. Cook looks at the background to the 1980s’ privatisations, the evolution of UK policy and the methods of sale. He also considers the extent to which the government’s objectives have been met, especially in terms of raising economic efficiency. In addition, he discusses the role of state regulation of privatised monopolies in the UK. The UK model of regulatory offices, operating ‘price caps’ to control prices in the privatised natural monopolies, has been studied closely by many countries planning their own privatisations of public utilities. Cook explains how the development of a regulatory environment to curb monopoly abuse has been a necessary accompaniment to privatisation in the UK. He concludes that in general terms the UK experience suggests that privatisation can bring about significant economic gains, but privatisation needs to be adopted ‘in a selective and pragmatic manner. Experience has indicated that there are a host of constraints to successful privatisation that need to be recognised and controlled . . . and that serious consequences for the credibility of the broader economic management of the economy arise if privatisation is mismanaged.’ This conclusion could be applied to all of the countries studied in this book. Finally, in chapter 13 Willem Hulsink and Hans Schenk study privatisation in the Netherlands. The Netherlands is a highly ‘open’ economy, very dependent upon international trade and in which a number of large, transnational corporations are located. Hulsink and Schenk explain how and why the country is moving towards deregulation and privatisation and how this is combined with a stronger ‘but still ineffectual’ competition policy. Through case studies of electricity, gas and telecommunications they demonstrate the relationship

6 David Parker

between ownership and competition and privatisation and EU directives. They conclude that in the Netherlands privatisation is pragmatic and opportunistic rather than ideologically driven. PRIVATISATION AS INDUSTRIAL POLICY: SOME UNANSWERED QUESTIONS There can be no doubting the impact privatisation has already had in terms of industrial restructuring in Europe. In a number of cases privatisation is providing an opportunity to rejuvenate once sleepy state industries. This will be of long-term benefit to competitiveness within the EU, but at the same time, cash-strapped governments have a certain penchant for ‘selling the family silver’ rather than the alternatives of raising taxes or cutting public spending to reduce public deficits. It is also disturbing that such a large-scale change of ownership of economic assets is occurring without serious consideration of its impact on the competitiveness of member economies and of the EU as a whole. Privatisation can take many forms, as it is doing within Europe and with, to be expected, differing economic effects. Privatisation has become an article of faith in certain political circles, amongst industrialists and large swathes of the media in Europe, but at a time when economists are also inclined to emphasise the roles of competition and state regulation in achieving long-term economic efficiency. Kay and Thompson (1986) have labelled privatisation in the UK ‘a policy in search of a rationale’. At the EU level an appropriate description might be ‘a confusion of rationales in search of a common policy’. Economic policy can be considered to develop through three broad stages (see Figure 1.1). The first stage is one of early development, where the ideas supporting the policy are new and under-developed. Generally, supporting theory will be limited, naive and simplistic and there will be little in the way of empirical testing. At this stage policy making is very much an article of faith. Privatisation as economic policy was in its early development stage in the late-1970s to mid-1980s. Developments in agent–principal theory in the mid-1980s provided more substantial foundations in terms of economic theory. Agent–principal theory suggests that generally shareholders with clearly defined property rights will more successfully monitor managerial behaviour in private sector enterprises, leading to higher levels of operating efficiency, than the government officials who monitor managerial behaviour in state enterprises. There was also from the mid-1980s the beginning of empirical study of privatisation, especially in the UK. The empirical work suggested that privatisation could lead to productivity increases but that such improvements were not guaranteed. This in turn led to theory refinement and the clear separation of competition from ownership as constraints on managerial performance. Competition as well as ownership was seen as important in promoting efficiency gains. There was also an appreciation of the potential adverse effects on efficiency of inappropriate state regulation of industries after privatisation. Privatisation in economics is still in the ‘consolidation phase’. To achieve the final, ‘maturity stage’ an economic idea needs a well-established theoretical base

Introduction

7

Figure 1.1 Privatisation in economics: developmental stages

and a substantial body of supporting empirical evidence. So far privatisation lacks both.1 Moreover, it is important to recognise that privatisation is as much about politics as economics, sometimes more so as the various chapters in this book emphasise. The decision to privatise, what to privatise and how to privatise are driven by political as well as economic considerations. It is to be expected, therefore, that the result will be differing economic outcomes depending upon the form and timing of privatisation. Privatisation in the EU is a complex and politically sensitive process which defies any simple classification or summary. So far there has been a lack of critical perspective at the EU level to make sense of all of the privatisation activity underway. Questions that urgently need to be addressed include: • Does privatisation have a lasting impact on industrial competitiveness and precisely how? What is the effect of privatisation on competitiveness within the EU and between the EU and the rest of the world? • What are the implications of privatisation for continuing state intervention in the economy, especially in terms of regulatory policies both at the member state and EU Commission levels? Is there a need for supra-EU regulatory bodies or will national-level regulatory offices suffice?

8 David Parker

• What are the effects of privatisation on industrial structures in Europe, including the impact on R&D, investment, training and skills, and on the ‘supply base’, i.e. firms supplying the newly privatised sectors? • What are the implications of privatisation for social welfare and social cohesion in Europe given the inevitable income redistribution effects that privatisation implies? • And, finally, how should privatisation be assessed within the context of economic power? Does it remove an undesirable concentration of economic power within the state, as many privatisation advocates argue, promoting consumer sovereignty and social wellbeing. Alternatively, does it lead to an undesirable shift of economic power in favour of large-scale capital, perhaps concentrated in large, often transnational, private sector companies? Privatisation is part of a wider trend towards a globalisation of capital and labour markets, but with what consequences? There have been many studies of privatisation at the national level, especially in the UK, and some comparative studies (for a review see Martin and Parker, 1997, ch. 4). However, these studies have been mainly concerned with the detail of privatisation or its immediate consequences in terms of the companies’ profitability or productivity. There has been much less attention to the questions listed above, no doubt because they are complex questions to answer. They are, nevertheless, important questions with real significance for the future of the EU economies. What exists at present are not answers but a research agenda. This research agenda lies centrally within the framework of the debate on industrial policy in Europe. On the one hand, for much of the postwar period industrial policy was associated with state involvement to direct and shape or at least influence economic activity with a view to raising national economic performance. The case for industrial policy draws on the concept of ‘market failure’. The arguments for industrial policy are based on the notion that market forces cannot be entirely relied upon to ensure the desired level of economic growth and prosperity. Through some kind of state planning and investment a more desirable outcome is obtained than if market forces solely determine the economy’s future. On the other hand, the case for privatisation and related liberalisation of markets is inspired by the notion of the superiority of market forces over state intervention, reinforced by arguments of ‘state failure’ in policy delivery. The result is government policy towards industry which takes the form of minimising direct state involvement in industry, promoting and defending private property rights and promoting competitive private markets. Privatisation is a central part of this reassessment of industrial policy and with it the role of the state. This book attempts to advance research into privatisation in the EU in terms of both theory and policy. It does not provide definitive answers to the above questions but it does surface the issues and identifies differences and complementarities in industrial restructuring in Europe. It will hopefully promote further interest at the EU level in privatisation not simply in terms of some short-term expedience to balance state budgets or as a method of achieving one-off increases in productivity

Introduction

9

(for example, by post-privatisation de-manning), but in terms of its potential as a dynamic for obtaining long-term, sustained, economic improvements. NOTE 1

Boycko, Shleifer and Vishny (1996) seem to suggest that there is a substantial body of theory and empirical evidence that, in their words, ‘privatisation works’ (p. 318). Their paper implies that privatisation in economics has reached the ‘maturity stage’, but their theory is partial and unsatisfactory in the light of both alternative theories (see, for example, Bös, chapter 3, and Willner, chapter 10, below) and experiences of privatisation in various parts of the world.

REFERENCES Boycko, M., Shleifer, A. and Vishny, R. (1996) ‘A Theory of Privatisation’, Economic Journal, vol. 106, March, pp. 309–19. Kay, J. A. and Thompson, D. J. (1986) ‘Privatisation: A Policy in Search of a Rationale’, Economic Journal, vol. 96, March, pp. 18–32. Martin, S. and Parker, D. (1997) The Impact of Privatisation: Ownership and Corporate Performance in the UK, London: Routledge.

2

Privatisation in the European Union An overview David Parker

INTRODUCTION There is a long history of state ownership of industry in Europe involving national and regional public corporations, state holdings in private sector companies, state holding companies and operation through local and central government departments. A major expansion of state enterprises occurred in the interwar years and more especially after 1945. For example, in Italy bankrupt industries were salvaged by the state under the pre-war Fascist regime; while after 1945 the Labour government in the UK nationalised major industries such as coal, the railways and electricity. On the continent industries owned by Nazi collaborators were taken into state ownership, such as Renault in France and many of Austria’s large enterprises. Later, in the 1970s, economic crises led to the state takeover of failing industries, such as British Leyland (motor vehicles) in the UK and steelworks in Sweden. In West Germany state-owned coal, steel and shipbuilding companies faced severe economic difficulties and attempted to widen their industrial base by investing in companies involved in downstream activities, thus expanding the scope of state control. Across Europe governments attempted to stimulate industrial development through investments in new technologies. Hence, new state firms appeared in electronics, computers, office equipment, pharmaceuticals, oil, chemicals, microelectronics, petrochemicals, pulp and paper and telecommunications (Monsen and Walters, 1983, p. 1; Anastassopoulos, Blanc and Dussauge, 1987). Following the Portuguese revolution of 1974 major industries and banks were nationalised and in 1981–2 in France a socialist administration took large numbers of industries and banks into the public sector (Hager, 1982; Redor, 1992, p. 160; chapter 5 below). At the peak of state ownership in France, in the mid-1980s, the state owned 13 of the 20 largest companies and had a controlling stake in many others (Nugent, 1994). The figures in Table 2.1 show the importance of state enterprises in the economies of most of the EU countries by 1991. It is clear from these figures that state ownership was significant in all of the economies, but most important in terms of the share of employment, value added and gross fixed capital

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Table 2.1 Numbers employed, value added and gross fixed capital formation (GFCF) in European public enterprises, 1991

Source: Centre Européen des Enterprises à Participation Publique, Bruxelles. (Les Entreprises à Participation Publique dans l’Union Européene. Annales du CEEP 1994. Résumé des Etudes Nationales) as summarised in Jacobson and Andréosso–O’Callaghan 1996, p. 283 Notes: aTotal GFCF; bpercentage share in non-agricultural turnover

formation in France, Greece, Italy and Portugal (and this in spite of some major privatisations in France between 1986 and 1988). If the data were for 1979, before the UK’s privatisation programme, then the figures for the UK would have been over twice as large. By the late 1960s a political consensus existed in Western Europe favouring the existence of a mixed economy. In spite of an essentially liberal economic climate in Western Europe, there was considerable neutrality on the issue of state ownership. Governments of different political leanings were reluctant to interfere substantially in the ownership of economic assets and in a number of countries, such as West Germany and Sweden, there was a decentralisation of economic power which restricted the sale of state assets owned by regional governments (Länder in West Germany) and municipalities (Bös, 1993, p. 100). This chapter reviews the development of privatisation across the EU and the role of EU policy. It also considers the different rationales for privatisation across member states and emphasises that there is no consensus on the likely efficiency gains from privatisation. The chapter reviews the privatisation literature and concludes that expectations of improved efficiency may not be borne out. The discussion then turns to industrial policy, where it is pointed out that privatisation and related market liberalisation are industrial policies only in a negative sense. Whereas in earlier years in some member states the state was seen as having an instrumental role in industrial development, privatisation and market liberalisation imply essentially that the state’s role should be limited to defining and protecting private property rights. Undoubtedly, privatisation involves a shift in property rights and therefore economic power.

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PRIVATISATION IN THE EU: HISTORY, TRENDS AND RATIONALE Although major privatisation activity in Europe is associated with the UK since 1979, there are examples of earlier sales of state assets, such as West Germany after 1959, in the UK in the early 1950s and early 1970s, Ireland in the 1960s and 1970s, and Italy in the 1950s and 1960s. These sales were not, however, part of a systematic programme aimed at slimming down the state sector (with the partial exception of the UK in the early 1950s). For example, the main objective in West Germany was a desire to curtail the power of the trade unions coupled with a wish to to spread share ownership more widely so as to create ‘manager-owners’ or ‘popular capitalism’; rationales that have featured in more recent privatisations, notably in the UK. In the event, it proved difficult to persuade the public to buy shares and hold them for long and interest in the programme declined. Privatisation began in the UK following the election in 1979 of a Conservative government. The new government was keen to reduce the role of the state in the economy following years of poor national economic performance; in 1979 nationalised industries accounted for 9 per cent of GDP. The programme began cautiously, however, and was extended to the public utilities, namely telecommunications (1984), gas (1986), water (1989), electricity (1990–1) and the railways (1995–7), only when it became clear that there would not be decisive opposition from management, unions or the public and that large privatisation flotations would be supported by investors. By 1997 the total value of UK privatisation sales had risen to around £65bn and the share of nationalised industries in GDP had fallen to under 2 per cent. Throughout much of the rest of the EU privatisation activity was on a much smaller scale in the 1980s, as discussed below. The main exception is France where a right of centre government between November 1986 and January 1988 privatised 14 large industrial, banking and financial trusts (Andreff, 1992, p. 135). For example, the oil company Elf Aquitane was privatised in September 1986, Saint Gobain in November 1986, Paribas in January 1987 and Alcatel–Alsthom in May 1987. Most of the firms affected had been nationalised in the early 1980s, although a few could trace their state ownership back to just after the Second World War, such as the bank, Société Générale. This extensive privatisation activity was brought to a halt by the re-election of a socialist administration in 1988. The 1990s have seen far more privatisation activity in Europe. This has been associated with two principal economic pressures, namely liberalisation of markets at the EU level and government budgetary difficulties – two motives discussed in more detail later in this chapter. Also relevant has been the election of governments sympathetic to privatisation. For example, March 1993 saw the re-election of a right of centre government in France and a renewal of the privatisation activity halted by the socialist administration in 1988. The Privatisation Law of 1993 slated 21 enterprises for privatisation and since then shares have been sold in a number of French state enterprises, including Elf Aquitane, the insurance group UAP, Renault, Rhone Poulenc, the bank BNP, Usinor Sacilor and the aluminium business Pechiney. So far

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France has chosen to concentrate on privatising industrial and commercial firms operating in competitive markets rather than monopoly public utilities, although it has prepared (and repeatedly postponed) a partial sale of France Télécom.1 Turning to the other EU countries, Italy also began its current privatisation programme in 1993. By the early 1990s state enterprises were recording mounting financial losses, notably those controlled by the giant industrial stateholding corporation the IRI (Istituto per la Ricostruzione Industriale). By 1994 the IRI’s losses were equivalent to 5 per cent of Italy’s GDP. The IRI was set up in 1932 to bail out failing industries and soon controlled directly or indirectly large parts of Italy’s shipbuilding, maritime transport and steel industries. In more recent times it had become a significant investor in the banking sector, motor industry (Alfa Romeo), air transport (Alitalia) and food industry (SME). Legislation in Italy to clear the way for the corporatisation, restructuring and sale of state industries was passed in January 1992, after delay arising from political opposition and disagreement between government and the state holding companies, such as the IRI, over whom should benefit from the privatisation revenues. Subsequently, continuing argument and frequent changes of government have slowed down the implementation of the legislation. The first important sale involved 67 per cent of the shares in the bank Credito Italiano in 1993 and this sale was followed by the privatisation of two other large banks, the Istituto Mobiliare Italiano and Banca Commerciale Italiana and the stateowned insurance group INA (Istituto Nazionale della Assiurazioni). The latter involved the largest equity offer ever from Italy. By 1996 some 300 state companies had been involved in some privatisation and the total privatisation receipts exceeded 25,000 bn lire. Portugal is another recent convert to privatisation. Until June 1989 the majority sale of state firms was prohibited under the Portuguese constitution and it was not until 1990 that a privatisation programme was launched, under a centre-right Social Democrat (PSD) government. Since then the programme has developed quickly and has become more extensive than anywhere else on the continent. To date sales have raised over Esc 1.3 trillion (over £5bn), representing about 6 per cent of Portugal’s GDP and reducing the state’s share of the economy from around 20 per cent in 1989 to 11 per cent now. As in the UK, and unlike in most other parts of Europe, the Portuguese have extended privatisation enthusiastically to the public utilities. In 1995–6 shares in Portugal Telecom were sold in two tranches reducing the state’s holding to 51 per cent. Electricidade de Portugal has undergone major restructuring involving the separation of electricity generation, transmission and regional distribution on lines similar to those adopted in the UK; although current privatisation plans involve the state retaining a majority shareholding. When Portugal recently elected a socialist government, the new government immediately announced that it not only intended to continue the privatisation programme but to accelerate it. The current programme includes privatisations affecting banks, steel, shipbuilding, oil, chemicals, mining, cement, gas, electricity, pulp and paper, tobacco, airport management and motorway construction and operation.

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In Spain privatisation activity has been less frenetic but still significant. State enterprises in Spain were an integral part of industrial policy from the Franco era and were organised around holding companies, similar to those in Italy. State companies were mainly in two organisations, the most important being the INI (Instituto Nacional de Industria). Further failing companies were nationalised post-Franco, between 1976 and 1982.2 By the early 1980s the holding companies accounted for two-thirds of the value added of state industry. Although at this time there was no systematic denationalisation strategy in Spain, between 1984 and 1986 the government dissolved or sold off over 30 smaller state concerns (Garcia Delgado, 1989, p. 496). The first noteworthy privatisations involved the sale of a minority stake in the Rumesa Group, rescued from bankruptcy by the government in 1983, and the sale of a majority stake in the loss-making car manufacturer, Seat, to the German company, Volkswagen, in 1986. Since then, with continuing losses in a number of state industries and budgetary pressures, further sales of state assets have occurred with 1989 and 1991 being years of particularly heavy privatisation activity. Sales of shares have occurred in SKF Espanola (tyre manufacturer), Endesa (the largest electricity enterprise in Spain), Repsol (formed out of the oil interests of the state-holding company, INH), Telefónica (telephones), Argentaria (banking group), and holdings in the textile and cellulose industries. In Finland state-owned enterprises developed as a response to a failure on the part of private investors to invest in the fledgeling state, threatened by the Soviet Union to its east. After 1945 Finland’s economic policies were influenced by a desire to develop a close trading relationship with the Soviet Union to reduce the military threat. The result was a comparatively large state sector, totalling as much as 20 per cent of domestic valued added and 15 per cent of the industrial labour force. Since 1987 successive governments have been committed to a programme that includes a large-scale privatisation of state industries. In 1991 the Ministry of Trade and Industry set out arguments and guidelines for privatisation in a report (Valtionyhtiöt markkinataloudessa) but initially progress was modest. In February 1988 there was a first share issue in the state airline Finnair and some share sales occurred around the same time involving the paper machinery, mining and steel sectors. The economic difficulties of the early 1990s halted the programme, however, and indeed a commercial bank was, temporarily, nationalised. Since 1993 the pace of privatisation has accelerated again in the face of more buoyant stock market prices. For example, stakes have been sold in Outokumpu, involved in mining and metals, Rautaruukki, the steel producer, and Kemira Oy, a major chemicals group; although only in the case of Outokumpu has the state holding been reduced to under 50 per cent. The election of a left of centre government in 1995 has created some uncertainty but it appears that the privatisation programme will continue. As mentioned earlier, West Germany privatised a number of state firms in the late 1950s and the early 1960s, but further privatisation was restricted by the federal political system and by the political consensus in favour of a mixed

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economy. In 1985 the Federal Minister of Finance outlined a general privatisation programme affecting 13 firms, but with the government intending to retain a substantial shareholding and in some cases a majority holding. Also, the government ruled out a sale of shares in the loss-making steel, coal and shipbuilding industries and state banks, the railways, posts and telecommunications and research institutes. However, even these limited privatisation proposals met with protests from the trade unions and in March 1985 the government reduced the number of firms targeted from 13 to 5. In the following years privatisation activity in Germany remained on a small scale3 until the absorption of the former communist East Germany meant the introduction of an extensive privatisation programme for that region. In addition, between 1990 and 1994 in former West Germany nine enterprises were sold entirely and three partially, so almost ending the federal government’s shareholdings in the industrial sector. However, the Länder continue to have major shareholdings in public credit institutions, insurance companies, power supplies, transport, construction and property, and some manufacturing firms. The flotation of Deutsche Telekom in late 1996 was the largest privatisation sale in the EU and at a stroke more than doubled the total value of (West) Germany’s privatisation sales.4 Turning to the Netherlands, this country was one of the most laissez-faire in Europe after the war in terms of economic policy, resulting in fewer state enterprises than elsewhere in Europe (Parris, Pestieau and Saynor, 1987). Nevertheless, by the 1980s the state participated directly in 41 companies and indirectly in many others, for example through the National Investment Bank and the Industrial Guarantee Fund. The result was, according to one observer, ‘a motley collection, each individual holding to be explained by historical accident rather than by any grand design or strategy’ (Andeweg, 1994, p. 205). A privatisation programme was officially announced in 1982 but the approach has been pragmatic. Shares have been sold in state enterprises whenever it seemed to make economic and administrative sense and when it was profitable to do so. Noteworthy sales have involved Royal Dutch Airlines KLM, Koninklijke PTT Nederland, NMB–Postbank Groep (renamed ING Bank), the chemical firm DSM and the state’s holding in the aircraft firm Fokker. The total value of privatisation sales was inflated by the disposal of Koninklijke PTT Nederlands, the country’s largest privatisation, and more generally the scale of privatisation has been limited.5 Sweden developed one of the largest welfare states in Europe after 1945, but like the Netherlands saw little need for extensive state ownership of industry. The private sector was viewed as the primary generator of wealth on which large taxes could be levied to pay for welfare services. In the 1970s, however, a number of failing companies were rescued by the state, notably in shipbuilding and steel. Indeed, at this time economic pressures on the Swedish economy meant that the non-socialist government, between 1976 and 1982, nationalised more companies than at any time under Social Democrat administrations. The Social Democrats governed Sweden from 1932 to 1976 and between 1982 and

16 David Parker

1991. In addition to operating the postal services, telecommunications, railways and electric power, by the mid-1980s the state sector included steel plants, mines, a bank, food and pharmaceutical companies and timber enterprises. In total there were around 70 state-owned joint-stock companies and nearly 1,400 local government enterprises. Also, the state had become heavily involved in some leading Swedish corporations such as Volvo and Astra. The setting up of wage earner funds (Löntagarfonder) in the early 1980s, to invest in shares in private sector companies and financed by profit levies, threatened to extend the socialisation of industry. The defeat of the Social Democrats in the September 1991 election led to a major change in policy. In December 1992 a privatisation bill was passed by parliament and early in 1992 a privatisation commission was set up within the government. The result was a plan to sell 34 state firms, including the electricity company Vattenfall, Nordbanken, Procordia in biomedicine and food products, Celsius in shipping and ASSI and Doman AB in forestry. In the same year the wage earner funds were dismantled. However, progress in privatising companies proved slow at first because of a crisis in the Swedish economy and the wider European recession. More recent years have seen some build up of privatisation activity including sales of shares in Procordia, Nordbanken, Stadshypotek AB, AssiDoman and Celsius. In addition, state organisations such as Vattenfall have been turned into joint-stock companies and given commercial objectives (Lane, 1994, p. 183). In total, between 1991 and 1994 the government sold shares in 20 companies, involving assets worth Skr 24bn. Sixty per cent of the shares were sold to the general public and employees and the rest to institutional investors. However, the re-election of a Social Democrat government in 1994 led to a reassessment of the privatisation programme. The new government agreed to go ahead with the privatisation of Nordenbank but not the other planned sales, including Vattenfall, whose future remains uncertain. In the case of Denmark, in the main what state industrial holdings existed have already been sold and the remaining major state-owned firms are in the postal, telecommunications, transportation and energy sectors. In the early 1990s the government began to change the legal status of public enterprises to limited liability companies6 and more recently has sold shares in some of these companies. The sale of a 51 per cent holding in the post office’s banking business, GiroBank, in 1993 was the country’s first large privatisation sale. Other sales have involved the state life assurance company (Statsanstalten for Livgforsikring) and the telecom business Tele Danmark. In 1994 a restructuring of the share capital of Tele Danmark had the effect of reducing the state’s holding from 89 per cent to 51 per cent. The government has also sold 25 per cent of its shareholding in Copenhagen airport. In a number of other EU member states there has been even less privatisation activity. The economy of Luxembourg is small and the scope for privatisation is limited. In Belgium there exists a long-established tradition of mixedownership or public–private joint ventures. As a consequence the Belgian government, particularly through the Societé Nationale d’Investissement, owns

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shares in many companies. Policy towards the sale of these shares has been pragmatic rather than ideological. In large part this results from the federal structure in Belgium and the existence of two linguistic communities. This in turn results in complex, unstable coalition governments and an emphasis on governing by consensus. In 1992 a new coalition government drew up a programme to sell state assets motivated by budgetary pressures and a government commission was established to review assets for possible sale. One result was the sale of 49.9 per cent of the shares in the banking and insurance company ASLK–CGER in 1994, another was the sale of shares in NIM–SNI, an industrial holding company. The government has also been looking for foreign telecom partners to invest in the state telephone company. Nevertheless, the approach to privatisation in Belgium has been cautious and there have been no mass state-asset sales comparable to those in the UK, France and Portugal, for example. The same is true of Ireland. Here the government has undertaken only modest privatisations, including sales of shares in state-owned insurance firms and in sugar production. State ownership played a key role in economic policy from the 1920s and although by the 1980s financial losses in state industries produced growing pressures for a transfer of some industrial and commercial assets to the private sector, this has not developed into a major drive for privatisation. Irish policy remains pragmatic with still some leaning towards continued state ownership. Similarly, privatisation remains at a low level in Greece, in this case reflecting political differences over continued state ownership. The election defeat of a right-wing government in 1993 led to the scrapping of earlier privatisation plans, including a 35 per cent stake in OTE, the state telecommunications company. However, within a year the new socialist government dropped its ideological objections to privatisation and decided to float minority stakes in some state-controlled companies and small privatisations occurred, such as the sale of Neorian shipyards by the state-owned development bank, ETVA, to a consortium of Greek shipowners and other business interests. Nevertheless, political disagreements, union opposition and constraints on the pricing of share issues imposed by the conservative political opposition have combined to block a number of further privatisations, including the sale of 25 per cent of OTE in November 1994. In the postwar period, Austria had one of the largest state sectors in the EU and the largest on some counts. This dated back to 1946 when industry and commerce seized from the Nazis were nationalised. In 1987, of the nine largest enterprises in Austria, five were totally state owned, one was under majority state ownership, and two others were state controlled through large nationalised banks. Only one was privately owned. Following a financial crisis in Voest– Alpine (steel and engineering group) in November 1985, exacerbated by losses incurred speculating in the oil market, and difficulties in the major state-holding company, ÖIAG, the government announced that it would introduce private funding into some of the state-owned companies. Progress occurred with the ÖIAG’s holdings in Siemens Austria and the OMV significantly reduced and

18 David Parker

minority sales of shares in the Länderbank, Creditanstalt and Austrian Airlines. The state also reduced its holdings in certain other companies. However, adverse economic conditions and a subdued stock market in the early 1990s led to a postponement of further privatisations. In November 1993 the coalition government parties agreed to renewed privatisation and in the following months the state holding company, Austrian Industries, was merged with the ÖIAG, which became responsible for selling assets. Also, plans were announced to privatise all of Austria’s state industries by the end of the decade. Nevertheless, so far sales have amounted to only around 1 per cent of GDP. The speed of sale has been slowed by a desire to protect ‘Austrian interests’; for example, the privatisation of the state bank Creditanstalt dragged on for over five years, as the government tried to put together a consortium of predominantly Austrian buyers. It is clear from the above brief review of privatisation activity in the EU member states that all have seen some privatisation activity, although the economic significance varies considerably reflecting a difference in the degree of enthusiasm for and opportunity to privatise from country to country. Table 2.2 provides estimates of the amounts raised by privatisation in a number of the member states between 1985 and 1995 collected from official statistics and of the value of these sales in relation to GDP in 1996. It is clear that measured in terms of the share of GDP, to reflect economic significance, privatisation has been most important in the UK followed by Portugal. On the other hand, it has been of much less significance in Austria, Italy, Spain and (West) Germany. Studying the rationale for privatisation at the policy level, it seems that this varies across the EU (also see Van Bergeijk and Haffner, 1996). It sometimes appears from a UK perspective that the idea that privatisation will lead to efficiency gains is well accepted across Europe (indeed the world!), but this is not so. In general, privatisation policies elsewhere in the EU have been more Table 2.2 Total privatisation receipts, 1985–95 (selected EU countries)

Source: Various Notes: UK figures are from 1977. Between 1977 and 1979 the Labour government sold shares in the oil company British Petroleum (BP)

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pragmatic and less ideological than in the UK and more recently in France. While in the UK the supposed superior efficiency of private ownership was a main driver of privatisation policy for the Conservative governments of 1979 to 1997, for some governments this is not so. For example, in Finland, where state enterprises were initially set up to offset a lack of interest by private investors in industrial investment: ‘Efficiency has not been an issue, because the state-owned companies’ commercial performance was in general the same as in private firms’ (Willner, 1994, p. 2).7 The same is to some extent true in the Netherlands, where the management of state firms have been expected to run them efficiently, as if they were private companies. In (West) Germany public enterprises have generally operated commercially with business interests represented on their supervisory boards. Even where efficiency is a major issue, the post-privatisation structure of industry has often been poorly articulated; for example, in the case of Austria it has been argued that ‘Privatisation began . . . as a political programme, designed to take advantage of the electorate’s increasing dissatisfaction with the nationalised industries. In the 1986 elections both parties referred to privatisation as a way of increasing their electoral fortunes, but neither had developed a clear idea of what role privatisation would realistically play in future economic strategy’ (Meth-Cohn and Muller, 1994, pp. 175–6). Although in recent years French governments may have argued that privatisation promotes economic efficiency, this view is not necessarily widely held in France: the case of France demonstrates that the status of a firm (private/ public) is not the only or even the most powerful factor determining its behaviour. The dynamic of the environment plays a fundamental role. (italics in the original; Redor, 1992, p. 163) Instead of the efficiency argument, sometimes more prominent have been arguments to do with capital market development and government financing. The desire to promote the national capital market has been particularly important in Spain and Austria. Privatisation flotations have increased the stock market capitalisation and provided a means of encouraging investment and international activity by domestic banks. Privatisation has also been a means of attracting investors to own shares as against fixed interest securities, traditionally preferred by investors on the continent. Government financing through asset sales has become more important as the prospect of monetary union has loomed. Indeed, meeting the Maastricht criteria for eligibility to join a single currency has become a very important consideration driving privatisations in a number of EU countries.8 Although the European Commission has ruled that privatisation receipts cannot be taken into account when calculating budget deficits under the Maastricht rules, privatisation receipts can be used to reduce the public debt – another of the treaty criteria – and a lower debt reduces interest payments made by government

20 David Parker

and therefore, indirectly, the budget deficit. In Spain, Portugal, France and Italy privatisation receipts are seen as a less politically painful way of reducing the state debt than spending cuts or tax increases. Sale proceeds have also been used to recapitalise the firms or remaining state firms in the absence of adequate state financing. In Austria privatisation share issues were not priced low (as occurred in the UK, especially in the 1980s) because the government wanted to raise the maximum revenue possible for the budget and industry restructuring. Indeed, so close has the link between privatisation and the public finances become in member states that commonly governments have announced targets for annual sales as part of their budget forecasts. In France and Italy legislation has been passed to limit the use to which privatisation receipts can be put. Under French legislation of 1986, privatisation proceeds had to go into repaying public debt or recapitalising the remaining state enterprises. This was amended in 1993 since when receipts have gone into the general budget. In Italy a law of October 1993 required that revenues from privatisation be set aside in a special fund to be used for the sole purpose of buying back outstanding public debt.9 In summary, across the EU there is no single, common rationale or objective for privatisation. Some governments promote privatisation to achieve efficiency gains, while at least as important in others is the potential of privatisation sales either to expand the capital market or meet the Maastricht criteria for monetary union. Some governments have seemingly pursued all of these objectives, even though they may not be compatible. For example, to achieve efficiency gains an industry may benefit from restructuring ahead of sale to promote competition, but by removing the opportunity for monopoly profits sale receipts are reduced and therefore so is the contribution to the state budget. Promoting a domestic capital market may mean restricting foreign share holdings, but foreign investors may help promote a more effective capital market constraint on managerial behaviour, as discussed later. A further factor impacting on national policies has been EU directives aimed at liberalising markets, to which the discussion now turns. PRIVATISATION, LIBERALISATION AND EU POLICY Privatisation in Europe confronts the EU with a particular dilemma. Traditionally, official EU policy reflected a neutral stance on ownership of industry and accepted the existing mix of state and private sector across Europe. This approach arose from the need to accommodate within the EU countries with differing levels of state ownership and from the belief that state monopolies were necessary in the public utility sectors to ensure a universal service and network economies. In postwar Europe postal services, telecomunications, railways, scheduled air and bus transport, electricity and gas industries and water and sewerage services were typically provided by central government or local municipal or regional bodies; although there were some important exceptions, such as water supply in France. Figure 2.1 provides information

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on state ownership of the major public utilities in seven of the EU economies. It is apparent that in spite of some privatisation activity, state ownership was still the norm in 1995. The expectation is, however, that the role of state industries will decline in the years ahead and this is reflected in recent EU directives. Throughout the Treaty of Rome runs the principle of free trade. Articles 30 to 37 set out the aim of free circulation of goods, while Articles 52 to 66 are concerned with the freedom to provide services and the freedom of establishment. Article 37 states that: ‘Member states shall progressively adjust any State monopolies of a commercial character so as to ensure that when the transitional period has ended no discrimination regarding the conditions under which goods are procured and marketed exists between nationals or Member states.’ At the same time, Article 222 confirms neutrality on ownership by stating that the commitment to a market economy ‘shall in no way prejudice the rules in Member states governing the system of property ownership’.

Figure 2.1 Utility ownership in 1995 Source: Economist, 9 December 1995, p. 96 Note: Since 1995 privatisation of the electricity industry has been completed in the UK, and the railways have been largely privatised. There have also been important sales of shares in publicly owned telecoms operations, for example, in Spain, Italy, Germany and most recently France.

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In other words, competitive markets are favoured but this is not taken to prejudge the form of ownership that should be adopted in member states. EU policy intervenes only when government policies are seen to be in conflict with free and fair trade within the EU. In particular, Article 92 forbids state aid that distorts competition between member countries, although in practice derogations have been granted under Commission guidelines that allow for the influence of other policy objectives, such as regional development, protection of the environment, industrial policy and R&D. For example, state aid is permitted for regional development provided that the benefits exceed adverse effects on the industrial sector as a whole and if rationalisation or innovation are stimulated. At Maastricht in 1991 Article 130 was inserted into the Treaty confirming that industrial policy measures must comply ‘with a system of open and competitive markets’. In practice, the Commission has fought a rearguard action against governments determined to support their loss making coal, steel and shipbuilding industries and, more recently, airlines. Until the 1980s the Commission stressed coordination and network economies when discussing the public utilities and to a degree still continues to do so, in part ‘to reduce tensions between the Member states and the Community institutions’ (Scott, 1995, p. 35). 10 The attitudes of member states vary considerably on the role of the state in the ownership and control of the utilities with some member states, notably France, more cautious about privatisation than, most obviously, the UK where almost all the utilities have been privatised. Nevertheless, a new interest in liberalisation and competition exists in parts of the EU influenced by economists pointing to technological change undermining ‘natural monopoly’ characteristics. In addition, there is recognition that while it may still make sense to have monopoly power grids, telephone lines and rail networks, since it would be uneconomic to duplicate them, this does not necessarily imply the need for monopoly service providers over the networks. Significant in changing policy within the EU has been the passage of the Single European Act in 1986. This aimed to remove the remaining non-tariff barriers to free trade within the EU by the end of 1992 and had implications for the public utilities, which were generally protected from competition both in terms of outputs and procurement policies. Utilities remain governed by national legislation and regulatory rules, but following the Single Market agreement, the European Commission has applied pressure for the markets of the utilities in member states to be opened up to competition. EU level intervention in utility markets was and remains, however, controversial. Member states are reluctant to see national sovereignty over their public utilities transferred to Brussels. In response the European Commission has fought shy of proposing a formal EU wide regulation of the utilities. Instead, the Commission has endeavoured to convince member states of the case for opening up their utility markets to competition and of the need to develop their own, national regulatory systems to promote competition and protect the consumer. To minimise opposition and to ensure a more speedy liberalisation, the Commission has adopted a ‘vertical’ or sectoral approach to policy making

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rather than attempting to force through a ‘horizontal’ or across the board policy. This has meant developing separate market-liberalisation policies for each utility sector. Each policy has progressed at different speeds reflecting practical opportunities for liberalisation in the member states and the strength of national opposition. Although at the EU level no explicit stance has been taken on ownership, from time to time there has been recognition that privatisation may be beneficial. For example, in 1994 the Commission stated that ‘attention should be devoted to improving the competitive environment in which firms operated’ and that ‘privatisation, to the extent that Member states judge it compatible with their objectives, could further the progress already made in this direction’ (European Commission, 1994, p. 11). In a 1995 White Paper the Commission repeated the point: progress is required . . . in the areas of insurance, intellectual and industrial property, public procurement, new technologies and services and freedom of movement. Moreover, progress has been slow in the extension of the single market to telecommunications and energy, while the internal market in transport remains incomplete. Furthermore, additional progress is necessary in reinforcing competition rules, reducing State aid and reducing the role of the public sector. Privatisation, to the extent that Member states judge it compatible with their objectives, could further the progress already made in this direction. (European Commission, 1995, p.15) The Commission has recognised that the notion of a non-discriminatory universal service, as part of a public service objective for a public utility, may conflict with liberalisation and privatisation. Can everyone have access to basic services of a defined quality and at an affordable price in a competitive private market? The development of an EU position on this question has been hindered, however, by the fact there is no common concept of a universal service operating within the EU, each member state has its own definition (CEPS Working Party on Utilities, 1996). In summary, as the EU has worked towards removing restraints on trade resulting from regulation, this has had implications for the nature of ownership in industries previously protected from competition. Deregulation policy implies a change in the relationship between government and state-owned utilities, most notably in terms of ruling out state subsidies and introducing private sector competition. In turn, this has created an economic environment which has led member states to review the benefits of retaining state ownership. Stateowned firms may be handicapped when facing competition from large private sector companies with ready access to capital markets. At the very least, competition can be expected to worsen the finances of the incumbent stateowned utilities, necessitating large capital injections.

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At the same time, the EU continues to struggle with the consequences of the changes underway in the utility markets, most notably how to balance efficiently operating public utilities, the public’s concern for ‘fairness’ in public service delivery and pricing, the propensity of national governments to want to retain control of these industries to some degree, and a properly operating internal, competitive market. This is no easy balance, as is evident in the following review of the evolution of EU policy toward transport including airlines, postal services, electricity supply and telecommunications. Transport Transport is one of three sectors specifically mentioned in Article 3 of the Treaty of Rome (external trade and agriculture are the other two) for which the Community intended to develop a common policy. However, in the years following the signing of the Treaty it proved impossible to achieve consensus on the changes needed in the member states to bring this about. Instead a series of ad hoc measures were introduced, relating to issues such as quotas for road haulage, axle weights and intra-community trading. In particular, the desire by member states to continue to plan and control their own transport systems resulted in consistent opposition to deregulation. In the 1980s, with the development of transport deregulation at the member state level, notably in the UK, and the Single Market initiative, the Commission began to press for extensive liberalisation, particularly of road haulage, the railways and of air routes. Since then the Commission has been successful in removing restrictions on competition in road haulage. The Commission has also suggested that rail links between member states should be opened up to competition and that operators should pay for track use (Hitiris, 1994, p. 273). A 1991 EU directive suggested that the railways should separate infrastructure charges from operating costs for book-keeping purposes, something that has occurred in some of the member states, for example the UK, Sweden and France11 Separate accounting is a step towards enabling new train operating companies to provide services on the rail network. This stage of liberalisation has met, however, with fierce resistance from the railway unions, especially in France. In addition, governments are suspicious of the impact on railway finances and the viability of the current rail network. In 1995 the Commission proposed opening up rail freight to cross-border competition, but following a French rail strike the proposals were scaled back to cover only the busiest freight routes.12 Turning to air travel, the Court of Justice ruled in 1986 that the EU competition rules (Articles 85 and 86) were applicable to air transport. In June 1987 the Commission responded by agreeing with the airline industry a package of liberalisation measures. In return the industry was granted a temporary and conditional block exemption from relevant EU competition law. In December 1989 the Community transport ministers agreed an airderegulation package which involved the scrapping of capacity-sharing arrangements and which

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created much freer access to European routes. This was followed in 1992 by a new agreement dealing with fares, market access and licensing of air carriers. The aim was to encourage further competition. The freedom to provide cabotage services (the right of an EU airline from one member state to operate on a domestic route in another state) remained, however, effectively prevented until April 1997. Nevertheless, faced by gradual deregulation of air routes in Europe and increased competition from airlines based outside the EU in world markets, national governments have been promoting rationalisation and new investment in their national carriers (sometimes leading to accusations of unfair subsidies, as in the case of recent state aid to the Spanish national airline, Iberia). The Commission has attempted to link continued state subsidies to capacity rationalisation programmes. The resulting restriction of state funding has led, in turn, to moves to encourage the participation of private capital in national carriers, for example in KLM and Lufthansa – in the UK the main national carrier, British Airways, was privatised in 1987. Posts Worldwide, postal adminstrations are coming under increased pressure to operate more commercially due to: (1) competition from rapidly expanding courier services and parcel delivery companies, such as United Parcel Service, DHL, UPS and TNT; (2) by customers demanding a higher quality of service; (3) by new electronic technology, notably the fax and email; and (4) by governments keen to reduce losses and to shift investment financing to the private sector. Traditionally, the postal service in each EU country was a state monopoly and operated with extensive cross-subsidies. Letter mail tended to crosssubsidise parcel deliveries and mail posted within cities much more expensive to deliver rural mail. Since competition threatens standard charges for collection and delivery, there has been considerable difficulty in getting agreement on the desirable level of competition in postal services among the member states. While Germany, the Netherlands and the Nordic countries, in particular, have favoured fast liberalisation, at the other extreme Greece, Portugal and France have wanted virtually none. Hampering liberalisation is the differing commercial position of the national post offices. The UK post office, for example, is profitable and has been for many years (Parker, 1994). However, the Italian post office lost £1.7bn in 1993 and the French post office lost £130m in 1995 (Financial Times Survey, 14 February 1996, p. II). Such losses reflect both uneconomic charging and operating inefficiencies. Germany’s post office, for example, delivers only a few more letters a year than the UK’s but employs almost twice as many workers. Therefore change is forestalled both by a fear that competition could end the universal service, leading to a withdrawal of services in rural areas or much higher delivery charges, and by government and union concerns about possible

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job losses (member state post offices currently employ nearly 2m workers). As a consequence, so far the European Commission has been able to achieve only limited support for changes to the postal market. An EU draft directive in December 1995 was a careful compromise between the supporters of liberalisation and those who wanted much slower change. The directive aimed to maintain a universal post service by allowing the national postal administrations to retain a monopoly over the basic letter service, i.e. the collection, sorting and delivery of items up to 350 g. This was an important concession given that the average letter weighs only 15 g. Also, the post offices would be able to retain control of the distribution of incoming cross-border mail and direct mail until the end of the year 2000, if this was ‘necessary for the financial equilibrium of universal service providers’. These proposals meant that for the time being 80 per cent of all mail would remain within the control of the post offices thus limiting the development of competition. Also, under the proposals liberalisation would come in from the year 2001 only if a further Commission review gave the go-ahead. Alongside these limp proposals some governments have already instituted their own and more ambitious liberalisation programmes. In particular, the profitable Dutch Post Office was floated on the Amsterdam stock exchange in 1994 and is beginning to circumvent some of the restrictions imposed by national postal monopolies. The Dutch have been adept at developing new markets and have a strong position in remailing (the bulk shipment of mail to a foreign postal administration). Also, Sweden and Finland have liberalised their markets with the Swedish post office losing its monopoly in 1993. The German post office is expected to float an initial tranche of its shares on the stock market in 1998. Interestingly, while the UK has taken a lead in most areas of utility privatisation and market liberalisation, in postal service it lags behind these countries. In 1994 the UK shelved plans for privatisation and the Royal Mail’s monopoly on the delivery of letters costing less than £1 to post remains. Electricity The liberalisation of EU electricity markets has proved troublesome.13 The 1988 White Paper on the Internal Energy Market promoted the case for liberalisation, but differing attitudes of member governments to competition and especially cross-border suppliers meant deadlock on the actual proposals for cross-border competition. The UK is still exceptional in its degree of market liberalisation with Italy (in effect) and France still having integrated monopolies and Germany a collection of mixed-owned or publicly owned de facto regional monopolies.14 The Swedish electricity market was recently deregulated, however, to ensure competition in generation and supply and Vattenfall, the state company, has lost control of the main transmission network. This is now in a separate agency and other electricity companies may use it. In Italy, legislation in January 1992 authorised private electricity generation but so far this has led to only a small

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amount of domestic competition. The state-owned producer, Enel, continues to dominate the market. The possibility of privatising Enel has been discussed but does not seem to be imminent. The Commission proposed a negotiated third party access (NTPA) scheme, which would throw open all EU members’ electricity markets to generators and distributors from other member states. This was favoured by Germany, which wished to see competition undercut its regional producer cartels, and the UK, with its privatised and liberalised electricity industry. France, however, feared the impact of unregulated cross-border supplies on its primary electricity supplier, Electricité de France. The EdF generates 81 per cent of its electricity in high fixed-cost, nuclear stations. While the French government did not object to the EdF losing its monopoly of electricity supply, it did object to it losing control over transmission and distribution. The company would then be unable to plan nuclear power supplies. In particular, importers could exploit temporarily low fossil fuel prices. Also, the French wished to maintain the same price for electricity supplies across France and this would be threatened by unregulated cross-border supplies. France has proved willing to allow its largest energy using companies to bargain with foreign producers for cheaper power, but insists that power imports must pass through a single buyer, i.e. the EdF or an alternative governmentcontrolled body, to control distribution and prices. The Commission agreed a compromise settlement in June 1996 opening up initially around 22% of the EU market. Telecommunications Telecommunications is one area in which technology (e.g. digital transmission and fibre optics) is quickly removing the ‘natural monopoly’ argument for having a single, national supplier. In turn this is leading governments to favour privatisation of the state utilities. Between 1985 and 1995 telecoms privatisations in Europe totalled the equivalent of $40.5bn, putting this sector well ahead of oil and gas ($32.7bn), banking and insurance ($32bn) and electricity ($26bn) in terms of the total value of asset sales. In the past telecom services were highly regulated at the member state level. Typically, a public telecom operator, usually connected to the national post office, was given exclusive rights to supply telecommunication services. In return it provided a universal service and perhaps contributed profits to the state finances. Each country had its own national supplier which meant that the EU telecommunications industry remained highly fragmented along national boundaries. The first country to change this arrangement substantially was the UK. In 1981 the UK separated posts from telecoms and in 1984 privatised the resulting state company, British Telecom (BT). At the same time, a competitor network operator was licensed, Mercury Communications. In the following years competing cellular telephone systems were also encouraged and in 1991 the provision of networks was opened up to further competition. Today there are over 70 telecom companies operating in the UK market, some exploiting cable TV technology.

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Since the mid-1980s similar changes have begun in most of the other EU countries. New operators have been licensed, posts and telecoms separated (although not in all cases) and support for privatisation has grown.15 In 1995 the telecomunications sector accounted for 25 per cent of the total amount raised by European privatisation sales (Sharpe, 1996). By mid-1997 BT in the UK and Telefónica of Spain were wholly privatised, Deutsche Telekom KPN/ PTT of the Netherlands, Tele Danmark and Telecom Italia were partially privatised and some privatisation was scheduled for France Télécom, Portugal Telecom and Telia of Sweden. The sale of the first shares in Deutsche Telekom in late 1996 was the largest single privatisation issue in the EU so far. However, there are clear variations in the form of restructuring. The UK, Sweden and Denmark operate highly liberalised markets, but this is less so elsewhere. Also, the Dutch gave priority to the privatisation of KPN/PTT Telecom over the setting up of an independent regulatory structure (Hulsink, 1996, p.7); the first shares in the business were sold in 1994. By contrast, the French have set up a regulatory structure but have been slow to privatise France Télécom (Burns and Parker, 1997). In Germany there is continuing uncertainty over the effectiveness of the regulatory authority that will oversee competition in Germany’s telecoms market and the extent to which competition will develop. In Italy draft legislation exists for establishing a telecommunications regulatory structure, but progress has been slow. The form of telecomunications restructuring in member states reflects wider national attitudes to competition and state ownership. Hulsink (1996) contrasts the liberal, free-market views that shaped UK telecommunications policy (privatisation and competition) with the consensus building-negotiating response of the Dutch in relation to affected parties (gaining the acceptance of the industry, suppliers and consumers to changes) and the state-led industrial policies of the French (protecting the technological capability of the French telecommunications industry as part of a wider industrial policy based on nurturing ‘national champions’). The postponement of the sale of France Télécom was the result of union opposition coupled with fears about the impact on the French telecommunications industry in general of a loss of state control. The French had to be pressured by the Commission to agree to a liberalisation of network provision and voice telephony. In this area of utilities policy, longstanding national attitudes are affecting the precise form that liberalisation and privatisation is taking within the EU. Although the Commission has stopped short of actively promoting privatisation, reflecting official neutrality on ownership, it has supported telecommunications liberalisation since the mid-1980s (the development of EU policy is detailed in Schneider et al. 1994 and Curwen 1996). In a 1987 Green Paper on the telecommunications sector the Commission emphasised: In general, an open, competitive market for new service providers and terminal manufacturers can make a substantial contribution to the rapid spread of the new services, under the current conditions

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of rapid development of technology and market opportunities . . . Given the complexity and multiplicity of the emerging telecommunications services, only the market can efficiently link the producer with the consumer. Economics knows of no other means of fulfilling this purpose and all attempts to replace it by something else have so far failed. (European Commission, 1987, p. 52) Also, in the 1980s the Commission had recourse to the EU competition rules (Articles 85 and 86) to oppose cases where member states were extending public-provider, monopoly powers to the supply of new terminal equipment, such as cordless phones and modems in Germany and first telex terminals and modems in Italy. In 1988 the European Council of Ministers adopted the Commission Green Paper on Telecommunications issued the previous year. This confirmed the progressive introduction of a common market for telecommunications services and equipment. The Green Paper was subsequently implemented through directives on: (1) liberalisation of the supply and provision of terminal and network equipment; (2) liberalisation of services, excluding for the time being public voice telephony (including fax) and the operation of the basic network; (3) the separation of regulatory and operational functions, in order to create efficient market structures; (4) open access to networks; (5) promotion of Europe-wide standards; and (6) full application of competition rules to the telecommunications industry (Foray, Rutsaert and Soete, 1995, p. 297). Progress in actually liberalising European telecommunications has, however, proved to be much slower than initially intended. Competition is well established in mobile communications and most EU countries have introduced some liberalisation into their telecoms sector. But liberalisation of the telecoms equipment market, required by EU Directive (88/301/EEC), was completed only after a delay of three years, due to slow implementation in Belgium, Ireland, Denmark and Germany. Moreover, liberalisation of all non-voice services (i.e. VANS) to be achieved by 1990, according to EU Directive (90/ 388/EEC), was not completed until some years later. Some member states have exploited a safety net in the 1988 Green Paper to delay change. Under the terms of the safety net, exclusive and special rights for the provision of the network infrastructure by the telecoms administrations and for a restricted number of reserved services may continue as ‘essential, at this stage, for safeguarding public service goals’. In addition, new competitors often complain about anticompetitive access charges to networks levied by public sector monopolies and an inadequate number of leased lines available. Cross-subsidies continue and cross-border call charges within Europe are still inflated. In general, telecommunication tariffs are regulated by government or other authority (e.g. the Office of Telecommunications [Oftel] in the UK and the Agence de Réglementation des Télécommunications in France). 16 Within member states local and national calls are typically priced below and

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international calls above supply costs. Resulting cross-subsidies are justified in terms of a universal service mission, which is itself sometimes justified in terms of exploiting positive network externalities. Under a July 1993 Council of Ministers resolution full competition in voice telephony is required from 1 January 1998 in the countries of the EU with the largest networks; in Belgium and Luxembourg from the year 2000; and in Ireland, Spain, Portugal and Greece by 2003. Member states are aware of the pace of change in telecommunications, and this explains the more ready acceptance of the case for liberalisation than in postal services. PRIVATISATION AND MARKET LIBERALISATION ASSESSED The usual argument for privatisation over state ownership in the economics literature centres on the comparative economic efficiency of the public and private sectors. In that part of the economics literature called public choice theory, public sector activities are said to be managed less efficiently because state officials pursue their own, non-social welfare maximising objectives (e.g. Niskanen, 1971; Mitchell, 1988; Donahue, 1989). Also, state industries are associated with conflicting and poorly articulated operating goals leading to disruptive political intervention in management, capture by rent-seeking groups (notably trade unions) and financial failure. In general, inefficiency is traced back to the ideological and political motives for government ownership of firms and continuing political involvement in their management (Aharoni, 1986; Shapiro and Willig, 1990). Certainly there are plenty of examples of political intervention leading to loss-making activities in state industries in Europe. However, the exact extent to which these interventions have been social welfare reducing as against profit reducing is less certain. For example, from time to time in the UK and France state industries have been used to control prices and to preserve jobs, both of which are incompatible with maximising profit but can be compatible with a social welfare goal. Employment preservation and good working conditions have also been objectives in other EU economies, notably Sweden, Austria and Ireland. In Finland and Italy state firms have made an important contribution to regional policy; while particularly in Sweden, Finland and France state ownership has been associated with industrial policies to rebuild and preserve international competitiveness. In Finland state industries were supposed to forgo profits and supply private firms with cheap supplies (see chapter 10 below). By contrast, in Germany in the 1960s, Social Democrats expected state firms to compete aggressively with private enterprises to raise the general level of operating efficiency in oligopolistic markets. It is true that the objectives of state enterprises are often multiple, sometimes conflicting, and always changeable as governments come and go. This can make it difficult for management to develop and implement consistent, longterm business strategies. As an example, over the years Spanish state industries

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have been expected to pursue exports, maintain high levels of employment, combat regional inequalities, improve the balance of technological trade, reindustrialise the country, and provide an example of the ‘work ethos’ (Garcia Delgado 1989). Indeed, as long as EU countries are participative democracies it is difficult to see how state enterprises can have unambiguous, long-term objectives. Each ministry and each interest group will push its own agenda and changes in government will inevitably bring changes in goals (Aharoni, 1981). In Italy, ruling parties have used state firms ‘to mediate among major interest groups, to receive special favours and to gain support in times of party struggles’ (Martinelli, 1981, p. 97; also, see Grassini, 1981 and chapter 9 below). Even in the Netherlands, where usually state industries have had a high degree of independence from government, political interference has still occurred from time to time. This is not necessarily undesirable, however, since if management are neither accountable to the private capital market nor to government, they can be expected to pursue their own utility and not necessarily the public interest. In the privatisation literature, enhanced management accountability in the private sector results from a combination of the transfer from public to private sector funding and the introduction of competitive product markets following privatisation (Vickers and Yarrow, 1988; Jensen, 1989; Zeckhauser and Horn, 1989). Agent–principal theory features prominently in the critique of state ownership. Ownership and control are associated with agent–principal relationships arising out of the nature of the property rights (Jensen and Meckling, 1976; also chapter 3 below). The weaknesses of state ownership result from the poorer mechanisms by which the principals (public) can control the behaviour of their agents (officials) in a world of information asymmetries and incomplete contracts; a problem compounded by unclear objectives and by the possibility of politicians and government officials pursuing their own ends. If information was perfect and complete contracts were possible then ownership would be irrelevant. Agents would be able to write efficient contracts that completely constrained agent behaviour so as to meet their goals, under both private and state ownership equally. In practice, however, information is imperfect and incomplete agent–principal contracts are the norm.17 The usual argument in the privatisation literature is that incentives for agents to pursue the goals of the principals are superior in private capital markets than in the state sector because of the profit motive (Bös, 1991; Boycko, Shleifer and Vishny, 1996). Private ownership more successfully limits managerial discretionary behaviour by capitalising expected future profits in the share price. Low expected profits lead to a depressed share price and the threat of a hostile takeover bid. Equally, large shareholders have a greater incentive to hold management to account for their behaviour than in the public sector, where ownership of state industries is diffused across the entire population. Large shareholders have more to lose individually from poor managerial performance. Also, in the private sector it is common for management pay to be profit related or involve stock options and bonuses. In the public sector management

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remuneration is often tied to fixed salary scales and, sometimes, to civil service pay rates. In general, the agent–principal literature, in combination with public choice theory, leads to the conclusion that state ownership is inherently inferior to private ownership, especially where there is a competitive capital market. This is supported by reference to the efficiency attributes of competitive product markets. In so far as state provision is associated with monopoly provision, the expectation is that privatisation, combined with the opening up of markets to competition (liberalisation), will lead to higher operating efficiency. Figure 2.2 illustrates the standard argument in the neoclassical economics literature regarding the relationship between competition in the product market, ownership and expected efficiency. Monopoly markets and state ownership are associated with both allocative and productive inefficiency. Monopoly leads to prices above marginal costs and ineffective state regulation to inflated costs. By contrast, the existence of a competitive product market and private ownership (with a competitive capital market) is associated with high allocative and productive efficiency. The intermediate positions of private ownership and monopoly and state ownership

Figure 2.2 Ownership, competition and performance: the standard argument

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and competition are associated with some efficiency loss, although presumably less so than under monopoly with state ownership. Such deductive arguments for privatisation need to be viewed carefully, however. In particular, in discussing the efficiency effects of privatisation it is important to distinguish between allocative and productive efficiency and in terms of static and dynamic gains. Allocative efficiency refers to the setting of prices according to marginal supply costs; productive efficiency to keeping supply costs as low as possible, which results from firms achieving both technical efficiency (producing on their production frontier and input price efficency) and input price efficiency (employing inputs efficiently according to their relative prices). Static efficiency involves one-off gains in productivity and cost efficiency (a movement to the firm’s production frontier and input price efficiency); while dynamic gains are associated with on-going improvements in production processes and products (a shifting outwards of the firm’s production frontier). The argument in neoclassical economics for privatisation is predominantly concerned with productive efficiency, particularly economising on inputs and often in a static, cost-reducing sense given current technology. It is possible for a firm to be productively efficient but allocatively inefficient (although not vice versa) and this is to be expected in monopoly markets where prices are above marginal supply costs. Dynamic effiency gains are associated with post- privatisation restructuring, involving investment, R&D and innovation, the subject matter of industrial policy, but have been relatively neglected in theoretical discussions. They can also be ignored in practice, as newly privatised companies attempt to satisfy the demands of their new investors for high dividend payments by concentrating simply on short-run cost reductions, notably, reducing manning levels and economising on investment and R&D spending. In addition, the allocative effects of privatisation have tended to receive less attention than productive efficiency in the privatisation literature and amongst policy makers. Allocative efficiency depends upon the competitive environment in which the firm operates, rather than ownership, and privatised monopolies may be highly inefficient in allocative terms. Therefore where monopoly firms are privatised, effective regulatory systems need to be introduced to lower prices to marginal costs, encourage cost efficiency and improve output quality. In effect, regulation replaces the direct departmental (hierarchical) control over management that exists under state ownership. Whether the new regulatory system will prove superior over the long-term in preventing monopoly abuse and promoting efficiency than direct control of industry by government depends upon the effectiveness of the regulatory system introduced. In the UK price controls through an RPI-X price cap18 appear to be superior to the previous cost-plus mentality when monopolies were state owned and the new regulatory offices have successfully promoted competition. But whether this proves to be the case over the longer term and in other countries remains to be seen.

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More generally, research cautions against drawing simple conclusions about public versus private ownership. There is a body of theoretical and empirical evidence which suggests that the market for corporate control is likely to be a weak deterrent against inefficiency, especially in large private sector firms (Grossman and Hart, 1980; Cosh et al., 1989; Ravenscraft and Scherer, 1989). The case for private over public ownership is based on the argument that private sector management cannot stray far from improving efficiency, otherwise shareholders depose the management or sell their shares, triggering a takeover bid. Management in the public sector face no such threat. What is left unclear is the optimal share ownership to effect this managerial constraint. For example, when the share capital is divided among many investors, the logical result of a privatisation policy aimed at increasing the number of small shareholders, if one shareholder engages in the task of monitoring management behaviour, he or she bears the full cost of the activity but receives only a small fraction of the total gain. Dispersed shareholding may, therefore, lead to sub-optimal monitoring of management behaviour. Also, there is little evidence that it is necessarily the poorly performing firms, in terms either of earnings, dividends or share price, that are the prime takeover targets in modern stock markets (Jenkinson and Mayer, 1994). Moreover, empirical studies of the comparative efficiency of public versus private sector firms (usually measured in terms of productivity or costs of production) have suggested that, while private enterprises are often more efficient than their state-owned counterparts, state enterprises can be as efficient especially in markets where there is little or no product competition (for an early summary of this research see Millward and Parker, 1983, and for a more recent review, Martin and Parker, 1997, chapter 4). Similarly, studies of the impact of privatisation on business performance in the UK suggest that it has not always resulted in improved productivity (however, this may be because of factors unrelated to privatisation, such as a less favourable trading environment); while the longer-term, dynamic effects remain uncertain (e.g. Bishop and Thompson, 1992; Parker and Martin, 1995; Martin and Parker, 1997). Assessing the impact of privatisation is complicated by the lack of agreement on what constitutes successful performance. Income distribution issues need to be taken into account when appraising privatisation from a social welfare perspective, yet most performance studies do not consider distributional issues concentrating instead on enterprise profitability, productivity and costs of production. Also, privatisation studies tend to adopt a partial equilibrium modelling. This is understandable given the great complexity of accounting for the wider, general equilibrium consequences, but the result may be a failure to capture important economic effects. State industries were set up across Europe not simply to maximise their own efficient use of resources, but to pursue wider goals, including raising industrial performance in general (for example in Finland and in France). Much of the privatisation literature has drawn a sharp distinction between management behaviour in the private and public sectors, but some studies have

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questioned the extent to which, in practice, the behaviour of state firms differs from that in private sector enterprises: state-owned enterprises do seem to share many characteristics with their private counterparts, especially when they serve similar markets and employ similar technologies. Moreover, with increasing frequency, large private enterprises are being exhorted to behave in a ‘socially responsible’ manner and to include representatives of labour and the general public in their governing structures. A good case can be made, therefore, for the view that large private enterprises are exposed to all the opportunities of privilege, the ambiguities of purpose and problems of multiple oversight that are the lot of state-owned enterprises. (Vernon, 1981, p. 16) In most countries, but especially France, the social and educational background of senior civil servants and private sector industrialists have been the same or similar. Typically, both went to elite grandes écoles, of which the most famous are the National Schools of Administration (Redor, 1992, p. 158). Also, managers have moved between public and private firms much more frequently than is the case in the UK, for example. This may help to explain why, on the continent, there is sometimes a much lower expectation of efficiency gains when enterprises are privatised than has existed in UK policy making circles. Certainly improvements in economic performance following privatisation are less likely the more difficult it is to make substantial changes in the way that enterprises are managed and operated. In a number of the EU countries there are more constraints on restructuring post-privatisation than have existed notably in the UK and Portugal. For example, in Italy legal constraints on job cuts in banking and finance, where early privatisations were concentrated, have meant formidable difficulties in rationalising manning. In the Netherlands, employees made redundant because of privatisation have been offered jobs elsewhere in the public sector and workers have retained a right to preferential civil service unemployment benefits (Andeweg, 1994, pp. 204–5). In the Netherlands, France, Italy and Germany the trade unions have strongly opposed privatisation and have been willing to take industrial action to stop privatisations that threaten to cause large-scale reorganisation and demanning. For example, a strike by Air France staff in October 1993 led the government to disown a restructuring plan drawn up by the airline’s management. Also, employees of utilities in France, such as France Télécom, are fonctionnaires with civil service privileges and this complicates any privatisation. The bargaining pre-privatisation between government and unions to facilitate a smooth sale usually involves protecting working conditions and staff gradings. A similar situation exists in Germany, where many railway, telecommunications and postal service employees have civil service status.19 When a new stateowned telecommunications company replaced the former state enterprise in

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Italy, all of the employees were guaranteed their jobs. In the Netherlands, incomes of the low paid have been guaranteed by the state during the first years after privatisation (ibid.). In other words, across Europe privatisation may not offer the same scope for immediate productive efficiency gains as existed in the UK; while even in the UK, not all enterprises have raised their economic performance following privatisation (Martin and Parker, 1997). Moreover, while the neoclassical economics literature emphasises the role of a competitive capital market in raising productive efficiency, in a number of European privatisations a competitive capital market is not the obvious result. In continental Europe the term ‘equity’ in financial markets implies a right to the residual income and assets of a company, subject to a much larger and more arbitrary degree of governmental and stakeholder (eg. workforce) influence than in the UK. Also, the stock markets are less open to the mounting of hostile takeover bids in countries such as Germany than is the case in the UK and USA, from which much of the relevant agent–principal literature originates.20 The form of the privatisation also affects the likely outcome. In particular, ‘corporatisation’ is not the same as privatisation. This needs stressing since a number of countries have transferred state activities from departmental control to quasi-independent corporations and insisted on describing the policy as ‘privatisation’, even when the state retains majority voting rights. In other cases restrictions have been placed on the rights of private shareholders. For example, when the Austrian government sold shares in the engineering firm VA Technologie, no shareholder was permitted to exercise more than 25 per cent of voting rights at the company’s annual general meeting. Elsewhere the state has retained some kind of ‘golden share’ to block unwelcome takeover bids, including the UK. But if the term privatisation is to be meaningful it is best limited to those cases where the state agrees to sell all or a majority of its (voting) shares, places no special restrictions on voting rights and ceases to interfere in the management and the future of the enterprises. Defined in these strict terms, privatisation has not been anything like as extensive in the EU as the figures for share sales imply. It is also important to appreciate that privatisation has not necessarily entailed acceptance of the case for a more open market in corporate control. In a number of European countries there are examples of privatisation policies aimed at keeping out or limiting foreign ownership and favouring ‘reliable’, domestic investors. Favoured investors is one way of securing the success of a privatisation issue without reliance on unrestricted foreign investment. For example, in Belgium generally sales have been on the basis of a preselection of investors, not public offers. In Spain sales of state shareholdings in the 1980s involved mainly the sale of minority stakes because the government did not want to forgo control of the enterprises. The government also feared that the companies might fall into the hands of foreign investors. The sale of Seat to Volkswagen was a notable exception to this policy because there was no domestic motor group available to purchase and rationalise the company.21 In the case of Portugal, the government has been accused of rigging privatisation

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sales to favour domestic groups that the government had privately considered from the outset to be suitable owners (Wise, 1995).22 The new government in Portugal has stated more firmly than its predecessor that it intends to keep strategic companies Portuguese. Although this policy conflicts with the notion of a European-wide competitive capital market, it reflects a deep-seated fear amongst EU governments that privatisation will lead to a loss of national control over important industries. The long delay in Austria in the sale of Creditanstalt was the result of opposition in Austrian business circles to the country’s second biggest bank falling into foreign hands (Hall, 1996, and chapter 4 below). In Sweden the government has favoured large and friendly investors and the UK has placed limits on foreign shareholdings in privatised companies at the time of flotations. Usually foreign ownership has been restricted to not much more than 20 per cent of the shares on offer. This is not so important if foreigners then have access to the stock market to buy further shares after the flotation, but for some privatised companies the UK government has placed continuing restrictions on foreign holdings. It is in France and Italy that a traditional hostility to foreign ownership of industry has developed into prominent policies to retain national ownership. Some foreign investor participation in recent French privatisations has been permitted, but in general policy from the mid-1980s discriminated against foreign capital.23 An Act of August 1986 prevented the state transferring more than a 20 per cent stake in privatised firms to foreign investors, though the limit was removed in 1993. French policy has favoured established, mainly French, core shareholders or noyaux durs. The objective of a noyau dur or favoured shareholder is to facilitate a smooth privatisation and to limit any post-privatisation takeover threat. For instance, in the ‘first phase’ of denationalisations, in1986–8, the hard core were 12 industrial firms, 12 banks, 11 insurance companies and 10 other corporations in France (Andreff, 1992, p. 148), included were the banks Crédit Lyonnais, Societé Générale and BNP and AGF. Since 1993 the core shareholders in France have been widened to include some foreigners, notably the Italian company FIAT and the bank Crédit Suisse. Similarly, Italy has its own noyau dur policy, for instance the preferred purchaser of shares in Istituto Mobiliare Italiano were banks owned by the government; while the sale of Credito Italiano was structured around the Milanese merchant bank, Mediobanca.24 One argument for placing shares with favoured investors relates to the size of the domestic capital market. The UK has a large and international capital market, but capital markets are much smaller in other EU countries. In countries such as Austria, Denmark, Finland, Sweden and Portugal privatisation plans have been slowed by a fear of ‘crowding out’ their capital markets. In these markets there is also only a relatively small volume of institutional investment. To make matters worse for the success of privatisation flotations, domestic investors on the continent have generally had a preference for fixed income assets (bonds) over equities (shares).

38 David Parker

The lack of large institutional investors at home and less interest in shareholding by domestic groups increases the likelihood of controlling stakes passing to foreign investors. Noyaux durs in France, continued core state holdings, restrictions on large holdings and golden shares mean that the threat of foreign ownership can be allayed. There is also competition law at the EU and national levels that may intervene where takeovers are proposed. In general, therefore, takeovers especially foreign takeovers of privatised companies have been rare so far. The UK is a partial exception in this respect, reflecting its traditionally more open and competitive capital market. By mid-1997, 11 of the 12 privatised regional electricity companies, responsible for electricity distribution and supply, had been taken over, mainly by US utilities; although the government has occasionally intervened, for example to block bids involving a privatised electricity generator and a regional electricity company. However, to the extent that where performance is disappointing a takeover is not a credible threat, the capital market constraint on managerial behaviour, a main argument for the superiority of private sector firms in the agent–principal literature, is radically reduced. Although some economists (and policy makers) have emphasised the potential efficiency gains from privatisation, it seems that the relationship between privatisation and efficiency is more complex than often perceived. Where enterprises have been reasonably well run under state ownership and are managed much as before, where they operated in competitive markets or remain state regulated much as before, where the capital market constraint on managerial behaviour works imperfectly, then the expectation must be that there will be no sharp change in allocative and productive efficiency following privatisation. PRIVATISATION, INDUSTRIAL POLICY AND WELFARE Industrial policy is concerned with promoting economic development through some kind of state action. In the postwar period in Western Europe the state was generally given a prominent role in economic development, especially when left of centre governments took power. Industrial policy was generally justified in terms of ‘market failure’, i.e. that free markets would not guarantee maximum economic welfare. Market failure occurs particularly where there are: (1) significant externalities – costs and benefits accruing to others than the buyer and seller directly involved in the market exchange; (2) monopoly – so that allocative and productive inefficiencies accrue; (3) increasing returns to scale – which reduces the scope for competition in markets (related to the ‘natural monopoly’ argument for state firms or state regulation); and (4) inadequate investment – where private markets for one reason or another fail to invest sufficient amounts in capital equipment, staff training and research and development. Until the 1980s, state intervention was generally accepted in Europe wherever there was evidence of market failure. Since the 1980s, however, the change in intellectual thinking brought about by the public choice and agent–principal theories in the economics literature,

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along with the internationalisation of product and financial markets, technological change, the Maastricht criteria for a single currency, plus the demonstration effect of privatisations in the UK, have all contributed towards the drive for privatisation in member states. Privatisation along with market liberalisation has substituted for more active state involvement in industrial development. But it is important to recognise that privatisation is industrial policy only in a negative sense;25 that is to say, it exists as confirmation of the superiority of market forces. Incontrovertibly, privatisation is leading to an appreciable industrial restructuring across the EU promoted by market forces, spreading out from the firms and markets directly affected to other industries (e.g. suppliers), competitors (new and old) and factor markets. To assess the full economic effects precisely is highly problematic and the social welfare effects even more daunting. A complete cost–benefit analysis of privatisation would require identification of all gainers and losers, the precise gains and losses and some form of social weighting of the gains and losses. In practice, empirical studies have generally been limited to the direct effects on the privatised firms, ignoring wider (‘spillover’) effects and without any explicit weighting of the income transfers. Jones et al. (1990) have set out a more comprehensive method, which has been applied by Galal et al. (1994). The approach considers consumer surplus, prices, costs, profits and transfers to government (as a result of ownership or taxes). This takes in wider effects of privatisation than most studies but does not extend to being a comprehensive welfare analysis. The study by Galal et al. was, in any case, restricted to looking at the immediate rather than longer-term effects of privatisation,26 whereas industrial policy is concerned with longer-term effects. The impact of privatisation on economic welfare is uncertain for it turns on the nature of the privatisation, the existence and form of continued state regulation and the impact on the various groups in society. The economic literature on privatisation has been primarily concerned with the impact on consumers – reflecting the usual neoclassical concern with product markets and with the widespread belief that privatisation will lower prices and improve product quality. It has also been concerned, more indirectly, with the interests of shareholders because higher profits are viewed as a reward for higher economic efficiency. By concentrating on the effects on consumers and investors, studies of privatisation are apt to see lower wages and other input costs as desirable outcomes, as they reduce costs and prices and raise consumer surplus and profit. Higher wages and other input costs are interpreted as evidence of ‘inefficient’ economic rents under state ownership. However, such discussion side-steps the importance of resource redistribution effects on welfare. In assessing the total welfare effects of privatisation, the impact on labour and other (non-capital) inputs should not be ignored even though this greatly complicates any assessment of privatisation. What is clear is the potential shift in economic power implied by privatisation and its associated redistribution of income to favoured groups – just in the same way as nationalisation implied such transfers, although to a different set

40 David Parker

of interests. French privatisation has directly benefited certain financial and business groupings. In Italy privatisation has strengthened the position of already powerful groups (e.g. those connected with the Agnelli and De Benedetti families) (Wright, 1994, p. 33).27 Some groups in society have been more clear beneficiaries of privatisation than others; most notable gainers so far have been bankers and financial advisers (‘the City’) and within the companies some senior management, in terms of their much higher remuneration. The losers have been the interests now less favoured by government, usually the trade unions and those vulnerable to unemployment or wage cuts post-privatisation.28 In general, most privatisations in the EU have been driven from the top, at government–industry–banker level, very little has occurred due to action from below, in terms of worker–manager initiated ownership restructuring. This contrasts with parts of central and eastern Europe where there have been many more cases of localised and ‘small-scale’ privatisations. Privatisation involves a shift in economic power, something underresearched and often ignored in the neoclassical economics literature. Privatisation suggests a more favourable view of the role of private (sometimes multinational) investment in promoting social wellbeing and a less favourable view of employment, employment rights, wages and trade union collective bargaining than existed for much of the postwar period in Europe. Whereas such ‘rights’ were once part of a postwar political consensus based around the notion of a ‘welfare state’, they are now viewed as inefficiencies that threaten European competitiveness. Nationalisation resulted from a belief that state ownership could counter the adverse effects on economic welfare of large-scale private enterprise, much of which today is transnational (Holland, 1975). For example, this was the case in France as late as the early 1980s. As EU member states have removed barriers to international capital flows and the movement of goods and services across Europe, state ownership has diminished the economic effects and permitted some retention of national control over important assets, especially in the public utilities. Privatisation is removing this means of state influence and in this sense substitutes financial freedoms for earlier social welfare and industrial policy objectives. Figure 2.3 distinguishes between the state’s power to set the economic context within which industries operate and the state’s direct operational control over enterprises. Context setting refers to the power to define or restrict the goals of organisations and their processes of service delivery so as to achieve social welfare in oligopolistic markets. Operational control is concerned with the day-to-day management of the organisations so as to meet the context-setting goals. In principle, state ownership is associated with both strong context-setting powers and operational control. It is therefore related to the notion of economic coordination to overcome market failure. Privatisation implies a loss of operational control, but the impact on the state’s power to set the context in which the privatised firms operate depends upon the degree of continuing industrial policy and regulation (including the

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Figure 2.3 Context setting powers and enterprise control

strength of competition policy). Where a penetration of international capital into industries previously controlled by government leads to a transfer of economic power out of EU countries then a significant decline in both operational control and context-setting powers may occur with economic (and social) effects that deserve fuller investigation. This is especially so as privatisation is occurring at a time of other changes in the global economy, resulting in greater capital mobility and reduced state control over factor and product markets. A loss of control at the national level implies the need for stronger control and context-setting powers at the EU level, but so far the EU Commission’s powers continue to lag behind the pace of economic change. In so far as EU countries lack adequate context-setting powers, notably new regulatory systems to replace former hierarchical state management of key industries, privatisation involves a potential loss of national influence over the behaviour of enterprises and markets. At the EU level there is no sense of urgency to develop regulatory powers to counter any threat from private monopoly abuse, especially in the face of takeovers, cross-shareholdings and inter-firm alliances amongst privatised companies.29 What is lacking within the EU is a clear response to the potential transfer of economic power implied by privatisation and for that matter any apparent and obvious concern at the potential loss of economic power at governmental level. To date surprisingly little research has been directly undertaken into industrial restructuring within the EU resulting from privatisation and its implications in terms of dynamic effects on economies. It is, therefore, not possible at this stage to pass judgement on the long-term effects on economic development of

42 David Parker

privatisation and associated market liberalisation. On the one hand, privatisation may lead to a better use of resources and more investment leading to higher economic growth. This is the belief of those who advocate privatisation to raise economic welfare. On the other hand, privatisation could lead to an extraction of profit overseas, reduced investment, lower R&D expenditure within Europe and growing industrial concentration across national boundaries. So far the likely outcome is unclear. CONCLUSION This chapter has reviewed privatisation in the different member states of the EU and the role of EU policy on market liberalisation. Although the EU has traditionally adopted a neutral stance to state ownership, recent directives on opening up to competition markets previously dominated by state enterprises is necessitating a review of ownership and regulation across Europe. An added important factor is technological change which is creating the scope for competition in markets previously considered to be ‘natural monopolies’, most notably in telecommunications. Interest in privatisation has been reinforced by the economics literature, mainly public choice theory and agent–principal theory, which has provided an academic argument in favour of state assets sales. At the same time, however, more recent research has pointed to restrictions in this literature, which cast some doubt on the suggestion of an automatic link between privatisation and improved economic welfare. This is supported by recent empirical work, especially in the UK, which concludes that allocative and productive efficiency improvements following privatisation are not automatic. The last part of the chapter has made a few brief observations on privatisation from industrial policy and welfare perspectives. Privatisation involves a move away from a state interventionist approach to economic development, favoured from time to time in the postwar period in member states, towards a kind of negative industrial policy, where economic development is left to market forces. By concentrating discussion on consumers and profits, surprisingly little attention seems to have been paid to the impact of privatisation on industrial restructuring in Europe and to the implied shift in economic power. Like all economic policies, privatisation can be expected to involve losers as well as gainers. These criticisms should not be viewed as necessarily implying that privatisation is foolhardy. There is evidence that privatisation has introduced a new competitive spirit into sleepy state enterprises (e.g. Martin and Parker, 1997, ch. 9). It is enabling management to manage freed from irksome accountability to government departments. Higher allocative and productive efficiency, where it occurs, should increase aggregate economic welfare (alongside income redistributions). But arguably such results need to be viewed from a much longer term perspective than has been possible so far, particularly focusing on the impact of privatisation and market liberalisation on industrial

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and market structures within the EU. What are the likely long-term consequences on the competitiveness of industry and services vis-à-vis other parts of the world, and more specifically on employment, training, investment and research and development expenditures, and on the location of business? In the longer term, where will the decision-making powers in privatised firms, the corporate strategy formulation, be situated – within the EU or outside? Although a number of EU countries have endeavoured to maintain headquarters within national boundaries and have cultivated noyaux durs, is this sustainable in the face of fluid international capital markets? In the absence of relevant research (and experience) answers are elusive. The notion that privatisation is a substitute for more active state industrial policy in Europe is essentially an article of political as well as economic faith – just like nationalisation before it. Economists have provided the economic rationale for privatisation, but it is politicians, influenced by interest groups, who continue to plan what, when and how to privatise across Europe. Hence, it is ultimately politics that will shape future privatisations. NOTES 1 In June 1997 a socialist government was elected in France and the future of the privatisation programme is now uncertain. A month earlier a centrist Labour administration took office in the UK and its plans for privatisation are unclear. In November 1997 the first Sale of Shares in France Télécom occurred. 2 The main holding companies in Spain were the INI and INH. The main ones in Italy were the IRI, ENI and EFIM (now abolished). The holding company structure has also been important in Sweden (e.g. the Statsforetag Convention, renamed Procordia in 1984) and Austria (most importantly the ÖIAG – Osterreichische Industrieholding AG), see chapter 4 below. 3 By December 1990 West Germany had privatised only around DM 10bn of federal state holdings (Hawkins, 1991). 4 The difficulties of the federal government when privatising Deutsche Telekom illustrate the problems some countries in the EU face in reducing state ownership. Until 1996, under Article 87 of the German constitution the privatisation of the railways and postal services (including telecommunications) required a two-thirds majority in the Bundestag and Bundesrat. To get the necessary support for the sale of Deutsche Telekom, the government had to agree to the demands of the main opposition party, the SPD, that a measure of state control should continue to exist over the company following the introduction of private capital; this to ensure the continuance of a universal service. 5 In addition to central government asset sales, in common with a number of other countries the municipalities in the Netherlands have developed policies to contract out local service delivery and corporatise municipal functions. Space precludes a discussion of restructuring and contracting-out of service delivery at the local government level. In addition, governments, especially in the UK, have subjected certain central government services to competitive tendering and have established agencies within government to run former departmental functions on a more commercial basis. Competitive tendering and agency status are also omitted from this overview of privatisation, although they clearly arise from the same view of the superiority of private competitive markets over state, planned provision. 6 In late 1993 the Dybkjaeer Committee decided that public enterprises should only be

44 David Parker corporatised where real private sector competition exists and then full private sector management practices should apply. 7 Many of Finland’s state industries have been highly competitive in world markets. In Finland state enterprises were intended to play a strategic role in the country’s development and were therefore encouraged to be ‘world class’. Unlike state industries in the UK, they were encouraged to adopt an international focus, involving investment abroad, if this was felt necessary for international competitiveness. 8 The Maastricht criteria for ‘sustainable economic convergence’ and eligibility to join the EMU are: (1) an inflation rate in the previous year of 1.5 per cent, at most, above the three member states with the lowest inflation; (2) long-term nominal interest rates in the previous year not exceeding by more than 2 per cent the average rate in the three member states with the lowest rates; (3) general government net borrowing and nominal gross debt below 3 per cent and 60 per cent of GDP respectively (known as the fiscal convergence requirement); and (4) a stable currency within the narrow band of the EMS without realignments or ‘severe tensions’ for at least two years. 9 In Portugal revenue generation was a prime objective behind the privatisation programme from 1990. Until July 1993 80 per cent of privatisation funds were to be used for state debt reduction. From July 1993 revenues could also be used to write off the debts of remaining state industries. 10 The Commission can apply the rules on competition (Articles 85 and 86) to any utility if its anti-competitive behaviour adversely affects trade between member states. 11 The UK has established a company owning the rail infrastructure, Railtrack, and privatised train-operating companies that provide rail transport under franchises. In Sweden SJ, the state-owned railway business, is still publicly owned but the track management was separated from the rolling stock in 1988 and SJ no longer owns the tracks. At the beginning of July 1996 SJ’s monopoly of rail services was removed. France has put infrastructure and the large debts of the rail business, SNCF, into a new state holding company. SNCF will be a rail operator paying toll fees for the use of the infrastructure. There are, however, no plans for privatisation of the SNCF or of the state holding company. Denmark, Germany and the Netherlands are discussing possible rail privatisation. 12 The plan now involves a small number of rail corridors for freight traffic across Europe. 13 Opening up European gas markets to competition was shelved in 1993 until the electricity market was liberalised. Liberalisation of the gas market is especially complex because a number of countries are dependent on gas imports from Russia, Algeria, Norway and Libya, often under ‘take or pay’ contracts. 14 Germany has nine large, integrated regional monopolies, 40 regional distributors and around 1,000 local suppliers. Mixed (public and private) ownership dominates. A publicly owned national monopoly still exists for electricity in France, Italy (in effect) and Portugal. Austria, Finland, Spain and the Netherlands have deintegrated their industries to some degree (Newbery, 1996, p. 30). 15 For example, in January 1995 the German post office was split into three joint-stock companies, Deutsche Post (postal services), Deutsche Postbank (banking) and Deutsche Telekom (telecommunications). 16 To promote competition the Commission requires that telecommunication operators be separated from the regulatory authority. This is occurring, but slowly. 17 Also, if managers were risk neutral they could simply pay shareholders a fixed rent for the right to manage the firm and bear all of the residual risks themselves. It is because managers are to some degree risk averse that optimal management contracts involve them in bearing some, but not all, of the residual risk and, therefore, in having less than complete incentives to act in the interests of shareholders. 18 This limits price rises in the regulated firm to the rate of inflation as measured by the retail price index less an efficiency factor, X, which reflects the scope for expected productivity improvements. 19 The German postal union has secured Deutsche Telekom employees continued status as

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21

22

23 24

25 26 27 28

29

45

civil servants after privatisation. Employees in France Télécom will continue to have civil service status with accompanying job protection rights until 2002. In other words, the ‘outsider’ model of corporate governance relevant to the UK and USA with their active stock markets, and on which the notion of the takeover as a discipline on management behaviour is based, may not be relevant. On the continent an ‘insider’ model based on continuing monitoring of company performance by interested stakeholders, who have a long-term relationship with the firm, is more pertinent. Action to change management decisions occurs through internal channels, such as participation in supervisory boards and committees. This form of corporate governance leads directly to the notion of large, favoured investors. In the last few years more foreign investment has been permitted because the Spanish domestic capital market is inadequate to absorb all of the privatisation issues. Nevertheless, when a further 8.7 per cent of shares in Endesa, Spain’s biggest electric company, were floated, 53.6 per cent of the issue was reserved for Spanish nationals. Nevertheless, the objective of restricting foreign ownership of privatised firms to 10 per cent unless there are special circumstances favouring a larger foreign investment has been circumvented, for example by foreigners purchasing Portuguese firms that then apply for shares in privatisation issues. There has been, in particular, a large foreign interest in investing in the Portuguese banking sector. The European Commission’s position remains somewhat confused. It did intervene when the French restricted purchases of shares in Saint Gobain but in other cases seems to have accepted restrictions on foreign investment. In Italy the Privatisation Law of 30 February 1994 allows for a stable nucleus of shareholders (nocciolo duro) in privatisation issues. It also includes powers for the government to restrict individual investors and associated parties voting rights to no more than 5 per cent of a company’s shares. ‘So far Italy’s treasury has sold only two businesses completely – INA, an insurer, and IMI, a financial-services group. But neither was a true privatisation. In both cases, control passed to “core” shareholder groups of public sector banks’ (Economist, 2 November 1996, p. 102). Negative in the sense of implying less, not more, state involvement in industry. This resulted from the short period since privatisation in the countries studied. Similar results may be occurring in Sweden where a small number of large private groupings dominate the economy, notably the Wallenberg group and Volvo. In the UK there are close ties between the City of London, which has gained from privatisation through consultancy and flotation fees, and the Conservative Party, which governed from 1979 to May 1997. A number of government ministers heavily involved in privatisation have subsequently obtained highly paid board-level appointments in privatised companies and City firms. The proliferation of recent strategic alliances amongst world airlines and telecommunication companies and the prospect of takeovers of privatised companies raises questions about the extent to which the state should intervene and the adequacy of existing regulatory systems in Europe to police competition. The latest case involves the European defence industry where takeovers and alliances are occurring as more of it is privatised.

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46 David Parker Andeweg, R. B. (1994) ‘ Privatization in the Netherlands: the Result of a Decade ’, in V. Wright (ed.). Andreff, W. (1992) ‘ French Privatization Techniques and Experience: A Model for Central-Eastern Europe? ’, in F. Targetti (ed.) Privatization in Europe: West and East Experiences, Dartmouth: Aldershot. Bishop, M. and Thompson, D. (1992) ‘ Regulatory Reform and Productivity Growth in the UK’s Public Utilities ’, Applied Economics, vol. 24, pp. 1181–90. Bös, D. (1991) Privatization: A Theoretical Treatment, Oxford: Clarendon Press. Bös, D. (1993) ‘ Privatization in Europe: a Comparison of Approaches ’, Oxford Review of Economic Policy, vol. 9, no. 1, pp. 95–111. Boycko, M., Shleifer, A. and Vishny, R. W. (1996) ‘ A Theory of Privatisation ’, Economic Journal, vol.106, March, pp. 309–19. Burns, P. and Parker, D. (1997) ‘ France ’, in I. Lewington (ed.) Utility Regulation 1997, London: Centre for the study of Regulated Industries and Privatisation International. CEPS Working Party on Utilities (1996) Towards a Single Market in Utilities, Working Party Report no. 14, Brussels: Centre for European Policy Studies. Cosh, A. D., Hughes, A., Lee, K. and Singh, A. (1989) ‘ Institutional Investment, Mergers and the Market for Corporate Control ’, International Journal of Industrial Organization, vol. 7, pp. 73–100. Curwen, P. (1996) ‘ The Restructuring of European Telecommunications ’, The Review of Policy Issues, special issue, vol. 2, no. 3. Donahue, J. D. (1989) The Privatization Decision, New York: Basic Books. Economist (1996) ‘ Italian Privatisation: Pianissimo ’, 2 November, pp. 101–2. European Commission (1987) Towards a Dynamic European Economy: Green Paper on the Development of the Common Market for Telecommunications Services and Equipment, Com. (87) 290 final, Brussels: CEC. European Commission (1994), ‘ Broad Economic Policy Guidelines ’, European Economic Policy, no. 58, p. 11. European Commission (1995), ‘ Broad Economic Policy Guidelines ’, European Economic Policy, no. 60, p. 15. Financial Times Survey (1996) ‘ European Postal Systems ’, Financial Times, 14 February. Foray, D., Rutsaert, P. and Soete, L. (1995) ‘ Telecommunication Services ’, in P. Buigues, A. Jacquemin and A. Sapir (eds) European Policies on Competition, Trade and Industry: Conflict and Complementarities, Aldershot: Edward Elgar. Garcia Delgado, J. L. (1989) Espana-Economia, Madrid: Espasa-Calpe. Galal, A., Jones, L., Tandon, P. and Vogelsang, I. (1994) Welfare Consequences of Selling Public Enterprises: An Empirical Analysis, Oxford: Oxford University Press. Grassini, F. A. (1981) ‘ The Italian Enterprises: the Political Constraints ’, in R. Vernon and Y. Aharoni (eds). Grossman, S., and Hart, O. (1980) ‘ Takeover Bids, the Free-Rider Problem and the Theory of the Corporation ’, Bell Journal of Economics, vol. 11, pp. 42–64. Hager, W. (1982) ‘ Industrial Policy, Trade Policy, and European Social Democracy ’, in J. Pinder (ed.), National Industrial Strategies and the World Economy, London: Croom Helm. Hall, W. (1996) ‘ First Austrian leaves Creditanstalt bidding group ’, Financial Times, 7 September, p. 9. Hawkins, R. A. (1991) ‘ Privatisation in Western Germany, 1957 to 1990 ’, National Westminster Bank Quarterly Review, November, pp. 14–22. Hitiris, T. (1994) European Community Economics, 3rd edn, London: Harvester/ Wheatsheaf. Holland, S. (1975) The Socialist Challenge, London: Quartet Books. Hulsink, W. (1996) ‘Persistent Divergence in a Converging Industry: A Comparison of Telecommunications Restructuring in France, the Netherlands and the United

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Kingdom’, mimeo, Science Policy Research Unit, University of Sussex. Jacobson, D. and Andreosso-O’Callaghan, B. (1996) Industrial Economics and Organization: A European Perspective, London: McGraw-Hill. Jenkinson, T. and Mayer, C. (1994) Hostile Takeovers, London: McGraw-Hill. Jensen, M. C. (1989) ‘ Eclipse of the Public Corporation ’, Harvard Business Review, vol. 67, no. 5, pp. 61–74. Jensen, M. C. and Meckling, W. H. (1976) ‘ Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure ’, Journal of Financial Economics, vol. 3, pp. 305–60. Jones, L. P., Tandon, P. and Vogelsang, I. (1990) Selling Public Enterprises: a Cost Benefit Methodology, Cambridge, MA: MIT Press. Lane, J. E. (1994) ‘ Sweden: Privatization and Deregulation ’, in V. Wright (ed.). Martin, S. and Parker, D. (1997) The Impact of Privatisation: Ownership and Corporate Performance in the UK, London: Routledge. Martinelli, A. (1981) ‘ The Italian Experience: A Historical Perspective ’, in R.Vernon and Y.Aharoni (eds). Meth-Cohn, D. and Muller, W. C. (1994) ‘ Looking Reality in the Eye: The Politics of Privatization in Austria ’, in V. Wright (ed.). Millward, R. and Parker, D. (1983) ‘ Public and Private Enterprise: Comparative Behaviour and Relative Efficiency ’, in R. Millward, D. Parker, L. Rosenthal, M. T. Sumner and N. Topham (eds) Public Sector Economics, London: Longman. Mitchell, W. C. (1988) Government As It Is, Hobart Paper 109, London: Institute of Economic Affairs. Monsen, R. J. and Walters, K. D. (1983,) Nationalized Companies: A Threat to American Business, New York: McGraw-Hill. Newbery, D.M. (1996) ‘ A Template for Power Reform ’, Private Sector, special edition, June, pp. 29–32. Niskanen, W.A. Jr (1971) Bureaucracy and Representative Government, Chicago: Aldine. Nugent, N. (1994) ‘ The Political Environment ’, in N. Nugent and R. O’Donnell (eds) The European Business Environment, London: Macmillan. Parker, D. (1994) ‘ The Last Post for Privatization? Prospects for Privatizing the Postal Services ’, Public Money and Management, vol. 4, no. 3, pp. 17–23. Parker, D. and Martin, S. (1995) ‘ The Impact of UK Privatisation on Labour and Total Factor Productivity ’, Scottish Journal of Political Economy, vol. 142, no. 2, pp. 201–20. Parris, H., Pestieau, P. and Saynor, P. (1987) Public Enterprise in Western Europe, London: Croom Helm. Ravenscraft, D. J. and Scherer, F. M. (1989) ‘ The Profitability of Mergers ’, International Journal of Industrial Organisation, vol. 7, pp. 101–16. Redor, D. (1992) ‘ The State Ownership Sector: Lessons from the French Experience ’, in F. Targetti (ed.) Privatization in Europe: West and East Experiences, Dartmouth: Aldershot. Schneider, V., Dang-Nguyen, G. and Werle, R. (1994) ‘Corporate Actor Networks in European Policy-making: Harmonizing Telecommunications Policy’, Journal of Common Market Studies, vol. 32, no. 4, pp. 473–98. Scott, C. (1995) Competition and Coordination: Their Role in the Future of European Community Utilities Regulation, International Series 3, London: Centre for the study of Regulated Industries. Shapiro, C. and Willig, R. D. (1990) ‘ Economic Rationales for the Scope of Privatization ’, in E.N. Suleiman and J. Waterbury (eds) The Political Economy of Public Sector Reform and Privatization, London: Westview Press. Sharpe, A. (1996) ‘ Sell-offs in 1996 May Total a Record £36bn ’, Financial Times, 26 January, p. 17.

48 David Parker Van Bergeijk P. and Haffner, R. (1996) Privatization, Deregulation and the Macroeconomy: Measurement, Modelling and Policy, London: Edward Elgar. Vernon, R. (1981) ‘ Introduction ’, in Vernon, R. and Aharoni, Y (eds). Vernon, R. and Aharoni, Y. (eds) (1981) State-Owned Enterprise in the Western Economies, London: Croom Helm. Vickers, J. and Yarrow, G. (1988) Privatization: An Economic Analysis, Cambridge, MA: MIT Press. Willner, J. (1994) ‘ Efficiency under Public and Private Ownership: a Survey ’, Department of Economics Paper, Ser.A:422, Åbo Akademi University: Turku, Finland. Wise, P. (1995) ‘ The Rapid Pace Continues ’, Financial Times, 8 November, p. 6. Wright, V. (ed.) (1994) Privatization in Western Europe, London: Pinter. Zeckhauser, R. J. and Horn, M. (1989) ‘ The Control and Performance of State Owned Enterprises ’, in P. W. MacAvoy, W. T. Stanbury, G. Yarrow and R. J. Zeckhauser (eds) Privatization and State Owned Enterprises: Lessons from the United States, Great Britain and Canada, Boston, MA: Kluwer.

3

Theoretical perspectives on privatisation Some outstanding issues Dieter Bös

INTRODUCTION In the 1980s the opinions of many economists began intensively to deviate from the Musgravian view which had long been prevalent in public economics. The allocation of resources became the field of central interest. Internal subsidisation in public enterprises was increasingly considered undesirable, as was any form of pricing with redistributive features. Furthermore stabilisation by public enterprises fell into disapproval. Monetary policy of the Friedman type was recommended as more appropriate for the achievement of the desired stable growth of an economy. Adherents to this view dismissed those distributional and stabilisational arguments in favour of public enterprises which had long been believed in theory and practice. With respect to the allocative justification of public enterprises, the natural-monopoly paradigm has been destroyed in the 1980s. Baumol and others1 stressed the contestability of enterprises which claimed to be natural monopolies, and this led to a careful reconsideration of the internal organisation of public enterprises. It became clear that typically only parts of production exhibit those cost advantages which prevent them from being contestable. Consequently, public utilities may be disintegrated either vertically or horizontally, with possible privatisation and market entry in those parts whose market position is contestable. My first paper on the theory of privatisation in a Western-type economy appeared in 1986.2 Hence, I would like to use the present paper to ask how far the theoretical reasoning on the topic has brought us in the ten years from 1986 to 1996. In these ten years quite a few neoclassical papers have been published which compare a publicly and a privately owned utility. Two types of models, which have become paradigmatic, will be presented and critically discussed in this paper. We shall denote these types as REGULASY- and as TU-models, respectively. REGULASY is an abbreviation for regulation under asymmetric information. Models of that type compare a publicly and a privately owned utility which are both regulated to avoid the undesired consequences of monopolistic pricing. The regulatory setting is captured by principal–agent approaches where the management of the firm as the agent is better informed than those government

50 Dieter Bös

officials which serve as the regulatory principal. The comparison is presented in a typical neoclassical manner: the information structure, and consequently the incentive structure changes because ownership changes. However, the regulator and the manager in the two firms to be compared remain the same. It is not a new generation of regulators or a new generation of managers whose new attitudes make the privatised firm more efficient than the public firm. The utility functions of regulators and of managers are exactly the same in both types of firms; it is only differences in incentives which imply changes in efficiency. I do not want to deny that changes in incentives are extremely important when it comes to a transfer of a firm from public to private ownership. However, in my opinion, this neoclassical way of reasoning misses many facets of the most important changes in enterprises which are privatised. After presenting the basic features of REGULASY-models, we shall deal with the two most important problems which the REGULASY-paradigm leaves open: • the particular way in which the objective function of the regulator changes as a consequence of privatisation; and • the particular way in which the utility functions of the management change in the course of privatisation. The REGULASY-models concentrate on the principal–agent relationship between the regulator and the management. Admittedly, this is already a very complicated model. However, its explanatory value is greatly reduced by the fact that privatisation also decisively influences the power of the trade unions and, consequently, the position of the employees in the utility. And the trade unions as an actor are missing in all of the REGULASY-models. There exist some simpler models, typically full-information multi-stage games, which compare a publicly and a privately owned utility and explicitly introduce the trade unions as actor. Let us denote them as TU-models. However, in those TU-models the bargaining power of the trade unions is always assumed identical regardless of the ownership of the firm. This is a phenomenon which is very similar to that accentuated in my criticism of the REGULASY-models. Once again, the main actors are assumed identical when it comes to a comparison between a publicly and a privately owned utility. And, once again, it is clear from practical evidence that this assumption is counterfactual. However, as usual in neoclassical economics, we lack a good theory to explain in formal terms how the trade unions’ power is reduced in the privatisation process. After presenting the basic features of TU-models, we shall deal with the single most important problem which the TU-paradigm leaves open: • the particular way in which the power of the trade unions changes as a consequence of privatisation. Some sections of this chapter draw heavily on my previous books (Bös 1991, 1994), in particular the survey sections. The originality in this chapter does not

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of course lie in these sections. The paper has rather been written to push the points which are made in the sections on changing welfare- and utility-functions and on changes in trade-union bargaining power. Purists might claim that neoclassical economics has nothing to say on these points. Obviously, I am not a purist. PRIVATISATION VERSUS REGULATION (REGULASYMODELS) In this section we deal with a monopolistic utility which is alternatively owned by the government or by private shareholders.3 If the government is not willing to accept the exploitation of consumers by profit-maximising prices introduced by the privatised utility, it can either refuse to privatise the utility, or regulate the privatised firm with respect to prices, quantities, rate of return, etc. However, if regulation is inevitable, why should the government privatise at all? Why should a regulated privatised enterprise be preferable to a public enterprise? These questions become particularly challenging if we assume that the economic environment is the same for the public and for the privatised firm: the same agents operate in both institutional settings, demand and production functions are the same, etc. Figure 3.1 illustrates the hierarchical tiers of the institutional settings which are to be compared.

Figure 3.1 Hierarchical tiers of the institutional settings Source: Simplified version of a figure by Shapiro and Willig (1990: 60)

52 Dieter Bös

1

The government framer

A government framer, interested in welfare maximisation, decides whether it is better to have a public firm (left-hand side of the figure) or a regulated privatised firm (right-hand side). The framer does not interfere with the firm’s activities, it neither gives incentives to the public officials who monitor the firm, nor to the managers who run the firm, nor to the private owners in the case of privatisation. Its only activity lies in framing; that is in making the decision whether or not to privatise according to the welfare consequences of the two compared cases. 2

Public officials (minister, regulator)

In both cases, the firm is monitored by public officials who serve as ministers responsible for a public firm or as regulators of a privatised firm. We shall speak of government if the officials are interested in welfare maximisation; we shall speak of bureaucrats if they want to maximise their personal influence as measured by their budget or by the output of the firm. 3

The private shareholders

The private shareholders constitute a special tier in the privatised firm. It can be doubted that the shareholders of a regulated privatised firm have any actual influence on the regulatory system. However, for reasons of commercial law, they cause an information barrier: the regulator cannot directly offer a contract to the manager because this manager is directly responsible to the board of his firm which represents the shareholders. An exception would be the case of an owner-manager; however, privatisation of public utilities typically does not lead to situations where owner and manager coincide, because in most cases it is large-scale enterprises which are privatised in Western economies, including the EU. 4

The management of the firm

The firm is run by a manager who draws utility from his income and suffers disutility from his effort. The effort actually applied is hidden action; it is only known to the manager. It cannot be observed by the public official or can at least not be verified before a court.4 Moreover, nobody is able to calculate this effort from other observations: when the manager’s employment contract is signed, there is some hidden information and only the combined result from this hidden information and the manager’s hidden action can be observed by persons other than the manager. By way of an example, let the production costs depend on the quantities produced, on the manager’s effort, and also on the manager’s ability whose actual value is the manager’s private information. The manager will be inclined to exploit the informational advantage to get

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more income or to reduce effort. To enhance the performance, therefore, the manager must be offered a contract which gives an incentive to approach allocative and productive efficiency as nearly as possible. Moreover, the manager must be offered compensation for effort which makes the job attractive, i.e. the managerial utility must exceed some reservation level. It is assumed that this level is identical in the two cases compared: the manager does not attribute a special value to working in a public instead of a private firm or vice versa. After setting the stage, let us present the comparison between the public and the private regulated firm. We begin with the case of welfare-maximising government officials who monitor the public firm (‘minister’) and the privatised firm (‘regulator’). As a benchmark case we assume fully informed officials. In this case, there is no difference between the case of a public and a regulated privatised enterprise. In both cases, the government officials are able to enforce the first best; welfare-optimal prices p* and welfare-optimal effort e* prevail. Regardless of ownership, the government officials achieve the same welfare optimum. In the regulated privatised firm the private owners will be left without any economic profit. The managers will always be forced down to their reservation utilities. The government officials will appropriate all rents. In this setting the framer is always indifferent between the case of a public and a regulated privatised enterprise. This result changes if there is asymmetric information. It is plausible to assume that the managers have private information in both the public and the privatised firm. This private information will refer to parameters which influence costs or demand, and, of course, to the manager’s own effort.5 The government officials in both public and private firms typically will not be fully informed about these parameters and about the manager’s effort. To get the relevant information, they have to ask the manager and give the right incentives for a truthful revelation. To give these incentives is costly. In other words, the manager earns an information rent. Now consider a public enterprise. Let the minister consider a positive shadow price of public funds. Therefore, the minister faces a trade-off between the manager’s information rent on the one hand and both allocative and X-efficiency on the other hand. Hence, the minister will compromise on efficiency and will accept an effort level epub < e*. In the privatised firm, conversely, there is a double information barrier. First, the regulator has to determine an incentive contract with the private owners. Second, the private owners also are imperfectly informed and have to extract private information from the managers by an adequate revelation mechanism. Therefore, both allocative and X-inefficiency are increased as compared with the public firm: the produced quantity is lower, and so is the managerial effort, epriv < epub < e*. Accordingly, the welfare-maximising framer will opt for the public firm. This holds unless the model is enriched by further assumptions on particular weaknesses of public enterprises. Laffont–Tirole (1991), for instance, assume that investments and the benefits from investments are not verifiable. However,

54 Dieter Bös

once investments in public firms are sunk, the government, which has the residual rights of control over the public firm, can ‘expropriate’ the managers by using the investments for purposes not originally intended. It may, for instance, tell the public managers to use the returns from their investments to employ excess labour. Anticipating such government behaviour, the public managers refrain from investing, in contrast to the private regulated firm.6 Even if there are no particular weaknesses of public enterprises, public ownership may be welfare inferior if minister and regulator do not maximise welfare. Let us, therefore, for the sake of argument assume that both minister and regulator have the same multiple objective: they want to maximise a weighted average of welfare and output instead of welfare alone. In this multiple objective the maximisation of output would require prices which are as low as possible, preferably zero tariffs. The simultaneous consideration of welfare, comprising consumer and producer surplus, requires higher prices, although they still would possibly lead to a deficit for the enterprise. This multiple objective allows the treatment of various types of ‘bureaucratic’ ministers or regulators depending on the weight which is attached to the output objective. Apart from the introduction of ‘bureaucrats’, the organisational structure and the informational setting of both the public and privatised firms are the same as in the preceding paragraphs. Therefore, once again, the regulator of the privatised firm faces one more information barrier than the minister who is responsible for the public enterprise. Due to the consideration of bureaucrats instead of pure welfare maximisers, however, this additional information barrier now has both negative and positive consequences. Negative is the reduction of managerial effort, as explained in the preceding paragraph. Positive is the taming of the bureaucrat. The additional information barrier restrains the bureaucratic regulator in the pursuit of the private agenda.7 Hence, the regulator will have to accept lower output after privatisation. If prior to privatisation the regulator’s output-maximising attitude had been very strong, this lower output will be nearer to the welfare-optimal output than was the case in the public enterprise. The privatisation body, which still is a welfare maximiser, evaluates the negative and the positive consequences of privatisation and if the positive consequences predominate, it will decide in favour of privatisation.8 ON CHANGING WELFARE FUNCTIONS OF REGULATORS Distribution policy The REGULASY-paradigm assumes that the minister who is responsible for the public enterprise and the regulator of the privatised enterprise have the same welfare function. The only change in an objective function which matters in REGULASYmodels is the move from a welfare-maximising public owner to a profit-maximising private owner, namely the private shareholders. However, privatisation will typically include a change in the regulator’s welfare function as well, relinquishing the distributional welfare judgements of the ministry in favour of an allocatively oriented

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welfare function. Let us clarify this change in the welfare function by using a generalised utilitarian concept, that is W = ΣΛhvh;

(1)

where v h (p, r h) is the indirect utility function of consumer h = 1, . . ., H, who faces a price vector p and a non- labour income r h. The price vector includes the wage rate w. The ministry which regulates the public enterprise shall be described by Λh =

W/ v h > 0; with

2

W/

v h2 < 0.

(2)

This implies a decreasing marginal welfare of individuality utility. The above welfare weights signal an inequality aversion of the policy maker. This inequality aversion refers first to the individual utilities. However, since any individual utility is increasing in the individual incomes, r h + wl h, the politician’s inequality aversion indirectly also refers to the individual incomes. Given this objective function, the minister as a regulator will advise the public enterprise to choose prices which reflect his distributional objectives 9 (if we add the realistic assumption that it is impossible for the minister to choose the individual lump-sum incomes {r h} as instruments). This type of pricing has been practically applied in many public enterprises. One of the intentions of privatisation is to end distributional pricing. The regulated privatised firm should not set prices so as to help the poor, since this type of public sector pricing always implies an internal subsidisation unwanted by those policy makers who pursue a privatisation policy. Hence, those policy makers will employ a regulator of the privatised firm whose welfare function is W = Σvh;

(3)

excluding any distributional weighting. How is the REGULASY-paradigm influenced by this change in the welfare function? Typically we would think of the framer as a conservative policy maker not interested in distributional targets of public sector pricing, that is, the framer has an objective function of type (3). Accordingly, the framer will replace the ministerial welfare-type (1) regulator by an efficiency-oriented welfare-type (3) regulator. Then, according to the REGULASY-paradigm, the framer will compare a publicly owned and a privately owned enterprise from the own point of view, that is from the point of view of a welfare-type (3) function. However, this is a bias in favour of privatisation. Let us conclude this subsection by looking at some problems of regulatory practice related to the change in the regulator’s welfare function. Price-cap regulation of a privatised utility does not necessarily exclude pricing with distributional objectives and internal subsidisation, respectively. This can be

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shown most clearly with the example of the British RPI - X regulation: the average price increase of monopolistically supplied goods of the public utility must not exceed the increase of the retail-price index minus an exogenously fixed X, which is politically determined, and should be set on the basis of expected productivity increases. RPI - X regulation fails to avoid internal subsidisation for the following two main reasons: • The RPI - X-constraint refers to an average price. This allows the regulated firm to rebalance the prices of the various services it supplies. In practice, this rebalancing typically is used to correct for former distributional ‘distortions’. British Telecom, for instance, used the RPI - X regulation to increase rental charges and local calls, but to reduce prices of particular long-distance calls.10 However, a regulator who cares for distribution policy could achieve at least part of his intentions under an RPI - X constraint unless competition makes this impossible. • Moreover, the weights of the retail-price index ‘distort’ the regulated prices in a systematic way. As shown in Bös (1991: 124–34), the resulting price structure favours lower-income earners. It is qualitatively identical with the Feldstein (1972) rule of distributional pricing.11 The reason is that the basket of goods which is used for the calculation of a retail-price index is always fixed on the basis of a consumer poll taken sometime in the past. However, empirical studies which are the basis for the regular revisions of cost-ofliving indices show that in a developed and growing economy the percentage of consumption dedicated to necessities falls over time. Hence, a basket of goods of some earlier period always exaggerates the weightings of necessities. Regulation on the basis of a retail-price index, which overaccentuates necessities, implies relatively lower prices for these necessities. Hence, RPI - X regulation implies distributional pricing, although the firm is privatised and maximises profits.

Employment and regional policy Changes in the regulator’s objective function not only relate to the distribution of personal incomes. It has often been recognised that governments require public enterprises to safeguard employment, to be a shining example when it comes to the relationship between firm and trade union, or to supply services to less developed regions of the country even if this is coupled with a high deficit. Then the minister who monitors and regulates a public enterprise must be described by an objective function which does not only include consumer utility W, but also some measure of employment, of trade-union compliance or of regional outputs. By way of an example, in Pint (1991), the government owner of a public enterprise maximises an objective function which is a weighted sum of consumer surplus, producer surplus and wages paid to labour. This makes the public enterprise biased in favour of labour inputs. After

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privatisation the firm is subject to a regulatory constraint bK on the rate of return, which makes the private firm biased in favour of capital inputs. In Pint, b is exogenously given, and the change in the regulator’s objective function is not explicitly modelled. The compliance of trade unions is a motivator in De Fraja (1993b). Here the utility of the relevant trade union enters the objective function of the public-firm regulator. De Fraja’s model will be extensively reviewed later in this chapter.12 ON CHANGING UTILITY FUNCTIONS OF MANAGERS Choosing optimal control inputs Let us assume that the management decides on particular control inputs and informs the regulator of the production possibilities resulting from the chosen control inputs. 13 In contrast to the imperfectly informed regulator, the management knows the exact relationship between all inputs and outputs. g(z, y, c) = 0,

(4)

where z is a vector of outputs, y a vector of production inputs, and c a vector of control inputs.14 The control inputs are used in the administration of that firm which the government is going to privatise. For ease of explanation they are fully separated from production inputs, although some production inputs may be of similar type to control inputs. For instance, we have administrative labour inputs which cannot be used for productive purposes. We assume decreasing returns to control, but allow for all sorts of returns with respect to both z and y. In contrast to the REGULASY-paradigm, w e assume that privatisation leads to the replacement of a bureaucratic staff by a market-oriented management. Both public and private managers try their best to be efficient. For any set of inputs y, a manager will reach the production possibility frontier by maximising chosen output bundles along a ray sz¯, where s > 0 denotes a scaling factor. In production theory s is well known as a Farrell measure of output efficiency.15 However, any choice of s requires costs of control p c corresponding to the technology g(sz¯, y, c c) pc is the vector of control-input prices. In contrast to the typical REGULASY. models, the private managers are characterised by a different type of utility function from that of the public bureaucrats. It is the difference in the personality types which drives changes in control and profitability. Private technocrats, for instance, may have been educated differently from public bureaucrats whose individual judgements are formed by a sort of civil-servant ethos. The private technocrats, possibly Yuppy types, start from different personal attitudes with respect to economic activities. Let us describe these differences by assuming that the subjective importance of technical efficiency and of the costs of control differs between the two groups of managers. This is captured by the utility functions

58 Dieter Bös U = U (sz¯, pcc); V = V (sz¯, pcc),

(5)

where U refers to the public managers and V to the private managers. The utility functions are assumed to be strictly increasing in outputs and strictly decreasing in the control inputs.16 Moreover, they are quasi-concave in the scale factor and in control costs. In Figure 3.2a the market-oriented private technocrats concentrate on increases in s and are willing to accept the higher costs of control. In a public firm, the public managers’ optimisation leads to point A, a full transition to private management implies a move to point B. This is a case where X-inefficiency is reduced at the expense of higher control costs. Note that this follows the Stigler approach of Xinefficiency rather than the Leibenstein approach:17 the firm always produces an ‘efficient’ input-output combination, but the efficient combination is shifted if the control costs change. In Figure 3.2b the opposite happens. The public technocrats are insensitive to control costs. They are accustomed to the hierarchical structure of the firm, to red tape and other expensive procedures of internal control. The private technocrats prefer less hierarchy and less expensive control, even if that implies a reduction in the scale of outputs. Here control costs are reduced at the expense of a reduced scale of output. One interesting question remains to be answered. In Figures 3.2 a and 3.2 b we distinguish two types of managers. Does privatisation correspond to Figure 3.2a or to Figure 3.2b, i.e., does privatisation imply an increase in the scale of output which is made possible by an increase in control costs (Figure 3.2 a), or does privatisation imply a reduction of control costs coupled with a reduction in the scale of output (Figure 3.2 b)? Bös and Peters (1988: 246–7), attained the result that only Figure 3.2b describes what happens in the case of privatisation – a more detailed explanation of the result is presented in note 20 below. If there are no possible reductions of control costs from selling any shares, the firm remains in public ownership. Too little output is not taken as the reason for starting to privatise.

Figure 3.2 Scale factor and control costs

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Therefore, ‘inefficient’ public firms may remain public, because the low output level could only be cured by an unwanted increase in control costs. In REGULASY-models the utility function of the managers is the same, both in the public and in the privatised firm. Hence, there is only one point on the production possibility frontier which matters, regardless of the ownership of the firm. By restricting itself to identical managerial utility, REGULASY loses much explanatory power. The case of partial privatisation A total shift from A to B refers to the case of total privatisation, where all public technocrats are replaced by private managers. In countries like (West) Germany, however, partial privatisation also plays a major role. Let us therefore deal with this case as well. More bureaucrats are replaced the higher the degree of privatisation. This degree can be measured by the percentage of shares of the firm which are owned by private shareholders. We denote this percentage by Θ. For any given extent of partial privatisation, let λ(Θ) denote the percentage of private managers in the management. In a public firm we have no private managers, so λ(0) = 0. On the other hand, 100 percent of public technocrats are replaced if the firm is fully privatised and, therefore, λ(100) = 100. For all cases in between, the percentage of private managers is higher, the higher the extent of privatisation. This shall be captured by assuming an increasing function λ(Θ). Partial privatisation implies that the two groups of technocrats have to compromise. Hence, they enter into negotiations. A special case of such negotiations would be as follows. Define U¯(Θ) and V¯(Θ) as the security levels of the two groups of managers for any degree of privatisation which is exogenously given to the management. Consider now a symmetric Nash bargaining solution with a continuum of agents. We aggregate identical agents, namely the λ(0) percent of private technocrats and the (100 - λ(Θ)) percent of public technocrats. Then the bargaining solution can be written as18 maxc,s B = (U - U¯)100-λ(Θ) (V - V¯)λ(Θ) subject to g(sz¯, y, c) = 0.

(6)

The game is played cooperatively as long as the utilities U* and V* which result from the cooperative solution exceed the respective security levels U¯ and V¯. The optimal s* (z, y, Θ) determines the output quantities which the firm will choose when combining outputs, control, and production inputs. Hence, we have s*z¯ = z

for any bundle z¯. Moreover, we have the optimal control inputs

(7)

60 Dieter Bös c* = c* (z, y, Θ).

(8)

An interior optimum of s and c is achieved if economies of scale are not ‘too large’ and if the technology exhibits decreasing returns to control.19 Once again, it can be shown that only figure 3.2b describes the efficiency movement in the case of privatisation. However, partial privatisation stops somewhere between points A and B, compromising between increases in X-efficiency and increases in control costs.20 It should be noted that in the limiting cases, Θ = 0 and Θ = 100, the optimisation problem (6) is also well defined, although there is no bargaining as only one group of representatives decides on c and s. Hence, the following text on the change in the technology which results from the changing managerial utility functions holds for both total and partial privatisation. Therefore, it has been made a separate subsection. Changes in the technology The control-input functions c(z, y, Θ) are the signals which the management sends to the regulator and which the regulator forwards to the framer. So the decisions of both regulator and framer are based on c(z, y, Θ), not on g(·), which is known only by the management. However, the knowledge of regulator and framer is fully sufficient. Including both g(·) and c(·) in their relevant optimisation approaches would be superfluous because the technology has already been taken into account by the management when choosing c(z, y, Θ). So any control-input vector c(·) implies technically efficient production. Note that the control-input functions describe the adjustment of the management to the degree of privatisation. Although the functional shape of g(z, y, c) is independent of the extent of privatisation, the control inputs move in the Θ-space and the technology is shifted in dependence on the framer’s privatisation activities. (The same argument holds for the typical REGULASY-models: although the functional shape of the production function is independent of privatisation, some argument of the production function depends on privatisation, for instance managerial effort e.) PRIVATISATION AND TRADE UNIONS (TU-MODELS) The trade unions’ influence will typically be reduced by privatisation. By way of an example, it has been argued that the privatisation of the British electricity industry, among other things, was aimed at breaking the power of the miners’ union because the government correctly anticipated that privatised electricity generation companies would increase the use of gas in power stations and also increase imports of coal, thus reducing the size of the British coal industry and, consequently, reducing the importance of the miners’ union. Similarly, the first wave of privatisation in West Germany some thirty years ago was intended to reduce union power. The strength of

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German trade unions, which are adamantly opposed to privatisation and exert a strong influence on political parties, was one of the main reasons why it took so long before the German government started to privatise public utilities.21 Some models explicitly introduce trade unions when it comes to a comparison between publicly and privately owned utilities. Let me begin with Bös (1989). In this paper the government is perceived as an institution which wants to draw money from selling its property, and so willingly cooperates with private shareholders who also are interested in the value of the firm. The antagonists are the trade unions. They are interested in the firm keeping jobs, even if this leads to the firm’s inefficiency in production and less profit. They are, however, willing to agree to at least some firing of employees if the remaining employees get some share of an increased profit and if there is a certain social safety net for the dismissed. Therefore, when deciding on privatisation, the government enters into negotiations with the trade unions about the plan for employees’ shares and financial compensation for the dismissed. In the course of the negotiations the players have to anticipate how the firm will adjust to the compromise the government and the trade unions have made. This adjustment is described as a cooperative game between the shareholders and the representatives of the trade unions in the firm. There are many different results in this paper. It is shown that private shareholders never get shares free of charge. It is also shown that partial privatisation never happens in this positive-theory framework. Either the firm remains in full public ownership or it is fully privatised. As can be expected, other results depend on the relative power of the trade unions and of the government. Two scenarios are particularly characteristic. First, a scenario where the trade unions dominate. Here, the trade unions preclude the private shareholders from any net incomes from dividends and confine the government to that minimum revenue requirement which is necessary to get the government to privatise. All profit which exceeds the government minimum revenue requirement goes to the employees through planned employees’ shares or is used to keep inefficient jobs in the firm. Second, there is a scenario where the conservative interests of the government dominate. Here, the government is not willing to share any part of the profit with the employees: there are no employees’ shares. However, it is willing to share part of the profit with private shareholders. The particular topic of employees’ shares is also taken up in Grout (1988). He concludes that, overall, the employees do not gain from share ownership. The sale of employee shares, according to Grout, is only in the interest of non-employee shareholders and, in the case of privatisation, in the revenue interest of the government. Let us first present Grout’s reasoning. 22 His unexpected result is rooted in the outcome of the wage negotiations. The owners and the employees share the aggregate revenue of the firm according to a Nash bargaining solution. When sharing a given revenue, it does not matter whether the employees receive money as wage-earners or as dividend-

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recipients. The bargaining only determines a particular sum of money which the employees receive. If they have more employee shares, the higher dividends will reduce their wage bill. The sum of wage income plus dividend income remains constant for any amount of employee shares. In contrast to wage incomes, however, dividend incomes require the acquisition of shares and, therefore, the payment of some issue price. Hence, the employees should opt for wage incomes only because they receive the same amount of money and have no additional costs. The more employee shares they buy, the higher the expenses for this portfolio without getting a penny more. This conclusion is superficial, however, as shown in Bös and Nett (1991). Grout’s argument is valid for the constant revenue case, but issuing employee shares changes the firm’s revenue. Unfortunately, Grout ignores this effect. Let me briefly illustrate how this effect works. Let us assume, as Grout does, that non-employees are the majority shareholders, and hence, they determine the level of investment activity of the firm. In doing so they also consider employee wages which will be negotiated at a later stage. The non-employee shareholders are long-run oriented and maximise the value of the firm, i.e., the discounted sum of future profits. Investment is an increasing function of the percentage of employee shares because wages to be paid per unit of revenue decrease if employees hold more shares: the employees contribute to costs proportionate to their share ownership. Therefore, total revenue, which is negotiated by the firm and the employees at a later stage, increases with employee shares. Any employee pondering about his investment in shares anticipates perfectly the consequences of his purchase. He knows that an increase in employee shares will increase revenue. On the other hand, the employees have to pay a price for their shares, although per unit of revenue they receive a constant income from wages and dividends. Since the two effects countervail, employees may either gain or lose from their share purchase. Grout neglects the possibility that the increase in revenue can be high enough to compensate employees sufficiently. A counter-example is given in Bös and Nett (1991). This example shows that the positive effect on revenue can outweigh the negative effect on income net of the issue price to such an extent that the employees gain from the introduction of employee’s shares. Let me finally present a TU-model which studies the long-run effects of privatisation on wages (De Fraja 1993b). The author first deals with a ‘mixed duopoly’ where a public and a private firm compete with each other. He analyses a two-stage game. In the first stage the public and the private enterprise simultaneously and independently bargain with a trade union to determine wages. The public firm maximises welfare, the private firm maximises profits. In each firm the wage level is determined by a Nash bargaining solution where firm and trade union engage in one negotiation, assuming that the negotiation in the other firm will also lead to the respective Nash bargaining solution. In other words: in the public firm a wage wo is determined according to a Nash bargaining solution for given w*1 of the private

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firm and vice versa.23 In the second stage the two firms are engaged in noncooperative Cournot competition in the output market. The outcome of the second stage is perfectly anticipated in the first stage. De Fraja’s main message is that ‘when there is oligopolistic interdependence between the private and the public firm, the latter is more likely to pay a higher wage than when the firms considered are independent’. De Fraja further investigates the effects of privatisation by examining the transition from the original mixed market to a duopoly of two profitmaximising firms. He concludes as follows: Although there may be exceptions for extreme values of the parameters, the general rule seems to be that while the wage in the privatised firm may go up or down, the wage in the other firm increases as a consequence of its rival’s privatisation. This result, read in conjunction with the previous one of higher wage in the public firm, would suggest that any observed wage differential between public and private firms operating in the same market is due more to the depressing effect of the presence of a public oligopolist on the private firms’ wages, than to any enhancing effect of public ownership on the workers’ wages. This is indeed a natural way of interpreting the result: the public firm, by expanding its output level beyond what a Cournot duopolist would choose, is a very aggressive competitor for the private producers, and as such, it reduces the size of the pie upon which the management and the union of the private firms can bargain, resulting in turn in lower wages and lower profit. (De Fraja 1993b: 466) ON THE CHANGING POWER OF THE TRADE UNIONS Typical TU-models share a common deficiency: the power of the trade union is held constant in the comparison of a public and a private enterprise. Consider a Nash-bargaining solution, say ßlog(u - u¯) + (1 - ß)log(v - v¯),

(9)

where u is the utility of the trade union and v is the utility of the firm. Barred variables denote reservation values. The transfer from public to private ownership is only reflected in changes in the function v which moves from welfare to profit. The parameter ß, however, is taken as constant in spite of privatisation. It is well known that this is a counterfactual assumption. Let us briefly reflect how the main results of various TU-models can be expected to change if the trade-union power is assumed to decline in the course of privatisation.

64 Dieter Bös

In the Bös (1989) approach the trade-union dominated scenario becomes less likely if privatisation implies a decline in the power of the trade unions. The conservative interests of the government prevail and it becomes very probable that there are no employee shares and that the government shares the profit with the private shareholders. A similar result is attained if we consider the Grout–Bös–Nett approach: the decline in trade-union power makes employee shares less attractive. The reason is simple. The revenue is shared according to a Nash-bargaining solution. The part of the revenue which goes to the employees shrinks if their trade union becomes less influential. Hence, privatisation implies that the sum of wages and dividends, as a percentage of revenue, is reduced. Even if the absolute amount of revenue increases as a consequence of issuing employee shares, the employees get a lower percentage of the revenue and this reduces their incentives to buy employee shares. Matters become more complicated when it comes to De Fraja’s (1993b) paper. His paper models some change in the trade unions’ power. Hence, I would like to deal more extensively with this model. In De Fraja’s mixed market, in stage one the Nash-bargaining solutions result from ßlog(u - u¯ ) + (1 - ß)log(S - S¯); for w1 =w*1, 0 0 ßlog(u - u¯ ) + (1 - ß)log(π - π¯); for w0 = w *0. 1

(10) (11)

1

The symbols have the usual meaning: S is the surplus which the public firm wants to maximise, π is the profit which the private firm wants to maximise, u , i = 0, 1 are the utilities of the respective trade unions.24 Privatisation means i that both firms maximise equation (11), taking the other firm’s wage as constant. As can clearly be seen, De Fraja leaves ß unchanged in spite of privatisation, just as in Bös and Grout. However, there is a change in tradeunion power in his model. The public firm’s objective is assumed to be S = C + II + αu , s

(12)

0

where S stands for surplus, C for consumer surplus and ? for the profit of the s public firm. Hence, the trade union influences the public-firm wages in a twofold way: first because it has bargaining power ß, second because its utility is directly included in the firm’s objective function. The value of a is exogenously given. Privatisation implies a move from objective S to objective ? and, therefore, includes a loss of trade-union power, although the bargaining power ß remains unchanged. For the following interpretation it is helpful to reprint some results of De Fraja’s numerical simulations. Table 3.1 presents a comparison of wages in private duopoly and in a mixed market (one public firm, one private firm). The private duopoly is attained because the public firm has been privatised. For the mixed market, we consider two alternative cases, namely a = 0, the conventional case of a government objective which comprises consumer and

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Table 3.1 Equilibrium values of wages Selected values of a and ß.

Source: De Fraja (1993b: 465) Note: aw 0 is the wage in the public firm, w1 in the private firm

producer surplus, and a = 0.5, which gives some special weight to the trade union’s utility.25 If the trade unions have no bargaining power, then the firms will only pay the competitive reference wages, which have been normalised to zero. This explains the first line of the table. 26 In the mixed-market cases we can see the crucial influence of a, the special weight which is given to the trade union’s utility. If a = 0.5, the public firm pays higher wages w > w , except for the 0 1 extreme values of bargaining power ß = 0, 1. If a = 0, the public firm pays higher wages only if ß is low (!). 27 Privatisation implies a move to the privateduopoly case. This always increases the wage of the private competitor. The wage of the formerly public firm is always increased by privatisation if a = 0, but may be reduced, if a = 0.5 and ß is low. This shows that the main effect of privatisation comes from a change in trade-union influence. CONCLUSION Neoclassical theories on the privatisation of public enterprises assume constant welfare- and utility-functions, whereas privatisation is decisively changing these functions. The same reasoning holds for the constant tradeunion bargaining power in the relevant models. This, unfortunately, is a major deficiency of all the relevant theories on the subject. In this paper we presented two types of papers where the ceteris non paribus problem (‘not everything remains equal’) is of particular importance. We first dealt with comparisons between a publicly owned and a privately owned utility, which in both cases is regulated under asymmetric information (REGULASY-models). We showed that the results of these models decisively

66 Dieter Bös

depend on the assumption of a constant welfare function of the regulator and of constant managerial utility functions of the two types of firms compared. We secondly dealt with the role of trade unions in the privatisation process (TU-models). Here we showed that the results decisively depend on the assumption that the trade unions’ bargaining power in wage negotiations is assumed typically to remain unchanged in spite of privatisation. The problems treated in this paper are not easy to handle. It is understandable that neoclassical economics has always been hesitant to model changes in welfare- and utility-functions and in bargaining power. After all, our practical knowledge of welfare functions and utility functions is next to nil. Hence, if we do not actually know the functional shape of welfareand utility-functions, how should we model changes of such a functional shape? Bargaining power also is something which, for understandable reasons, is treated as exogenous in typical neoclassical models. However, if changes in welfare- and utility-functions and in the bargaining power of trade unions are just what matters for privatisation, then one has to either model these changes or to give up neoclassical modelling of the problem in question. The latter position would imply that (neoclassical) theory has nothing to say on privatisation. May I conclude by stressing that the two above-mentioned positions are quite extreme. Often it would suffice to note changes in the relevant utilityand welfare-functions without explicitly modelling these changes and the same holds for changes in the trade unions’ bargaining power. Hence, there is still much scope for neoclassical explanations of privatisation. Nevertheless, these explanations should refrain from holding things constant whose change is central to the process of privatisation. NOTES 1 Particularly well known is the book of Baumol–Panzar–Willig (1982). 2 See Bös (1986). 3 Privatisation in this paper always means a transfer from public to private ownership. Other forms of privatisation, like contracting out, de-bureaucratisation, promotion of competition by market processes, ‘cold privatisation’, etc., are not considered in this paper. 4 The non-verifiability of certain variables is particularly important in the theory of incomplete contracts. For an interesting application of this theory to the comparison of public and privatised regulated utilities, see Schmidt (1996). 5 See Laffont–Tirole (1993) or Bös (1994: 289–381), for detailed analyses of various cases of informational advantages of managers. 6 It can well be doubted whether this is a realistic setting. In practice, it takes a great deal to discourage managements in public enterprises from investing and the diversion of the enterprises’ surpluses into welfare purposes would not stop investment. After all, such diversion is an implicit purpose of public enterprise. 7 Shapiro–Willig (1990) present this argument. For purely didactical purposes they assume that the bureaucrat is perfectly informed about the public firm (no information rent to the manager!).

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8 The discussion in this section complements discussion in other chapters in this book on objectives in public and private sector firms. 9 The paper which first modelled this type of prices is Feldstein (1972). 10 For details see Vickers–Yarrow (1988: 224–5). In response, rental charges were subjected to their own price cap illustrating that it is possible to introduce a price cap in a particular service thus removing the scope for re-balancing. 11 Maximising profits, given an RPI - X-constraint, leads to exactly the same price structure as minimising the retail-price index, given a revenue-cost constraint. For the latter problem, see Bös (1978), who proved the qualitative equivalence of minimising RPI and of maximising a distributionally weighted consumer surplus, in both cases under a revenue-cost constraint. 12 In De Fraja (1993a), the government objective function is a weighted average of the utilities of consumers, shareholders and managers/workers. This paper is a comparison of X-inefficiency in public and private firms; however, it does not include regulation of the private firm. Hence, it has not been included in the REGULASY-paradigm. 13 See Bös and Peters (1988). 14 In contrast to Bös and Peters (1988), we do not apply the netput concept. Hence, all variables are measured in positive values. 15 See, for instance, Färe (1988). 16 U := U/ (Uz¯) > 0 and U2:= U/ (pcc) < 0, and analogously for V. 1 17 See Stigler (1976). 18 See for instance Roth (1979), 15–17. For an alternative concept to justify such an objective function see Holler (1985: 249–58). 19 For details see Bös and Peters (1988: 239). 20 Some more detailed explanation of this result is as follows. Consider a government privatisation body which uses the extent of privatisation Θ as an instrument to maximise welfare W(pz, p , z, y) subject to the firm’s budget constraint p z - p y c z y ΙΙ(Θ), is the profit resulting from the compromise of p c (z, y, Θ) = ΙΙ(Θ), where c welfare interests of the government owners and profit interests of the private owners of the firm. Prices p , p , p and quantities z, y are exogenously given when c the privatisation body takesz itsy decision. Maximising the respective Lagrangean function leads to the following Kuhn–Tucker conditions -p cΘ = IIΘ, for Θ* < 1; -pccΘ > IIΘ, for Θ* = 1. c

21

22 23 24

Both p and IIΘ are positive. Therefore, along the path of privatisation, c must be c T negative: control costs are always reduced. Now consider the two scenarios on the technological management we have illustrated in Figure 3.2. Only Figure 3.2b describes the technological change in the case of privatisation. Particular difficulties arose in the German railway and PTT-system where many employees have civil-servant status which provides job security and generous pension plans (Vogelsang 1988). Accordingly, special provisions for civil servants were made in the corporatisations of these public utilities. In this brief presentation we skip all effects of taxation which Grout explicitly includes in his model. De Fraja (1993b) in a footnote comments: ‘That is, I look for a Nash equilibrium in Nash bargaining solutions.’ The trade unions want to maximise union rents, that is, the total wage above the competitive wage level. In other words, any union has an objective function u = (w - r)L(w), where r > 0 denotes the competitive wage level and L(w) the firm’s level of employment.

68 Dieter Bös 25 The competitive wage level which serves as a basis of reference in the trade unions’ utility functions is set equal to zero. De Fraja himself also investigates the case of r = 0.5. 26 Strangely enough, an increase in a does not change this result. 27 Table 1 of De Fraja contradicts his own conclusions on p. 466.

REFERENCES Baumol, W. J., Panzar, J. C. and Willig, R. D. (1982) Contestable Markets and The Theory of Industry Structure, rev. edn 1988, New York: Harcourt Brace Jovanovich. Bös, D. (1978) ‘ Cost of Living Indices and Public Pricing ’, Economica, 45, 59–69. Bös, D. (1986) ‘ A Theory of the Privatization of Public Enterprises ’, in D. Bös and C. Seidl (eds.) Welfare Economics of the Second Best. Vienna: Springer (Journal of Economics/Zeitschrift für Nationalökonomie, Supplement 5), 17–40. Bös, D. (1989) ‘ Privatization of Public Firms: a Government–Trade Union–Private Shareholder Cooperative Game ’, in M. Neumann and K. W. Roskamp (eds) Public Finance and the Performance of Enterprises, Detroit: Wayne State University Press. Bös, D. (1991) Privatization: A Theoretical Treatment, Oxford: Oxford University Press. Bös, D. (1994) Pricing and Price Regulation (Advanced Textbooks in Economics, Vol. 34), Amsterdam: North-Holland. Bös, D. and Nett, L. (1991) ‘ Employee Share Ownership and Privatisation: a Comment ’, Economic Journal, 101, 966–9. Bös, D. and Peters, W. (1988) ‘ Privatization, Internal Control, and Internal Regulation ’, Journal of Public Economics, 36, 231–58. De Fraja, G. (1993a) ‘ Productive Efficiency in Public and Private Firms ’, Journal of Public Economics, 50, 15–30. De Fraja, G. (1993b) ‘ Unions and Wages in Public and Private Firms: a GameTheoretic Analysis ’, Oxford Economic Papers, 45: 457–69. Färe, R. (1988) Fundamentals of Production Theory, Berlin: Springer. Feldstein, M. S. (1972) ‘ Distributional Equity and the Optimal Structure of Public Prices ’, American Economic Review, 62, 32–6. Grout, P. A. (1988) ‘ Employee Share Ownership and Privatisation: Some Theoretical Issues ’, Economic Journal, 98, Supplement, 97–104. Holler, M. J. (1985) ‘ Strict Proportional Power in Voting Bodies ’, Theory and Decision, 19, 249–58. Laffont, J.-J., and Tirole, J. (1991) ‘ Privatization and Incentives ’, Journal of Law, Economics, and Organization, 7, 84–105. Reprinted in Laffont, J.-J., and Tirole, J. (1993) chapter 17. Laffont, J.-J., and Tirole, J. (1993) A Theory of Incentives in Procurement and Regulation, Cambridge, MA: MIT Press. Pint, E. M. (1991) ‘ Nationalization vs. Regulation of Monopolies: the Effects of Ownership on Efficiency ’, Journal of Public Economics, 44, 31–64. Roth, A. E. (1979) Axiomatic Models of Bargaining (Lecture Notes in Economics and Mathematical Systems, no. 170.), Berlin: Springer. Schmidt, K. M. (1996) ‘ The Costs and Benefits of Privatization – an Incomplete Contracts Approach, Journal of Law, Economics and Organization, 12, 1–24. Shapiro, C., and Willig, R. D. (1990) ‘ Economic Rationales for the Scope of Privatization ’, in E. N. Suleiman, and J. Waterbury (eds.) The Political Economy of Public Sector Reform and Privatisation, Boulder, CO: Westview Press. Stigler, G. J. (1976) ‘ The Xistence of X-Efficiency ’, American Economic Review, 66, 213–16.

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Vickers, J. and Yarrow, G. (1988) Privatization: An Economic Analysis, Cambridge, MA: MIT Press. Vogelsang, I. (1988) ‘ Deregulation and Privatization in Germany ’, Journal of Public Policy, 8, 195–212.

4

The privatisation experiment in Austria Karl Aiginger

THE SPECIFIC EXPERIMENT AND ITS BACKGROUND 1 The term ‘privatisation’ can refer to three broad types of policy: first, asset transfer from the public to the private sector, generally through sale; second, deregulation or liberalisation of statutory monopolies (with or without the sale of assets), with particular emphasis on the removal of entry restrictions; and finally, franchising or contracting out the provision of marketable goods and services to private sector firms.2 We could add corporatisation as a fourth method of privatisation; this is transferring the supply of goods and services from the governmental sector to a separate company according to corporate law, while the government remains the owner.3 And we can label activities to promote efficiency and competition within the government as a fifth mode of privatisation. The motives for privatisation fall in general into one or more of the following categories: financial motives of the seller (gaining revenues or balancing losses), increase of productive efficiency (reducing average costs), and the pursuit of allocative efficiency (increasing consumer surplus). It is well known that the first goal can be achieved only in combination with an increase in the second, because otherwise the selling price would equal forgone future dividends. We can observe in Austria examples of all these policy types and motives. The single largest cohesive experiment ever performed, however, was the privatisation of the former nationalised industry in the 1990s. Up to the late 1970s, publically owned manufacturing firms (‘Verstaatlichte’) together with firms belonging to nationalised banks accounted for 25 per cent of Austria’s manufacturing sector.4 In the 1990s, the majority of all large industrial firms was sold in a specific attempt to realise the first type of privatisation (transfer of ownership). The motive was primarily financial, namely the attempt to limit the financial losses, which were remunerated by the public budget. The method of privatisation had specific, interesting features, which were different from the strategies applied in other sectors in Austria and in other countries. The paper is structured as follows: in the next section we describe the extent and background of public involvement in Austria’s economy. Then we report on the successful privatisation experiment in the nationalised industry during the 1990s. In contrast, we also report on the decade long struggle to privatise a

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large bank, which received worldwide attention, and stress the differences between the two strategies. Finally we report on the lag in reforms in Austria as far as the second type of privatisation (the liberalisation of sectors with natural monopolies) is concerned. THE HISTORY AND STRUCTURE OF PUBLIC INTERFERENCE The public sector has traditionally played a strong role in the Austrian economy, as well as in issues of education, culture and law. One reason for this may be the positive and progressive impact of the enlightened monarchy in the nineteenth century (‘aufgeklärte Monarchie’), which at this time led to the development of a rather efficient bureaucracy in Austria. On the other hand, Austria did not produce a large stratum of innovative and dynamic entrepreneurs during the second half of the nineteenth century, but in contrast, experienced a lacklustre phase of liberalism. More recent roots the high level of government interference involve the wide-ranging bureaucratic structures of the former Austro-Hungarian Empire that were concentrated within the small Austrian Republic following the First World War, and the economy stagnating between the two wars. After 1945, Austria needed and engineered a strong government in the form of a stable ‘grand coalition’ uniting the conservative and socialist parties, and – parallel to the two blocs – highly centralised ‘social partners’. Both institutions helped to counterbalance economic backwardness, helped to regain Austrian sovereignty, and protected the property of former German firms from the grip of the Allied Powers, during Austria’s period of limited sovereignty, from 1945 to 1955. There are estimates that near the end of the 1970s, 25 per cent of the gross national product was produced by publicly owned firms.5 The lack of large private companies and a very underdeveloped capital market characterised the other side of the coin. All the major banks were owned by the government, specifically the two largest, the Creditanstalt and the Länderbank.6 These banks had considerable stakes in big manufacturing and construction firms. Electricity, the post and telecommunications, broadcasting and large parts of the transportation sector (highways and railways) were owned by central or local governments. The share of value added provided by the government bureaucracy (as measured by the payroll of the civil servants) amounted to about 20 per cent. While public ownership in infrastructure had long been a common feature of European economies, maintaining a large share of public ownership in manufacturing up to the 1990s was, it seems, peculiar to Austria among Western market economies.7 The larger part of the nationalised sector – specifically firms doing business in mining, oil, chemicals, steel, and aluminum – was nationalised in 1946. Socialists had, to some extent, favored nationalisation for ideological reasons. The People’s Party supported nationalisation, in part because no potential Austrian owners were available, and partly because nationalisation reduced the

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grip of the Allies on former German firms. German ownership existed in Austria in 1945, since some of the larger firms were founded by the Nazi regime to help supply their war machine. Other firms were expropriated during the Nazi period. In sectors in which natural monopolies traditionally were supposed to exist, or in which the possession of a central facility enabled one large firm to dominate the national markets, it is well known that there are two alternative methods of dealing with market failure. Continental Europe, as well as the UK and Australia, usually established public ownership, while the US chose to regulate private firms. Instead of choosing between these two options, Austria installed a double grip: ownership plus a regulatory process embedded in the bureaucracy of a ministry (also allowing the trade union and employers’ organisations to play supporting roles). This tactic led to a predominance of political over economic goals. In the first stage, this governance structure implied a rapid rebuilding and expansion of capacity, which proved extremely important in Austria’s recovery process. Later on, the selection of managers not only according to their ability, but according to their political orientation became the norm. Initially prices were fixed with the goal of sheltering low income consumers from unaffordable expenses; later on, prices were set with an eye on the next election date. Many of the well-known inefficiencies of cost-plus regulation became apparent; investment decisions were made according to regional demands and political lobbying, increasing capacity became a more important goal than innovation and service orientation, regulators were to some extent captured by the monopolies. These judgements are, of course being made with the benefit of historical hindsight. It has to be stressed that this negative assessment evolved only after the system had operated successfully for three or four decades. The first twenty years after the war was a period of remarkable recovery in Austria. The efficient infrastructure provided by the national champions, as well as the inexpensive and high-quality products produced by the state-owned basic goods industry were two pillars of that process. Equally important were the low prices for heating and transportation, which helped Austrians with lower incomes to catch up with the middle class. But, as the system continued over decades, the potential increase in the productive efficiency of large firms, and their Schumpeterian potential for innovation, were more than outweighed by Leibenstein’s ‘x-inefficiency’ and allocative inefficiencies. Rent-seeking managers, firms and political parties decreased the incentive to equate resources with demands (leading to allocative inefficiencies), while cost-plus regulation inhibited the search for low-cost technologies and innovation and promoted organisational slack. SOME INTERMEDIATE STEPS TOWARDS REFORM We should mention that several attempts to reduce public interference were made. As far as privatisation is concerned, there was a limited wave of privatisation in the late 1950s. Several firms, located in eastern Austria, had been German-owned, and later managed by the Russians during the occupation period. In the late 1950s, the

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need for restructuring was unavoidable. Some firms were sold to private owners, and some were privatised by a stock offering, specifically targeted at employees and middle-income investors (‘Volksaktie’). Minority shares in the two large nationalised banks (Creditanstalt and Länderbank) were also offered to the public, although the government retained the voting rights. This experiment is considered today to have been moderately successful. No broad capital market existed in Austria and there was no popular, widespread attitude favouring investment in stocks. Only a limited number of small-income investors had the patience to wait for stock prices to rise, so that the lion’s share of the broadly distributed shares was, in a short period, acquired by large or institutional buyers. Many examples exist of cases in which reforms were implemented in an attempt to insulate the daily management of agencies or firms from direct bureaucratic grip, through the formation of quasi independent agencies or independent companies under corporate law (corporatisation). In this form of restructuring, the government is still the owner, deciding in principle upon the goals, strategies and activities of the firm, selecting and monitoring the management. However, decisions regarding daily operations, financial details, and personnel are made at the level of the firm and operation is according to the rules of the private sector. The minister cannot give direct orders (Weisungsrecht) and the employees have no lifelong job guarantee. Examples of this type of ‘privatisation’ are available at all government levels and involving a huge diversity of legal and operational constructs. At its very beginning, the Austrian Central Bank (OeNB) was established as a quasi public agency with majority ownership by the central government, but free from any direct state interference in monetary affairs. Here we see that it is even legally possible to transfer an inherent public responsibility (hoheitsrechtliche Aufgabe) to an independent company. Another early example is the Austrian Broadcasting Company (ORF), which was transferred to a separate agency in the late 1960s. The Austrian Railways were organised as a separate company in 1993; the post and telecom company in 1996. Several funds for industrial support (ERP, Buerges, FFF) were organised as companies at arm’s length, as was the labour service organisation in 1994. Air traffic control was corporatised in the same year. The 1980s was associated with a new wave of privatisation, in the sense of ownership transfer. The motives were mixed. Efficiency was among them. The People’s Party joined the government and supported privatisation as a political goal, but the potential of the revenues for reducing the federal budget deficit was the driving force. In the majority of cases, ownership changed from one public agent to another. The largest single action was the transfer of the Hauptmünzamt (the central mint) from direct ownership by the central government to the Austrian Central Bank (OeNB) in 1989. The second largest was the privatisation of 49 per cent of the electrical utilities company, a state-owned monopoly,8 and the sale of specific producers of electricity in 1987. The largest portion of the shares was bought by other public companies or local governments; only some of the shares were purchased by the broad public. The state travel agency was sold to a private investor in 1990; state-owned residential flats were sold to their tenants; and minority

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shares in the Austrian Airlines (AUA) were purchased by the public and other airlines. State ownership shares in the two largest banks were reduced in 1987 and 1989. All in all, the volume of ‘privatisation’ in the 1980s may have amounted to ASch 30bn, but two-thirds constituted a restructuring from one public owner to another and therefore was not true privatisation. The main objective was to reduce the federal deficit, a secondary issue was the increasingly fashionable idea that efficiency and innovation would be promoted by private ownership.9 HOW TO PRIVATISE FIRMS: SELLING THE MAJORITY OF FIVE LARGE INDUSTRIAL FIRMS The governing structure of the public firms in manufacturing has changed several times over the last four decades.10 Sometimes the firms were directly governed by a ministry, sometimes separate agencies were installed with limited freedom in strategic and operational decisions. In the early 1970s a stock company (ÖIG, then ÖIAG) was created as a holding company for individual firms; 100 per cent of the shares remained in government hands. Different steering methods were tested within the conglomerate of firms; sometimes the holding company was designed as a loose financial holding. Later, it was transformed into a holding according to Austrian business law, which implied that it could implement strategic goals and extract dividend payments from the individual firms and reshuffle them between industries. At the beginning of the 1970s, all the firms within an industry were integrated into a branch holding: the big steel companies and those in the non-ferrous metals industry were merged. A planned oil/chemical merger was prevented by the firms and regional lobbies, though the law also called for this merger (‘Branchenzusammenführung’). Following the large losses suffered by the firms during the 1980s – centred around the steel company and its unsuccessful diversification into, for example, mining and oil speculation – a new step towards reform 11 changed the rules of management rather dramatically in 1987. One specific feature was the increased independence of the nationalised firms from the government: the choice of management was de-politicised, a large subsidy (ASch 33bn) was injected to stop losses and facilitate active strategies. The government announced that this was the last injection of government money that could be expected; any further losses would have to be covered by privatisation. The leverage of the holding organisation over individual subholdings and firms was increased by defining a newly created holding company, Austrian Industries (AI), under Austrian corporate law. The vision was to form a large, professional, Austrian, multiindustry conglomerate, with plans to go public within three to five years. Positive restructuring took place during the following years. The quality of decision-making processes and management was upgraded and the firms invested in active internationalisation. Minority stakes in the oil company were sold in 1987 and 1989, but afterwards, privatisation via stock offerings in individual firms was forbidden by the holding organisation, which eventually wanted to place its own shares. A bond option as a means of going public was

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issued in 1990, offering a preferential swap into stocks in five years time. However, the attempt to restructure the firms failed. One reason was the unfriendly business climate in the steel industry at this time, another was a mismanaged internationalisation campaign by the large aluminum company (AMAG). This resulted in a loss of ASch 12bn in 1993. In addition to these unlucky events, the conglomerate proved to be too large and the interests of the firms too different. In this situation the strategic interference and control potential of the holding company was, in various cases, simultaneously too strong and too weak. In the globalising world economy, the time for large diversified conglomerates had passed. Competitors had opted for cost reduction, leanness, flexibility, and flattened hierarchies. The final stage of Austrian nationalised industry and the privatisation experience started in 1993. The old holding structure was dissolved.12 A new capitalisation of ASch 7.5bn was provided and combined with a binding demand to sell all the majority stakes. The new holding organisation (ÖIAG) was explicitly stated in the law as being not a holding company according to Austrian corporate law (Konzerngesetz). It could give no orders to its subsidiaries, except those which were necessary for the promotion of the privatisation process. For some of the firms, explicit deadlines for privatisation were set (e.g. 51 per cent of the technology group should be privatised by June 1994), while for others, the method of privatisation was indicated (the steel company should be offered to the public). The law used the term ‘should’, which meant that the legislation stopped short of enforcing the time and method of privatisation. Instead, an indicative guide was created which did not have to be followed if there were strong arguments against it, but otherwise the expectation was that it would be followed. The law declared that the goal of privatisation – and therefore the criteria for choosing between alternative offers and methods – was the amount of revenue gained by the seller. But the law added that the selling agency also had to ‘to consider that Austrian manufacturing firms and the value added in Austria should be maintained, if economically feasible’. This clause had to be realised and was made operational in the so-called ‘privatisation concepts’, which were to be developed by the new holding organisation and approved by the owner (the central government). In these ‘concepts’, the detailed time schedule and method of privatisation, as well as the restructuring intentions, were fixed by the ÖIAG management, and approved by its supervisory board and finally the new owner. The character of the privatisation concept can be assessed as equivalent to a strategic plan, which is based on targets set down in the law but which makes them more concrete. An ‘Austrian clause’ was made operational by establishing a ‘privatisation checklist’. This included an assessment of the long-term business plans of the potential buyers regarding investment, employment, research activities and the location of headquarters; the probability that the firms would continue to exist or even be upgraded; the role of the Austrian firms as a centre of competence; and the consequences for Austrian suppliers and consumers. The final purpose of the checklist was to

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assess whether the buyer would strip the firm, eliminate an unwanted competitor, use the acquired firm as a low-cost supplier, or whether the bidder had a strategic interest in a quality partner with own core competencies. The checklist did not contain a preference for the nationality of the buyer, as such. By mid-1997 the majority of all of the five large holding organisations had been privatised. In each case a different method, speed or process had been applied and in all cases the headquarters remained in Austria. The oil and gas company, OMV, found a strategic partner in IPIC, a company in Abu Dabi. Today, the holding organisation owns a 35 per cent share of OMV, which is syndicated with IPIC, so as to guarantee the joint strategic dominance of these two partners. The remaining shares were offered to the public. The attempt to win other Austrian energy groups as partners failed, due a to competitive attitude and personal jealousies. IPIC was chosen because it guaranteed a long-term strategic interest, the company wanted to integrate forward and to diversify geographical interests. Finally, it is not linked to one of the major multinational oil companies. The potential interests of the large multinational oil companies did not fit into the privatisation strategy chosen. There was a fear that the Austrian firm would be acquired by one of the large multinational oil companies, in order to eliminate an independent competitor and to downsize it to being a regional network of gas stations. Further attempts to decrease the shares held of the holding organisation are to be expected, but are limited by the necessity to find a reliable partner acceptable to the syndicate. The Austrian Technology group, VA-Tech, is a success story. It started as a collection of several small engineering firms in the energy and environmental industry, to which the engineering divisions of the largest steel firms were added. Now VA-Tech is a large international engineering conglomerate with subsidiaries all over the world. Specifically, the firm has a lead in technologies for the reduction of production costs in the steel industry (KVA technology). Fifty-one per cent of the shares of VA-Tech were offered to the public with 20 per cent to be held by VA-Stahl (the largest steel firm) and 24 per cent remaining with the holding organisation. Out of the 51 per cent sold, a slight majority is held by international investors (most of them are very small shares held by investment and pension funds, a 5 per cent share was bought by General Electric), 43 per cent of the shares sold were bought by Austrian investors. Originally, 27,000 Austrian investors bought stocks, although more than half of them sold their shares after one year (Goldmann, 1996). The privatisation of the two steel firms was performed via the stock market. The VA-Stahl (which concentrates on flat steel and basic products in the long steel sector) was sold in 1995. The holding organisation kept 38.8 per cent, but plans to sell more shares later. The VA-Tech has a considerable cross ownership, so that majority ownership by Austrians is well established. In addition, out of the publicly offered stocks, 56.5 per cent were bought by Austrian investors. Since VA-Stahl has traditionally been one of the largest

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and best-known Austrian firms, the ownership of this firm is a sensitive issue in the country. During the 1950s, VA-Stahl developed the path-breaking LD steel technology and today concentrates on high-quality products for the car industry. BUAG is a company which produces special steel products, and which has leading positions in high-quality tools. It is the result of a merger of Austrian and Swedish firms and is under Austrian management. Its international qualities, with respect to location, employees and sales, made its sale to the international public possible and advisable. This was done in two offerings, in 1995 and 1996. The ÖIAG currently retains a 25 per cent stake. AMAG is Austria’s largest aluminum firm and made heavy losses in 1992 stemming from an unsuccessful internationalisation strategy. Too many firms, some of them ailing and some of them at extremely high prices, were purchased. No middle management existed capable of keeping track of the reorganisation and AMAG’s assets were too small for a firm in a risky and volatile field. Earlier, a strategic internationalisation programme, orientated towards the future, had been delayed by long discussion as to whether the firm’s outdated primary aluminum capacity should be rebuilt with the help of a large public subsidy. Political leaders had specifically promised the subsidy at election time and the management had concentrated on lobbying for low energy prices to make primary aluminum production competitive. But competitiveness is a tough problem in a high-income country which lacks the necessary raw materials and has expensive transportation. The firm finally had to be restructured before it could be sold. AMAG was sold in 1996 at a negative price to a joint venture consisting of the management and a large, private Austrian company (Constantia). Many smaller firms have also been sold, some via management buyouts, some to foreign firms with larger stakes in the industry, and some to Austrian entrepreneurs. No ownership form has been accepted as ideal on ideological grounds. Instead, the privatisation checklist is always used to add nonfinancial parameters when choosing between offers. The privatisation experience is now considered to have been successful. The revenues achieved of ASch 23bn, have been much higher than anticipated. The holding organisation still owns a strategic investment in four of the five large firms privatised, which is valued by the market at ASch 28bn, and the headquarters of the privatised firms remain in Austria. The sales of the five firms are rising and the stock market evaluation has outperformed the general index. Employment has declined in the firms, but not much faster than in other parts of manufacturing.13 To sum up the results, we can recognise the following specific features of the privatisation process of manufacturing in Austria: • Privatisation was rationalised by the experience that neither variant of public ownership tried could control a large and diversified conglomerate. The

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only way to stop pouring money into the firms was to subject the firms to private ownership and stock market control. • The former holding company, which initially was a financial holding and then a holding under corporate law exerting a strategic influence on the individual firms, was transformed into a privatisation agency with the objective of relinquishing majority stakes. For that purpose, but only for that purpose, it could intervene in the firms, with the stick being the necessity to pay back old loans and the carrot being an incentive contract for the management with a 50 per cent bonus if privatisation revenues exceeded planned revenues. To a great extent, the firms were restructured before privatisation, which helped considerably to increase the revenues from privatisation. • The maximisation of revenue was the main criterion for choosing the time and type of privatisation, since only high revenues would allow the paying back of more of the old debt. The time schedule in the privatisation law was indicative and could be changed if the holding organisation demonstrated that postponement for restructuring would increase the revenues. • A second criterion for choosing among potential buyers was continuing operation of the privatised firms and the value added created by them in Austria. This criterion nearly equates to a national preference clause. But the careful use of words and the nature of the objective allowed the law to pass the scrutiny of the EU competition agency. Preferring a buyer who can plausibly contend that he will continue the production in the same country and use the plants as the headquarters for international expansion is not unreasonable. The alternative, by which the plants would be shut down since they are one of many in an industry faced with overcapacity with the headquarters of the acquiring firm located in a faraway country which is itself coping with excess capacity, would in any case probably have been shunned by potential private investors. The privatisation checklist and the privatisation strategies adopted definitely pre-selected the potential buyers. In the oil industry, it was quite clear that no large multinational firm would be accepted. In the aluminum industry, the offers made by three buyers were very close as far as revenue alone was concerned. In the case of BUAG and VA-Stahl, large share purchasing by a competitor would probably not have been accepted. Privatisation succeeded insofar as all five companies were sold and the strategic ownership of all of them remains in Austria. This was achieved in a nondiscriminatory fashion, no single question of fairness was raised in Brussels by a competitor. The success of this process induced the Austrian government to use the holding organisation, and respectively its management team, in further privatisation plans. The holding organisation was asked to privatise the Austrian Salt Company (Salinen AG) and the Austrian Tobacco Industry. The

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management team chairs the Austrian Post and Telekom Holding (PTBG) which has two goals, to repay old debts and to make the operating company (PTA) fit for competition and privatisation in 1999. HOW NOT TO PRIVATISE A BANK In contrast to the successful privatisation of the manufacturing firms, the privatisation of the two largest banks has become a long-lasting nightmare. Specifically, the Austrian government has been planning to give up its majority stake in the Creditanstalt (CA) ever since 1987. The type of privatisation selected was to find a buyer who would purchase a stock package, which would give strategic control of the bank. The process of selling was directly managed by the Minister of Finance. Offers had to be made to him; he assessed the adequacy of each offer. An agreement between the two parties of the ruling coalition declared that privatisation was a sensitive issue in which the Minister of Finance had to consult the Minister of Economics. There was no definite agreement as to what objectives the sale should follow – for example, whether the maximisation of revenues was the overriding goal or whether it was a necessary or warranted condition that the purchaser be of Austrian nationality. At least implicitly, the latter was the case. In addition there was an understanding that the CA had always been a bank within the sphere of the conservative party, so that buyers from that party had priority. Several offers came in over time. A serious offer was made by a large Swiss bank, but it was publicly rebuffed by the Austrian People’s Party, and therefore withdrawn (in 1993). Another offer came from a group representing an agroindustrial bank, which was rejected by the Minister of Finance due to its imprecision. For a long time, the favourite bidder was a consortium which included a conservative bank, an Italian and a German group, as well as several Austrian manufacturing firms. Their offer was accepted with varying degrees of enthusiasm on the right and the left of the government, but the financial offer was rather low and the decision-making structure within the consortium remained unclear. Finally, a public offer was issued in the London Financial Times. Although it did not mention a preference for Austrian offers, a few days later the head of the Austrian government declared that Austrian buyers would have priority. The result was – apart from angry comments in the international press – that the offer made by the Austro-Italian-German consortium remained the sole bid. This was discussed for many months and then the Minister of Finance decided that it was too low. He issued another, final tender, stating that the size of the offer, its strategic effect on reform in the Austrian financial sector, and unspecified Austrian interests would be the decisive criteria for acceptance. Three offers were received: one made by the consortium; one by a private Austrian citizen who had sold Austria’s largest retail company some months earlier; and a surprise offer by Bank Austria, the CA’s main competitor. Through a merger some years earlier, Bank Austria had become Austria’s largest bank. Its ownership structure is difficult to explain, but

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essentially its boards are appointed by the local Viennese government. The last offer was by far the one offering the largest financial contribution. Now a political quarrel began between the coalition partners. The socialist party had for a decade implicitly accepted that the CA should remain within the conservative sphere of influence, but this assumption was never expressed explicitly and was, of course, not one of the conditions in the tender. Officially, the People’s Party claimed that the offer should be rejected because Bank Austria had, itself, received public support to prevent bankruptcy 12 years earlier. Furthermore, Bank Austria had asked for exemption from the obligation to meet the compulsory banking standards for its own assets, as recently required by EU law. It was also claimed that this offer would not result in a privatisation, since the majority share of Bank Austria belonged (in a rather indirect way) to the Viennese local government. Experts also questioned the synergies between the two banks which would be derived from a merger; others decried the loss of options for large firms, especially firms wanting to issue stocks, since together the two banks made up 80 to 90 per cent of newly issued equity in Austria. On the positive side, many observers agreed that the merger of the two banks would create a large player in the European finance industry and one highly competent in Central and Eastern Europe. Austrian ownership of CA would result, while the value to the restructuring of Austria’s overcrowded financial sector was considered to be mixed, although judgements were leaning towards the positive side. The Minister of Finance permitted the bidding to enter a second round. The Bank Austria and the consortium increased their bids, but the relative ranking of the bids remained unchanged. Before finally awarding the CA to the Bank Austria, the coalition partners reached several side agreements, which to some degree will soften the links between Bank Austria and the Viennese local government and which will temporarily shelter the CA from radical stripping and downsizing. After ten years of irresolution, the story has ended with a financial success for the Minister of Finance and a strategic triumph for Bank Austria over an indecisive consortium. The EU Commission agreed the merger with minor amendments. What is to be learned from this story? The main conclusion is that the Minister of Finance cannot privatise a firm by himself. His attention to the problem of privatisation fluctuated over time. When budgetary problems or Maastricht criteria became urgent, the attention towards privatisation altered. In addition, he is a member of a political party and as such is confronted with a great amount of pressure from his own party and from his coalition partner. The task of the owner is to specify in advance the goals, a rough time frame, and maybe the type of privatisation. Then, he needs to delegate the process to an agency or company, which can make decisions professionally, according to the rules stated. The agency should have some temporary leverage over the firm to be privatised, the minimum being a close cooperation with the firm’s supervisory board. Several times, the management of the CA actively interfered to attract or thwart offers from potential bidders. It preferred a public placement

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because this type of privatisation would have permitted the largest manoeuvring capacity for the management and, of course, their continuation in office. Finally, the incentives for the privatisation agency should be such that payment directly depends on the fulfilment of the criteria for privatisation as declared by the owner. All these rules were fulfilled in the privatisation of the nationalised manufacturing firms, while none was evident in the privatisation of the CA.14 LAGGING DEREGULATION IN AUSTRIA The system of regulating natural monopolies has already been described as a ‘double grip’, consisting of public ownership and a rather strict regulatory policy for entry, prices and technical rules (the precise system varies for electricity, telecommunications, railways, and gas). Pressure to change the system has originated from the rules issued by the European Community (see chapter 2), but deregulation or liberalising entry is lagging in all sectors. Only a few steps were and are being taken to meet the requirements of the new rules and to facilitate the entry of new competitors. Posts and telecommunications is still in public ownership in a traditional PTO. The creation of a separate company and the necessity to make crosssubsidisations public through an explicit cost statement for the organisation’s divisions, ‘yellow post’, buses and telecommunications, were delayed up to 1996. The first non-public telephone supplier was permitted in the mobile phone business late in 1996, well after the PTO was allowed to start its own mobile phone line. Five decades of regulation and government-backed policy to prevent entry have resulted in high prices for telephone lines, data transmission and the lack of a service sector and content providers. Specifically, in Austria the variable costs of telephoning are high, long distance and international calls are expensive, while the fixed charges for installing new capacity are somewhat lower. The PTO was separated from direct government control in 1996. Plans to privatise the operating company, starting in 1999, were forced upon the unwilling company on the initiative of the People’s Party in a coalition agreement. The original plan to nominate retired senior members of the PTO to the supervisory board (and the holding company PTBG) were luckily given up at the last minute. Retired managers from the old public system would have effectively colluded with the new management and its employees to prevent the privatisation efforts of the owners. Electricity can be imported and exported only by the nationalised company ‘Verbundgesellschaft’ (Verbund). In addition it is the Verbund that has the general responsibility of providing as much capacity as needed. Electricity is, however, generated by several layers of independent units, some owned by regional governments, some by large cities, while a very small amount is produced by private generators or by industrial firms. The Verbund owns ‘Sondergesellschaften’ which help buffer demand, if other plants are not able to provide enough electricity. The system has resulted in large reserve capacity.

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The regulation has been a mixture of cost-plus type and restrictions on the return on capital, both are known to lead to low cost-efficiency and to overinvestment. The electricity firms pay by far the highest per capita wages in Austria, and most clashes with environmentalists originate in unreasonable capacity enlargements. By law, the large firms must be public (2. Verstaatlichungsgesetz, 1947), although it is expected that this law will soon be changed. There is no agreed strategy as to how the future of this industry will look. A unanimous opinion is that the relations between the various layers should be restructured so that the lowest-cost producer will be the supplier. There is a suggestion that the losses involved in the possible contracting of large firms with foreign suppliers should be spread (the so-called ‘cooperative solution’) among Austrian firms, but this does not comply with EU law. A strong Austrian company able to compete internationally would be an obvious option, but it is a very unlikely one. It looks as if privatisation will come very late and only a few companies will retain positions as important players in the liberalised market. The privatisation of the railways is not on the agenda in Austria, though the central railway was separated from direct government influence in 1994. Its efficiency and service quality are rated as disappointing by both external analysts and business firms. Several steps towards reform have been attempted and have resulted in marginal changes for the better, but the closest the railway has come to privatisation has been an attempt to allow local government to influence the closure of regional services. If the local government pays and declares its specific interest, it can influence the schedule and extend the service of local lines originally planned to be closed. Some minor examples exist in which a local line has been privatised. One feature common to the PTO, electrical utilities and the railways (the same holds true for the publicly owned banks) is that, historically, the pursuit of ownership interests and regulation has not been separated. The ownership rights of the PTO and of the state railway are both allocated to the Ministry of Transportation; formerly, this ministry was also the regulator. The ownership of the electrical utilities is monitored by the Ministry of Economics, as is their regulation. The ownership of the banks is monitored by the Ministry of Finance, as is their regulation (Bankaufsicht). This decision was made with respect to social planning. If there is a social optimum which can best be achieved by a single firm (due to economies of scale or other form of ‘market failure’), the firm can be controlled and regulated together and the interests of managers, owners and consumers are presumed not to differ from one another appreciably. It is historically true that interests in postwar Austria – given its destroyed capacity in 1945 – were not too different: capacity had to be increased as quickly as possible and infrastructure had to be provided as cheaply as possible. The first conflict of interest arose when the producers preferred a higher price, while consumers appreciated a lower price. This conflict was managed, in part, outside of the regulatory system with the help of the social partnership system. The system worked well for a long time. The quantity and quality of such

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basic services as electricity, railways and the telephone matched Western European standards as early as the 1960s, which is a great achievement. But eventually, the negative effects of low competition and innovation outweighed the advantages. Over time, the interests of managers and society became more complex. Managers began to prefer excess capacity (to be on the safe side, or to utilise construction units, or to maximise price) and environmental issues evolved. The system developed many aspects of ‘regulatory capture theory’; the regulators started defending the firms when they were accused of installing excess capacity, raising prices and creating environmental problems. The regulators were appointed to the supervisory boards of the firms, as if there was no conflict between the objectives of the firms and the tasks of the regulators. It is currently being discussed whether regulatory tasks should be given to a separate agency. This now appears feasible for the telecommunications sector where privatisation is planned, but not for railways and electricity where no privatisation programme yet exists. Contracting out, tendering licences and incentives Contracting out and the tendering of services and licences are underdeveloped in Austria. The delegation of tasks performed within the state sector to agencies or firms under company law has been applied for the railways, telecommunications and broadcasting and in many other cases. It has become even more popular recently because of the commitment to fulfil the Maastricht budgetary criteria, which favours off-budget practices. It is beyond the scope of this chapter to provide an overview of the success and failures of these initiatives. The general view (as expressed for example in Gantner, 1996) is that off-budget companies have not been especially efficient. Arguably, this follows from an insufficient monitoring process. In only rare cases are the objectives of these firms stated precisely and many of the agencies try to follow certain non-economic goals, including universal service obligations or additional social and political responsibilities. The criteria and extent of these non-economic objectives are not specified and often the government erroneously believes that the ownership responsibility ends with the separation of bureaucracy and management. The firms become agencies without effective principals; safe in the knowledge that they can return to the state for financial help. CONCLUSION Privatisation has recently become an important topic in Austria. Privatisation revenues are now large compared to a number of other countries in the EU and compared to the size of the Austrian stock market (see Table 4.1). Traditionally, there has been a high degree of direct interference by the government and centrally organised social partners in Austria’s economic sector. Public

84 Karl Aiginger Table 4.1 Privatisation revenues in EU countries

Source: Financial Market Trends, 66, Paris, March 1997 Notes: aInformation on trade sales not available; b1993; c1990, 1993; d1991, 1993; e 1991–3; f1990, 1992, 1993; g1992, 1993; h1996, 1997; i1995, 1996

ownership has been larger than in other Western countries; specifically, up to one-fifth of Austria’s manufacturing firms were nationalised. The nationalised sector of manufacturing developed well up to the 1970s; but afterwards it stumbled from one crisis to the next. Between 1993 and 1996 a majority of all the large firms were sold after restructuring. The experience is considered a success since the revenues were high, the headquarters of the firms remained in Austria and the privatised firms now outperform the stock market average. The privatisation was delegated to a former holding company, which was transferred into a privatisation agency with clear incentives to privatise. The privatisation schedule and mode were flexible; a specific supplementary criterion demanded that offers where headquarters and value added remained in Austria should be preferred, if economically feasible. The nationality of the owner, however, did not play a direct role. In contrast to this successful privatisation of manufacturing, the attempt to privatise one of Austria’s largest banks gained worldwide attention as a never ending story. The difference between privatisation in the manufacturing sector and privatisation in the banking sector was that the first followed explicit rules (guidelines for the objective, the schedule, and the form of the privatisation) and was delegated to a privatisation agent with the power to restructure firms. In contrast, the latter remained under direct ministerial control up to the very last stage of the privatisation process, the rules were changed during the process and never made explicit up to a very late stage, and choices were limited by political considerations.

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Finally, Austria continues to lag in liberalising infrastructure or public utility markets. So far only the telecommunications business is clearly slated for privatisation. NOTES 1 The author thanks Wilhemine Goldmann, Gerhard Jersabek, Claudia Schmid and Gunther Tichy for discussing an earlier version of this paper, Dagmar Guttmann for calculations, Gerhard Schwarz for correcting the manuscript. 2 See Domberger and Pigott 1994, p. 48. 3 German literature sometimes distinguishes between ‘materieller Privatisierung’, where the government stops providing a service, and ‘formeller Privatisierung’, where government continues to provide a service, but makes use of a company structure while remaining owner of this company. A third type is ‘contracting out’, here the government guarantees the provision of the service, but uses the means of a contract with a private firm (see Fuest 1997). 4 The exact shares differed over time and according to whether investment, value added, employment or exports were used as indicators for measuring public ownership. Aiginger, 1985, reported that 25 per cent of value added in manufacturing was produced by publicly owned firms, 14.5 per cent of total value added in manufacturing was produced in firms with public ownership, as determined by the nationalisation law of 1946, 5.4 per cent was accounted for by firms owned indirectly via banks with public majorities. At its climax 125,000 persons were employed in the first group, and 50,000 in the second. 5 Aiginger (1985, p. 41). The figure was 25 per cent for the total economy, excluding public consumption in the numerator, but using GNP in the denominator. If we add public consumption the share of public ownership increases to 37 per cent. 6 Later the Länderbank merged with the Zentralsparkasse (a savings bank with strong stakes in Vienna’s city government) to become the largest bank, called Bank Austria. 7 Comparing ownership structures across countries is a difficult empirical issue. However, the share of public ownership in manufacturing in Austria was definitely higher than in Germany or Sweden. Comparing the share of public firms with France, the United Kingdom and Finland does not produce a clear picture. Studies cited in Aiginger (1985) report approximately equal shares of about of 11–13 per cent of employees for France, the United Kingdom, Italy and Austria. On the other hand public ownership in all its different forms, including bank subsidiaries, state monopolies and cooperative associations amounted to 19 per cent according to Austrian statistics. 8 Verbundgesellschaft, 1988. This company has the import and export monopoly, owns the largest share of the distribution system and guarantees the overall supply of electricity. 9 For a summary of attempts at privatisation between 1987–90, see Siegl (1990). The figures cited do not include some specific attempts at privatisation in the nationalised industry sector. During this period, a minority share in an oil company was sold to the public and the ownership of a pharmaceutical firm and an electrical firm was transferred to foreign investors. But at the same time, the nationalised firms purchased just as many firms, in an attempt to restructure and to internationalise, so that we consider this phase as one of restructuring, but not of (net) privatisation. The OECD (1997) calculates revenues for privatisation in Austria at US$1.2 bn in 1996 but this includes only privatisation by public offerings, not by trade sales.

86 Karl Aiginger 10 There are several types of public ownership of manufacturing firms in Austria. The largest type is the so called ‘Verstaatlichte Industrie’. This sector is comprised more or less of those firms which were nationalised in 1946 by law (Verstaatlichungsgesetz 1946). The ownership rights were monitored by different ministries and then by different holding or operating companies, called ÖIG, ÖIAG, AI, and finally again ÖIAG. The second most important form is the indirect public ownership of firms, whose shares are held by nationalised banks. The number of firms held by the banks was reduced over time, but as of 1997, the largest European brick company and major Austrian firms in the vehicle and chemical industries, and specifically construction industries were still held by the banks. A third group includes the (former) state monopolies for tobacco and salt; a fourth sector of firms has been organised as cooperatives. 11 ÖIAG Gesetz 1986, ÖIAG Finanzierungsgesetz 1987. 12 ÖIAG Gesetz und ÖIAG Finanzierungsgesetznovelle BGBL 973/1993. The holding company Austrian Industries was merged with ÖIAG and thus disappeared. 13 As of 1996, total sales accounted for ASch 164bn. The four firms employ 48,000 people. 14 In the latest stage, most of the rules were fulfilled. An international consultant guided the last tenders in close collaboration with the bureau of the Minister of Finance.

REFERENCES Aiginger, K. (1985), ‘ Die wirtschaftliche Stellung des Öffentlichen Sektors in Österreich ’, Wirtschaftanalysen – Die Erste, 1, pp. 37–61. Beesley, M. and Littlechild, S. C. (1994) ‘Privatisation: Principles, Problems, and Priorities’, in Bishop et al. (eds), pp. 15–31. Bishop, M., Kay, J. and Mayer, C. (1994) Privatisation and Economic Performance, Oxford: Oxford University Press. Bös, D. (1993) ‘ Privatisation in Europe: A Comparison of Approaches ’, Oxford Review of Economic Policy, 9 (1), pp. 95–111. Boyko, M., Shleifer, A. and Vishny, R. W. (1996) ‘ A Theory of Privatisation ’, Economic Journal, March (106), pp. 309–19. Domberger S. and Piggott, J. (1994) ‘Privatisation Policies and Public Enterprise: A Survey’, in (ed.) Bishop et al. (eds), pp. 32–61. Estrin, S. (1997) State Ownership, Corporate Governance and Privatization, Paris: OECD Conference on State Ownership, Corporate Governance and Privatisation. Fuest, W. (1997) ‘Privatisierung in der Bundesrepublik Deutschland’, Köln: Institut der deutschen Wirtschaft, mimeo. Gantner, M. (1994) Budgetausgliederung-Fluch(t), Manz: oder Segen. Goldmann, W. (1996) ‘ Die Privatisierung der ÖIAG – eine Erfolgsstory ’, Wirtschaftspolitische Blätter, 6, pp. 631–639. Itzlinger, A., Kerschbaumer, R. and Van der Bellen, A. (1989) ‘ Verstaatliche Industrie ’, in H. Abele et al. (eds) Handbuch der österreichischen Wirtschaftspolitik, 3rd edn, Vienna: Manz. Lieberman, I., Nellis, J. and Nestor, S. (eds) (1997) Mass Privatisation: A Comparative Analysis, Washington, DC: World Bank/OECD. Maurer, J. (1990) Privatisierung in Österreich, CA Quarterly III. Nestor, S. (1997) ‘ Institution Building and Mass Privatisation: A Comparative Overview ’, in Lieberman et al. (eds). OECD (1997) ‘ Privatisation: Recent Trends ’, in Financial Market Trends, 66, March, Paris: OECD. OECD–CEET (1996) ‘ Trends and Policies ’, in Privatisation, 3(1). ÖIAG (1996) ‘ Die österreichische Privatisierungsagentur ’, Bank und Börse, 21.

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Parker, D. (1995) Measuring Efficiency Gains from Privatisation, Research Centre for Industrial Strategy, Occasional Paper no. 36, Birmingham: University of Birmingham. Siegl, R. (1990) ‘Austro–Thatchers?’, Die Industrie, 5(12), pp. 20 ff. Wall Street Journal (1995) ‘Creditanstalt: How Not to Privatise a Bank’, 21 September. Zeitschrift für Gemeinwirtschaft (1996) ‘Privatisierung: Ziel oder Instrument?’ (with contributions by Krejci, H., Nowotny, E., Van der Bellen, A., Wojda, F., Becker, E., Hollweger, K., Pühringer, O. and Stadler, G.) Gemeinwirtschaft, 1.

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Privatisation in an industrial policy perspective The case of France Jacques de Bandt

INTRODUCTION This chapter is about privatisation and industrial policy: what do the recent privatisation processes mean, from the standpoint of industrial policy and strategy? This will be analysed using the specific case of France. In the case of the recent privatisations in France, to analyse the situation it is necessary to look first at the opposite nationalisation processes which took place in the early 1980s. Privatisations have to a large extent been influenced by the British example, which occurred only a few years after French nationalisation. France has been following, first from 1986 to 1988, then again since 1993, the general movement towards total or, in a few cases, partial, privatisation of big state enterprises, in both the industrial and the service sectors especially banking and insurance. These two phases correspond to the arrival in the Parliament of a new political majority and of rightist governments (albeit with a leftist Presidency).1 During the same period dramatic changes have affected industrial policies, as concerns the attitudes towards industrial policies and the concrete definition and implementation of industrial policies, and the resources which have been directed to such policies. While industrial policies had been gaining momentum during the 1970s and until the beginning of the 1980s, the nationalisations at the beginning of the 1980s were unable to give a new impetus to this tendency. The emphasis in industrial policy, at least in the formal sense of the term, has been, from 1983 on, progressively reduced, more and more so because of mounting pressures from Brussels. At first glance, it may seem that the privatisation processes have been part of the trend away, since 1983, from industrial policies and towards the full restoration of market principles and mechanisms. While this is likely to be true – privatisation, liberalisation and deregulation have clearly been convergent trends – we have to look deeper into those realities, in order to understand how privatisation has been affecting industrial policies. We need to consider not only the instruments or the resources allocated to industrial policies, but the industrial strategies and policies in general.

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Of course, privatisation can be analysed from different angles and several aspects of the process can be highlighted: the procedures which have been followed, the impact of privatisations on the financial structures of the French capitalist system, the results for the shareholders (in terms of the value of their assets), the use by the government of the revenues from the sale of privatised assets, the consequences in terms of the management, the strategies and the performances of the firms whose status has been changing, and so on. The second phase of privatisation is quite recent, therefore it is still rather difficult to give any detailed evaluation of these privatisations.2 The main emphasis here is on industrial policies: what can be said about the meaning and the role of the recent privatisations from the standpoint of industrial policies? Industrial policies can be understood either in the large sense – in this large sense, what is at stake is the industrial strategy of the country, to the extent of course that such a strategy can be identified – or in the narrow sense of the word – in this narrow sense, we are speaking essentially of the interventions of the state in the functioning of the industrial system. Be it in the large or in the narrow sense, the question is whether the impact of privatisation can be identified. In fact, it is not easy to analyse the specific impacts, for several reasons. The main reason is that all the firms concerned are particular cases, with their own specific history. Even if there are a number of cases, it is difficult to isolate the impact of privatisations from these specific situations and histories. The same can be said of the macro-economic context: while nationalisations took place in the recession of the early 1980s, the first phase of privatisation benefited from the boom of the mid-1980s. By contrast, the second phase was strongly affected by the unforeseen severity of the recession in 1993. The content of the chapter is as follows. The first part is purely descriptive: the objective being to present briefly the main facts as concerns the privatisation processes in France. The second part aims at characterising some of the main aspects of those privatisations. Finally the chapter will analyse, so far as it is possible, the interrelationship between privatisation and industrial policy. THE NATIONALISATIONS OF 1982 At the beginning of the 1980s the French public sector was already quite developed, important nationalisations having taken place just after the Second World War. The mixed economic model (‘economie mixte’) was more or less seen as a built-in characteristic of the French economic system. When the Socialists took power, together with the Communists on the basis of their ‘Programme commun’, in 1981, they shared strong common views on the necessity to nationalise some of the big private groups. There were several reasons for this. The most obvious was ideology: the most leftist parts of the left were still strongly in favour of the socialisation of the means of production.3 Other reasons were related to the necessity to manage collectively the on-going transition crisis following the 1970s oil price increases and economic recession. This meant both rescuing large sections of the productive system which were suffering severely from the crisis – several big firms

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were in bad shape and needed financial aid and restructuring – and strong action and intervention of the state in order to develop new accumulation processes.4 The political outcome was initially uncertain, but was settled at the end of 1981 with a decision of the Constitutional Council, allowing for the effective nationalisation of firms. This became effective at the beginning of 1982. The following firms were subsequently nationalised: • • • • •

Compagnie Générale Electrique: electrical engineering Saint Gobain Pont a Mousson: glass Thompson: electronics Pechiney Ugine Kuhlmann: aluminium Rhone Poulenc: chemicals

The State also took control of • Usinor and Sacilor: steel • CGCT (a subsidiary of ITT): telecommunications and majority stakes in • Matra: electronics and transport • Dassault: aircraft • CII–Honeywell Bull: informatics The importance of the nationalisation process is clearly shown by the following figures. The share of the public sector in total productive activities (in brackets, in total industrial activity excluding energy) in France changed because of the nationalisations of 1981– 2, from 17.2 per cent to 29.4 per cent (from 8.9 per cent to 24.3) in terms of sales, from 11 per cent to 22 per cent (from 6.4 per cent to 18.3 per cent) in terms of employment and, in terms of investments, from 43.5 per cent to 51.9 per cent (from 12.1 per cent to 25.9 per cent). These figures show that, due to these nationalisations, the public sector included around one-quarter of industrial activity as compared with around 10 per cent beforehand. The industrial public sector was essentially made up of big firms: in terms of sales, the public industrial sector included 48.4 per cent of the firms with 2,000 and more employees, 18.2 per cent of firms with between 500 and 2,000 employees, but only 6.1 per cent of firms with less than 500 employees. In 1981 total sales of the industrial public sector amounted to FF 374bn and total debt to FF 142.5bn. A few remarks may be useful at this stage to clarify the position: 1 Nationalisation was considered by many members of the left as an objective in itself. Collective ownership was all that mattered. There was no clear idea about the prospects for nationalisation in an industrial strategy.5 2 Immediately a new political battle raged within the left during part of 1982. The question was how should new nationalised firms be managed: within the framework

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of a strict plan or by very strict decision criteria6 or with complete autonomy? The Prime Minister decided abruptly (in July 1982) that the firms should have complete management autonomy. But somewhat later, it was decided as a compromise, that they would have to negotiate and sign a contrat de plan, i.e. a kind of contractual definition of their strategy and major development decisions. The objective was to try to influence the strategies of the nationalised firms in order to make them converge with national strategies or policies. In practice, the ‘contrat de plan’ remained purely formal. Contrats de plan were signed between the government and the firms in the public sector, but they proved to be without any real influence on the strategies and behaviours of the firms. 3 At the end of 1982 it was explicitly stated that the enterprises of the public sector which were the biggest investors would constitute the driving force of an ambitious industrial policy,7,8 but in practice no real attempt was made to use the public sector in order to define and implement any kind of systematic and ambitious industrial policy.9 There are several reasons for this: the first was the political decision to give the nationalised firms complete management autonomy, which did not seem to leave much room for any industrial policy.10 The second reason was probably a lack of competence within the government in the fields of strategic management and organisation. The third reason was the fact that time was short. Already in March 1983 (with Mr Fabius first as Minister of Industry – then as Prime Minister11) the movement away from industrial policy had set in at government level. While the Ministry of Industry had been increasing its powers during the first phase of nationalisation (1981– 2), immediately after the more traditional balance of power was restored within government to the benefit of the Ministry of Finance. It appeared more and more difficult for the Ministry of Industry to get the necessary information on the economic and financial situation of the firms within the public sector. As a consequence, from 1983 on there was no intervention whatsoever in the strategies and management of public enterprises. There was a sheer absence of any willingness to push forward any kind of industrial strategy in France. 4 One specific aspect of nationalisation should be mentioned, which is quite important. The Secretary of State (J. Le Garrec) in charge of the nationalisation programme had a double mission: to both extend the public sector and democratise it.12 One major objective of the leftist government was to make progress towards some kind of economic democracy with more participation in the management of state enterprises, at least for the workers directly employed. As a consequence – parallel to ambitious reforms in the fields of labour organisation and industrial relations (under the name of ‘Lois Auroux’) – two efforts were made. One consisted in nominating representatives of the employees to the boards of public enterprises. Although the relations of these representatives with management and the trade unions were never totally clear, the system worked quite well, but for a short period only until 1986. The second – in line with the self-management (‘autogestion’) ideology – the strategies of public enterprises were to be discussed and defined on the basis of systematic participation procedures before being formalised in the contrat

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de plan; however, no serious attempts were made in this direction. The participation of employee representatives on the boards was considered sufficient for the time being. While democratisation was clearly seen as an important issue by the left, most prominent members of the socialist party did not really know how to advance it.

THE FIRST WAVE OF PRIVATISATION (1986–8) After the 1986 Parliamentary elections gave a clear majority to the right, one of the priorities of the Chirac government (notwithstanding the opposition of F. Mitterrand who was still President) was privatisation.13 The new government clearly aimed at obtaining additional financial resources in order to reduce the budget deficit and to restructure French capitalism to the advantage of some well-defined financial groups. The following firms were successively privatised: • • • • • • • • • • • • • •

Elf Aquitaine (September 1986): petroleum Saint Gobain (November 1986): glass Paribas (January 1987): financial holding company Sogenal (March 1987): banking Cie du BTP (April 1987): building BIMP (April 1987): banking CCF (May 1987): bank Alcatel–Alsthom (May 1987): telecommunication systems Havas (May 1987): advertising Société Générale (June 1988): bank TF 1 (July 1987): television Suez (October 1987): financial holding company Lagardère Groupe (January 1988): electronics Crédit local de France (November 1988): bank

This represents 14 privatisations – all total except for the partial sales of Elf Aquitaine and Crédit local de France – and achieved within two years. When the left regained power in 1988 the privatisation process came to a stop. President Mitterand imposed his ‘neither privatisation, nor nationalisation’ policy, meaning, of course, that the existing situation had to be kept as it was. The policy came to be called the ‘ni-ni’ policy, for ‘ni’ privatisation and ‘ni’ nationalisation. Only very limited changes were supposed to be allowed, either for international reasons (at least officially) or when no loss of power was implied. In the meantime, the opposition of the socialists to further privatisations had clearly declined, not least because of the budgetary pressures the government faced. Indeed, two partial privatisations took place in the petroleum sector. As a matter of fact, many public enterprises were given the freedom, within the overall framework of the ‘ni-ni’ principle, to change substantially their ownership structure.

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THE SECOND PRIVATISATION WAVE (FROM 1993 ON) In 1993, still under the presidency of Mitterrand, the right again won the parliamentary elections. The new Prime Minister, E. Balladur, immediately launched a new privatisation programme. Subsequently, a new government of Mr Juppé (this time under the Presidency of Mr Chirac) went ahead with further privatisations. Several firms were involved in this more recent phase of privatisation, though some were only partly privatised. The firms include: • • • • • • • • • •

Elf Aquitaine (March 1992 and February 1994): petroleum Total (June 1992): petroleum Rhône Poulenc (January and November 1993): chemicals Crédit local de France (June 1993): bank BNP (October 1993): bank Renault (November 1994 and June 1996): automobile14 Seita (February 1995): tobacco Usinor Sacilor (July 1995): steel Pechiney (May 1995): aluminium AGF (April 1996): insurance.

Some other privatisations are already in the pipeline and there are still several industrial firms (for example, Renault) or services (for example, Crédit Lyonnais or Air France) which can be further privatised. Of course the firms have to be saleable and it may take time before some state firms reach the point where they are sufficiently attractive to investors. It is not clear where the limit to privatisation is in France. The debate on the future of the public utilities (‘services publics’) tends to reveal quite divergent opinions on the desirability of privatising the public utilities, notably France Télécom, Electricité de France and Gaz de France, though a first sale of shares in France Télécom occurred in October 1997. SOME SPECIFIC ASPECTS AND CHARACTERISTICS OF PRIVATISATIONS IN FRANCE The procedures There is not much to discuss about the procedures used in privatisation in France at least for those privatised firms which are sold to the public at large. The procedures used are quite standard. Due to the fact that the state had complete ownership, there was no market valuation of the companies. Auditing firms were therefore asked to value each firm, so as to indicate an upper and a lower price limit for the shares.15 The government then had to decide between those limits, taking account both of the situation on the stock exchange and of the necessity to attract as many individual investors as possible.16 For the public at large, the share price was

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decisive in promoting interest in the sales.17 It should be noted that priority was given to the employees, in the sense of reserving quantities of shares for them to purchase at privileged prices. What is quite original in the case of the French privatisations, however, is the fact that prior to the sale of part of the shares to the public, the government (more specifically the Ministry of Finance) systematically set up a limited network or subset of big financial or institutional groups, which were supposed to become a core group of permanent shareholders. The organisation of a core group of stable institutional investors (the noyaux durs) has become a central component of the privatisation process in France.18 The impact on the financial structures of French capitalism From the standpoint of the government – to be more specific, from the standpoint of Mr Balladur (Minister of Finance in the Chirac government in 1986–8 and Prime Minister in the period 1993–5) – one major objective of privatisation was the organisation and control of the financial structures of French capitalism. The purpose of the government was to organise, in a certain sense, the restructuring and the strengthening of financial powers within the French system. The government had decided to promote systematically the organisation of a selection of major participations (at a somewhat higher price) from some big industrial or financial groups. These groups were not chosen haphazardly or by pure accident. As a matter of fact the procedure was used not only in order to create a core group of permanent shareholders, but as an instrument for building strong links between two or more of those shareholders. This is likely to have an enormous impact on the financial structure of the French system. The impact has indeed been quite significant already. F. Morin,19 who has systematically studied the central financial structures (what he calls ‘le coeur financier’) of capitalist countries, shows quite convincingly how these financial structures have been restructured into two major groups or networks of interrelated groups. According to the figures assembled by Morin (1994), the French capitalist system has already been strongly restructured by the privatisation process and around three major poles or groupings: 1 The most coherent one, of European size, involves UAP (insurance), BNP (bank) and Suez (investment). Several major companies are significantly related to this pole, namely Elf (petroleum), St Gobain (materials), Pechiney (aluminium) and Air France (air transport). 2 The second, with somewhat looser links involves Paribas (investment), Crédit Lyonnais (bank) and AGF (insurance). Again, several big companies are significantly related to this pole, namely Total (petroleum), Cogema (atomic energy), Aerospatiale (aerospace), Thomson (electronics), Usinor– Sacilor (steel) and Rhône Poulenc (chemicals).

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3 The third pole, somewhat smaller, but the pure result of privatisations, is organised around Société Générale (bank) and Alcatel–Alsthom (telecommunications, rapid trains), with significant links with Générale des Eaux (water) and Havas (advertising, media). The first and third of these poles have taken the most advantage of the privatisation process. It must be underlined that these poles are characterised by systematic cross-shareholdings between the major players, giving them a high degree of automatic control of the privatised companies in which they buy shares. Some big firms have relations with more than one pole. A movement towards stronger concentration within the poles has been going on and is not yet completed. The prices of shares of privatised companies The sale of shares in privatised companies is generally considered by public opinion as having been handled badly. Most of the shares in the first wave increased their value substantially, though with some big exceptions (Paribas and Suez, two holdings, and Cie du BTP, a building company). But the shares of the second wave were all, by the beginning of 1996, performing poorly, with three exceptions (Total, petroleum; Crédit local de France, bank; Seita, tobacco). All were trading below their issue price. For this reason there is generally a low image of privatisation in the minds of the French public.20 As a matter of fact these developments are not, but for the exceptions mentioned, due to particularly good (for the first wave) or bad (for the second wave) performances of the shares of the privatised firms. Rather, the result is a product of disappointing trends in share prices in general on the French stock exchange.21 Many small investors who entered the domain of the stock exchange by buying shares in privatised firms have been disappointed by what has happened to their savings and have had little regard for what has been happening in the stock market as a whole. Budgetary resources Part of the resources obtained by privatising enterprises has been used to recapitalise the firms which have remained in the public sector, especially firms which are likely to be privatised at some later stage, when they become saleable. This is necessary to the extent that the capital needs of the total public sector have systematically exceeded capital resources in recent years.22 It must, however, be added here that while the capital needs of the public sector have been increasing substantially, this has been to a large extent due to the fact that public firms have entered, since the late 1980s, into a process of shopping around for acquisitions outside France. The financing problem has been solved by the backing of big financial partners to which the state has been linking the public firms. Besides this recapitalisation process, the privatisation resources

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have been used essentially as additional receipts into the current state budget. In principle, the resources to be obtained from actual and future privatisations should help reduce past debts, but this is only true in principle. The government has systematically and progressively been more and more eager to privatise for current budgetary reasons. From that standpoint, receipts from privatisations have remained below expectations. The 1987 crash on the Stock Exchange stopped the privatisation process of one of the largest privatisations (UAP: insurance). The 1992–3 recession and the disappointing evolution of the stock market in 1994–5 reduced both the pace of privatisations and the prices at which privatisations could take place. THE INDUSTRIAL POLICY IMPLICATIONS It has already been indicated that, while more and more emphasis was being put at the beginning of the 1980s on industrial policies, aimed both at modernising existing industrial sectors and at developing new high-tech activities, the trend away from industrial policies had clearly set in as early as 1983. It has also been indicated that, partly for this reason, the nationalisations of the early 1980s were not translated into new industrial policies. It can safely be said that the main result of nationalisations was to save and restructure most of the firms, which were in a bad and in many cases hopeless state at the beginning of the 1980s. Unfortunately, the large financial resources thus distributed (the nationalisations took place at unreasonably high prices) did not lead to additional investments elsewhere in the economy. In the middle of the 1980s, before the first privatisation phase, the most severe restructuring problems were seen as practically solved. It was becoming quite clear (because of the evolution of ideas and policies elsewhere in the world and also because of pressure from the European Commission) that the industrial policy era was definitely over. As indicated, one of the top priorities of the new rightist government from 1986 was privatisation. They were opposed both to the public sector as such and to the forms of state participation introduced by the former government. They were also opposed to the previous forms of industrial policy. Industrial policies, which fell out of favour, were now increasingly replaced by scientific and technological policies, together with some attempts to promote and support small and medium-sized enterprises (SMEs). These two types of policies progressively gained momentum, seemingly eliminating the necessity for any specific and wide industrial policy. There seemed to be good reasons for not caring about industrial policies. The more so that the first privatisation phase took place in a booming economy. But more fundamentally, as indicated, the main objective was to help existing financial powers to consolidate and reinforce their positions, by capturing some of the good parts of the state assets and assets which, at least in principle, had been duly restructured. The approach was mainly predatory, aimed at concentrating economic power and providing easy profits to the benefit of a small group of capitalists.23

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The approach seems, at the same time, very conservative or defensive, as is apparently the case for a major proportion of mergers and acquisitions outside of the state sector. 24 Financial asset management, aimed at consolidating ownership and power, would seem to be in clear contradiction to either strategic management at the micro level or industrial policy at the global level. Rationalising existing assets and structures does not leave much room for development-oriented strategies. This can of course also be said the other way around: when risk aversion is deterring bold strategic moves, one looks for (quick) profits by manipulating or rationalising existing structures. The economic circumstances in the early 1990s changed dramatically. With the 1992–3 recession, the situation of many public firms worsened and most firms within the financial sphere (banking and insurance) were badly affected, due to the collapse of the real estate market. Rescue plans for particular firms (Air France and later Air Inter, Crédit Lyonnais and GAN) absorbed most of the attention and the available resources. The combination of these new economic circumstances, along with the obstinate desire of the new government (in 1993) to resume the privatisation process, which had been interrupted in 1988 for political reasons, made the second privatisation phase even more than the first phase concentrate on two objectives: budgetary objectives and the concentration of financial power. As concerns the first objective, the government made clear the amount of resources it was expecting from privatisations, which meant that privatisations were decided with reference to budgetary objectives. As concerns the second objective, the government, even more clearly than in the past, indulged in manipulating the financial structures during privatisation thus reinforcing the major financial powers. There was not, therefore, much room left for consideration of industrial policy at the state level. In any case, industrial policy had been abandoned some time earlier. The government is still interventionist – it can even be said that the government has been in the very recent period more interventionist than in the 1980s – but essentially within a case by case approach aimed at solving immediate problems, reinforcing existing structures or defending national interests. Moreover, the intervention has taken place at the level of particular firms and not within the framework of some well thought out national development strategy. The major interventions have taken place in air transport, banking, informatics, the railways and armaments.25 It must be emphasised that the only major contribution of the left in redefining industrial policies in the early 1980s, namely the attempt at democratising the public sector, has been progressively abandoned. As indicated, the absence of any clearly defined industrial policy has not prevented the development of alternative policies, e.g. of technological policies and, more so, of policies aimed at promoting and supporting SMEs. But it does not seem possible to find any link between privatisations and these policies or the way they have been developed.

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CONCLUSION The conclusion from all this tends to be that the whole nationalisation/ privatisation process in France over a period of 16 years, from 1981 to 1997, can be characterised as follows: 1 the overall process has helped restructure many (most) big French enterprises or groups, whose activities, boundaries and organisation have changed substantially; 2 enormous assets have been transferred in both directions between the private and public spheres, to the final benefit of some financial groups in whose hands the restructured assets are now concentrated; 3 notwithstanding the changes of ownership, the relations between the state and large enterprises remained very important before, during and after nationalisations and privatisations; and 4 the financial logic behind asset management has constantly been dominant in state policy in France, at the expense of any clearly defined long-term industrial strategy for the country. As the writing of this chapter was completed, a new socialist government was elected in France, in early June 1997. The future of France’s privatisation programme is therefore uncertain. NOTES 1 The first phase in 1986–8 (during the Chirac government), a second phase in 1993–4 (during the Balladur government) and then (during the Juppé government), but this time with a rightist President. 2 For example, until very recently, shareholders were losing substantial amounts on the privatisations of the second phase. This has changed recently, but the experience continues to affect the third phase of privatisation. 3 By contrast, the most rightists parts of the left considered that either minority holdings would be sufficient to control these groups or influence their strategies or that the state already had enough participation in industry. 4 Account must be taken here of the fact that, ignoring the crisis at the beginning of the 1970s, most of these big companies had been continuing to invest rather heavily for many years and that, for these very reasons (together, of course, with the impact of the oil crisis), their financial situation had been worsening steadily. As a matter of fact, this was not only the case of big companies. Studies made by the Expert Group in Sectoral Analyses of the EEC at the end of the 1970s indicated the lack of a decisive restructuring of French industry as a whole. Policy seemed to hesitate between adjustment and defence of existing structures. This kind of hesitation became to a certain extent formalised: while the Minister of Industry was in charge of the defence of traditional sectors, the President took charge of policies aimed at inducing some big firms into new technological developments with large-scale state aid. 5 I remember attending a meeting, in December 1981, which was opened by the socialist minister in charge of the nationalisation process, saying: ‘we won the battle of nationalisation; the question is now: nationalisation, what for?’

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6 The communist part of the left was developing at that time sets of decision and performance criteria which would be imposed on firms in the public sector. 7 From 1974 to 1981, while the volume of investments of private firms remained stagnant, that of big national enterprises increased by 80 per cent. The biggest investors in 1981 were EDF (electricity), SNEA (petroleum), PTT (Post), SNCF (railway) and Renault (automobile) – all national enterprises. The idea was that with many more firms in the public sector, national investment would be raised. 8 J.P. Chevènement, Minister of Research and Industry, organised a big national meeting (followed by several others on specific issues) in order to launch a new, ambitious industrial policy. In the summary report of the working group on the role of the public sector (chaired by A. Gomez, who has been for many years CEO of Thompson), this idea of the public sector as a main economic driving force was explicitly stated (‘Elles ont une finalité: constituer le fer de lance d’une grande politique industrielle’, p. 199, in Une politique industrielle pour la France: Actes des journées de travail des 15 et 16 Novembre 1982, La Documentation Française). However, Mr. Chevènement left the government in March 1983 before having succeeded in defining the new orientations of the industrial policy he intended to design and implement. This was the most decisive turning point in the economic policies of the left, from then on the government adopted ‘rightist’ or ‘orthodox’ economic policies. 9 Cf. de Bandt (1983). 10 In a meeting of all the heads of the newly nationalised firms, they confirmed unanimously that they had less contact with the politicians and higher administration than previously. In the former situation, those firms were more or less dependent on the state, and had repeatedly to ask and thus to lobby to get additional resources. This was no longer the case. 11 L. Fabius stated very clearly that he was abandoning any kind of interventionist approach: ‘Le rôle du ministre de l’industrie est d’abord de se préoccuper de l’environnement industriel.’ 12 His title was ‘Secrétaire d’Etat à l’Extension et a la Democratisation du Secteur Public’. 13 Mr Balladur was by then Minister of Finance and became the instigator and the organiser of the first phase of privatisation. He thus determined a number of the new rules and procedures. 14 As a result of the 6 per cent sale in June 1996 the participation of the state in Renault was reduced below 50 per cent. 15 Incidentally, these auditing procedures have raised problems which have since become quite important in the relations between shareholders and managers of many companies. Accountancy principles and rules are essentially conventional. This is true everywhere, but French firms have kept and used large degrees of freedom in the application of the principles and rules with the result that it is quite difficult to value many firms. Alternatively, the performances as indicated by the accounts may hide important weaknesses or losses. 16 Share prices are set rather low at privatisation, such that demand largely exceeds supply, and hence the prices are likely to increase immediately with the possibility of investors making quick profits. In consequence, many of the small investors who purchase shares sell them rapidly. In order to encourage shareholders to hold on to their shares, the investors that keep their shares for at least one year have been given a 1 share premium for 10 initially bought. A similar phenomenon of selling for quick gain and incentives to hold shares for longer exists in UK privatisations. 17 It is not the price per se, but what experts in the newspapers are saying about the level of the price both inside and outside France. Many individuals have speculated on the possibility of reselling their shares immediately for profit. 18 The Ministry has been organising what is called a ‘tour de table’ aimed at defining a noyaux durs so as to concentrate in their hands a decisive proportion of the shares.

100 Jacques de Bandt 19 F. Morin, a professor in the Economics Faculty of the University of Toulouse, was also, in the 1980s, the General Secretary of the National Council of the Public Sector. This was set up after the nationalisations of the early 1980s in order to monitor the performance of the public sector. 20 This is, of course, likely to affect adversely the privatisations to come, unless the situation improves on the stock exchange. The number of shareholders fell from 5.7 million in 1994 to 5.3 million in April 1995. 21 The CAC index of the Paris stock exchange increased from an average level of 1200 in 1987–8 to the level of 1800 in 1989–90. With some highs (in 1990 and 1994) and lows (end of 1990, end of 1992 and end of 1995), the index fluctuated around the level of 1,800 from the middle of 1989. 22 Since 1992, the gap has been widened dramatically due to some very substantial deficits in a number of firms in the public sector, namely at Air France, Crédit Lyonnais, Bull, SNCF (railways) and Elf Aquitaine. 23 The French privatisation process is an extreme case of appropriation of large assets by small numbers of people. This has happened seemingly without provoking strong reactions, but for those of Raymond Barre former Prime Minister in the 1970s, who has been very critical of the financial synergy thus created: ‘L’expérience des privatisations depuis 1986, qui avait pour but de liberer les forces economiques de l’emprise d’un Etat immodeste et arrogant, a fini par se révéler comme un processus par lequel l’Etat, ou plus encore la direction du Tresor, n’a renoncé en rien à ses moyens d’intervention et de pression’ (Le Monde, 1 December 1987). Barre prefers to criticise the Treasury instead of the Minister of Finance in person, but the role of the Minister of Finance and the network of interests around him, has been clearly demonstrated. 24 On this question, see Schenk (1998). 25 The Chirac/Juppé governments have been willing to impose restructurings, e.g. in armaments and aerospace, without letting market mechanisms operate to determine the required restructurings. Typical is the example of the merger of Aerospatiale and Dassault, which has been imposed by the government.

REFERENCES Chevenèment, J. P. (1983) Une politique industrielle pour le France, Paris: La Documentation Française. de Bandt J. (1983) ‘ Les Nationalisations: La gestion du secteur public et du systeme productif ’, Revue d’Economie politique, July, no. 5, pp. 704–13. Morin F. (1994) ‘ Les Trois Pôles du coeur financier ’, Le Monde, 8 March. H. Schenk (1998) Industrial Policy in a Bandwagon Economy (forthcoming).

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Privatisation in Germany Symbolism in the social market economy? Josef Esser

INTRODUCTION1 As in other Western industrial societies of a liberal-capitalist nature, social and economic discussions in the Federal Republic of Germany were dominated from the mid-1970s by the neo-liberals. However, the latter had to wait until the autumn of 1982 before they could begin to think about implementing their strategies. It was a conservative-liberal government, comprising the Christian Democrats of the CDU-CSU (its Bavarian sister party) and the liberals of the FDP, which was the first to include in its programme its intention of reducing state influence on the private economy and of strengthening market forces. The new government also clearly defined its position on the privatisation of public property: it underlined in its 1983 annual economy report its desire to work for a policy that would reduce the activities of the state to those that were appropriate, to transfer as far as possible public services to the private sector and to privatise public goods whenever possible without harming the interests of the state. In the first 10 years of being in office, however, the conservative-liberal government carried out its promise to reduce the activities of the state only to a very small extent. This created increasing disappointment amongst neoliberal theorists, who complained that the privatisation and deregulation measures promised by the government remained insignificant (Woll, 1987). The debate on privatisation was again reactivated in the 1990s following first, the collapse of communism in East Germany and the process of reunification which was thereby triggered. A new policy emerged and this concerned the vast public sector of the eastern part of the country. The declared intention was to convert into competitive private enterprises the 9,000 firms and holdings which were ‘the people’s property’ under the Germany Democratic Republic (GDR). This new debate on privatisation was in the beginning also completely dominated by neo-liberal thinking. Emphasis was placed on the need to bring about a rapid, brutal and effective break with the past, in line with Schumpeter’s concept of ‘creative destruction’. However, since the spring of 1991 this crash programme has been abandoned, and privatisation is no more than one objective amongst many others to improve the situation of nonprofitable firms with the help of the state.

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Second, new pressures for deregulation and privatisation arose challenging Germany’s politically regulated infrastructure sector (telecommunications, postal services, energy supply, transport). These arose from a complex mixture of technological factors (new information and communication technologies), economic factors (merger of branches in the area of ICT and globalisation) and political factors (creation of a common domestic market within Western Europe) which have also affected other EU countries. As a result today this sector is in the process of being deregulated, commercialised and partly privatised. This chapter attempts to explain the clear reluctance of the state to pursue a radical privatisation programme in (West) Germany, in spite of the demands of important parts of the mass media and of the neo-liberals since the 1980s. The chapter also considers the rather conservative, cautious and pragmatic privatisation course adopted in the 1990s. The chapter begins by giving an outline of the West German nationalised sector, its significance and its structure. This is followed by an analysis of the privatisation policy of the conservative liberal government between 1982 and 1996. Then the policy that has been carried out by the Treuhand (the state body which was given the task of privatising the East German economy) is discussed. The last part of the chapter deals with the causes of the cautious and until now, corporatist mode of privatisation in Germany. SIZE AND STRUCTURE OF THE PUBLIC SECTOR IN WEST GERMANY The public sector at the local and Lander levels When describing the public sector in the west part of Germany it is important to distinguish between property which belonged to the Federation, that which belongs to the Länder (regional or state governments) and that of the towns and other local authorities. Naturally, a detailed study of the public sector, which cannot be undertaken here, would be necessary to show the extreme variety of forms across the entire public sector, since the position changes from Land to Land and from town to town. However, some points should be observed. Very often the following duties are carried out at Länder or local level: rubbish collection, public health and public housing, gas and electricity supply, education and training, transport and road systems. Functions relating to rubbish collection, slaughterhouses, swimming pools, schools, and local transport systems are carried out at local level, whereas the Länder look after the energy supply, universities, and credit organisations. The German Federal Bank has estimated the actual market value of the enterprises belonging to all the public authorities in 1990 at around DM 370 billion (Neue Zürcher Zeitung, 30 November 1990). In 1988 the nominal shares of the Länder in the capital of these enterprises amounted to some DM 12.3 billion, those of the Federation

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to about DM 6.5 billion – in other words about half of the value of that belonging to the states (Wirtschaftswoche, 52/53, 23 December 1988: 15). Without doubt the twelve state banks constituted, both from an economic as well as a social viewpoint, the most important element in the sector belonging to the subnational authorities. In 1994 the four major Länder banks were the Westdeutsche Landesbank with assets worth DM 379 billion, the Bayerische Landesbank with DM 281 billion, the Südwestdeutsche Landesbank with DM 168 billion, and the Hessische Landesbank with DM 153 billion. These banks have been transformed into universal banks in the meantime and two of them, Westdeutsche Landesbank and Bayerische Landesbank are amongst the ten biggest banks in Germany (Monopolkommission, 1996: 229). One would find nobody in the Federal Republic and especially in the governments of the Länder or in the councils of the major local authorities who would envisage the privatisation of such effective credit bodies. Politicians of all political persuasions consider these banks to be vital instruments of structural and regional policies. Indeed, at the moment the principal issue concerns the possible merger of these banks so that they may remain competitive in financial markets which are increasingly liberalised and internationalised (The Economist, 15 October 1994). When (as in the case of Hesse in 1988) a Christian Democratic Länder government decided to give up its shares in the Land bank they were bought by savings banks which belonged to the local authorities within the same Land. Generally, estimates made by the German monopoly commission (Monopolkommission) suggest that between 36 per cent and 40 per cent of the German banking sector is in public hands and only a small part of that is in the hands of the Federal government. Over many years the German monopoly commission has demanded the privatisation of these banks and the Federal government has argued in the same vein, but nothing has happened (Monopolkommission, 1996: 37ff., Jahreswirtschaftsbericht der Bundesregierung, 1993, and 1995). The privatisation ambitions of the neo-liberals initially targeted local services. They have come to very little. No doubt the occasional town has privatised a local service such as rubbish collection or street cleaning. Several towns have also sold some of their properties to reduce their debt. However, on the whole, and irrespective of the political persuasion of the local authority, local services have remained firmly in the public domain. Indeed, when the Federal government does decide upon very limited policies of deregulation and privatisation either the policies have no impact at Länder or local level or the local and Länder authorities buy what the Federal government has decided to sell. Consequently, when analysing the policy of privatisation in Germany it is essential to exclude large parts of the considerable public sector belonging to the towns and to the Länder. At this subcentral level, the public sector is underpinned by a complex and widespread network of economic, political and social interests, and has become a significant means to pursue specific objectives

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in the field of infrastructure, transport, training, social and industrial policy. Until now, this system has remained perfectly intact. In other words, at the local and Länder level there is a wide consensus on the need to respect the social market economy. There is a feeling that public enterprises are needed to compensate for market failures – in both social and infrastructural terms. Naturally, these enterprises have to be competitive and efficient. But to the extent that they fulfil these conditions and there is no empirical evidence that privatisation would improve their social and economic performance, local and Länder interests see no point in calling into question the current ownership. Nevertheless, there is a debate, which is just beginning in certain towns, on the virtues of public–private partnership inspired by the British and American models (Heinz, 1993; Reichard, 1994). The causes of this debate include the high costs of reunification, which have partly to be met by the communities in the West. Another reason is new and fierce competition between local authorities across Europe to entice the investment of transnational corporations. Finally, the economic pressures on government from the rising costs of social benefits and the costs of modernising local infrastructure have stimulated debate about the proper role of the state and the future of the social market economy in Germany. This may give rise to changes in policies in the next few years. The public sector at the federal level The remainder of this chapter is concerned with the industrial public sector of the central government in Germany, since currently it is only at this level that privatisation on an appreciable scale is envisaged. It is worth recalling that this sector dates from the Weimar Republic or the Nazi period. It is embedded in political will, being advocated by both the pre-war right and left, and rooted in the ambition to industrialise the country rapidly in order to catch up with Britain and the USA (Himmelmann, 1986; Knauss, 1986). After the Second World War there was no nationalisation in West Germany, either of major sectors or of firms in difficulty. As a result, the central government’s public sector remained smaller than that of many European countries where powerful working-class movements were able to impose extensive nationalisation programmes. The German working-class movement advocated nationalisation in its early postwar programmes, but it was too weak politically to have the policy implemented. On the other hand, there was no one in West Germany who wished to denationalise the existing public sector. And the West German Constitution even protected until 1996, in Article 87, a state monopoly of the Federal railway system, the postal and telecommunications sectors, and inland navigable waterways. A two-thirds majority of both houses of the German Parliament was required to break up the monopoly. Christian Democrat governments of the 1950s and 1960s, which were far from being neo-liberal, utilised the public sector, inherited from Weimar and the National Socialists, in order to maintain political support for the economic restructuring of the country; while the Social Democratic-Free Democrats

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coalition government of the 1970s mobilised it to back their Keynesian-inspired mixed economy model. Andrew Shonfield’s ‘organised private market economy’ is a term which he used to characterise the West German economy. This is well chosen given the specific mix of successful free entrepreneurs, effective peak business associations, the big banks, a strong industry policy, a nationalised sector and state intervention whenever it was deemed necessary in the national interest (Shonfield, 1965). During the 1970s the industrial public sector controlled by the central government grew sharply. The reason was clear. The most important public sector groups included steel, coal and shipbuilding, all of which because of internationalisation faced increasing competition. In these circumstances, state firms in these industries attempted to widen their industrial base by buying shares in other industrial branches or in companies which were connected to or suppliers to their own activities. As a result, the number of firms in which the Federal government held at least 25 per cent of the shares increased from 697 in 1970 to 958 to 1982. At the same time, the capital share of the Federation increased from DM 3.7 to DM 7 billion (Bundesminister der Finanzen, 1983). Table 6.1 enables us to assess the size of the Federation’s public sector when the Christian Democrats regained office. Compared with the situation in other European countries the figures are rather modest. Within Western Europe in 1978, the major public sector enterprises comprised 13.7 per cent of the turnover of the 269 biggest companies. Accounting for only 3.9 per cent of total turnover, the West German public sector was one of the smallest and a long way behind Austria, which had the biggest public sector with the state accounting for 82 per cent of turnover, Italy with 51.8 per cent, France with 24.9 per cent and the UK with 12.5 per cent (Czada, 1983: 256; Dunning and Pearce, 1981).

Table 6.1 Germany: size of the federal industrial assets

Source: F. Knauss (1986: 227)

106 Josef Esser Table 6.2 Germany: share of the industrial federal sector in different industries (% of national production)

Source: F. Knauss (1986: 227)

Table 6.2 provides data relating to the share of domestic production, by industrial sector, belonging to the Federal government. The overrepresentation of the public sector in the problem-ridden industries of coal, steel and shipbuilding emerges clearly. The most important direct stakes of the central state in 1983 involved the Salzgitter steel group (100 per cent owned), Lufthansa, the national flag carrier (74.3 per cent), the mines of the Saabergwerke (74 per cent), Vereinigte Industrieunternehmen (VIAG), a holding company with interests in electricity, gas and aluminium (86.5 per cent), and Industrieverwaltungs-GMBH (IVG) which was active in industrial share buying, property deals, transport and oil (100 per cent). The central state also had important minority holdings in powerful German companies such as VEBA, the energy and chemical group (43.8 per cent) and the motor car company Volkswagen (20 per cent) and held a significant stake in the country’s banking system. Excluding the central bank, in 1982 Federal state assets in banking were worth around DM 170 billion, placing these banks just behind the Deutsche Bank and Westdeutsche Landesbank (itself a public bank since it belongs to the Land of Rheinland–Westphalia) in terms of size ranking. The most important part of the Federal state’s banking arsenal was the Kreditanstalt für Wiederaufbau (KfW) (Credit Institute for Reconstruction), which specialised in providing financial aid for industrial development and export guarantee loans. Another, the Deutsche Ausgleichsbank, had a similar central-state interventionist rationale: it was initially set up to finance the programmes for integrating political refugees from the East. This bank, together with the Credit Institute for Reconstruction, has since become the major instrument for managing the European Recovery Programme. Mention should also be made of the Deutsche Siedlungs- und Landesrentenbank (which provides aid to the agricultural sector), the Berliner Industriebank (which financed help for the West Berlin economy until 1990), the Deutsche Pfandbriefanstalt (later called: Deutsche Pfandbrief- und Hypothekenbank which is involved in local government financing) and the Deutsche Verkehrs- und Kreditbank (which serves its sole shareholder – the German Federal Railways).

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In the scientific field, too, the central state retains considerable leverage. The Federal Ministry of Research and Technology controls fourteen research institutions (Max-Planck-Institutes or Fraunhofer Institutes), often together with the states in which the Institute is located. These research institutes are charged with ensuring basic knowledge or technological innovation, often in close collaboration with the private sector (Hohn and Schimank, 1990). Finally, we should note the Treuarbeit, which plays an important role in structural and industrial policy by examining the balance sheets and potential of firms which apply for Federal aid. The Treuarbeit belongs to the Federal state and five Länder, each of which has an 11 per cent stake in the body. THE POLITICS OF PRIVATISATION IN WEST GERMANY Privatisation for popular capitalism (1959–65) The first privatisation measures taken in West Germany date from 1959–65 with the denationalisation of Preussag and the partial denationalisation of VEBA and of Volkswagen. They are worth mentioning here because the failure to create a ‘popular capitalism’ through state asset sales played an important part in shaping the perceptions of governments involved in later privatisation programmes. Also, at the time there was no question of making privatisation an integral part of an extensive programme of economic liberalisation, which might have prejudiced the social market economy. Rather, the programme was designed to widen ownership as part of a policy of giving people a share in the country. The campaign in favour of popular capitalism was linked with the socio-political programme of the social market economy: its purpose was to make each citizen a committed managerowner who was economically autonomous. However, this programme of redistributing national wealth was not a success. The major reason lay in the reluctance of large sections of the German population to invest their savings in equity: they preferred to put their money into investments with guaranteed returns. This situation has not changed since that time. The average German has little confidence in shares: only 14.5 per cent of West German wealth in 1995 was in equity and private savers held only 5 per cent of their money in shares (Deutsche Bundesbank, 1997: 29). Until 1992 government support for the creation of wealth (Vermögenspolitik) had the result that 96 per cent of financial investment was related to guaranteed savings plans, life insurance or plans linked to housing (Deutsche Bundesbank 1993:26) Symbolic privatisation (1983–95) When the liberal conservative government in 1983 committed itself to an overall privatisation programme, it was reacting to the increasing pressure, largely ideologically inspired, exerted by neo-liberal circles and professional investors, and by the Free Democrats (FDP) who belonged to the government coalition. There was no real economic necessity, but there was a need to underline the break with

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the immediate Social Democratic past. It must be emphasised that the pressure for a radical programme was largely symbolic. The industrial sectors that were of long-term strategic significance in the international marketplace were already in the private sector, and the public sector, as already noted, was not very extensive, especially at the Federal level. But it should also be mentioned that fiscal deliberations were part of the game. The sale of some of the jewels in the national industrial crown was expected to help reduce the national debt. Although the principle of privatisation was decided in 1983, the Federal Minister of Finance waited two years before presenting a general programme for its implementation. This prolonged period underlines the divisions over privatisation within the government coalition and within the interest groups close to the coalition at the time. Meanwhile, and as a sop to an increasingly impatient Free Democratic Party, it was decided to privatise partially the apparently problem-free VEBA company. In the first place, the Federal government reduced its stake from 48 per cent to about 30 per cent, and decided not to take part in the recapitalisation of the company, which had the effect of further reducing its stake to 25.6 per cent. This stake was later sold to private investors. However, the attempt to privatise through a policy of widespread share ownership was, as in the past, a failure. Over 4 million shares were sold, but only 52,000 went to new shareholders. When the Federal Minister of Finance eventually outlined his general privatisation programme in 1985, he announced that only thirteen companies were in a fit state to be privatised. All the other public firms were either not viable financially, were in deep economic crisis (in particular, the steel, coal mining and shipbuilding enterprises) or had to be kept in the public sector for industrial policy reasons. In the latter category were placed the state-controlled banking sector, the research institutes, the railways and the postal and telecommunications services. Furthermore, the Minister announced that of the thirteen proposed privatisations, in all cases he intended to retain a stake in line with the strategic needs of the Federation. In the majority of cases this involved retaining a 51 percent stake. In others a 25.1 per cent holding was deemed adequate. What is striking, therefore, is that the privatisation programme was far from radical. Nevertheless, it triggered a wave of protests, even within the government. As a result, the cabinet decided, in March 1985, to reduce the list of thirteen to five: VlAG, Volkswagen, PraklaSeismos, Deutsche Pfandbriefanstalt, Deutsche Siedlungs- und Landesrentenbank (OECD, 1989). In the other cases it was agreed to explore the matter further or to postpone the decision. How far has this modest privatisation programme been implemented until now? In 1988 the Federal state disposed of its remaining stakes in Volkswagen and VIAG. In both cases, it is interesting to note that the two Länder, which also partly owned the companies, did not follow the central government’s example: Lower Saxony retained its 20 per cent stake in Volkswagen for regional industrial policy reasons, and for the same reason Bavaria bought through Bayernwerk AG, in which it had a holding, a 15 per cent stake in VlAG (Wirtschaftswoche, 23 December 1988: 18) In 1994, however, the Bavarian government in cooperation with Bayernwerk and VIAG changed its industrial policy strategy – an event which the monopoly

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commission has called ‘Scheinprivatisierung’ (apparent privatisation) (Monopolkommission, 1996: 38). A new conglomerate, ‘VIAG’, in which the government, the earlier Bayernwerk and the ‘government-friendly banks’ (Bayerische Vereinsbank and Bayerische Hypotheken- und Wechselbank) have stakes was to be built up as a new competitive ‘global player’ in the sectors of energy utilities, chemical, transport and telecommunications. This corporation with 100,000 employees and a turnover about DM 40 billion is now the second biggest firm in Bavaria, behind Siemens, and the sixth largest in Germany. It also has been shaped as a counterweight against Nordrhein Westphalias energy utilities RWE and Veba (Neue Zürcher Zeitung, 1 December 1993 and 12 March 1994). Once the steel crisis had abated, Salzgitter was also privatised, but the Federal government remained the owner of Saarbergwerke (coal) because of the economic troubles facing this enterprise and the Bavarian government increased its stake in Maxhütte, a steelmaker, just before it was to be declared bankrupt. IVG and Deutsche Pfandbrief- und Hypothekenbank were privatised in the meantime, too. The central government also reduced its stake in Verkehrs-Kredit Bank (to 75.1 per cent) and in Deutsche Siedlungs- und Landesrentenbank (to 55 per cent) . The part privatisation of the DSL was greeted with considerable opposition. The crucial role played by this bank in the state financing of agriculture compelled the Minister of Agriculture to intervene in the privatisation debate. The compromise which finally resulted involved the DSL remaining a public law institution with administrative functions (Handelsblatt, 9 June 1988: 9). The planned full privatisation of Lufthansa also did not happen. In the 1980s it failed because of several disputes, notably between Bavaria and the Federal government. The initial plan was to reduce the central government’s stake from 79.9 per cent to 55 per cent. The CSU, the Bavarian sister party of the CDU, opposed the proposal arguing that it would be unwise to undermine the national role of the airline by introducing foreign capital into the company. The state had to remain the dominant owner. The CSU also raised the vexed question of national defence, since Lufthansa was obliged in the case of armed conflict to place its aircraft at the disposal of the armed forces. Behind this appeal to national interest there lay the real reason for Bavarian opposition, and it was rooted in the industrial policy of the state. It is in Bavaria that German aircraft and aerospace industries are concentrated with Messer-Schmidt-Bölkow-Blohm (MBB), now integrated into Deutsche Aerospace, a subsidiary of Daimler-Benz. The German parts of the European Airbus programme are also located in Bavaria. Franz Josef Strauss, Minister President of Bavaria at this time, was chairman of the board of Airbus. The Bavarians feared that privatisation of Lufthansa would lead to an undermining of the close links which had been established between Lufthansa, MBB and Airbus through the judicious use of state procurement policies. In the controversies within the government coalition the Free Democrats lost ground to the CSU. In spite of repeated accusations of advocating state capitalism, the latter maintained its opposition to the privatisation of the national flag carrier. After lengthy debates in cabinet, the CSU won the day; it was decided to retain the Federal stake in Lufthansa. Nevertheless, Bavaria was

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unable to prevent the ‘passive privatisation’ of the company, since it was agreed that it could raise new capital on the private financial markets, thus effectively reducing the public stake to 52 per cent. Bavaria reacted by increasing its own shareholding. When Daimler–Benz took control of MBB, with the massive backing of the Bonn government which was keen to strengthen the German aerospace industry, the Länder of Bavaria, Hamburg and Bremen refused to sell their stakes in the company, thus becoming minority shareholders in Deutsche Aerospace, the subsidiary of Daimler-Benz. Today Bavaria is gradually abandoning its opposition to privatisation of Lufthansa. On the whole, it must be concluded that the 1985 privatisation programme was only partially implemented – even though the Free Democratic Party, a key coalition partner of the CDU, denounced the timidity of the 1985 programme. Privatisation reduced the number of firms in which the Federal government held at least 25 per cent of the shares, from 958 in 1982 to 400 in 1995, which generated about DM 12.5 billion in revenues for the government (Jahreswirtschaftsbericht, 1995: 24). The only point on which the coalition appeared to be united was the need to sell certain parts of the ‘family silver’ in order to raise money for the state budget. Nevertheless, the supporters of privatisation were content with the measures taken. They were, it was argued, symbolic in character, and suggested that a Germany which appeared stuck in the mire of corporatism had finally decided to smash some of the taboos surrounding denationalisation. Eventually, they envisaged a more radical neoliberal economic policy emerging. Deregulation, commercialisation and partial privatisation of the infrastructure sector Germany’s social market economy has always featured two major sectors. One, as mentioned earlier, comprises private key industries that compete fiercely in international markets in areas such as mechanical engineering, car industry, factory construction, chemicals and electronics. The other has always been a politically regulated one in which the principles and requirements governing competition in the marketplace have taken a back seat to the aims of social and structural policies (Esser, 1995). Such areas included transportation, postal services and telecommunications, public utilities, public banks and saving institutions, which make up an important part of the infrastructure of the social market economy. Beginning in the 1980s, but winning ground not before the 1990s, there were discussions going on within West Germany which suggested that infrastructure provision should be deregulated, reorganised, commercialised and in part privatised. This resulted from a complex mixture of technological, economic and political factors embracing new information technologies, globalisation and the Single European Market initiative. The first and most instructive example of the corporatist, gradual and social-consensual manner in which the restructuring has been implemented involves telecommunications (more details can be found in Esser, 1995, and Esser, Lüthje and Noppe, 1997).

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In the 1980s vast changes in the telecommunications sector at international and European level forced West Germany and many other countries to call into question the status of telecommunications as a natural monopoly owned by the state. German neo-liberals demanded outright privatisation, as in Britain and Japan. However, in the 1980s the Bonn government was successful in refusing to follow the neoliberal path in spite of considerable pressure from the Free Democrats. At the same time, Bonn recognised the key importance of the role played by the Federal post office system (Deutsche Bundespost) in creating the new telecommunications technical infrastructure (notably the Integrated Service Digital Network or ISDN), as well as the increasing importance of telecommunications for German competitiveness. It therefore accepted that new organisational structures were required to enable quicker and more flexible reactions to technical, economic and political change. Hence a governmental advisory commission was set up in 1985 for the purpose of examining the problem. It included, in addition to scientists and legal and business experts, senior representatives of the professional associations concerned, delegates from all parties represented in the Bundestag, representatives from the Länder, and a representative of the postal union, Deutsche Postgewerkschaft (DPG). Following wide-ranging discussions lasting two-and-a-half years, the commission reached a broad compromise on the future of telecommunications, a compromise that provided the basis for the Act of 1 July 1989 on the structure of postal services, whereby Germany telecommunications were reorganised (Postreform I). What was remarkable about the changes proposed was that, in spite of obvious conflicts of interest between manufacturers of transmission equipment, information and communication technology industries, and between users, constructors and installation engineers, the commission achieved a compromise. This was ‘broadly capitalist’ in character, yet resulted less in privatisation than in ‘mild deregulation’. The administrative function was distinguished from the strictly business functions and transferred to a reorganised Ministry for Postal Services and Telecommunications, which was then the central regulatory authority in this sphere. Federal postal services (Deutsche Bundespost) were subdivided into three relatively autonomous state-owned enterprises responsible respectively for postal services, financial services (Postbank) linked to the post office, and telecommunications (Deutsche Telekom), each having at its head a newly created managerial body. Cross-subsidisation from profitable businesses to loss-making ones was sanctioned for only a limited transitional period. Telekom retained as well its monopoly, the strategic function of effective implementation of ISDN as the standard for a unified telecommunications technology. Furthermore, a distinction was made between the ‘network monopoly’, which was to remain administered in the public domain, and a market domain. Transmission services of all kinds as well as terminal equipment manufacture were to form the core of the latter. Private firms would compete with Deutsche Telekom in these areas; an arrangement which also took into account the interests of the Länder, for whom the monopoly position of Telekom provided a guarantee of

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equitable distribution of network and telephone services. In fact, the agreement of the Länder was vital in any restructuring of post and telecommunications. Although Deutsche Telekom was not privatised, its functioning was now more subject to market mechanisms. So as to be able to finance the considerable cost of setting up ISDN on its own, it had to perform in the same way as a service concern in the private sector. Both management orientation and work practices had to be adapted to marketing objectives and methods; rationalisation was essential, entailing job losses and new working conditions, with a view to achieving both higher quality and greater efficiency. The agreement of the post office workers union was won only after fierce resistance; for a long time it opposed the compromise plan put forward, but, being in a weak position, was eventually obliged to accept it as the lesser of evils. Even so, the future of Deutsche Telekom was not finally settled. Debate continued after reunification in 1990 over whether or not Telekom should be totally privatised. First, from the government’s point of view, this would afford the possibility of further budgetary revenue to help finance the integration of the eastern territories. But second, and more importantly, there was increasing pressure initiated by the European Commission to liberalise the European telecommunication market totally, as well as by Deutsche Telekom itself, which welcomed its opportunity to compete internationally. Its management considered that its present status as a public corporation denied it the right to do this. It was argued that because of challenges posed by a completely altered and increasingly competitive world market, Telekom had to position itself as a global, high-tech service provider in a key technology area, and that strategic alliances with foreign partners were necessary to extend its current activities to the global stage. If Telekom were no longer subject to public service law, in matters of wages, employment status and working conditions, it could better achieve the flexibility needed to compete (Ricke, 1994). This discussion was occurring in a familiar setting and resulted in the 1996 Postreform II. The opposition SPD party had to be involved in order to achieve a two-thirds parliamentary majority, which was necessary to remove the Bundespost’s constitutional status as government property. The states had to become involved, since otherwise they could exercise a veto in the Bundesrat. Finally, the postal unions and the postal service officials also had to agree to the changes, since both the SPD and CDU/CSU would not have been able to stand up to any resistance from the postal employees. All this happened in summer 1996 after more than two years of fierce bargaining between federal and state governments, the opposition party SPD, and the postal union. The new law turned Deutsche Telekom, the postal savings bank and the postal service into three different joint-stock companies which were intended to be partly privatised over the next few years. Additionally, the postal service and Telekom were to lose their monopolies in sending letters and transmitting phone calls. The postal service, due to be partially privatised in 1999 or 2000, is limited in its exclusive licence to letters weighing under 100 grams and costing less than DM 5.50 to post and only until the end of 2002. Whether after that date full competition will happen or not is difficult to say at present, for the plan faces stiff resistance in the upper

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house of parliament. It is opposed by the majority of the federal states and the postal trade union because of fears of job cuts, higher postal costs and a deteriorating universal service. The selling of Postbank, the postal savings bank, is scheduled for 1997 for about DM 3 billion. A planned stake by the postal service in Postbank has now been limited to 17.5 per cent to prevent a blocking minority shareholding (25.1 per cent) (Neue Zürcher Zeitung, 1 and 2 March 1997). This result came after a fierce debate within the CDU–FDP coalition government, in which the liberal FDP feared a resurrection of the old state monopoly under a new roof. Deutsche Telekom loses its monopoly in transmitting phone calls on 31 December 1997. This date coincides with the European Union voice telephony liberalisation. The first step of partial privatisation of the enterprise was undertaken in November 1996, when about 25 per cent of the shares were sold to private owners. The next step is scheduled for 1998. There were three conflicting issues between government, opposition, states and trade union which had to be solved before this agreement could be reached: (1) the future of the universal service principle; (2) the structure of the new regulatory authority ; and (3) the right of municipalities to charge for the carriage of telecoms services across their gas and electricity networks (‘Wegerecht’). The opposition SPD and the postal union had attempted to ensure that each telecom licence issued after 1998 should be tailored to cover both urban and rural areas and to deliver every customer the same technical ISDN-standard telephone at the same price. Government and industry rejected this and licences will be available to any operator who meets certain technical standards within the area covered by the operator. This will have the result that the German social market telephone infrastructure, which until now has been politically controlled and regulated by the state providing coverage of the whole country at unified prices which are affordable to all, will be displaced over time by a system of divergent access conditions and opportunities of participation dictated by the market. The concept of basic provision telecommunication infrastructure for all will only apply to technically primitive minimum facilities. ‘An extension of the diversity of services on offer will best be achieved through effective competition, not through state rules which hinder competition’ (BMPT, 1996: 1). The states had also tried to exert substantial political influence over the nature of the future regulatory authority. This will be established in 1998 as a new agency within the Ministry of Economy after the abolition of the Ministry of Posts and Telecommunications. Under the Postreform I from 1989, Deutsche Telekom was supervised by a ‘Regulierungsrat’ made up of officials from the Federal government and in which especially the states tried to ensure that the private companies could not neglect infrastructure investments in less-populated areas. The states had proposed an authority including Länder representatives but the government suggested that it would be prepared only to allow the states some say in appointment of a staff which it insisted must be ‘professional’ and not ‘political’. Both sides agreed on a compromise whereby an 18-strong advisory council made up of Bundestag and Bundesrat members would be consulted about appointments to the regulatory authority.

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Although there is consensus about ‘asymmetrical regulation’, which means that only dominant market players have to fulfil minimum universal service obligations before receiving a licence, details about management, organisation, staff and the specific power of the proposed new regulatory authority are still not finalised. The big proposed new competitors of Deutsche Telekom in the liberalised market after 1998 (VEBA/RWE, VIAG/British Telecom, Mannesmann/German railway and AT&T) have attacked the government for failing to decide the vital details of liberalisation like fees for interconnecting telephone networks. Pressure has been placed on SPD deputies by the municipalities, traditional SPD constituents, which want to ensure that they can charge for the carriage of telecom services across their networks. But the Federal government has insisted that it will not permit this and though the state chamber, ‘Bundesrat’, first voted to approve this claim of the local authorities, it eventually accepted the government’s position. This dispute is not settled, however, because the municipalities have decided to take their fight to the supreme court. In a similar manner, cautious, pragmatic and social-consensual change is being advocated for the German railways (Deutsche Bundesbahn). This publicly owned activity has been corporatised with the intention that it should be decentralised, liberalised and privatised in the longer run (Lehmkuhl and Herr, 1994). A government commission, in which all important social and political actors were represented, made a proposition for a reform draft and the first step towards its realisation was the so-called ‘privatisation of the organisation’ (Organisationsprivatisierung) in 1994. Under the reform, the German Bundesbahn and German Reichsbahn (the railway organisation of the earlier GDR) were combined in the Deutsche Bahn AG, a joint-stock company. Under this governmentowned holding company, three independently operated enterprises for passenger transport, goods transport, and the rail infrastructure were formed. This is not true privatisation and under current plans rail infrastructure is to stay in public ownership with the state remaining responsible for building, maintenance and marketing of the railway track. In 1996 regional rail traffic started to be managed under the authority of the 16 states after the Federal government agreed to subsidise this new Länder task. Civil service status was revoked for new employees and consequently wages and working conditions have become more flexible. Despite Bavarian opposition to the privatisation of Lufthansa during the 1980s, the transition of this enterprise to private ownership is now well underway. The intention is to help the airline compete better in the market and to enable it to build up strategic alliances with other airlines (a worldwide trend in the airlines market). The Bavarian government agreed to sell its stake in DASA to Daimler-Benz and second, accepted the further reduction of the public stake from 52 per cent to 36 per cent; though together with the stakes of the public Postbank AG, German railway, the KfW and the Land Nordrhein Westphalia, the public stake in Lufthansa still totalled 40.65 per cent (Bundesminister der Finanzen, 1995). In January 1997 the German government announced that it would sell its remaining stake in Lufthansa, while approving legislation intended to keep the carrier in German hands. The draft legislation called for the airline’s traditional bearer shares to be converted

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into registered shares so that the government could monitor who owned the stock (New York Times, 15 January 1997). Lufthansa started major restructuring in 1992, which was gradually implemented after consultation with representatives of the personnel. The central business sectors – freight, technology and airline transport – were established as independent profit centres; while activities such as sales, cost accounting and product management continued to be centralised within the Lufthansa holding company. The status of the workers as civil servants is being gradually ended, starting with the introduction of flexibility contracts and acceptance by the trade unions of step by step employment reductions. A deregulation commission, established in 1989 by the Federal government, made recommendations for deregulation and privatisation in the field of energy supply. However, nothing of major significance has happened so far with the traditional local or regional coalitions of interests and clientele structures remaining intact. This does not mean that the big players in this sector, like RWE, Veba, Bayernwerk etc., will not adapt to new international competition and pressure, especially from the EU Commission, to liberalise energy markets. The point is that the current restructuring processes are being undertaken while retaining publicly owned firms (Esser, 1995). PRIVATISATION POLICY IN EAST GERMANY The degree to which the process of privatising concerns in East Germany that were formerly the ‘property of the people’ may affect the overall policy of privatisation in the new united Germany remains to be examined. The Treuhand was set up in March 1990 by the GDR, while still autonomous. Its task was to convert the 9,000 nationalised firms and holding companies, representing at the same time some seven million workers, into business companies and require them to be run in accordance with the norms of a market economy. The West German government then used its pressure to make changes in the Treuhand’s management, placing its own managers of proven capacity in key administrative posts, in what was termed the ‘largest industrial holding company in the world’ (Mrs Breuel, chair of the Treuhand). After reunification the Treuhand became a legally constituted entity under the legal and technical supervision of the Federal Ministry of Finance. The nine members of its Board and the 24 members of its management enjoyed a considerable degree of autonomy in defining which of the 9,000 firms under their jurisdiction should be candidates for survival, whether they were to be split up, and if so how, and whether they were to be sold off, and if so to whom and for what price, and what should become of the sale proceeds. Examination of these problems was divided among five specialised sectors for the various industries and 15 subgroups regionally based, their task being to ‘municipalise’ immovable assets and privatise small firms operating in a fairly local context. After reunification, the West German trade unions won the right to have four representatives on the board of management. Given that the Treuhand was not a joint-stock company under German law, the

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possibility for joint management by the unions did not exist; nevertheless, constant pressure on their part led to them being granted minimal participation. In conformity with the market ideology destined to prevail in the new united Germany, the Treuhand began by announcing that its priority was to privatise ‘competitive’ firms in East Germany and liquidate the remainder. Moreover, it took the view that wider structural and social policy considerations were not within its competence. Given the policy of closures, the Treuhand rapidly made itself extremely unpopular not only with the East German population but with the elected local and Länder representatives in the ex-GDR. Mass demonstrations, organised by the unions, vehemently demanded that priority should be given to industrial rehabilitation before privatisation or liquidation was considered. The feeling was strongly expressed that the prime objective should be to preserve the basic industrial core and thus prevent the eastern part of Germany from being radically deindustrialised. When in the spring of 1991 the number of job losses began to mount sharply, politicians and unions in East Germany increased their pressure on the Federal government to force the Treuhand to alter its priorities. Indeed, within the ranks of the CDU protests grew more vociferous, even to the point of threatening the party’s unity. In an agreement of March 1991, called ‘Grundsätze der Zusammenarbeit von Bund, neuen Ländern und Treuhandanstalt für den Aufschwung Ost’ (principles of cooperation between federation, new states and Treuhand agency for upturn in the East) efforts were made to improve the coordination between federation, states, trade unions and the Federal agency for labour market policy. Additionally, ‘Treuhand cabinet offices’ (TreuhandWirtschaftskabinette) were established in every one of the new Länder and were to be informed by the Treuhand about every planned measure of privatisation affecting their region. Consequently, from that spring onwards the Treuhand gave greater consideration to the rehabilitation of non-profitable concerns and set about finding ways to consolidate key areas of industry, such as steel, chemicals, shipbuilding and engineering, even when private investors and purchasers were not forthcoming. Furthermore and generally speaking, when a decision about a firm’s future was taken, greater attention was given to its combined repercussions on the industrial sector concerned, on the region and on the labour market. Management in every single firm passing through the hands of the Treuhand was expected to act as an entrepreneur in the task of restoration of profitability. The trade unions where successful in fighting for social plans, job creation clubs (Beschäftigungsgesellschaften) and measures of retraining when redundancies happened. In the autumn of 1992 the Treuhand and 500 firms agreed to specific bilateral plans supporting investment. Five ‘management societies’ were created in which the Treuhand cooperated with experienced managers to bring together and rehabilitate small or medium-sized state firms for later privatisation. Finally, the new states created agencies which had the task of identifying strategically important enterprises for restoring in cooperation with the Treuhand agency (Hickel and Priewe, 1994: 60).

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The result was that the regional authorities in East Germany succeeded in acquiring more muscle; while the Treuhand alone retained the power to pronounce on a firm’s future, with the option of closure. Expert ‘economic cabinets’ were now set up in the five new Länder, which the Treuhand was obliged to inform in advance of measures that were being considered affecting firms in their region. This requirement of prior notice resulted in a kind of corporatist system of negotiation, whereby the unions and municipal authorities concerned were brought in to discussions with the Treuhand and regional governments. In this way, the regional and union representatives on the Treuhand’s management board found themselves in a considerably stronger position to put the case for account to be taken of local economic and social problems. East German privatisation has been successful so far in introducing West German standards and procedures to the East. But the German taxpayer has had to pay the bill for the assistance measures, including payment for unemployment relief and a raft of work creation and retraining measures. By the end of 1996 net transfers from West to East since 1991 added up to over DM 900 billion, running at about 5 per cent of West German GDP (Sachverständigenrat, 1995; Deutsche Bundesbank, 1997). At the end of 1994 the Treuhand agency was abolished. It was successful in privatising about 15,000 firms or parts of firms with total of debts about DM 256 billion and an income of DM 67 billion. About 3,000 privatisations were ‘management-buyouts’; while only 860 firms were placed in the hands of foreign owners (Bundesregierung, 1995: 125). Eighty-five per cent of the East German industrial assets are now in the ownership of West Germans, which is best characterised as a large-scale ownership transfer from the East to the West of Germany (Arbeitsgruppe, 1996: 161). A new agency, the ‘Bundesanstalt für vereinigungsbedingte Sonderaufgaben’ (BvS) supervised by the Ministry of Finance now manages the privatisation of those firms which were not privatised under the Truehand. It is too soon to say yet whether this new policy of rehabilitation and privatisation is likely to be a fruitful one. All that can be said is that the East German economy would by now have collapsed were it not for the West German taxpayer and his/ her DM 900 billion paid between 1991 and 1995; a figure which includes industrial subsidies of DM 54.26 billion in the same period (Arbeitsgruppe, 1996: 168). It should be added that initial projects for radical privatisation were abandoned early on. In the face of the threat of the eastern regions being deindustrialised wholesale, there was (nearly) general appreciation that market forces alone were incapable of carrying through the economic and social integration of the former GDR with the Federal Republic. Now, and for a long time to come, the need for intervention and support on the part of the government is accepted, the only matter to be settled is how extensive such intervention should be. Is the answer an overall and systematic industrial policy with the setting-up of state-financed industrial holding companies (the view held by unions and SPD and to which certain areas of industry are sympathetic)? Or would the joint involvement of the Länder and private and publicly owned banks in major developmental concerns within a region be sufficient (the

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view held by the Federal government and most professional associations)? In any event and which ever way the debate goes, it is now accepted that after the wave of neo-liberal euphoria opinion is moving back in the direction of the West German ‘social market economy’ model. EXPLANATIONS AND CONCLUSION: THE CORPORATIST GERMAN MODEL – BUT FOR HOW LONG? To understand precisely why the privatisation process in Germany has been so hesitant since the 1980s in (West) Germany, and despite the large-scale privatisation underway in the East, it has to be appreciated that public ownership of industrial corporations was relatively insignificant, and that the sectors of industry which were crucial in the drive for exports – mechanical engineering, construction of industrial equipment, car manufacture, chemical and electrical industries, to name only the most important ones – were already privately owned. Consequently, a highly sophisticated and effective financial sector based on private capital was in place, whose interests closely interlocked with those of West German industry. Unlike the situation that applied in a number of other European countries, a policy of privatisation was not, from an economic standpoint, of paramount importance in making sure that Germany remained competitive in world markets. Then again – a factor closely linked to that just mentioned and one plain to observe – there was no significant political or social force in Germany to advocate a massive privatisation programme. Privatisation was not strongly championed by professional business associations, trade unions, or either of the two main political parties. On the contrary, generally speaking there was an effective consensus among Federal and state governments, local authorities, political parties, unions and business associations that public assets should not be privatised so long as they were considered essential for industrial and regional policy. This was true of the major research institutes, telecommunications, federally owned banks such as Kreditanstalt für Wiederaufbau, air transport (Lufthansa), or again, at regional and local level, energy distribution and a certain number of business concerns. In all of these sectors, the consensus existed that Federal government intervention, in either monopolistic or majority shareholding form, was perfectly right and proper. It was also true, however, that in general the view was that these concerns should be run in line with market criteria, as regards profitability, competitiveness and so on. Accordingly, the debate on privatisation from the 1980s, at all levels, has in the main been taken up with the issue of whether and to what degree the state enterprises have continued to satisfy the demands of an enterprise economy. Politically speaking, the only discordant voice has been that of the Free Democrats, which has been forced by growing interparty rivalry to take a more aggressive stance on behalf of the interests of its relatively wealthy clientele, who want more investment alternatives. The CDU certainly needed to take account of its neo-liberal partner in government; at the same time it could not afford to disregard sections among its own electorate who clamoured for the wider possibilities of share flotation. Here can be found the most important reason for the somewhat

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symbolic character of German policy in respect of privatisation. While this category of voters needed to be appeased, it had to be made clear to them that their interests, justifiable though they were, had to be deferred for the time being. The broad mass of the electorate did not see privatisation and deregulation as self-evident political objectives. In the wake of the unhappy experience of the sale of “Volksaktien”, popular shareholding capitalism no longer held vote-winning properties for the major parties. People have continued to prefer to put their savings into low-risk stock or into property. Whether this attitude is changing now, as many politicians, business and media people are hoping after the successful selling of Deutsche Telekom shares in November 1996, it is too soon to say. A third important factor to explain the reserve evident in privatisation policy in Germany is attributable to the country’s political system and institutions. Devolution of power at regional and local levels has resulted in extreme fragmentation of political decision making. Hence the need for a coordinating role at the Federal level in order for government to function properly (Lehmbruch, 1976), and a whole range of institutional and technical ‘political interlocking’ devices (Scharpf et al., 1976; Ellwein and Hesse, 1987). Hardly surprisingly, municipalities and Länder have not had the slightest intention of parting with public ownership given the advantages that accrue to them in areas of local and regional policy. Their preference would be for what the Free Democrats disdainfully term ‘state capitalism’: having at their disposal the wherewithal to conduct an appropriate policy in terms of research, technology and industrial development, meanwhile retaining the option to subsidise research and innovation among smaller firms. Consequently, local and regional authorities stand in the way of Federal privatisation plans and, moreover, were able to exercise their veto on issues such as railway or telecommunications privatisation in the 1980s. For all these reasons, privatisation has so far affected no more than a few stateowned concerns and those which have proved to be profitable. The debate over the principle of privatisation, and when, and how, has involved not merely the interests of a small number of shareholders eager to enlarge their portfolios, but fiscal considerations, the urge to bring a measure of reform into the distribution of national assets, as well as the concerns of industrial policy. In other words, the key factors in the coalition government’s privatisation policy have sprung from a combination of symbolism (‘we are privatisers too’) and fiscal considerations. It can be argued that privatisation in East Germany did not really change this well-established pattern. After a short illusory boom of neo-liberalism, privatisation happened there in a way consistent with the West German corporatist, social market economy model. That privatisation was a political issue at all was a result of the until then unknown problems involved in solving the breakdown of the East German economy and turning it into a social market economy, like that in the west of the country. It is important to take into account that the political elites in the West, including business and labour organisations, were united in the belief that the wellestablished institutions of the West German model should be transferred to the East (Lehmbruch, 1990; Seibel, 1994; Esser, 1995). Whether these institutions will work there is another question. Until now the West German taxpayer has shown

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solidarity by paying the bill; but if the economic integration fails then the whole of Germany will be changed dramatically. Especially as the result will be the absence of a modern, self-sustained and competitive economy in the East, which alone can form the basis for the functioning of an effective social market economy throughout the newly unified Germany. A new drive for privatisation has arisen in the politically regulated infrastructure sector in recent years. Here new challenges which may be encapsulated in phrases like ‘third technological revolution’, ‘triadisation of production’ and ‘Europeanisation’ have forced the economic and political actors to break up longestablished public monopolies. Public monopolies shaped to fulfil the duties of producing a community of interest based on the provision of universal public goods. Although the government has attempted to manage these new pressures for privatisation and deregulation in a traditional, pragmatic and corporatist manner, the unintended consequences of destroying universal services (for instance in telecommunications) or ‘public goods’ for this social-consensus oriented society are difficult to estimate. Until now economic measures in the German ‘social market economy’ model have continued to stand out in terms of the economic success and social stability they have achieved. Efficiency and stability are, in fact, two sides of the same coin, one standing for continuing economic modernisation – which meets with general acceptance because it succeeds and which succeeds because it meets with general acceptance! The fact that an equation containing so many imponderables has so far regularly met with solutions would seem to be a vindication of the political and organisational resources of the social market economy. In the absence of any real urgency in the past, why then abandon this tried and tested approach to economic policy in pursuance of a policy of privatisation and deregulation, whose consequences are unforeseeable? If Germany resolves to embark on a wide-ranging and systematic policy of privatisation and liberalisation, which includes all the public assets at local and state level, it would be promoted by the urge to proceed with a radical restructuring of capitalism. That may happen – but forecasting its economic and social consequences is another story. NOTE 1 This article is a revised and updated version of J. Esser, ‘Germany: Symbolic Privatization in a Social Market Economy’, in V. Wright (ed.) (1994) Privatization in Western Europe, London: Pinter.

REFERENCES Arbeitsgruppe Alternative Wirtschaftspolitik (1996) Memorandum ’96, Cologne: PapyRossa. BMPT (1996) Das Bundesministerium fur Post und Telekomunikation, Postpolitische Informationen, May 1996. Bundesminister der Finanzen (ed.) (1983) Beteiligungen des Bundes 1983, Bonn: Heger. Bundesminister der Finanzen (1995) ‘Bericht zur Verringerung von Beteiligungen des Bundes’ Fortschreibung 1995, Bonn, mimeo.

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Bundesregierung (1995) Materialien zur Deutschen Einheit und zum Aufbau in den neuen Bundesländern, Bundestagsdrucksache 13/2280, 8 September 1995, Bonn. Czada, R. (ed.) (1983) ‘ Nationalisierugspolitik ’, in M. G. Schmidt (ed.) Westliche Industriegesellschaften, Munich: R. Piper. Czada, R. (1995) ‘ Der Kampf um die Finanzierung der deutschen Einheit ’, in G. Lehmbruch, (ed.) Einigung und Zerfall, Opladen: Leske & Budrich. Deutsche Bundesbank (1993) Zur Vermoegenssituation der privaten Haushalte in Deutschland, Frankfurt am Main: Monatsbericht, October 1993, Frankfurt am Main, pp. 19–32. Deutsche Bundesbank (1997) Die Aktie als Finanzierungs- und Anlageinstrument, Frankfurt am Main: Monatsbericht, pp. 27–41. Dunning, J. H. and Pearce, R. D. (1981) The World’s Largest Industrial Enterprises, Farnborough: Westmead. Economist, 15 October 1994. Ellwein, T. and Hesse, J. J. (1987) Das Regierungssystem der Bundesrepublik Deutschland, 6th edn, Opladen: Westdeutscher Verlag. Esser, J. (1995) ‘ Germany: Challenges to the Old Policy Style ’, in J. Hayward, (ed.) Industrial Enterprise and European Integration, Oxford: Oxford University Press. Esser, J., Lüthje, B. and Noppe, R. (eds) (1997) Europäische Telekommunikation im Zeitalter der Deregulierung – Infrastruktur im Umbruch, Münster: Westfälisches Dampfboot. Handelsblatt, 9 June 1988. Heinz, W. (ed.) (1993) Public Private Partnership – ein neuer Weg zur Stadtentwicklung?, Stuttgart: Kohlhammer. Hickel, R. and Priewe, J. (1994) Nach dem Fehlstart, Frankfurt am Main: Fischer. Himmelmann, G. (1986) ‘ Geschichtliche Entwicklung der öffentlichen Wirtschaft ’, in H. Brede and H. von Loesch (ed.) Die Unternehmen der Oeffentlichen Wirtschaft in der Bundesrepublik Deutschland, Baden-Baden: Nomos, pp. 31–56. Hohn, H.W. and Schimank, U. (1990) Konflikte und Gleichgewichte im Forschungssystem, Frankfurt–New York: Campus. Jahreswirtschaftsbericht der Bundesregierung (1983) Bundestagsdrucksache 9/2400, 27 January 1983, Bonn. Jahreswirtschaftsbericht der Bundesregierung (1993) Bundestagsdrucksache 12/4330, 11 February 1993, Bonn. Jahreswirtschaftsbericht der Bundesregierung (1995) Bundestagsdrucksache 13/370, 2 February 1995, Bonn. Knauss, F. (1986) ‘ Unternehmen in der Industrie ’, in H. Brede and H. von Loesch (eds) Die Unternehmen der offentlichen Wirtschaft in der Bundesrepublik Deutschland, BadenBaden: Nomos, pp. 213–29. Lehmbruch, G. (1976) Parteienwettbewerb im Bundesstaat, Stuttgart: Kolhammer. Lehmbruch, G. (1990) ‘ Die improvisierte Vereinigung: Die dritte deutsche Republik ’, Leviathan, 18, pp. 462–86. Lehmkuhl, D. and Herr, C. (1994) ‘Reform im Spannungsfeld von Dezentralisierung und Entstaatlichung: Die Neordnung des Eisenbahnwesens in Deutschland’, Politische Vierteljahresschrift, 35(4), pp. 631–57. Monopolkommission (1991) Zur Neuordnung der Telekommunikation, Sondergutachten der Monopolkommission Bd. 20, Baden-Baden: Nomos. Monopolkommission (1992) 9. Hauptgutachten, Baden-Baden: Nomos. Monopolkommission (1996) Elftes Hauptgutachten der Monopolkommission 1994/95, Bundestagsdrucksache 13/5309, 19 July 1996, Bonn. Neue Zürcher Zeitung, 30 November 1990. Neue Zürcher Zeitung, 1 December 1993. Neue Zürcher Zeitung, 12 March 1994. Neue Zürcher Zeitung, 1–2 March 1997. New York Times, 15 January 1997.

122 Josef Esser OECD (1989) Wirtschaftsberichte Deutschland 1989, Bonn: OECD. Reichard, C. (1994) Umdenken im Rathaus: neue Steuerungsmodelle in der deutschen Kommunalverwaltung, Berlin: Edition Sigma. Ricke, H. (1994), ‘Schlanker, flexibler, schneller: Die Privatisierung stellt die Telekom vor grosse Herausforderungen’, Frankfurter Allgemeine Zeitung, 6 September 1994, B13. Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (SVR) (1983) Jahresgutachten 1983/84, Bundestagsdrucksache 10/669, Bonn: Heger. Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (SVR) (1995), Jahresgutachten 1995/96, Bundestagsdrucksache 13/3016, 15 November, Bonn: Heger. Scharpf, F. W. Reissett B., Schnabel, F. (1976) Politikverflechtung: Theorie und Empirie des kooperativen Federalismus in der Bundesrepublik, Kronberg: Athaeneum. Seibel, W. (1994) ‘ Strategische Fehler oder erfolgreiches Scheitern? Zur Entwicklungslogik der Treuhand 1990–1993 ’, Politische Vierteljahresschrift, 35(1), pp. 3–39. Shonfield, A. (1965) Modern Capitalism, Oxford: Martin Robertson. Wirtschaftswoche, 42 (52–3), 23 December 1988. Woll, A. (1987) ‘ Diskrepanz zwischen Worten und Taten in der deutschen Wirtschaftspolitik ’, Neue Zürcher Zeitung, 23–4, 8 (Fernausgabe), pp. 11–12.

7

Privatisation in Greece Nicholaos Haritakis and Christos Pitelis

INTRODUCTION This chapter examines privatisation in Greece. The country has had a privatisation programme since 1991, which has gained the support of both major political parties but has failed so far to generate any spectacular results. The aim of the chapter is to examine the history, process and progress of privatisation in Greece in the period 1991 to 1997. Following this introduction, the next section reviews the relative efficiency of alternative ownership structures (public versus private); then privatisation in Greece is examined. Concluding remarks follow in the last section of the chapter. THEORETICAL CONSIDERATIONS Privatisation of state-owned assets became a major economic policy of many countries in the 1980s. This was part of a reconsideration of the nature and role of the state sector in market economies, which seems to have been resolved in favour of the view that government involvement had been excessive (Pitelis, 1994). At the end of the 1980s, the demise of central planning in Eastern Europe led to an attempt to create markets there and to privatise whole economies. It is interesting to examine why this has happened, in particular the theoretical reasons offered for or against privatisation. The state is widely acknowledged to be one of the most important institutional devices for resource allocation and the division of labour, along with the market (price mechanism), and the firm. In centrally planned economies, the state has been primary. However, in market economies, too, the role of the state has been increasing steadily since the Second World War. In most OECD countries, government receipts and outlays as a proportion of GDP are high, in some cases as high as 60 per cent (Mueller, 1989). Many theories have tried to explain the growth of the public sector in market economies. They originate from a number of different ideological perspectives. In brief, neoclassical theories tend to consider such growth as a result of increasing demand for state services by sovereign consumers, while public choice theorists regard it as a result of state officials, politicians and bureaucrats’ utility-maximising policies, which tend to favour enhanced state

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activity. In the Marxist tradition, the growth of the state sector was linked to the laws of motion of capitalism – increasing concentration and centralisation of capital and declining profit rates – which generate simultaneous demands by capital and labour on the state to enhance their relative distributional shares, for example, through infrastructure provisions and increased welfare services, respectively. There are variations on these views within each school. Besides explaining why states increase their economic involvement over time, many economists in the 1980s focused their attention on why states could fail to allocate resources efficiently and, more particularly, on the relative efficiency properties of market versus non-market resource allocation. Particularly well known here are the views of the Chicago School, in particular Friedman (1962) and Stigler (1988). In a number of papers, Friedman has emphasised the possibility of states becoming captive to special interests of powerful organised groups, notably rich business people and trades unions. Stigler, among others, on the other hand, has pointed to often unintentional inefficiencies involved in cases of state intervention. Examples are redistributional programmes by the state which dissipate more resources (for example, in administrative costs) then they redistribute. For these reasons – and the tendency generated by utility-maximising bureaucrats and politicians towards excessive growth – rising and redundant costs tend to lead to government failure. Wolf (1979) has a classification of such failures in terms of derived externalities (the Stigler argument): rising and redundant costs because of officials’ ‘more is better’ attitude, and distributional inequities, in favour of powerful pressure groups (as in Friedman). On a more general theoretical level, the case for private ownership and market allocation has been based on three well-known theories. First that of the neoclassical property rights school, which suggests that the communal ownership (the lack of property rights) will lead to wealth dissipation – sometimes called the ‘tragedy of the commons’ argument.1 Second, Hayek’s (1945) view of dispersed knowledge, according to which, knowledge is widely dispersed in every society and efficient acquisition, utilisation and creation of (new) knowledge can be achieved best through price signals provided by markets. Third, Alchian and Demsetz’s (1972) residual claimant’s theory which suggests, much in line with the property rights school, that private capitalist ownership of firms is predicated on the need for a residual claimant of incomegenerating assets, in the absence of which, members of a coalition, for example a firm, will tend to free ride thus leading to an inefficient utilisation of resources. There is now a huge literature on the merits and limitations of these theories; see for example Eggertson (1990) for an extensive coverage. Some significant weaknesses have been exposed in each defence of private ownership and market allocation. Concerning the ‘tragedy of the commons’, it has been observed that, historically, communal ownership often had efficiencyenhancing effects. Hayek’s critique of pure planning loses much of its force when one considers choices of degree in ‘mixed economies’, which is virtually always the case, at

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least in market economies. Lastly, the residual claimant theory downplays the potential incentive-enhancing attributes of cooperatives and, moreover, becomes weaker when applied to modern joint-stock companies run by professional management.2 Well-known mainstream arguments relating to the problem of government failure are also Bacon and Eltis’s (1976) claim that services, including state services, tend to be unproductive; and Martin Feldstein’s (1974) view that payas-you-go social security schemes tend to reduce aggregate capital accumulation. The alleged reason for this is the view that rational individuals consider their contributions to such schemes as their savings, and they thus reduce their personal savings accordingly to remain at their optimal consumption-savings plans. Given, however, that the schemes are pay-as-yougo (that is, contributions are used by the government to finance current benefits), no actual fund is available, so that individuals’ reduction of personal savings represents an equivalent reduction of aggregate saving, equated by Feldstein to capital accumulation. Some of the above reasoning is reminiscent of (and is supported by) certain Marxist criticism of the role of the state; for example, the views that the state is captive to capitalists’ interests (Miliband, 1969), and that some state services involve unproductive (that is, no surplus value-generating) labour (Gouph, 1979). This is often linked to the falling tendency of the rate of profits, and the tendency for government spending under advanced capitalism to exceed government receipts. Reasons are related to demands by both capital and labour on state funds and resistance on both sides to taxation, which are particularly intensified under conditions of monopoly capitalism. The near universality of the attack on the state, from both ends of the political spectrum, as reflected above, is informative of the general theoretical aim underlying the drive to privatise (for one of the few attempts to defend the public sector, see Heald, 1983). Concerning specifically the relative efficiency properties of private sector versus public sector enterprises, the focus of attention has been, in the main, on issues of managerial incentives, competitive forces and differing objectives. It is claimed that public sector enterprises achieve inferior performance in terms of profits or of the efficient use of resources. While private sector managers are subject to various constraints leading them to profit-maximising policies, this need not be the case with public sector managers. Such constraints arise from the market for corporate control (that is, the possibility of takeover of inefficiently managed firms by ones which are run more efficiently), the market for managers (that bad managers will be penalised in their quest for jobs) and the product market, including the idea that consumers will choose products of efficiently run firms for their better price for given quality. Among other factors which tend to ensure that private sector agents (managers) behave in conformity with the wishes of the principals (shareholders) – by maximising profits in private firms – are, for example: the concentration of shares in the hands of financial institutions; the emergence

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of the M-form organisation which tends to ensure that divisions operate as profit centres; the possibility of contestable markets, that is, markets where competitive forces operate through potential entry by new competitors, as a result of free entry and costless exit conditions. It is assumed that public sector enterprises are not subject to such forces, at least, not to the same degree, which implies the possibility that managerial incentives for efficient use of resources and profit maximisation may be less pressing in public sector firms. Many of the above factors are linked to the concept of competition and competitive forces. Here again the claim is that public sector enterprises may be more insulated from such forces, being thus less likely to pursue efficiency and profit maximisation. The latter will also be true if public sector enterprises simply do not aim at such policies, for example because they are used as redistribution vehicles by the government; and/or for non-economic reasons, such as the need for electoral support; and/or because they aim at correcting market failures, such as the high prices of private sector monopolies. All these factors tend to establish the economic-theoretical rationale for the efficiency of private firms, and therefore for privatisation. Vickers and Yarrow (1987) and Kay et al. (1986) offer extended discussion. Various limitations can be identified in the case for the relative efficiency of the private sector. One limitation arises from the possibility that the various constraints on private sector firms’ managers are not as strong as they are often suggested to be. For example, large size may protect inefficient firms from the threat of takeover; it may be difficult to tell when a manager has performed well, given the often long-term nature of managerial decisions; and boundedly rational consumers may often fail to tell differences in the quality of similarly priced products. Concerning competition, a private sector monopoly is as insulated from it as a public sector monopoly, ceteris paribus (assuming no difference in the forces of potential competition). Furthermore, the absence of competition is not per se a reason for privatisation: it could well be a reason for opening up the public sector to such forces, for example, through competitive tendering and franchising (Yarrow, 1986). Such considerations have led many commentators to the conclusion that the issue is not so much that of the change in ownership structures as the nature of competitive forces and of state regulatory policies (Clarke and Pitelis, 1993; Kay and Silberston, 1984; Vickers and Yarrow, 1987; Yarrow, 1986). An important issue often downplayed by proponents of privatisation policies is that the very reason for public sector enterprises has often been market, not government, failure (Rees, 1986). It is worth reminding ourselves of the issues here. In mainstream economic theory, the first fundamental theorem of welfare economics shows that markets can allocate resources efficiently without state intervention, provided that market failures do not exist. Such failures, however, are widely observed; famous instances of market failure being the existence of externalities (interdependencies not conveyed through prices); public goods (goods which are jointly consumed and non-excludable); and monopolies, which tend to increase prices above the competitive norm. The observation,

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among others, that efficient government itself is a public good, has led to the idea of pervasive market failure (Dasgupta, 1986), which is viewed as the very raison d’être of state intervention (Stiglitz, 1986). The very reason why public sector enterprises are run by the state is that they have been seen as natural monopolies (firms in which the minimum efficient size is equal to the size of the market as a result of economies of scale, leading to declining costs). If private, it is assumed that these firms would introduce structural market failure in terms of monopoly pricing. The undertaking of the activities of such natural monopolies (often known as public utilities) by the state could solve the problem through, for example, the introduction of marginal cost-pricing policies. Although such policies need not necessarily re-establish a first best Pareto-optimal solution (given imperfections elsewhere in the economy), they could, at the very least, point to the limited value of any claims that public utilities do not maximise profits, given that this was not their objective to start with. To summarise, theory and evidence seem to be less clear-cut on the issue of the relative efficiency properties of different ownership structures than would appear to be the case on the basis of the privatisation mania of the 1980s. This is not to say that ownership does not matter, but rather that the issue of market versus non-market allocation is far more complex than often allowed by the proponents of privatisation. This conclusion need not be true if the very reason for public enterprise was misplaced to start with. As was seen in the previous subsection, neoclassical, Chicago and Hayekian perspectives would point to this conclusion. However, the immense literature on the issues of contestable markets, differential efficiency and differential innovation is at best indecisive (see Pitelis, 1991, for a survey). Furthermore, and importantly, the transactioncost theory is predicated on the existence of firms as solutions to transactional market failures; therefore it strongly questions the alleged efficiency of the market. All these again would appear to question the simple view of the efficient private sector versus the inefficient public sector. Theory and evidence, once again, are indecisive on the issue of the relative efficiency properties of different ownership structures.3 THE CASE OF GREECE The salient characteristics for understanding the reasons and the performance of the privatisation programme, launched by the Greek government in 1991, can be summarised as follows: 1 The state-owned enterprises as units of production – as distinct from providers of secure employment – were in general a failure. 2 Insiders of state-owned companies, both workers and managers, compounded resistance to privatisation expressing fears that the process would exacerbate unemployment and, at the extreme, that the new liberal government would be swept away (political cost argument).

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3 For many practical reasons, such as valuation difficulties, meaningless accounting statements and unclear sales and costs accounts reported, the impression was formed that buying those state companies was a dubious investment. 4 In this muddled situation, the presence of a largely state-owned banking system and the suspicion that buyers were benefiting from low sales prices at the expense of the state, produced an inflexible response and, in particular, a complete lack of financial liquidity to support the programme. Table 7.1 Greek state-owned industrial companies: major information, March 1991

Source: Denationalization Secretariat, Ministry of Industry 1991 Note: aDr. = Drachma Key to Tables 7.1 to 7.4: Agricultural Bank of Greece (ABG); Commercial Bank of Greece (CBG); Hellenic Bank of Industrial Development (HIBD); Ministry of Economics (ME); Ministry of Industry, Trade and Technology (MITT); Ministry of National Defence (MND); Ministry of Transportation and Communications (MTC); National Bank of Greece (NBG); Industrial Restructuring Organization (IRO); Public Power Corporation (PPC); Greek Telephone Authority (OTE)

Table 7.2 The Greek privatisation programme, March 1991

Source: ICAP Notes: aCompanies in the energy sector are not included; bexcept the Greek Telephone Authority and the mobile telephone sector

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included in the privatisation programme. The bulk of industrial assets and a good part of industrial property required either a drastic liquidation or (for very few of them) privatisation through a sale auction. The last was implemented under the condition that the company would be able to compete and survive after the privatisation. Starting from 1993, the government passed on to buyers a new responsibility. It required them to put forward a business plan which would keep each company in its current line of business and make firm proposals for employment and investment targets. Very often those targets were used as evaluation criteria for potential buyers. From the legislative point of view, privatisation went through three phases. During phase one (1990–1) only partial adjustments were made and all measures were aimed at the formation of a group of necessary conditions required in order to initiate the main programme. Following a trial and error procedure, the government tried to understand the required core legislative transformations for a full implementation of the programme. During phase two (1992–3) the experience gained in the previous phase was presented through a complete legislative framework (Law 2000/91). The new law expressed experience gained from international practice and incorporated particular characteristics of both the Greek and the European Union legal environment. In this framework one can observe an important difference vis-à-vis the regulations approved for the same purpose in other countries. Law 2000/91 described the companies to be included in the privatisation programme without listing them explicitly. This was in contrast to other countries involved in the same procedure before, for instance, the German legislation passed on June 17/1990 and it could be an important reason for the delays observed afterwards in the programme. As part of law 2000/91, authority passed to the Denationalisation Secretariat and the Central Triministerial Committee and the law demanded the privatisation and reorganisation of nationally owned and controlled property in general. At this level it was, at least from a legislative point of view, feasible to extend the privatisation procedures either to the ex-private and currently public companies nationalised during the first Pasok (socialist) government (1982–4), public utilities and state-owned monopolies and non-viable companies mainly acting as collateral of state-owned financial institutions. The basic goals expressly set by the law (beyond the political-ideological principles of ‘less state’) at that time were: • the need for an improvement in the average effectiveness of production activity; • a drastic and permanent reduction in public deficits; and • the necessity for an acceleration in the acceptance of the new environment for the functioning of the markets implemented by the European Union. Finally, during phase three (1993) and when deficits generated by state operations had already been substantially reduced, privatisation procedures were announced primarily for profitable and high asset value public entities and utilities. The target

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was to accumulate new funds and to achieve a drastic reduction of aggregate outstanding public debt. The organisations affected were, for example, the Telecommunications Organisations of Greece (OTE), the National Tourist Organisation (EOT), casinos, oil refineries, airports and mobile telephony. Phase diagrams, Figures 7.1 and 7.2, display the administrative steps required in order to fully complete the procedures as well as the legal network established by the new legislation. It is evident that the creation of an effective privatisation procedure in a country with an established legal environment is complicated and

Figure 7.1 The privatisation process in Greece

Figure 7.2 The Greek privatisation model

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rigid. Furthermore, socialising the debt of an organisation, according to an EU competition policy ruling, demands additional administrative procedures and a very complicated authorisation process. A credible privatisation programme, implemented by a government with a minimal electoral majority in the parliament, as it was in Greece at that time, is likely to result in short-term problems. It is likely that there will be political pressures and interest group lobbying for mid-course changes, and there may even be pressures to reverse the programme. In the Greek case, even though the government had taken significant actions to provide a clear signal that a change in policy favouring privatisation had occurred, it failed to build a good track record on its commitment and in the end was pushed to resignation, in November 1993, after losing its parliamentary majority by one vote. Table 7.3 summarises the actions taken by the companies which were initially included in the privatisation programme during the period 1990–1993. It is clear that few outright sales occurred, although many Table 7.3 Privatisation programme: early stages, to March 1991

Source: Denationalisation Secretariat, Minsitry of Industry Notes: aThe Bank of Central Greece is not included; bIncluding LARKO and PYRKAL (two industrial companies owned by the state); cHellenic aircraft industry; dHellenic urban transportation and mobile telephony are excluded

Table 7.4 Job reductions in privatised and restructured state-owned holding groups in Greece

Source: Denationalisation Secretariat, Ministry of Industry

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firms were evaluated for possible privatisation. Preparations for privatisation in Greece seem to have had a depressing effect on economic activity. The data on unemployment in Table 7.4 shows that a large number of job losses resulted from privatisation and the restructuring of state-owned firms. The largest privatisations that took place during the 1991 to 1996 period were: • In shipbuilding: the sales of Elefsis and Neorion shipyards, i.e. the second and the third largest facilities. • In banking: during the first period of privatisation two small banks – the Bank of Piraeus and the Bank of Athens – were offered to the private sector. • In telecommunications: during the first period cellular telephone was privatised and licences were offered to two private companies to operate the system. In 1996 and 1997 the government launched two flotations of the Greek Telephone Authority (OTE). In total, in both issues the government sold close to 20 per cent of the 24 million shares in the company. • In industry: between 1989 and 1994 seventeen companies were privatised with proceeds amounting to Dr 137.3 billion. The sale of Aget Heracles Cement to Calsestruzzi and the flotation of the Hellenic Sugar Industry on the Athens Stock Exchange were the two major ones. Looking at the positive potential aspects of the privatisation programme in overall economic activity, we note: 1 the stabilisation, with a tendency to recovery, that has been noticed in the rate of utilisation of productive forces in the industrial sector, from a 75.5 per cent average value for the period 1982–1989, to a 77.5 per cent average value for the period 1990–1992 (Institute of Economic and Industrial Research, 1993); and 2 the improvement measured in average industrial profitability, which rose sharply between 1990 and 1993 (European Economy, 1996). The general remarks which can be made on the privatisation programme in Greece are not dissimilar to those made for programmes in other countries. On the positive side: • the analysis of the problems of some state banks (mainly the Agricultural Bank of Greece and Hellenic Bank for Industrial Development) and the support provided for their portfolios to overcome bankruptcy status; and • the establishment of a control mechanism for the management of the aggregate public sector portfolio. On the negative side: • the rate of privatisation, which was very conservative in the beginning and more dynamic afterwards. This caused overall uncertainty regarding the quality of the actions taken; and

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• the failure to create a ‘critical mass’ of successfully privatised companies in order to work as paradigms for full completion of the programme.

CONCLUSION Theory and evidence suggest that the relative efficiency of alternative (private/ public) ownership structures is too complex to allow any easy and a priori generalisations. For the case of Greece, there is little doubt that speeding up the process of privatisation is essential, at least for the case of so-called ‘problematic’ enterprises. A reason for this need is the often particularly inefficient and corrupt public sector in Greece. It is, however, important that privatisation takes place alongside reorganisation, restructuring and improvement in efficiency in the remaining public sector. NOTES 1 The title comes from over-grazing of common lands in agricultural communities. 2 For a further discussion of these criticisms see chapter 2. 3 The explanation of the drive for privatisation is more complex, and more political, than pure ‘market versus planning’ considerations might suggest. Vickers and Yarrow (1987, p. 157), for example, offer the following classification of the objectives of privatisation: (1) reducing government involvement in industry; (2) improving efficiency in the industries privatised; (3) reducing the public sector borrowing requirement; (4) easing problems of public sector pay determination by weakening the public sector unions; (5) widening share ownership; (6) encouraging employee share ownership; and (7) gaining political advantage.

REFERENCES Alchian, A. and Demsetz, H. (1972) ‘ Production, Information Costs and Economic Organization ’, American Economic Review, vol. 62, no.5, pp. 777–95. Bacon, R. and Eltis, W. (1976) Britain’s Economic Problem: Too Few Producers, London: Macmillan. Clarke, T. and Pitelis, C. N. (eds) (1993) The Political Economy of Privatization, London: Routledge. Dasgupta, P. (1986) ‘ Positive Freedoms, Markets and the Welfare State ’, Oxford Review of Economic Policy, vol. 2, no. 2, pp. 25–36. Eggertson, T. (1990) Economic Behaviour and Institutions, Cambridge: Cambridge University Press. European Economy (1996), no. 62. Feldstein, M. (1974) ‘ Social Security, Induced Retirement and Aggregate Capital Accumulation in the United States ’, Journal of Political Economy, vol. 82, pp. 905–26. Friedman, M. (1962) Capitalism and Freedom, Chicago: University of Chicago Press, Chicago. Gouph, I. (1979) The Political Economy of the Welfare State, London: Macmillan Educational. Hayek, F. A. (1945) ‘ The Use of Knowledge in Society ’, American Economic Review, vol. 35, pp. 519–30. Heald, D. (1983) Public Expenditure: Its Defence and Reform, Oxford: Martin Robertson. Institute of Economic and Industrial Research (1993) Quarterly Report, Issue no. 4, November.

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Kay, J., Mayer, C. and Thompson, D. (1986) Privatisation and Regulation: The UK Experience, Oxford: Clarendon Press. Kay, J. A. and Silberston, Z. A. (1984) ‘ The New Industrial Policy – Privatization and Competition ’, Midland Bank Review, spring, pp. 8–16. Miliband, R. (1969) The State in Capitalist Society, London: Quartet Books. Mueller, D. C. (1989) Public Choice II: A Revised Edition of Public Choice, Cambridge: Cambridge University Press, Cambridge. Pitelis C. N. (1991) Market and Non-market Hierarchies, Oxford: Blackwell. Pitelis C. N. (1994) ‘ Industrial Strategy for Britain, in Europe, in the World ’, Journal of Economic Studies, vol. 21, no. 5, pp. 2–92. Rees, R. (1986) Public Enterprise Economics, Oxford: Philip Allan. Stigler, G. (1988) ‘ The Effect of Government on Economic Efficiency ’, Business Economics, vol. 23, pp. 7–13. Stiglitz, J. E (1986) Economics of the Public Sector, New York: Norton. Vickers, J. and Yarrow, G. (1987) Privatization: An Economic Analysis, London: MIT Press. Wolf, C. (1979) ‘ A Theory of Non-market Behaviour: Framework for Implementation Analysis ’, Journal of Law and Economics, vol. 22, no. 1, pp. 107–40. Yarrow, G, (1986) ‘ Privatization in Theory and Practice ’, Economic Policy, vol. 2, April, pp. 323–78.

8

The importance of state enterprises in the Irish economy and the future for privatisation Sean Barrett

INTRODUCTION In 1990 commercial state companies employed 65,500 persons. This was 24 per cent of total public sector employment of 273,100. By September 1995 employment in commercial state companies had declined to 56,200. This was 20 per cent of total public sector employment of 278,100 at the end of 1994 (CSO, 1996: 125). Health employees (63,900) and education staff (61,700) outnumber those in state commercial enterprise. Other categories of state employment are local and regional authorities (30,900), civil service (31,400) defence (14,000), and police (10,700). Total employment in the Republic of Ireland in 1995 was 1,231,000 comprising 139,000 in agriculture 342,000 in industry and 751,000 in services. Between 1990 and 1995, while employment rose from 1,134,000, employment in state enterprise declined from 5.8 per cent of the total to 4.6 per cent. The reductions in state commercial employment in the 1990s were caused by two privatisations in 1991, Irish Sugar and Irish Life Assurance, and the shedding of labour in the state transport, communications and energy sectors. This chapter first examines the long political tradition of government intervention in Ireland over two centuries. There follows analyses of the enterprises in the 1960s and of disillusionment with them in the 1980s. Three case studies of privatisation are examined and the outlook for future privatisations is reviewed. GOVERNMENT AND THE ECONOMY: THE HISTORICAL BACKGROUND The Republic of Ireland, then known as the Irish Free State, gained independence from Britain in 1922. There had previously been a brief period of legislative independence from 1782 to the Act of Union in 1800. The period of legislative independence saw interventionist policies and relative prosperity. Daly states the ‘the belief that the Act of Union brought industrial decline and that Home Rule would mean prosperity was an important dimension in Irish nationalism. Its greatest exponent was the founder of Sinn Fein – Arthur Griffith’ (Daly, 1981: 79). According to Daly, Griffith misinterpreted the German economist

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Friederich List’s infant industry argument to justify protection of industry (Daly, 1992: 5). The crisis of Irish economic performance in the last century is illustrated by Kennedy, Gibbon and McHugh (1988: 4). In 1841 Ireland’s population was over three times that of Scotland and more than half that of England and Wales; by 1921 Ireland contained 10 per cent fewer people than Scotland and one-ninth of the population of England and Wales. Thus ‘the apparent coincidence between industrial decline and loss of an Irish parliament encouraged an exaggerated belief in the power of politics to determine economic well-being, an interpretation given greater credence because the interventionist policies of the late eighteenth century coincide with a period of prosperity’ (Daly 1992: 4). After the Act of Union in 1800 Irish politicians developed the skills of lobbying at Westminister for government intervention in the Irish economy. Robert Peel, Chief Secretary for Ireland (1812–18) stated that ‘everybody in Ireland instead of setting about improvement as people elsewhere do, pester government about boards and public aid. Why cannot people in Ireland fish without a board (for fishing) if fishing be so profitable’ (McDowell, 1952; Meenan, 1970; Hitchins and Birnie, 1994). An interesting echo of that period has been the success of Irish politicians in recent decades in lobbying for EU assistance. The political wish of Irish leaders for more government intervention in the economy drew a response from British political leaders which was known as ‘Killing Home Rule with Kindness’. The separatist movement in Ireland would be granted its requests for more state boards to intervene in the economy in the hope that separatism would thus be weakened. Guiomard (1995: 207) notes that ‘by 1914, there were forty government departments in Ireland. Although eleven were Irish branches of British Departments, twenty-nine had no British equivalents.’ Later research has emphasised factors other than the loss of legislative independence when explaining Ireland’s poor economic performance in the nineteenth century. According to Cullen, Ireland’s ‘proximity to the leader of the industrial revolution and the dramatic reduction in transport costs in the nineteenth century in conjunction left its small-scale and domestic industries vulnerable in a more fiercely competitive age’ (Cullen, 1968: 124). This is echoed by Daly, who argues that it is no longer possible to explain Irish industrial failure as a direct consequence of the Act of Union. Falling transport costs did more to remove the effective protection of Irish firms and the pace of technological change in the nineteenth century was such that traditional firms would have disappeared, regardless of the Act of Union. The belief in state intervention by both Irish nationalists and the British administrations before independence was a powerful influence in Ireland up to the late 1980s. Ireland maintained its monetary union with Britain until 1979 when it joined the European Monetary System. The absence of the exchange rate as a policy instrument increased the emphasis on direct state intervention in the economy. The interventionist political culture in Ireland was therefore well established for over a hundred years when independence was obtained in 1922. A civil war between proponents and opponents of the treaty with Britain and uncertainty about

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the division of border areas between the new state and Northern Ireland diverted attention from economic policy. Tariffs were first imposed in 1924: ‘By 1929 the government claimed that 60 per cent of non-agricultural imports were subject to tariffs creating an extra 15,000 jobs’ (Daly, 1992: 41). Tariff protection created an interventionist public sector which sought to influence the ownership and location of industry. There was a rent-seeking relationship between those seeking protection and the political and administrative systems (Kingston, 1995: 260–1). The first state enterprises were established in 1927. These were the Agricultural Credit Corporation, to provide credit for that sector, the Electricity Supply Board, and the Dairy Disposal Company to acquire bankrupt creameries and rationalise the sector. The natural opponents of state intervention, the major exporting sectors firms such as the Ford, Guinness and Jacob companies, located branches in Britain in response to the increase in protectionism. Irish agricultural exports peaked in 1929, at a forty-year high in volume terms. The depression caused governments to turn away from free trade. In Ireland that movement was accelerated by the election of Fianna Fail in 1932 – the new government espoused national self-sufficiency. Disagreement with Britain over land annuities, used to buy out agricultural landlords in the latter half of the nineteenth century, led to a tariff dispute known as the ‘economic war’. The pace of intervention quickened. State companies were established in the areas of industrial credit, sugar manufacture, chemicals, shipping, insurance, steel and fertilisers. There was also an element of ‘New Deal’ policy in order to alleviate the world recession in the 1930s. The political culture of Irish economic policy making was further reinforced. One major legacy of the thirties was the institutionalisation of an Irish dependence on the state, and on politicians, for economic benefits. This reliance had evolved during the nineteenth century under British rule and although Cumann na nGaedhal appears to have attempted to break it Fianna Fail policies brought a considerable extension. (Daly, 1992: 178) The first Irish government from 1922 to 1932 was somewhat at variance with the interventionist tradition of Irish politics. The 1932 change of power saw intervention at the core of economic policy. In the war years Ireland was neutral and a command economy operated. The 1950s was a decade of stagnation when Ireland did not participate in Europe’s postwar recovery. In the 1960s the country looked at its prospects as an exporting economy for the first time in four decades. Free trade with Britain was negotiated in 1965 and Ireland joined the European Community in 1973. Support for public enterprises was shared by all political parties throughout the period from the mid-1920s until the mid-1980s when the consensus broke down. The establishment of new enterprises was typically welcomed by opposition parties in parliament. When governments changed, the policies towards public enterprise did not. However, a philosophy favouring public enterprises did not develop. Indeed

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it became a political badge of honour not to express a philosophy of public enterprise but to cite ‘pragmatism’ as the guiding principle of policy. The growth of public enterprises in Ireland ‘owed little to socialist theory. After the eclipse of the left wing of the labour movement during the latter part of the First World War, there were few socialists in Ireland, no socialist movement worth the name and no developing body of socialist doctrine’ (Chubb, 1970: 274). In 1960 Fitzgerald published a review of some fifty-five state-sponsored bodies, as ‘a first attempt to fill this gap in our systematic knowledge of Irish institutions’ (Fitzgerald, 1960: 3). The following section reviews this first systematic treatment of Irish public enterprise. THE FITZGERALD TAXONOMY OF STATE ENTERPRISES IN IRELAND Dr Fitzgerald, a future Taoiseach (Prime Minister), noted that state-sponsored bodies ‘had not hitherto received the attention which they merit by virtue of their importance in the life of the country’ (ibid.: 3). He attributed this dearth to ‘their relative novelty as an instrument of government’. Fitzgerald noted the high share of total gross fixed investment carried out by state companies, 30 per cent of the total in 1960 and that ‘earnings per head in this sector appear to be about 40 per cent above the national average for employees’ (ibid.: 2). In his analysis of state trading enterprises Fitzgerald offered two main motives for their establishment: • ‘a desire to maintain in existence a bankrupt, or virtually bankrupt, undertaking, whose preservation is believed to be in the national interest’; • ‘a desire to initiate an economic activity deemed necessary in the national interest–but one which for one reason or another private enterprise has failed to inaugurate or to operate on a sufficiently extensive scale’ (ibid.: 15). Fitzgerald included the state transport company CIE and Irish Steel, in the first category and in the latter, the state companies in peat, air transport, shipping, and capital for industrial development. The Fitzgerald analysis was reassessed subsequently. For example, the state transport company was nationalised in 1950. However, the state had prevented competition since 1932 and 1933 so that no private sector alternative to the bankrupt, protected company was available. Despite the massive subsidisation of the state transport company, the unsubsidised private sector currently has a larger bus fleet and the independent road freight sector is many times larger than the state-owned fleet. The bankruptcy argument for state intervention was gradually reassessed in the 1980s. The state-owned Irish Shipping Company was declared bankrupt in 1984, while in 1988 the state rescue agency for the private sector was wound up. Contestability theory assumed that both ease of market entry and exit were necessary to secure the benefits of competition. The indispensability of state enterprise in the

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peat, air transport, shipping, electricity and food sectors was also questioned both as a matter of historical record and of contemporary relevance. The Irish Sugar Manufacturing Company, operated by the Belgian company, Lippens, commenced operations in 1926, some seven years before the state sugar company was established. (Foy, 1976: 33). Manning and McDowell (1985: 1) note that Ireland had an electricity industry for over forty years before the establishment of the Electricity Supply Board by the state in 1927. The government chose the state scheme on the Shannon in preference to a private sector proposal to install hydro stations on the Liffey. In the early 1920s there were 160 electricity undertakings in the Irish state of which 140 were private and the balance run by local authorities (ibid.: 15). These operations were compulsorily acquired and typically shut down; for example, in 1930–1 twentyfour generating stations were closed down (ibid.: 77). In the category which Fitzgerald thought necessary to initiate economic development, private enterprise has grown significantly: for instance, in the shipping sector, after one state company went bankrupt and the second was sold with a substantial debt written off. In air transport, however, Aer Lingus became insolvent during 1992 but was rescued by a government capital injection of £175 m. The shortage of capital for industrial development is referred to by Ireland when lobbying in Brussels for EU assistance, but Ireland is, in fact, a substantial exporter of capital. A shortage of projects to absorb the available savings in the economy has become a factor in the debate on privatisation. In addition to Fitzgerald’s categories of reasons for the establishment of state companies two other factors are important, lack of opportunity and a strong economic nationalism. Lee states that ‘not until the state sponsored bodies began to develop did some openings arise for managers who had lacked the foresight to be born into the right families’ (Lee, 1989: 393). Economic nationalism is a common theme in the establishment of state enterprises, from 1928, when the creameries were nationalised, through to the nationalisation of the B and I shipping line in 1965. In 1928, in the parliamentary debate on the Creamery Act, concern was expressed that control of some 112 creameries would pass into the hands of Lovell and Christmas, ‘the biggest grocers in the world’ (PDDE, vol. 25: 233). In 1936 the acting Minister moving the Insurance Bill stated that, ‘we are taking steps to promote the extension of native insurance by prohibiting the entry of any further insurance companies into the Saorstat (Irish Free State)’ (PDDE, vol. 63: 2650). An underlying theme for decades after the Second World War was that state enterprise would provide security in future wars which would have similar economic effects as those in the 1939–45 conflict. The purchase of Irish Steel was presented to parliament as ‘a valuable insurance against our being deprived of essential supplies from foreign sources at any future time of international difficulties’ (PDDE, vol. 184: 290). After four decades of protectionism these sentiments were undiminished. The Minister stated in 1965 that ‘a greater measure of Irish participation in the cross

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channel trade has for a long time been an important objective of government policy’ (PDDE, vol. 214: 952). The measure received a warm welcome from the opposition. ‘It is a good thing that the B and I Line is now in Irish hands . . . there are far too many foreigners buying land and public firms in this country’ (PDDE, vol. 214: 974). The Irish Steel Company was sold for a nominal £1 to Ispat International on 30 May 1996. As part of the sale, the Irish government provided some £20m in respect of pensions, costs of outstanding works and wrote off debts of £17m. The Ispat Corporation installed its own board and management in the company. The Irish Steel Company was profitable in only three of its last twenty years and had accumulated losses to June 1995 of £145m. Employment fell from over 1,000 in the 1970s to 561 in the 1990s and there is a target of 300 under privatisation. Ispat International invested £5m in working capital in 1996 and will invest £20m over the following six years. In the Senate on 20 March 1996 the Minister for Enterprise and Employment stated that, ‘the experience over the years has demonstrated that the State was far from the ideal partner for Irish Steel’ (PDSE, vol. 146: 1548). DISILLUSIONMENT WITH STATE ENTERPRISE The state companies became identified with high costs and overmanning. The companies achieved ‘regulatory capture’ over the government departments charged with their supervision. They received regular subsidies from the Exchequer and sought regular supplies of free capital. The protection which the state companies enjoyed created economic rent which was absorbed by a combination of overmanning and remuneration in excess of the levels in sectors which did not have protection from competition. The National Prices Commission (1972: 45) found that bus and train fares in the public sector were substantially above those charged by the small independent operators. Data produced by the European Conference of Ministers of Transport showed that the average productivity of railway workers in the European Commission was 44 per cent greater than in Ireland. In air transport, Aer Lingus was shown in ICAO data to have a labour productivity in 1984 of only 53 per cent of the European average for seventeen national and major airlines (Barrett, 1987: 65). Average remuneration in Aer Lingus was four times the GNP per head compared to an average of 2.56 for European Airlines. A Civil Aviation Authority study of eleven major European routes from London in the years 1980– 85 found that the fare increase to Dublin, at 72.6 per cent, was some two-thirds greater than the average increase of 43.7 per cent. The route was then operated by a cartel of two state airlines, Aer Lingus and British Airways. Deregulation of the Ireland–Britain air routes in 1986 resulted in real fare reductions of up to 70 per cent and a doubling of passenger numbers on the Dublin–London route in three years (CAA, 1987; Barrett, 1993). The restraints on commercial road haulage, designed to benefit the state rail and road freight services, resulted instead in some 83 per cent of road freight

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moving in the ‘own account’ vehicles of industrial companies. Following the deregulation of road freight in 1988 the hired haulage share of the market increased to 63 per cent by 1993. The electricity company ESB in 1962, partly under pressure from an earlier Taoisearch (Prime Minister), was influenced by the compelling national need to maximise employment. This ‘inevitably led in turn to a general emphasis on job creation and job retention which gradually became an integral feature of industrial organisation and trade union expectations in Ireland’ (Lee, 1989: 400). The Report of the Inquiries into Electricity Prices (1984) was chaired by E.G. Jakobsen, managing director of ELSAM Denmark. It found that of a staff of 13,200 in 1982–3 ‘reductions of the order of 3,000 or more do not seem impossible, if accompanied by appropriate organisational and operational changes’ (Jakobsen, 1984: 253). The manning levels in the Irish electricity industry were double those in Scotland, three times those in Denmark and six times those in Vermont (ibid.: 83). The ESB declined to provide payroll data to the Jakobsen Inquiry ‘claiming that the extraction of such detailed analysis would be an enormous task and would present major difficulties’ and that ‘it would take six months to provide the information’ (ibid.: 82). Jakobsen notes with irony that ‘prior to the inquiry, public criticism of the ESB in the area of payroll was rebutted by ESB Management on the grounds that simple comparisons were misleading and the correct information was available to those who bothered to ask’ (ibid.). A general belief in the inefficiency of state enterprise was reinforced by the experiences of the national telephone company, Telecom Eireann. In 1979 the Dargan Report found that the company was overmanned by a factor of three compared to Britain, four compared to the US and almost eight compared to Switzerland. The company undertook a large investment programme in the 1980s and also increased its labour force. In 1992 the Culliton Report on Industrial Policy found that ‘Telecom revenue in Ireland – at 2.7 per cent of GDP – was by far the highest of any EC country with most other member states having revenue in the range of 1.3 to 1.8 per cent of GDP’. The government sold 20 per cent of Telecom Eireann to KPN/Talia in April 1996, valuing the company at £915m. The sale price compared to a £3.5 billion investment by the state. The large loss on the sale reflected overmanning, low returns on investment and price uncompetitiveness as deregulation of the telecoms sector approached. Lee notes that in the early 1980s the Labour Party’s proposal for a National Development Corporation failed to arouse enthusiasm: the public had so lost confidence in the capacity of any state organisation to serve any purpose except its own self-interest that the proposal generated more scepticism than enthusiasm. A series of poor returns on several enterprises and the apparent casualness with which public sector trade unions resorted to the tactic of inflicting suffering on the public, the same public they claimed to

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serve in their more esoteric flights of rhetorical fancy, in order to intimidate government into concessions, left public opinion increasingly dubious about the likely results of direct state intervention. (Lee, 1989: 536) Notwithstanding disillusionment with public enterprise, the major political parties did not adopt policies of privatisation. The major parties, Fianna Fail and Fine Gael, grew out of the Sinn Fein independence movement which had a policy of economic intervention, including state enterprise. The Labour Party espoused public enterprise on ideological grounds. These parties typically enjoyed the support of about 90 per cent of the electorate. The first political party in parliament to advocate privatisation was the Progressive Democrats founded in 1985 (McDowell, 1987: 27). In a political system based on clientelism and the spoils of office the patronage of appointments to state bodies was an important barrier to the evolution of political support for privatisation. Keogh cites a 1992 estimate that there were some 2,200 appointments to state boards compared to 1,500 locally elected representatives (Keogh, 1994: 331). The system of political patronage thus established was identified by Lee with the Fianna Fail party and Mr de Valera: ‘He encouraged the gradual growth of an insidious, if initially discreet spoils system in the army, the police, the judiciary and the state sponsored bodies’ (Lee, 1989: 322). CASE STUDIES OF PRIVATISATION IN IRELAND Three major privatisations occurred in Ireland in 1991–2. These were the Irish Sugar Company, renamed Greencore, the Irish Life Assurance Company and the British and Irish Steam Packet Company. The rationale for state intervention in each sector, the movement to privatisation and the record since privatisation is now examined for each of the enterprises. The Irish Sugar Company/Greencore The establishment of an Irish sugar beet industry was a policy of the Irish nationalist movement, Sinn Fein, from 1908. In 1926 the state promoted a private sector sugar factory in Carlow with an annual subsidy of £400,000. In 1933, the Irish Sugar Company was established by parliament. The state company was empowered to acquire the private factory and to construct three further factories. The objects of the state sugar enterprise included ‘a national wish to be independent of foreign supplies of basic needs’ (Foy, 1976: 23), and a wish to develop alternative products for farmers. Food exports to Britain fell during the 1930s as a consequence of the ‘economic war’ concerning land annuities. Import substitution was judged desirable even though sugar beet was not competitive with imported cane sugar.

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By the 1980s the business was in some difficulty. Losses were £30.5m in 1980 and peaked at £50.7m in 1982. Between 1980 and 1990 over 1,800 jobs were shed, representing a halving of the size of the workforce, and the government provided capital grants of £59m in 1983, 1984 and 1987. Some twenty-three subsidiaries were either closed or sold, including two of the four sugar factories. Turnover declined from £383.5m in 1980 to £198.9m in 1987, when the firm returned its first profits in the decade of £10.4 m. The holding company, Greencore, was formed on 14 February 1991 and was offered for sale on 18 April at a market capitalisation of £192.5m. The purpose of the privatisation was to ensure that ‘the development of Irish Sugar will no longer be constrained by the fact that it has a single ordinary shareholder which, for policy reasons, may not be in a position to provide funding in the future’ (Greencore, 1991: 7). The government sold 55 per cent of the company in 1991 and the remaining shares in February 1992 (15 per cent) and April 1993 (30 per cent) (Reeves, 1996: 7). Staff members were given 109 shares each and staff and sugar beet growers were given preference in the purchase of shares. Significant senior management and board changes at Greencore followed privatisation. Reeves (ibid.: 20) found that: besides the Chairman, all three other executive directors and the group secretary were appointed after privatisation. Furthermore there were five changes of non-executive directors in 1991 and the size of the board was reduced from twelve in 1990 to ten. This is explained by the removal of the trade union representative and worker directors. Between 1991–94 there were three further changes of director. Turnover increased from £271.4m in 1990 to a projected £474m in 1996 and the pre-tax profits increased over the same period from £21m in 1990 to a projected £53.9m. By 11 June 1996 the company’s market capitalisation had risen to £588.8m. The report on the company by Davy Research in June 1996 states that: ‘a hallmark of the company is its progressive improvement in margin through cost efficiencies. Another is its very strong free cash flow generation which, over the short term, will build strong net cash balances.’ The operating profits by class of business before privatisation and by 1996 are shown in Table 8.1. It is evident that in all areas operating profit has risen sharply. The Irish Life Assurance Company In the late 1920s approximately 80 per cent of insurance was under British control; the majority of Irish firms were insolvent and the industry invested the overwhelming majority of its premiums outside Ireland (Daly, 1992: 158). The object of the Insurance Bill in 1935 was ‘to assist companies owned, controlled and operated by nationals of the Saorstat (Irish Free State) to attain

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Table 8.1 Irish Sugar/Greencore: operating profit by class of business, 1990 and 1996 (£m)

a position in which they can command the utmost confidence of the insuring people and to secure that, in due course, the greater part, if not all of the Assurance business arising from the Saorstat will be placed with such companies’ (PDDE: 1710). The Insurance (Amendment) Act, 1938, confirmed and gave statutory effect to an agreement between certain life assurance companies to transfer their life assurance business and their industrial assurance to a single company. Three Irish companies faced insolvency, while five British Companies and one other Irish one had signalled their intention to withdraw from the market (Irish Life, 1991a: 10). In 1939 a rescue plan came into effect whereby the government undertook to make good any deficiency. The Industrial and Life Assurance Amalgamation Company took over the business of the nine others. The shareholding structure was Irish Companies – 10 per cent, British Companies – 72 per cent and Minister for Finance – 18 per cent. In 1947 the Minister for Finance purchased the British shareholdings and in 1959 the name was changed to the Irish Life Assurance Company. Problems mounted, however, in the late 1980s when the company experienced a sharp fall in its share of the national life and pension sales, from 42.7 per cent in 1987 to 28.8 per cent in 1989, with a partial recovery to 30.3 per cent in 1990. In addition its building society failed to generate significant volumes of business (Davy, 1991: 15). The Irish Life Assurance Company was offered for sale on 12 July 1991. The Minister for Finance held 90.25 per cent of the ordinary share capital and offered for sale some 46 per cent. In addition a further 10 per cent of the shares were sold to two financial institutions with which the company had joint ventures. The remainder of the shares were sold subsequently, in 1992 and 1995. The motive for the sale was stated in the offer document: ‘The Minister has decided to reduce his shareholdings in order to realise part of his investment and to facilitate the future development of the Group. The directors believe that the listing of Irish Life’s ordinary shares on the Stock Exchange will increase national and international awareness of the Group and its products’ (Irish Life, 1991b: 4). The embedded value of Irish Life Group in 1990 was £458m before privatisation. Premium income rose from £602m in 1990 to £767m in 1995 by which time the embedded value was £664m. The embedded value of a life assurance company is defined as the sum of its adjusted net worth and the value of its in-force business. In 1995 the board of Irish Life had thirteen

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members of whom five were appointed after privatisation. Of the five members of the executive board in 1991, one remained in 1995. Irish Shipping/B and I Line Irish Shipping was established to meet the nation’s strategic shipping needs during the 1939–45 war. Between its establishment in 1941 and its liquidation in 1984 Irish Shipping received some £129.5m in 1985 prices. The company had fifteen years of profit to 1982 but lost £14m in 1982–3. The company was liquidated in 1984 and by then had assets of £23m and liabilities of £117m. It was estimated that the cost of keeping the company in operation for the period 1984–9 would be £ 144.45m after which it would have debts of £59m. The Minister for Communications told the parliament that ‘charter agreements were entered into on behalf of Irish Shipping without the knowledge or consent of the then Minister for Transport or the Minister for Finance and have led to the destruction of what was, up to then, a viable and successful State enterprise’. The only section of Irish Shipping which has survived is Irish Ferries. This company was 75 per cent owned by Irish Shipping and in 1987 a number of institutional investors acquired the company. Profits in 1987–8 were £869,000 on a turnover of £34.1m and in 1988–9 the profits were £1.5m on a turnover of £35.6 m. In 1992 Irish Ferries took over a second state shipping company, the British and Irish Line. The British and Irish Steam Packet Company was founded in 1836 in Dublin. It operated passenger and freight ships between Dublin and London and Liverpool. In 1919 it acquired the older City of Dublin Steam Packet Company, founded in 1823, and the combined line was in turn acquired by Coast Lines Limited. ‘Each of the companies in this group, most of which were themselves the results of amalgamations preserved its identity and continued for the most part to trade in familiar waters. Coast Lines Limited, the controlling or parent company, owned and operated ships in its own right. By the mid 1950s the combine made up one of the world’s largest fleets of coastal steamers’ (Smyth, 1984: 119). The Irish government acquired the B and I Line in 1965. ‘The decision by the government to acquire the company stemmed from a concern that its owners appeared to be willing to tolerate the running down of some of the cross/channel services operated and were not prepared to consider the replacement of obsolete tonnage. The government were also anxious to obtain a significant Irish influence in the sphere of surface transport between the Republic and its main customer, Great Britain’ (Smyth, 1984: 222). At the time of acquisition there was a fleet of nine ships with a total of 17,546 GRT. The second half of the 1980s brought serious difficulties for the B and I Line. At the end of 1989 the company had accumulated losses of £128.5m and a capital deficiency of £26.5m. Between 1985 and 1989 the turnover of the company declined by 45 per cent in real terms. The number of passengers declined by 20 per cent and the volume of freight by 17 per cent. The staff numbers fell by a half to 897.

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The B and I Line was sold to the Irish Continental Group in 1992. The sale price was £6m and debts of £27m were written off. The fleet then comprised two ships with a combined GRT of 10,248. No director of the B and I company was retained by the new owners. In 1990 the profits of Irish Continental Group were £2.3m and the losses of the B and I Group were £3.4m. The profits of the enlarged Irish Continental Group in 1995 were £11.0m. CONCLUSION The political culture of state enterprise is firmly rooted in Irish public life. It is based on an interpretation of a period of legislative independence from 1782 to the Act of Union in 1800. Revisionist historians have subsequently disputed the prosperity allegedly generated by legislative independence and attribution to the Act of Union of responsibility for economic decline, emigration and famine in nineteenth century Ireland. Economic interventionism was increased by independence for the Irish Free State in 1922, the recession in 1929 and an economic war with Britain in the 1930s. Public enterprise became identified with low productivity and high wage costs in the 1980s, but until the foundation of the Progressive Democrats in 1985 privatisation was not on the political agenda. State companies in shipping, sugar manufacture and insurance were privatised in the early 1990s and their profits increased steadily in each case. The state steel company was sold in 1996, as was 20 per cent of the state telephone company. The state companies enjoyed protection by their parent government departments. For example, the Department of Transport was frequently described as ‘a downtown office of Aer Lingus’. Under EU competition policy, government departments have had to adopt an arm’s length relationship with state companies. In areas such as steel, transport and telecommunications, EU competition policy has brought liberalisations which have allowed governments to become market regulators rather than providers of legislative protection and free finance to state enterprises. In late 1996 privatisation in Ireland had lost its impetus. It had been successfully challenged by the trade union movement, which is dominated by the public sector unions due to differential unionisation rates in the public and private sectors. It was also opposed by the Labour Party, which had been in government longer than other members of coalition governments throughout the 1990s. The EIU Global Privatisation Manual (1994: 34) indicates some forty-seven countries with privatisations in the pipeline – Ireland is not included. In the event of political change to favour privatisation the most likely candidates are the airline Aer Lingus, the airports body Aer Rianta and the state banks Agricultural Credit Corporation and Industrial Credit Corporation. The heavy losses on rail services make the state transport company, CIE, an unattractive purchase for the private sector. In the case of monopolies, such as the electricity company ESB, Ireland lacks the necessary legal powers of regulation to ensure that the enterprises operate efficiently in either the public or private sectors. Public ownership is seen as a second-best solution.

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From 1982 to 1997 the dominant party of government in Ireland was the Labour Party. It held office in three coalition governments, two with Fine Gael and one with Fianna Fail. It used its bargaining power within these coalitions to veto privatisation. In the 1997 election a minority government of Fianna Fail and the Progressive Democrats was returned to office thus ending the veto on privatisation. REFERENCES Barrett, S. (1987) Flying High: Airline Prices and European Regulation, Aldershot: Avebury. —— (1991) Transport Policy in Ireland in the 1990s, Dublin: Gill and Macmillan. —— (1993) ‘ Air Transport ’ in Banister, D. and Berechman, J. (eds) ‘ Transport in a Unified Europe ’, Amsterdam: North Holland. Burke, A. (ed.) (1995) Enterprise and the Irish Economy, Dublin: Oak Tree Press. Central Statistics Office (CSO) (1996) ‘ Public Sector Employment ’, Irish Statistical Bulletin, pp. 123–5. Chubb, B (1970) The Government and Politics of Ireland, London: Longman. Civil Aviation Authority (1987) Competition on the Main Domestic Trunk Routes, London, CAA Paper 87005. Convery, F. and McDowell, M. (1990) Privatisation, Issues of Principle and Implementation in Ireland, Dublin: Gill and Macmillan. Cullen, L. M. (1968) The Formation of the Irish Economy, Cork: Mercier Press. Culliton, J. (1992) A Time for Change: Industrial Policy in the 1990s, Report of the Industrial Policy Review Group, Dublin: Government Publications. Daly, M. E. (1981) Social and Economic History of Ireland since 1800, Dublin: Education Company. —— (1992) Industrial Development and Irish National Identity, 1922–1939, Dublin: Gill and Macmillan. Dargan, M. (1979) Report of the Posts and Telegraphs Review Group, Dublin: Government Publications. Davy Equity Research (1991) Irish Life Company Profile, Dublin: Davy Equity Research. —— (1996) Report on Irish Life, Dublin: Davy Equity Research. —— (1996) Report on Greencore. Dublin: Davy Equity Research. Economist Intelligence Unit, (1994) The EIU Global Privatisation Manual, London: EIU. Fitzgerald, G. (1960) State Sponsored Bodies, Dublin: Institute of Public Administration. Foy, M. (1976) The Sugar Industry in Ireland, Dublin: Irish Sugar Company. Greencore PLC (1991) Offer for Sale, Dublin. —— (1995) Annual Report, Dublin. Guiomard, C. (1995) The Irish Disease and How to Cure It, Dublin: Oak Tree Press. Hitchins, D. W. and Birnie, J. M. (1994) The Competitiveness of Industry in Ireland, Aldershot: Avebury. Irish Life PCL (1991a) Pathfinder, Dublin. —— (1991b) Offer for Sale, Dublin. —— (1995) Annual Report, Dublin. Jakobsen, E., (1984) Report of the Inquiry into Electricity Prices, Dublin: Government Publications. Kennedy, K., Giblin, T. and McHugh, D. (1988) The Economic Development of Ireland in the Twentieth Century, London: Routledge. Keogh, D. (1994) Twentieth Century Ireland: Nation and State, Dublin: Gill and Macmillan. Kingston, W. (1995) ‘ Entrepreneurship or Rent Seeking? ’ in A. Burke (ed.) Enterprise and the Irish Economy, Dublin: Oak Tree Press. Lee, J. J. (1989) Ireland 1912–1985, Politics and Society, Cambridge: Cambridge University Press.

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McDowell, M., (1987) Privatisation and Liberalisation: A Survey of Some Issues in Economic Policy, University College, Dublin: Centre for Economic Research, Policy Paper no. 28. McDowell, R. B. (1952) Public Opinion and Government Policy in Ireland, London: Faber and Faber. Manning, M. and McDowell, M. (1985) Electricity Supply in Ireland: The History of the ESB, Dublin: Gill and Macmillan. Meenan, J. (1970) The Irish Economy since 1922, Liverpool, Liverpool University Press. National Prices Commission (1972) Occasional Paper 10, Dublin: Government Publications. PDDE, Parliamentary Debates Dail Eireann, Dublin: Government Publications. PDSE, Parliamentary Debates Seanad Eireann, Dublin: Government Publications. Reader, E. (1951) A History of the B and I Line, Dublin: British and Irish Steam Packet Company. Reeves, E. (1996) Organisational Status, Change and Performance: The Case of Irish Sugar/ Greencore, University of Limerick. Smyth, H. (1984) The B and I Lines, Dublin: Gill and Macmillan. Sweeney, P. (1990) The Politics of Public Enterprise and Privatisation, Dublin: Tomar.

9

Privatisation in Italy A tale of ‘capture’ Massimo Marrelli and Francesca Stroffolini

INTRODUCTION1 Privatisation in Italy is one of those economic phenomena which surprise for their suddenness and for the strength of the swing which took place from a view which favoured a widespread public intervention in the economy, in the form of state ownership, as an effective instrument of industrial policy, to one in which the market and private property are seen as the panacea to all inefficiencies and economic failures.2 All the parties in the political arena, from left to right, with the notable exception of the neo-communists of Rifondazione, hold the view, today, that a profound process of privatisation is a desirable thing for the country. To many foreign observers the Italian political economy model has always been something rather mysterious and somewhat incomprehensible, and this last phenomenon does nothing but confirm them in their opinion of the unforeseeable nature of the Italian model. In this chapter we hope to show that many of the choices in the matter of public intervention versus privatisation can be quite easily rationalised and explained, once one takes into account the political economy nature and the ‘peculiar’ characteristics of the Italian political system and institutions. In order to do this, we will first and very briefly, describe the role of state ownership in Italy, we will discuss this role and analyse possible economic pressures to change it. Second, we will consider the extent to which privatisation is being pursued in Italy, which model of corporate governance is being sought and which regulatory structure is being prepared. We will, then, propose some simple political economy model which rationalises the choices which have been made, and, finally, we will discuss some of the lessons to be learnt. In the economic literature a few papers have already addressed the issue of Italian privatisation: in particular, very comprehensive and illuminating ones have been written by Goldstein and Nicoletti (1996, 1997), whose work we frequently refer to. Our contribution, we hope, is in the final part of our paper where we propose a simplified political-economy model which is intended to shed some light on the peculiarity of the Italian model. In examining industrial policy choices in Italy, one has to bear in mind the particular nature of the Italian political system where no clear distinction exists between the ‘legislative’ and the ‘executive’ branch; indeed, most of the laws

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passed in Parliament are government initiatives but their implementation lies with a very high number of bodies’ so that the ‘executive’ responsibility is much diluted. This explains why so many Acts of Parliament in Italy never get implemented or they do so after facing very many obstacles and difficulties. Added to this is the fact that no political culture of incomplete contracts exists. Hence, the legal and cultural tradition is such that all possible contingencies tend to be explicitly regulated and no residual power of decision tends to be granted through a system of rights to decide in unforeseen occurrences. It is easy to understand then the resulting excessive number of laws (often contradictory), regulations and decrees that complicate the implementation of political decisions. Finally, until very recently, the Italian Parliament was based on an almost pure proportional system of representation which, in a fragmented society, gives rise to unstable coalition governments. It is not surprising, therefore, that the process of privatisation, in Italy, has been (and still is, to some extent) a very long and controversial one, full of stops and go, often contradictory, and, sometimes, with results opposite to the ones sought by the government. PUBLIC FIRMS IN ITALY BEFORE 1990 Dimension and evolution The Italian public sector is by far the greatest single owner of firms in the whole economy, furthermore their extent, both in terms of sectoral diversification and in terms of employment and value added creation is one of the largest within the OECD countries. In 1988, all utilities were public, both at the central and at the local authorities level (with very few exceptions), and publicly owned firms (Partecipazioni Statali) were responsible for 16 per cent of non-agricultural employment and for 19 per cent of the national value added3 (see Figure 9.1). The corresponding average EU data were, for the same year 12 per cent and 10 per cent, respectively.

Figure 9.1 Italy: employment and value added of publicly owned firms in Europe Source: Goldstein and Nicoletti (1996)

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Figure 9.2 Italy: State ownership and industrial sectors Source: Goldstein and Nicoletti (1996)

Moreover, with the exception of the ‘Distribution’ sector, the share of employment of Partecipazioni Statali (PS from now) in total employment was consistently higher than the EU weighted average in all non-agricultural sectors (see Figure 9.2). Finally, in 1991, state-owned banks collected 80 per cent of total deposits and gave 90 per cent of total loans, the second insurance company in Italy was public and 12 of the first 20 firms in terms of sales volume and more than onethird of the first 50 were publicly owned; it is interesting to notice that public sector owned enterprises were present in almost all sectors (see Table 9.1) The situation depicted in the above paragraphs derives, obviously, from a long historical process4. This dates back to 1880 with direct public intervention in the sphere of industry occurring in the early 1930s, when IRI (Istituto per la Ricostruzione Industrial, a public company created in 1933) was still regarded as a temporary body with the main function of reorganising its holdings in certain sectors with a view to selling them back to private enterprise. So, when, in 1937 IRI was transformed into a permanent industrial holding body, it is not surprising to find its assets scattered over ten sectors, but with a predominating influence only in fields where private enterprise was unwilling to risk losses. Efforts were made to render IRI holdings more homogeneous: financial holdings companies were created to coordinate and finance investments in various sectors (STET, Finmare, Finsider), however, the way in which IRI had obtained its assets determined the new method of exercising state control; for while IRI itself was a mixed public–private law corporation, wholly owned by the state, but with financial and legal autonomy, the firms it acquired remained joint stock companies operating under private law. The IRI kept a controlling interest but private investors also could hold shares. ‘The change from a predominant doctrine of laissez-faire to one of deliberate State intervention . . . had emerged in practice out of the traditional policy of salvaging private industries that had got into difficulties’ (Posner and Woolf, 1967: 30), but, after the Second World War, another conscious policy was the aim of imposing some form of control for the benefit of the society, especially in a country like Italy where industry had displayed such strong monopolistic tendencies. This required greater control of IRI’s activities by

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Table 9.1 Italy: selected statistics on public enterprises

Source: Goldstein and Nicoletti (1996)

Parliament and coordination of all institutions financed by state budget under a single technical committee responsible to Parliament. The solution was the creation of the Ministry of State share holdings (Ministero delle Partecipazioni Statali). The ministry was to take control of all state shareholdings (in IRI and ENI, a public corporation which had been created in 1953 to coordinate the activities of the existing state-controlled joint stock companies, like AGIP, in the field of oil and natural gas) and certain patrimonial possessions (spas, mines, cinema), but was to have no power over the Aziende Autonome5 (railways, postal services, monopolies, etc.) or over state insurances, which were to remain under their respective ministries. Organisation and control The organisation of state enterprises in Italy, was based on a multi-tier hierarchy (of up to seven tiers) and a common agency model. Three different juridical and organisational forms were involved: Enti di gestione (private law corporations with their stock wholly owned by the state), Enti Pubblici (public law organisations, which are controlled by one or more ministries, but have managerial autonomy and their own capital stock, usually government funds) and Aziende autonome (see note 5). The Enti di gestione (IRI, ENI, EFIM)

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controlled conglomerates and subholdings, which, in turn, exercised control over productive firms, and were under the political control of the Government, of the Ministero per le Partecipazioni Statali, and of different permanent interministerial committee like CIPI (Interministerial committee for industrial policy) and CIPE (Interministerial committee for economic policy). In the Board of Directors of the Enti di gestione many were appointed by the political parties, and the same was true for subholdings and firms. All of this greatly reduced the autonomy of holdings, subholdings, and firms, the first two having to have their strategic plans approved by government and Parliament. Furthermore, the balance sheets of the Enti di gestione and of the Enti Pubblici were to be submitted to and approved by the Corte dei Conti (a somewhat judicial institution, which has jurisdiction in the field of public accounting and management). In Figure 9.3 we give a rough idea of the situation before 1992. If it is recalled that from 1947 to 1990 Italy had 46 governments, most of them involving a ‘reshuffling’ of the same majority party, one can easily imagine how the cost of autonomy reduction for the public enterprises may not have been compensated for by the benefits of greater political control. The role of public enterprises before 1990 State-owned enterprises were seen until the beginning of the 1980s as an important instrument of industrial and economic policy Their role in the Italian postwar growth process has definitely been important (Posner and Woolf, 1967); they were attributed economic and social goals, such as the industrialisation of the Mezzogiorno (the economic underdeveloped South of Italy), technological innovation, employment creation or defence and the public control of strategic sectors. The main idea was also to pursue, through direct productive activity of the state, social welfare ends, instead of leaving them exclusively to a social welfare system. This doctrine, which was reflected in legislation (the Act of Parliament no. 634/1957 obliged the Minister of PS to locate 60 per cent of investment in new industrial plant and 40 per cent of total investment by the public enterprises in the Mezzogiorno), recognised that firms were going to face extra costs (oneri impropri) and therefore needed direct financing from the state. State endowments (Fondi di dotazione) were seen as a means of covering the extra costs imposed on the firms for pursuing objectives that were not firms’ typical goals. However, the organisation of the structure of control (described above), the endemic instability of the Italian governments, the institutional constraints of the Italian legal system, and the degree of asymmetric information between politicians and firms made it very difficult to analyse the social costs and benefits.

Source: Goldstein and Nicoletti (1997) Note: Controls exercised by the Corte dei Conti are limited to administrative and legitimacy issues

Figure 9.3 Italy: the public enterprise sector before 1992

156 Privatisation in Italy: a tale of ‘capture’

PRESSURES TO CHANGE Economic results In the light of the considerations of the last paragraph, it is not surprising that public enterprises reported in the 1970s and 1980s considerable losses and increasing debt. Figure 9.4 shows net profits as a percentage of value added for the private and public enterprises over the period 1974–91. As Goldstein and Nicoletti show, much of the difference in the economic results between private and public enterprises can be explained by the higher leverage ratio (debt/equity) of public firms, which gave rise to higher financial costs, especially in periods with high inflation rate and high real interest rates (notably from 1975 to 1982). However, even if one excludes financial costs, one finds that private firms perform generally (with the only exception of 1990) better than public ones. This comparison becomes particularly significant when one compares firms operating in the same industrial sector and one examines other indicators such as

Figure 9.4 Italy: net profits as a % of value added in private and public enterprises, 1974-91 Source: Goldstein and Nicoletti (1996)

Figure 9.5 Italy: private and public enterprises – some performance comparisons, 1991 Source: Goldstein and Nicoletti (1996)

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Table 9.2 Costs and tariffs of public utilities in Europe

Source: Goldstein and Nicoletti (1996) Index nos. unless otherwise stated.

average labour productivity6 and the share of profits in value added (see Figure 9.5). Also, public services production in Italy often seems to be less efficient than elsewhere in the EU (see Table 9.2). This is definitely true of railway transport, where, with the number of passengers roughly similar to those of Germany, France and UK, average costs are definitely higher, and for the postal services where the deficit as a percentage of revenue is larger (except for Spain). Furthermore, the quality of service tends to be lower in Italy than elsewhere; for example, more than 10 per cent of trains arrive late and the time taken for mail delivery is longer. As Goldstein and Nicoletti notice, since proprietary structure, technology and market structure (with a possible exception of the UK) are very similar in all of the EU countries, the differences in performance are probably due to the regulatory structure. Notwithstanding substantial state transfers (from 1982 to 1986 they amounted to 5,300 billion lire a year, i.e. 0.7 per cent of GDP) public enterprises continued to make very high losses. For instance, EFIM’s financial debt in 1991 reached 8,000 billion lire (0.5 per cent of GDP) and in 1992 the IRI’s net debt was equal to 90 per cent of its total sales (or 5 per cent of GDP). If the Enti di gestione were subject to private law they should have been liquidated or recapitalised; indeed the Italian Corporation Law requires either a bail-out in the form of a recapitalisation or an adjudication of bankruptcy every time: (a) losses amount to more than one third of assets; (b) the value of the corporation’s assets decreases under 200 million lire. Furthermore the value of outstanding bonds cannot exceed that of assets and finally, if all the shares are owned by a single shareholder, the shareholder faces unlimited liability. Public debt and the financial crisis of the state. Although not directly correlated with it, another indirect pressure to privatise came in the early 1990s from the financial crisis of the state. Public debt as a percentage of GDP increased from 34.2 per cent in 1970 to 108.6 per cent in 1992, even though, at the same time, fiscal revenue (inclusive of social security

158 Privatisation in Italy: a tale of ‘capture’

contributions) increased from 26 per cent of GDP (1970) to 42.4 per cent of GDP (1992). If one remembers that, for example, in the period 1982 to l986 transfers from the state to public enterprises amounted to an average of 5,300 billion lire a year (0.7 per cent of GDP), it is easy to understand why, even if not ever explicitly mentioned in official documents, the financial crisis of the state constituted a strong external pressure to privatise. Privatisation would have helped both to reduce public expenditure and to increase (at least partially) public revenue. THE PROCESS OF PRIVATISATION

Legal procedures and strategy The organisation and the legal structure of control of Italian public enterprises required a profound change in the legislation for an effective process of privatisation;7 the direction and the type of changes required, obviously, depended on the strategic decisions of the government. In particular, one has to bear in mind that selling public properties, on the part of the state, required different procedures according to which institutional form was granted to the direct ‘owner’ of the firm. The case of firms owned by the Enti di gestione like IRI, ENI etc., would be substantially different from the case of a public utility owned by a municipality (Azienda Speciale) or by a Ente Pubblico. Moreover, if, among the objectives of a privatisation plan the government includes the promotion of some form of ‘people’s capitalism’, there would be a need to transform public enterprises into corporations before selling them into the market, and so on. The Amato government, in 1992, prepared the ‘Reorganisation Plan of IRI, ENI, ENEL, IMI, BNL and INA’, which, together with the Green Book on State Share Holdings, constitutes the first organic official document to tackle the problem of privatisation. This plan proposed the immediate sale in the market of a few big and profitable firms, financial institutions and public utilities, committed the government to interrupt the flow of fondi di dotazione to IRI and ENI and drastically reduced the possibility of conceding special credits. It also imposed an upper limit to the leverage of the Enti di gestione and their subholdings, in the hope of tightening their budget constraint and of increasing efficiency incentives for the managers of public firms. In the next four years, the state was supposed to sell other less profitable firms, those operating in economic sectors which were outside the fundamental scope of IRI and ENI and all public utility firms. The economic goals stated in the privatisation plan were: 1 to pursue efficiency increases in the privatised firms and especially in the public utilities; 2 to increase the number of big private groups in the economy from the existing 6–7 to 10–12, thus rendering the industrial structure more competitive in the international market;

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3 to increase the share of corporate stock owned by families, thereby promoting some sort of ‘people’s capitalism’; 4 to favour foreign demand for investment in the Italian stock exchange; and 5 to reduce public debt (with less emphasis). In order to pursue these goals a wide set of different sale techniques were allowed: both ‘private sale’ and ‘private placing’ were possible, so were an ‘offer for sale’ and a ‘tender offer’, and, finally, ESOPs and management buyouts (MBOs). Furthermore, the possibility for the state of retaining a ‘golden share’ and of converting public debt into public firm shares was also mentioned. In conclusion, both public companies, corporations with a solid control by few shareholders, and partial privatisation were sought. The achievement of these objectives required a profound change in the legal system and so a number of new laws, government decrees and directives was prepared in the period from 1990 to 1995. This process is still under way. A detailed list of all the Acts of Parliament (more than 30) which have been approved and were made necessary by the complicated structure of the Italian legal system can be found in Goldstein and Nicoletti (1996). Table 9.3 simply lists the main ones. Two facts are worth emphasising: on the one hand, the legal procedures necessary to achieve an effective privatisation have been extremely cumbersome and complex; on the other, the problem of regulation has been tackled relatively late. It is important to notice, though, that the powers attributed to the regulatory authorities are very wide in scope. They have the power to propose to the government the criteria for attributing, renewing, revising and repealing the franchise. They also have the power to set the tariffs, which have to be based on a ‘price cap’ system, the power to control the quality of the services, and powers in respect of the ‘universal service’ principle. Moreover, they have the power to report to the antitrust authorities behaviour of the franchisees which constitute violations of the competition law. As a consequence of this long revision process, the organisational structure of state shareholdings changed radically; Figure 9.6 shows the main changes. What is noticeable first of all is the profound phenomenon of corporatisation. This was partly due to the necessity of keeping open the option of partial privatisation and partly due to the attempt to simplify the procedures of privatisation. Also evident is the drastic reduction in the number of judicially autonomous activities run under public law. The fact that the operation and management of these companies now fell under the rules of the civil law made it possible to sanction future changes in the state of public enterprises by government decision rather than by legislative action. Even if the results of this attempt to simplify procedures were not exactly as drastic as those expected by the government,8 the government obtained a much more rational and easy to manage organisation of state enterprises. Also, the process of corporatisation produced an even stronger effect, which can be said to constitute the ‘point of no return’ on the road to privatisation.

160 Privatisation in Italy: a tale of ‘capture’ Table 9.3 Italy: privatisation laws and decrees

Source: Goldstein and Nicoletti (1997) Note: Controls exercised by the Corte dei Conti are limited to administrative and legitimacy issues

Figure 9.6 Italy: The public enterprise sector after corporatisation and privatisation

162 Privatisation in Italy: a tale of ‘capture’

As already mentioned, the Italian Corporation Law requires either a recapitalisation or an adjudication of bankruptcy every time: (1) losses amount to more than one third of assets; and (2) the value of the corporation’s assets decreases under 200 million lire. In addition, the value of outstanding bonds cannot exceed that of assets and finally, if all the shares are owned by a single shareholder, the person faces unlimited liability. On the other hand, the Table 9.4 Privatisations in Italy, 1992–5

Source: Goldstein and Nicoletti (1996) Notes: PP = private placement, PO = public offer, IPO = initial public offer, MBO = management buyout; afirst tranche; bsecond tranche

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European Commission sees recapitalisation of firms by the state as a violation of the European Competition Law. The combination of these two factors leaves the Italian government with no other way out but to strengthen incentives (in the attempt to reduce losses) or sell public firms to the private sector. Privatisations After a long period of gestation, due to the need to prepare the necessary legal framework and to the divergence among political parties, privatisation properly started in late 1993. The identification of the companies to be sold took place earlier, in 1992.9 By the end of 1995 over 25,000 billion lire (more than 1.5 per cent of 1993 GDP) were raised by the sale of shares of 11 IRI companies, 8 ENI enterprises, IMI and INA. Table 9.4 from Goldstein and Nicoletti (1996) provides a detailed listing of the privatisations from 1992 to 1995. The success of this first tranche of privatisation was due to both its sequencing and to the intense restructuring process which took place before selling. On the first issue, it is worth noticing that banks were among the first public assets to be privatised; this decision was rightly justified on the basis of the argument that, with more than 80 per cent of the credit controlled by state-owned banks, and with the new banking law which relaxed the ban on bank shareholdings in non-financial enterprises, the privatisation process could have been nullified by the state-owned banks acquiring shares of state-owned enterprises. On the other hand, the restructuring of the whole organisation of state ownership, described above, was accompanied by a profound process of change in management, replacement of capital goods and labour-shedding together with a consolidation of balance sheets. This produced significant effects on the economic results of the major state-owned and state-controlled enterprises, reversing the L. 10,000 billion of 1993 losses to a combined profit of L. 1,288 billion in 1994. Proprietary structure and corporate governance Amongst the aims of the 1992 privatisation plan, as already said, were both an increase in the number of big private groups in the economy and an increase in the share of corporate stock owned by families, to promote some sort of people’s capitalism. The wide variety of sale techniques originally allowed in the plan is to be explained by these different objectives of corporate governance; indeed, the choice of the sale technique has an obvious impact on the desired structure of property rights in the privatised firms. In Italy, the aims of privatisation, with regard to the transformation of governance, were particularly ambitious. The need to favour the surge of public companies that are subject to the discipline of the market for corporate control was explicitly stated and sought for in all the official documents of the period. On the other hand, the partisans of the noyaux durs (preference given to a select group of shareholders) emphasised

164 Privatisation in Italy: a tale of ‘capture’

the need for a stricter monitoring of managers, which small shareholders are not able to exert. The final decision was taken favouring public sales, even if in the case of STET and ENEL the government is still considering the creation of a hard core of stable shareholders. However, the success of public offers for sale and the diffusion of shareholdings did not give rise to the creation of public companies or to a revitalising of the market for corporate control. The main reason can be found in the fact that the Italian corporate sector is characterised by a small core of groups mutually protected by cross-ownership of shares (Barca et al., 1995) and coordinated by Mediobanca, the only real merchant bank in Italy. In an attempt to prevent a small number of large investors acquiring control of the privatised firms, the government introduced limits to the amount of shares which could be owned by a single investor. The 3 per cent ceiling, established by the Board of Directors of Banca Commerciale and Credito Italiano, were in practice nullified by Mediobanca, which, exploiting its monopoly in relational banking, moulded coalitions in the two banks. With less than 20 per cent of the shares, and allegedly acting independently, Mediobanca appointed all of the directors to the boards. Paradoxically, the limits established to single shareholder ownership can now reduce the risks of takeover for the controlling groups and thus reduce the incentive power of the market for corporate control. More complex problems face the government in the privatisation of public utilities. With regards to corporate governance, in this sector a viable option from the theoretical point of view, is partial privatisation with the retention of a golden share on the part of the government. This is seen as a form of internal regulation. However, the Italian governments have committed themselves to the sale of major public utilities such as telecoms and electricity supply, and, in response to EU directives and Italian Antitrust Authority rulings, to liberalisation of the market.10 The form of privatisation and the ownership structure is still a matter of debate. THE REGULATORY STRUCTURE As already mentioned the problem of regulatory structure was tackled relatively late in the Italian privatisation debate. However, Law no. 481 of 1995 established the guidelines for setting up the establishment of the regulatory authorities for Energy and Gas and for Telecommunications: their powers were defined, the tariffs setting formulas were chosen and the mechanisms for allocation of concessions were designed. After that law, the political debate often centred on the opportunity to establish other Authorities: an example is the Regulatory Authority for Radio and TV Broadcasting. However, so far, little has been done, especially in relation to coordination of the powers of the different Authorities with those of the Antitrust Authority, of the powers of the Antitrust and those of the Bank of Italy relative to violation of the competition law on the part of the banks, and, especially, on the issue of reducing the risks of regulatory capture.11

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The two sectors which have, at the moment, a planned regulatory framework, electricity and fixed-link telephony, are public monopolies. The new regulatory plans envisage for electricity private ownership, a competitive market structure for generation and a public monopoly for transmission, while the distribution branch will be partially competitive.12 The price of the electricity will be subject to discretionary regulation and quality regulation and the promotion of competition will also be among the duties of the Regulatory Authority; finally the arbitration process will be a judicial one. Similar provisions are considered for telephony; both the local calls and long-distance calls markets are to become competitive, and for both of them the regulatory mechanism is to be based on price caps. Much, of course, remains to be defined or explained; although the reasons why the price mechanisms were adopted and which activities are regulated by law owe much to the British model. Probably the regulatory structure also reflects the need to adopt a high-powered incentive scheme. The efficiency gains which can be expected by the new regulatory structure, will, of course, depend on how well the price caps are set, on the length of the revision period, and on the degree of competition the regulatory authorities will be able to promote. A POSITIVE MODEL OF PRIVATISATION IN ITALY In this section we will try to offer an economic interpretation of the phenomenon of privatisation in Italy. The discussion will focus mainly on the mechanism which produced widespread inefficiencies in public enterprises and on the reasons why the privatisation process took place. In doing this there is no pretence of being thorough and exhaustive (real-world processes show more complexities than a model can take care of), but we do believe that a large part of the phenomenon described in the pages above can be explained by a political economy model of regulation like the one we propose.13 Our starting point derives from statements like: ‘Italian state firms are told to build production facilities in the South, the bedrock of support of the ruling Christian Democrats’ (Martinelli, 1981). Therefore, we build a model in which public ownership of firms allows the ruling party (the majority) to extract private benefits from localisation and/or employment policies by, for example, localising plants in its constituencies (or by requiring overemployment) even if such policies imply inflating cost and a net loss for society as a whole. Consider that, by localising plants at one of the majority’s constituencies or by hiring more people than necessary, the majority can obtain a private benefit of k at the cost of reducing productive efficiency (raising production costs) of γ; then it is plausible to assume private benefits to be a function k(γ) with a positive first derivative and a negative second one, furthermore k(1) = 0. Consider the case of a project of given dimension to be realised by a public firm whose cost function is:

166 Privatisation in Italy: a tale of ‘capture’ C = ßγ - e γ > 1

(1)

where ß {ß, ߯} is an efficiency parameter which reflects the technology of the firm (ß being the more efficient type) and which is private information of the firm - γ is a cost inflating variable and e is a moral hazard variable which can be seen as the cost-reducing effort of the firm. We assume that a γ > 1 can be imposed (at a cost) to the firm by the majority to appropriate private benefits. The different efficiency parameters of the firm give rise to different cost increases for the same γ: In other words, we assume that the more efficient firm can absorb this exogenous cost variable better than the inefficient one. Effort is costly, so if the manager exerts effort level e, the monetary cost of the project is reduced correspondingly, but the manager incurs a disutility level which in monetary terms is equal to ψ(e). We assume positive first, second and third derivatives; furthermore, ψ(e) = ∞, e →γß. The population of consumers is a continuum, composed of two types (1 and 2) who attribute value S1 and S2 respectively to the project, and α (respect. 1 - α) is the proportion of type 1 (type 2) in the economy. The regulator observes realised cost, C, and gives a transfer t to the firm: a contract between the regulator and the firm can be based on these jointly observed variables. In particular, the regulator offers a contract to the firm, specifying a transfer-cost pair for each type: namely {t, C} for type ß and {t¯, C¯} for type ߯. The utility (or rent) of type ß firm, when it selects the contract specified for its type is: U = t - C - ψ(ßγ - C) U¯ = t¯ - C¯ - ψ(߯γ - C¯)

for the efficient type for the inefficient type

(2)

Let v = prob {ß = ß} and λ > 0 be the shadow cost of public funds; in other words, we assume that, in order to levy £1, the government inflicts (1 + γ) disutility to taxpayers. Furthermore, let t1 (resp. t2) be the fraction of transfer to the firm levied on type 1 (resp. type 2) taxpayers, so that: t = αt1 + (1 - α)t2

The per capita net surpluses are: V1 = S1 - (l + λ)t1 and V2 = S2 - (1 + λ)t2

(3)

The utilitarian expected social welfare will then be: W = αS + (1 - α)S + k(γ) - (l+λ) [vt + (l - v)t¯] + vU + (l - v)U¯ 1

2

(4)

which is the sum of net consumer’s surplus, of majority’s private benefits, and of the utility of the firm.

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The benevolent regulator selects the contract which maximises the expected social welfare function under the following constraints. Individual rationality constraints of consumers: V1 = 0, V2 = 0

(5)

and of firm: U = 0; U¯ = 0

(6)

where the reservation level of utility has been normalised to zero. Incentive compatibility constraints for the efficient and inefficient type firm are: U = t - C - ψ(ßγ - C) = t¯ - C¯ - ψ(ßγ - C¯) U¯ = t¯ - C¯ - ψ(߯γ - C¯) = t - C - ψ(߯γ - C)

(7)

which guarantee that the contract designed for the efficient (respectively inefficient) type firm is the one it prefers in the menu of transfers cost-pairs. Rewriting the problem in terms of the effort variable and remembering that e = ßγ - C, the incentive compatibility constraint of the efficient type can be written as: a) U = U¯ + φ(e¯)

where b) φ(e¯) = ψ(e¯) - ψ(e¯ - ∆γß)

(8)

Since ψ″ and ψ″′ > 0, φ(·) is increasing and convex. This ensures that the objective function is concave. The function φ determines the rent of the efficient type firm (relative to the inefficient type’s effort) by measuring the economy in disutility of effort associated with a better technology. Given that there is a continuum of consumers, incentive compatibility (for consumers) leads to uniform pricing of the project so that t = t ; then, the regulator’s problem is to maximise the expected social 1 2 welfare function with respect to e, e¯, U, U¯, γ under the constraints specified above. Consider, first the derivative with respect to ?: k’(γ) - (1 + λ) (vß + (1 - v)߯) - λνψ″(e¯ - ∆ßγ)

(9)

since we are assuming that private benefits of the majority can be obtained at the expenses of a welfare loss for the society as a whole, we will consequently assume that the above derivative is negative14 for all γ > 1 . Then maximisation of welfare (for a benevolent politician) implies γ = 1 and the following conditions):

168 Privatisation in Italy: a tale of ‘capture’ a) ψ′(e) = 1 ⇔ e = e*

c) U¯ = 0 ⇔ t¯ = ߯ - e¯ + ψ(e¯) d) U = U¯ + φ(e¯) ⇔ t = ß - e* + ψ(e*) + φ(e¯) e) V = 0; V = 0 1

(10)

2

This means do the project if:

Equations (10a) and (10b) show that, while the effort of the efficient type is socially optimal (e*), since it is determined by equating at the margin disutility and benefit which arise from the reduction in production cost, that of the inefficient type is lower than the socially optimal one. This is due to the fact that the rent of the efficient type (see equation 10d) depends positively on the effort of the inefficient one; as it is socially costly, because of the excess burden of taxation, a rent–efficiency trade-off leads to a lower effort level (e¯ < e*) of the inefficient type. Furthermore, the excess burden of taxation explains why no rent is granted to the latter (see equation 10c). Consider now what happens when there is first an election in which two candidates commit to govern in favour of type 1 and type 2 respectively; each consumer votes for the candidate representing his type so that, if a > 1/2, the candidate of type 1 wins the elections and maximises type 1 consumers’ welfare subject to incentive constraints (no discrimination between taxpayers and incentive constraints for the firm). Since the firm is public, whoever wins the elections appropriates private benefits (from overemployment or localisation) and the objective function of each candidate (say type 1) will be: V = aS + k(γ) - (1 + λ)a[vt + (1 - v)t¯] 1

(11)

1

which will be maximised under the participation and incentive compatibility constraints stated above. Incentive compatibility for consumers prevents tax discrimination and therefore saturation of type 2 individual rationality constraints. Moreover, since rent to the firm is costly, the majority (type 1 voters) will want to minimise it and, therefore, transfers will be: t¯ = ߯γ - e¯ + ψ(e¯) t = ßγ -e + ψ(e) + φ(e)

(12)

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By substituting equation (12) into the objective function and maximising with respect to the relevant variables we get: a) k’(γ) - (1 + λ)a(vß + (1 - v)߯) - (1 + λ)avψ″(e¯γ - ∆ßγ) = 0 b) ψ’(e) = 1 ⇔ e = e*

(13)

Notice that the necessary condition for the majority to set a γ > 1, even if this is not viable from a social welfare point of view, is λ > 1; so, for a very distortive tax systems, the ruling party might inflate production costs to appropriate private benefits even if this causes a social welfare loss. However, increasing ? also increases the rent to be granted to the firm (see equation 8b) and, since this is costly, the regulator (government) reduces the effort of the more inefficient type in order to reduce the rent (see equation 13c above). This kind of mechanism, therefore, induces a low-powered incentive scheme more similar to a cost-plus contract than to a price cap. Notice also that the slimmer the majority (the closer a to 1/2) the higher the γ for a given λ (see equation 13a); so this model predicts that the slimmer the majority the lower the effort of the firm (and therefore the higher the cost): a testable implication. In Italy, the proportional nature of the political representation (and therefore the degree of cohesion of the coalition in power) makes things a bit more complicated; however, in the period 1975–83, when the losses of public enterprises were at their highest, majorities were always slimmer than in previous and successive periods. Finally, a simple comparative statics exercise shows that the equilibrium γ decreases if the shadow cost of public funds increases. This in turn can be seen as one of the causes of privatisation. When public debt and marginal tax rates were not excessively high, it was convenient for the ruling parties to appropriate private benefits by inflating costs of the firms. But the ensuing soft budget constraint contributed to raise taxation and therefore the shadow cost of public funds (λ); and this, in the long run, did not make it convenient any more for the governments to appropriate private benefits: one way out was privatisation. Of course, we do not claim that our stylised model exactly explains all the complex phenomena behind the role of public enterprises in Italy up to the process of privatisation; but we believe that it captures some of the truth. CONCLUSION Privatisation is still an on-going process in Italy. Much has been done in terms of preparing the institutional framework in which privatisation is taking place. Much, however, remains to be done in the field of liberalisation: the regulatory structure has been announced but not yet implemented and the promotion of competition has only just started. The outcome, in welfare terms, of this process

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will strongly depend on the effectiveness of the liberalisation and the regulatory processes. Finally, very little has been done to prevent ‘regulatory capture’, and this, given the previous history of state enterprises in Italy should be of major concern. NOTES 1 The authors wish to thank CNR and Murst in Rome for financial support and II Mulino, Bologna, for permission to reproduce figures and tables from the paper by Goldstein and Nicoletti (1996). 2 Until very recently state-owned enterprises in Italy were seen as a very effective instrument of industrial policy with the aim of promoting industrialisation and growth. The IRI (discussed further below) was studied as a role model and attempts were made to import it into other countries: one might think, for example, of the Industrial Reorganisation Corporation in Britain in the 1970s as a model of ‘nationalisation Italian style’. 3 These figures, the following data and the description of the public sector in Italy are drawn from Goldstein and Nicoletti (1996). 4 A detailed account of the history and role of public enterprises in Italy can be found in Posner and Woolf (1967), and Fausto (1982). 5 Aziende Autonome are corporations originally created, in 1920, to administer state forests, telephones, the postal and telegraph services, state monopolies and roads. Their financial needs are covered entirely by the state, but they possess a slighter greater degree of autonomy than government departments. They have a separate director general and board of directors and publish independent balance sheets Although authority over the various Aziende Autonome is vested in different ministries (Industry, Finances, Transport, etc.) they are regarded as a single group because of their analogous legal structure. A slightly different version of Aziende Autonome are the ones owned by municipalities and local governments (Aziende Speciali) 6 Defined as value added per worker. 7 This is obviously not unique to the Italian system; for example, some privatisations in Germany required a change in the Fundamental Law (the constitution) and, therefore, a qualified majority, see chapter 6. 8 The Corte dei Conti, which, in the intention of the government was not supposed to exercise control after the corporatisation, appealed to the Constitutional Court and retained some control. This is limited to administrative and legitimacy issues. 9 This list included two banks, Banca Commerciale Italiana and Credito Italiano (4th and 6th largest), both owned by IRI; the second largest insurance company in Italy, INA, a special credit bank, IMI; the industrial activities of SME, IRI’s food and distribution subholding; IRI’s communication subholding, STET, the whole of the electricity public production and distribution, ENEL; and, finally AGIP, ENI’s subholding for oil production and distribution. 10 In 1994 a second licence was awarded (to Omnitel) in the market for mobile telephone services; but, at same time, the new entrant was asked to pay a fee for the GSM licence (while the incumbent was granted the licence for free) and the public telecom operators were reorganised into a single new holding. 11 Regulatory capture occurs when the regulator ceases to serve the interests of consumers and instead protects the interests of the regulated company(s). 12 The European principle of the ‘visible consumer’ is applied. 13 A similar approach can be found in macro-economics in Persson and Tabellini (1996) and Aghion and Bolton (1994). The first paper to examine industrial policy in the light of the political economy literature is Laffont’s (1996); for a complete version of our model see Marrelli and Stroffolini (1997). Other models which see the inefficiency of

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public firms as the result of political pressures can be found in Shleifer and Vishny (1994), and Boycko, Shleifer and Vishny (1996); however, their models are based on the incompleteness of contracts which govern the relationship between managers and politicians so that the residual right of control rather than asymmetric information becomes the initial determinant of resource allocation. Also, both models do not allow one to explain why privatisation ever takes place. 14 Notice that this restrictive assumption is made to simplify the exposition, but the general results do not depend on it. Indeed, even if maximisation of welfare would entail some cost increase the inefficiency of the political system would imply a distortion from the optimal level and, therefore, a welfare loss; for a more detailed exposition see Marrelli and Stroffolini (1997).

REFERENCES Aghion, P. and Bolton, P. (1994) ‘Government Domestic Debt and the Risk of Default: A Political–Economic Model of the Strategic Role of Debt’, ch. 11 in R. Dornbush and Draghi, M. (eds) Public Debt Management – Theory and History, Cambridge: Cambridge University Press. Barca, F., Bianchi, M., Brioschi, F., Buzzacchi, L., Casavola, P., Filippa, L. and Pagnini, M. (1995) Assetti Proprietari e Mercato delle Imprese, Vol. II, Gruppo, Proprietà e controllo nelle Imprese Italiane Medio-Grandi, Bologna: Il Mulino. Boycko, M., Shleifer, A. and Vishny, R.W. (1996) ‘ A Theory of Privatisation ’, The Economic Journal, 106 (March), pp. 309–19. Fausto, D. (1982) ‘ The Finance of Italian Public Enterprises ’, Annals of Public and Cooperative Economy, 53 (March), pp. 3–23. Goldstein, A. and Nicoletti, G. (1996) ‘ Le Privatisazioni in Italia, 1992–1995: motivi, metodi e risultati ’, in A. Monorchio (ed.) La Finanza Pubblica Italiana dopo la Svolta del 1992, Bologna: Il Mulino. Goldstein, A. and Nicoletti, G. (1997), ‘ Italian Privatisation in International Perspective ’, Cuadernos de Economia, 33 (100), Santiago de Chile. Laffont, J. J. (1996) ‘ Industrial Policy and Politics ’, International Journal of Industrial Organization, 14, pp. 1–27. Marrelli, M. and Stroffolini, F. (1997) ‘ Some Political Economy of Regulation and Optimal Decision Rules ’, mimeo, DTSEP, University of Naples. Martinelli, A. (1981) ‘ The Italian Experience: An Historical Perspective ’, in R. Vernon and Y. Aharoni (eds) State-owned Enterprise in the Western Economies, London: Croom Helm. Persson, T. and Tabellini, G. (1996) ‘ Federal Fiscal Constitutions: Risk Sharing and Moral Hazard ’, Econometrica, 64, pp. 623–46. Posner, M.V. and Woolf, S. J. (1967) Italian Public Enterprise, London: Gerald Duckworth and Co. Shleifer, A. and Vishny, R.W. (1994) ‘ Politicians and Firms ’, Quarterly Journal of Economics, 109, pp. 995–1025.

10

Privatisation in Finland, Sweden and Denmark Fashion or necessity? Johan Willner1

INTRODUCTION Despite a reputation for welfarism and a tradition of public intervention, the Nordic EU-countries Finland, Denmark and Sweden have been affected by the same policy shifts as elsewhere. This chapter provides a case study of their experiences of public ownership and privatisation and a critical assessment of the major motives for their present policy. In particular, we focus on the challenge to public ownership in small countries that is caused by European economic integration. This is often seen as restricting scope for wider objectives than profit maximisation, but it turns out that there is one sense in which the opposite is true. Among Nordic EU-countries, Finland ranked first, Sweden second and Denmark third – and below most other EU-countries – in terms of preprivatisation shares of public ownership. The nationalised sector in Britain was usually described as large, but Britain’s share was between Finland’s and Sweden’s in relative size.2 Unlike in Britain, mainstream parties have not been divided on ownership. Sweden and Denmark have traditionally been Social Democrat strong-holds, but Nordic Social Democrats never pursued nationalisation when in power. Communists were strong in Finland and they even participated in some governments, but were kept at arm’s length from industrial policy. As in most other European countries, public ownership has been widespread in infrastructure industries like transport, water and telecommunications, but also in banking (Postipankki in Finland, Nordbanken in Sweden and GiroBank in Denmark). The airline Scandinavian Airlines System (SAS) is jointly owned by the Danish, the Swedish and the Norwegian states; Finland has its own state-owned carrier Finnair. In Finland and Sweden there has been public ownership in manufacturing as well; commercial initiatives alone could not ensure rapid industrialisation in such large and sparsely populated countries. In what follows, the term public enterprise will denote all types of public undertakings, conforming to Parris et al. (1987, pp. 7 and 22). A state enterprise is operated by and financially integrated with a government department, like schools, universities and sometimes postal services or railways. A state-

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sponsored enterprise is more autonomous but subject to some authority, like the nationalised industries in the UK or public enterprises in Ireland. Public utilities like postal services, telecommunications and railways (‘public business activities’) have been organised in this way in Scandinavia. A state-owned company (SOC) has the same legal status as a private company despite dominant public sector shareholdings. Such public enterprises have been transformed into companies, with or without an ambition to privatise. The term privatisation is sometimes used when objectives become commercial without a change of ownership, as is often the case in Scandinavia. Consequences may be similar, but objectives can be more easily reversed. In what follows, privatisation therefore denotes a change which both reduces shareholdings and removes state control. For example, a reduction from 51 per cent to 49 per cent is included in the definition, but not from 100 per cent to 51 per cent or 49 per cent to 0 per cent.3 OWNERSHIP AND SOCIAL OBJECTIVES Some motives for the universal trend to privatise are ideological. However, public ownership is also believed to be inefficient because of soft budget restrictions and agency problems. Theoretical contributions, for example by De Fraja (1993a), Estrin and Pérotin (1991) and Pint (1991), and surveys such as Boyd (1985), Millward and Parker (1983) and Willner (1996a) suggest that this may not be true. Moreover, if markets fail, the benefits associated with public ownership might overshadow higher costs. Public ownership in market economies often exist because of structural reasons. For example, the state might initiate or maintain a commercial activity in an industry or region where the private sector is not interested. Once established, the company then usually behaves as if it was in private ownership. However, such behaviour may in some cases lead to market failure. The reasons for public ownership are behavioural if the authorities want the conduct of a company to be inconsistent with private ownership. Cases in point are natural monopolies and mixed oligopolies.4 There might exist behavioural reasons when larger staffing means higher quality, as in child- or health-care, or when the frequency of a transport service affects user mobility.5 Cost cuts may mean lower wages and/or harder work and thus partly a redistribution of income rather than higher efficiency. Moreover, some sluggishness in laying off workers or raising prices might be desirable in cases where private companies tend to over-react leading to economic recession. In practice, SOCs do not always maximise welfare, but the opportunities to change policy are lost if an activity is privatised. Public intervention through ownership is often seen as a top-down mechanism only. However, non-profit maximising organisations can be given autonomy when needed, or they can be required to act according to the views of those concerned. In contrast, commercial activities are top-down if corporations become too powerful, for example when it is profitable for them to neglect local needs.6

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The wider objectives of a public firm may actually threaten private competitors (Cremér et al., 1989 and Willner, 1994). On the other hand, to give some weight to consumers and workers in the objective function causes the public firm to make losses in bargaining models (see Haskel and Szymanski, 1992).7 Some authors conclude that wider objectives cannot survive increased competition without violating EU regulations on subsidies (Bös, 1993). Futile or even harmful attempts to benefit voters or workers should therefore be blocked through privatisation. However, this analysis seems out of place, at least when applied to Scandinavia where SOCs are not in general loss-making.8 For example, the bargaining situation would change if the subsidies that were present in Haskel and Szymanski’s models no longer existed. Moreover, it is not self-evident that the pay-off is the same as when choosing output. Central bargaining, as in Scandinavia, would presumably reduce or eliminate wage differences. All companies in an industry could even be members of the same federation, as often is the case in Finland. Even if these qualifications are ignored it might not be true that wider objectives make a company more vulnerable. This is discussed further later in the chapter. PUBLIC OWNERSHIP AND PRIVATISATION IN SCANDINAVIA Finland – preparing for Europe Finland’s first manufacturing public enterprises emerged in 1918, soon after independence, to ensure domestic ownership in the forest industry (Veitsiluoto and Enso-Gutzeit) and basic metal industries (Outokumpu and later Rautaruukki).9 Rikkihappo, later part of Kemira, which supplied fertilisers, and the electricity generating company Imatran Voima were created for similar reasons in the 1930s. Some factories were established to supply the armed forces. Enterprises were then organised as companies in order to ensure access to capital markets, unlike the nationalised industries in Britain and Ireland. After the war, a number of companies were established partly because of payment of damages to the Soviet Union and the need for reconstruction. Cases in point are Valmet, which made aeroplanes, ships and tractors and which is now a world leader in paper and board machines; Typpi, which produces fertilisers and later became part of Kemira; and Neste, which refines and distributes oil products. Later cases are the electricity generating company Kemijoki and the steel plant Rautaruukki. In the 1970s, the government focused on joint ventures like the car plant Saab– Valmet with a private Swedish partner, rather than on pure state ownership.10 Governments in Finland have nearly always been coalitions. Privatisation emerged on the agenda in the late 1980s when Social Democrats were still dominant in the government. This resulted in the Ministry of Trade and Industry (MTI) blueprint, Visio yksityistämisestä Suomessa 1990-luvulla (1991). The subsequent right-wing coalition wanted to privatise, but was prevented from doing so until 1994 because of the economic crisis. Its policy is now being continued despite a swing to the left in the 1995 elections.11 According to MTI policy statements, each company should be treated

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individually and some are to remain in public ownership. Unlike in Britain, no company is to be sold unless the state can get a satisfactory price, for example from international investors. The government has promised to use privatisation proceeds to encourage R&D in small and medium-sized firms. The extent of privatisation of companies owned by the state in January 1994 and the remaining public ownership in February 1997 are described in Table 10.1.12 It seems that public ownership will remain relatively important in Finland. Only three major companies (Enso–Gutzeit, Valmet and Outokumpu) were privatised in 1994–96. The state actually became the largest shareholder (30.4 per cent) in a previously completely private manufacturer of mineral products and machinery, Partek, which took over the state’s shares in Sisu (73.6 per cent). The government is entitled to reduce ownership to 50 per cent in Kemira and Neste and to less than 50 per cent in Rautaruukki. Finnish government reports are less explicit on the motives for privatisation than in Sweden and Denmark. However, competition is not an obvious motive, because the 1991 blueprint recommends privatisation as a way to achieve mergers.13 It also emphasises the importance of proceeds from sales and warns against public sector dominance of industries.14 Efficiency is an objective, but the blueprint admits that the state-owned companies were fairly efficient. However, as their developmental mission in the economy has been fulfilled, the authorities now emphasise the need for new risk capital and changed business Table 10.1 Privatisation and remaining public ownership in Finland

Notes: *Companies affected by complete or partial privatisation, 1994–6; aFundia Oy and Keskometalli Oy were nationalised in 1995 and merged with Rautaruukki Oy; bThe aircraft manufacturer Valmet Lentokoneteollisuus is still in public ownership

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conditions, in particular integration and international competition (Kääriäinen, 1994).15 Competition and commercialism might transform public services more profoundly, because manufacturing companies cannot become more commercial and there is no intervention to force them to compete more rigorously. For example, bus routes are increasingly tendered and some want to see them privatised. Two large operators in the capital region are already owned by Linjebuss (of Sweden) and Stagecoach (a British company). Railways, postal services and telecommunications are not yet privatised, but they are required to emphasise profitability rather than social objectives. As a result, railway services have been cut and a large number of post offices closed. Telecommunications, traditionally provided by the state or local public or cooperative companies, have been deregulated. Calls have become cheaper, but this might result from technical change, cream-skimming and reduced crosssubsidisation. Some experts think that there is no alternative to this privatisation (Kivinen, 1996). What is clear is that, although Finland became a leader in deregulation rather than a follower, the consequences of the experiment are disputed. Sweden – ideological change As in Finland, early state-owned manufacturers in Sweden were established in the paper and pulp industry (ASSI) and in mining (LKAB) in order to exploit natural resources under domestic ownership. 16 However, the scale of the investments needed called for public activity, in more recent times as in the case of Asea Atom. Companies have also been established in order to ensure the supply of certain products such as X-ray films (Cea) and pharmaceuticals (Apoteksbolaget). Ownership has partly been organised through holding companies like Statsföretag, later Procordia, in order to reduce government involvement in operational decisions. Procordia’s subsidiaries were engaged in, for example, pharmaceuticals (Kabi Vitrium), railway rolling stock (Kalmer Verkstäder) and hotels and restaurants (SARA), but focused later on pharmaceuticals under the name Pharmacia & Upjohn.17 Ideological differences in Sweden were minor in the 1970s and 1980s. For example, the shipyards were nationalised in 1976–82 when non-socialists held power. Between 1982 and 1991, when the Social Democrats ruled, Procordia sold a number of companies like Kockums Industrier and Kalmar Verkstäder in order to concentrate on core activities. Datasaab was sold to L. M. Ericsson, and the radio and TV manufacturer Luxor to Nokia (of Finland). Moreover, financial markets, telecommunications, buses, flights, agriculture and TV and radio were deregulated. But a decisive shift took place under Carl Bildt’s rightwing government of 1991–4, which authorised the privatisation of 35 companies. As in Finland, efficiency was not a direct issue, rather privatisation was seen as promoting a ‘competitive ownership structure’

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(‘Privatiseringsrapporten’, 1994). The government proposals wanted a clear division between politics and business. The government argued that public ownership distorts competition (Regeringens proposition 1991/92: 69). In contrast with the position in Finland, markets were required to be competitive after privatisation. The government also wanted to broaden share ownership, to strengthen the market for venture capital, to release funds for infrastructure investment and to pay off public debt. At the same time, ideological motives were more evident than in Finland. The employers’ union, SAF, lobbied extensively for privatisation and was a large sponsor of the publisher Timbro, which issued neo-liberal or Thatcherite pamphlets.18 It managed to get influential support, in particular from the right-wing party Moderaterna. Given the lower level of public ownership in Sweden than in Finland, the government’s intentions were more radical. However, many enterprises had to be reorganised before divestiture and this delayed the privatisation process. In 1994, before the elections, 20 companies had been completely or partially privatised. Share prices were set closer to the subsequent market valuation than in Britain, and it seems that the overall process has been more cost efficient than in Britain or France (‘Privatiseringsrapporten’, 1994).19 Table 10.2 describes the extent of the privatisation of companies with dominant state ownership and the remaining public ownership in December 1996. It does not include privatisations before 1991 and/or companies where minority holdings were sold, such as in the case of the cement manufacturer Cementa, the steel company SSAB Svensk Stål, and the oil company OK Petroleum, or a number of regional investment companies. The Social Democrats won the elections in 1994, and no general authorisation was given to sell the reminder of the 35 companies chosen by the previous government. State ownership of Apoteksbolaget, which handles the distribution of pharmaceuticals, was even increased to 100 per cent. On the other hand, Nordbanken was partially privatised in 1996 and the vaccine producer SBL Vaccin may in the future get some private shareholders or even be privatised without any parliamentary decision. Privatisation is no longer an end in itself, however, and the emphasis is now on an active rather than institutional ownership. A reduction to a 34 per cent state shareholding can be made without parliamentary permission (further reductions would eliminate the possibility of blocking a change in corporate objectives). But at the same time, state ownership can be increased, though not extended to completely private companies, without a parliamentary decision. Reduced state ownership may be part of a restructuring in favour of other companies and net revenues are used for paying off government debts (Regeringens proposition 1995/96: 141). Active state ownership is described as a way to improve efficiency, in particular when there is joint ownership. There are no signs in the proposal of non-commercial objectives, apart from an emphasis on high ethical standards. As is the case in Finland, transformation in services like child- and health-

178 Johan Willner Table 10.2 Privatisation and remaining public ownership in Sweden

Notes: *Companies affected by partial or complete privatisation, 1991–6; aNcb AB and Domän AB were merged with ASSI AB; the new company is called AssiDomän AB; bthe SKD group is winding up its operations; cthis company is now liquidated

care, telecommunications and transport may therefore be of a greater significance than privatisation per se. According to right-wing thinking, the presence of a few commercial SOCs may not after all be the main problem if society is characterised by excessive welfare provision and hostile attitudes towards business.20 The railways (Statens Järnvägar) are still organised as a state-owned enterprise, but telecommunications were reorganised as a company (Telia) in 1993. At the same time, the number of municipal bus companies has been reduced from 40 in 1989 to 21 in 1994, usually because of tenders being lost. Most of these were acquired by Linjebuss, which is private, or by Swebus which was owned by Statens Järnvägar until being sold to Stagecoach of Britain in 1996. Both companies now operate in Finland as well. Fölster et al. (1993) have evaluated 38 cases of privatisation by local authorities in Sweden. They found 8 cases of reduced efficiency, 4 bankruptcies and 6 cases of higher costs to the local authority. On average, costs had been reduced, although they expected them to increase in the longer run. While not disputing the merits of privatisation, the authors argued that a failure to benefit from international experience of privatisation and to identify cases where public operation is actually cheaper might provoke resistance to further sell offs.21

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Both policy and evaluation of privatisation can be criticised for being obsessed by costs, when some studies of particular industries suggest that lost benefits may dominate. For example, according to Alexandersson et al. (1996), competitive tendering in public transport has lowered costs, but tariffs have increased. Moreover, as non-overlapping services have been cut, waiting times have risen. Studies from Sweden, Finland and Britain suggest that longer waiting times deter car owners from using public transport and that cuts in the network and service frequency overshadow any improvement in buses or rolling stock (Bussiammattilainen, 1994, no. 5, pp. 8–11; Goodwin, 1993). Denmark – less privatisation and less to privatise In Denmark, railways (DSB) are still organised as public enterprises (statsvirksomheter), and Postvæsendet (postal services) is still a state-sponsored enterprise. 22 The largest SOC (Statsejede aktieselskab) is Tele Danmark (telecommunication); it is followed by SAS Danmark, Dansk Olie og Naturgas or DONG (oil and natural gas) and Copenhagen airport (Københavns Lufthavne). Moreover, the state operates ferries (DSB Rederi with subsidiaries) and builds fixed links from Sealand to Jutland and Sweden (Sund og Bælt Holding). Ownership outside infrastructure industries has included EKR (credit insurance), Statens Konfektion (garments), shares in the steel industry (Det Danske Stålvalsværk) and a few other manufacturing companies, such as Junckers Industrier. Like Finland and Sweden, Denmark is at present governed by Social Democrats, which replaced a non-socialist coalition. In Denmark’s case, the shift took place in 1993. However, it seems that industrial policy is affected more by a long-run change in attitudes than by short-term shifts in political power. Also, there has been practically no state ownership in manufacturing, therefore the scope for privatisation is smaller in Denmark than in Finland and Sweden. Nevertheless, 11 state enterprises have been transformed to companies and more privatisation is now taking place than under the previous government. Privatisation in Denmark is handled by the Ministry of Finance. Its motives do not appear to be ideological and efficiency, as such, is not an issue. At the same time, separating companies from political intervention and public sector policy on staffing and salaries is seen as desirable. The most important motive for privatisation or conversion is a perceived need to ‘strengthen the commercial aspects’ of a company’s activities (The Danish Policy of Privatisation, 1996). The authorities expect increasing international competition because of EU-initiatives and changes in domestic markets. New technology and the need to assure strategic cooperation are also mentioned. Proceeds from privatisation sales also seem to be an important motivating factor. A number of activities that have been privatised in other countries remain in public ownership and only three major companies have been privatised in the proper sense of more than 50 per cent of the shares being sold. Two are from the financial sector, while the third is the computer centre (Datacentralen), where 75 per cent of

180 Johan Willner Table 10.3 Privatisation and remaining public ownership in Denmark

Notes: *Companies affected by partial or complete privatisation 1992–6; asubsidiaries include A/S Dampskibsselskabet Øresund and ScandLines A/S (50%); bco-owned by Greenland’s Home Rule; cfiled for bankruptcy in 1996

the shares were sold to an American company because of a desire to achieve technical cooperation. In addition, Tele Danmark and Copenhagen airport have been partially privatised and the railway company (DSB) is concentrating on its core activities – up to 25 per cent of its shipping and bus divisions may be sold in 1997. Table 10.3 shows the extent of privatisation until 1996 of companies owned by the state in 1992. Unlike in Sweden and Finland, the state does not pursue privatisation and deregulation of the service sector. Nevertheless, some municipal bus companies, such as in Esbjerg, have been sold, or services have been contracted out, as in the Copenhagen region.23 THE CASE FOR WIDER OBJECTIVES The main motives for public ownership in manufacturing in the Nordic countries seem to have been structural. Given the ambition to industrialise, some companies have been located according to needs that the private sector would not have taken care of, such as Svenska Etablerings (financial assistance to new market entrants), Rautaruukki and Kemijoki. Moreover, there were in the 1970s attempts to save a number of companies through nationalisation, but most of these have now closed. GiroBank in Denmark and some SOCs in Sweden were supposed to reduce market concentration (via structure rather than conduct), but now there is a tendency to rely on the EU rather than public sector initiatives to promote competition. Because of the structural motives for public ownership, profitability, at least in the long run, has been the dominant objective. Earlier restrictions concerning layoffs and redundancies have now been removed;24 for example, companies in Sweden

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are no longer allowed to take more responsibility for employment than a private firm. In Finland and Denmark they belong to the private employers’ association and managers in Sweden are recruited from the private sector rather than the civil service. Not surprisingly, state-owned firms have generally been commercially successful, which explains why efficiency has not been an issue in the same way as in Britain.25 However, SOCs have occasionally promoted business activities in general rather than their own profitability, for example when providing cheap railway freights or energy as in Finland. In Sweden, state ownership was used to support R&D or increase information about particular production methods, as in the cases of Svenska Utvecklings, Datasaab or the pharmaceutical industry. One important reason for privatisation in Scandinavia was the notion that state ownership had a mission to promote economic development. Also, successful companies have been a source of government revenue, though governments now expect profitability to be reduced because of increasing competition. Therefore, they prefer divestiture while prices are still high.26 Behavioural motives for state ownership have often been paternalist as in lotteries and football pools. Moreover, Finland and Sweden still have monopolies in wines and spirits; the aim of using high prices as a regulatory tool has also been highly profitable to the state.27 However, as such monopolies are now threatened by the EU, the commercial emphasis is strengthening in anticipation of future liberalisation. Governments address market failure in some cases, as in telecommunications in Denmark which are regulated. However, many services are required to be profitable, in particular in Finland, without convincing reasons. In addition, concentration in manufacturing has always been relatively high in Scandinavia. Economic integration is believed to reduce market power, but deregulation and competition are often followed by mergers. This suggests that there might be an even stronger case than before for wider objectives, even if some old motives for public ownership may no longer be valid. Arguably, the authorities lack vision or they blame the EU for making wider objectives impossible, thus forcing even public sector core activities to become commercial. COMPETITION AND BEHAVIOURAL MOTIVES FOR PUBLIC OWNERSHIP Wage bargaining and profitability: the case of a public monopoly Increasing competition and/or market size and rules against subsidies have, in particular in Denmark and Finland, been important reasons for privatisation. Wider objectives are seen as no longer viable, though no research has been undertaken on how new entrants and/or increasing market size affect the conditions for breaking even. To address this issue, we construct a model in which a state-owned company maximises a weighted sum of its profits and wage sum. This can be interpreted as a compromise between promoting profits and other components of the social surplus. Alternatively, the procedure can be seen as a result of pressure from unions

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and/or consumers. Otherwise, the model is conventional. For example, cases where competition might not be desirable because of network externalities or other coordination problems are ruled out, and the public firm has the same pay-off in the bargaining situation as when deciding about output.28 Demand is p = a - x, where a is a positive parameter. Labour is the only input, and each unit of output requires one unit of labour. The company attaches a positive weight p < 1 to the wage sum. The wage rate is determined by Nash bargaining, where the union’s utility equals total rents. Output is determined after the wage rate is known; consequently, we first determine output as a function of the wage rate. The public firm has the following objective function: W = (a - x)x - wx + pwx.

(1)

Maximising yields x(w) = (a - (1 - p) w) /2, and it follows that W = (x(w) )2. The union maximises its utility U = x(w)(w - w¯), where w¯ denotes the outside option. Assuming equal bargaining strengths means that the procedure works as when maximising B = logW + logU = 3 log x(w) + log(w - w¯).

(2)

This yields: (3)

Inserting in X*(w) yields: (4)

It is obvious that consumers and workers are better off than in a commercial monopoly (p = 0). Welfare (the total surplus) is increasing in X as long as X* < a - w¯, which means that welfare is higher unless p is too large: (5)

Inserting in a - x* - w* yields the values of p under which the company can make profits or break even. However, it is more convenient to characterise the conditions from the inverse relationship between p and w¯/a:

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As shown in Figure 10.1, the highest permissible value of p approaches 0.6 as w¯/ a approaches zero, and zero as w¯/a approaches unity. Welfare is improved in areas I and II, but the company makes losses in II. The same is true in III, where there is overprovision as well. Can wider objectives survive competition? Suppose now that the public firm faces competition, but to begin with, only in the same market as before. We then get a mixed oligopoly where firms with different objectives interact. If it is true that wider objectives cannot survive competition, area I in Figure 10.1 would shrink or disappear. The public firm, which is now indexed by 1, maximises a weighted sum of its own profits and its contribution to the wage sum in the industry: W = (a - x)x - w x + pw x . 1

1 1

(7)

1 1

There are n - 1 identical profit-maximising competitors. The typical profit function is: π = (a - x)x - w x ; i = 2, 3,. . . I, I n i

i

i i

Figure 10.1 The case of a public monopoly

(8)

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It will be convenient to introduce the notation v = (w , w ,. . . I, I w ). Output in firm 1 2 n 1 and firm i are then represented by the following functions of v: (9)

(10)

Bargaining works as if maximising B = 3 logx (v) + log(w - w¯) B1 = 3 logx 1(v) + log(w 1- w¯) i

i

(11) (12)

i

After differentiation, use symmetry to set w = wj = w for all i, j ? 1: i

(13)

(14)

Insert to get p - w and rearrange to get the following condition for the public firm 1 not to make losses: (15)

Using (15) to infer the shape of the boundary p(w¯/a) shows that the largest permissible value of p decreases from p(0) = 3n/(4n + 1) to p(1) = 0. It is obvious that p(0) increases from 0.6 to 0.75 as n increases from one to infinity. Industry output is increasing in p and is thus always higher than in a conventional oligopoly (p = 0): (16)

Welfare is also higher unless there is overprovision (x* > a - w¯), which happens if p is too large: (17)

Actually, no private firm would be willing to produce if p is chosen above this boundary, which has a negative slope that is decreasing in absolute value. It intersects the line p = 1 if w¯/a = (4n + l)/(7n + 1), which decreases from 0.625 to 0.571 as n increases from one to infinity.

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Figure 10.2 The impact of competition

Figure 10.2 shows how the regions I–III from Figure 10.1 change as we move from monopoly towards increasing competition. In fact, the region where firm 1 does not make losses is increasing in n. For example, suppose that a = 10 and w¯ = 2. A public monopoly would than make losses if p > 0.511, but in duopoly only if p > 0.549. Thus, if for example p = 0.530, a loss-making public monopoly would become profitable by having a competitor. It might be easier to understand this result by considering a change in the opposite direction. To get a monopoly is like introducing central bargaining, which yields a higher wage rate because of worker unity. If the monopolist is commercial, the higher price normally compensates for this. However, if the firm has wider objectives, the wage rate may increase by more than the price. However, economic integration means an increase in the market as well. Suppose that there is a country A with public monopoly and a large area B with n - 1 private firms. Demand is xA = a - p and xB = b - p respectively. When A joins B, inverse demand becomes p = (a + b)/2 - x/2 = a’ - x/2. The larger size of B means that b > a, but w¯A = w¯B = w¯. Reworking the calculations for the integrated economy gives the following condition for the public firm not to make losses: (18)

Thus, is p(0) is 3n/(4n + 1) as before, but p = 0 is now associated with w¯/a = (a + b)/2a, which must be larger than one. Thus, if also the market increases, the scope for wider objectives increases further. Figure 10.3 illustrates the case where B is three times as large as A, which means that (a + b)/2a = 2 and n = 3. Area I is the initial permissible region, area II the increase for the case when we get three firms in the initial market, and III

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Figure 10.3 Competition and integration

the additional increase caused by the increase in market size. Note that there are both price and wage rate increases for any monopolist whose market grows in this sense, but the price effect dominates. This explains why the combined effect of competition and a larger market size is to make it even more easy to break even while pursuing wider objectives. CONCLUSION In the past public ownership has been an integral part of Nordic industrial policy. However, motives have been structural, in the sense that the states have created or saved companies that would otherwise not have existed but have not interfered with the market mechanism once an activity has been initiated. There are a few exceptions, usually related to paternalism or an ambition to promote profitability in general rather than a particular company. A significant group of companies will remain in public ownership, in particular in Finland and Sweden, in spite of the privatisation programme underway. Some companies have been privatised partly because of the view that their developmental mission is completed; while natural monopolies are not likely to be privatised. Also, public ownership may remain desirable in situations where commercial operation would cause economic distortions. As the analysis of mixed oligopolies shows, the presence of public ownership in such a market does not necessarily exclude private competitors. On the other hand, competition may create more problems than it solves even if several firms can make profits. The presence of a completely commercial state-owned company does not necessarily increase welfare, but privatisation would prevent any attempt to change its behaviour towards welfare maximisation. At the same time, governments seem

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to lack a vision about wider objectives, or they think that only commercial companies can survive in the EU. However, as follows from the model, competition may even make it easier for a company with wider objectives to break even. NOTES 1 A preliminary version of the chapter was presented at the HCM-workshop in Sophia Antipolis, 14–15 February 1997, arranged by EUNIP. I am grateful for comments by participants and by colleagues at Åbo Akademi University. In addition, a number of government officials have helped me with details and supplied me with policy statements, government proposals etc. In particular, I want to thank Markku Tapio (the Ministry of Trade and Industry, Finland), Krister Berggren (Näringsdepartementet, Sweden) and Jacob Heinsen and Christian Roslev Sorensen (Finansministeriet, Denmark). They are not responsible for any mistakes nor for my views and interpretations. 2 In terms of percentage shares of domestic value added, public enterprises were responsible for 22 per cent in Finland, 10–11 per cent in Britain and 6 per cent in Sweden. The figure for Sweden does not include ownership through the so-called wage earners funds, because their share ownership in each company was limited. Figures for Denmark are not available. However, too much emphasis should not be given to particular numbers because of the definitional problems involved. 3 There is no perfect way to distinguish between private and public control. The state would in many countries need 67 per cent of the votes to implement a change of corporate objectives and 34 per cent to block an attempted change, like abolishing a public service commitment. A company can be controlled through minority ownership if there is dispersion of shareholding, but any amount of private capital might make other than commerical objectives difficult to pursue. 4 For a survey of some of the mixed oligopoly literature, see De Fraja and Delbono, 1990. 5 In such cases, it would be meaningless to compare costs, because commercial and non-commercial operation would lead to different varieties of a public service. 6 Some transnational actually have a turnover that exceeds Finland’s GDP. 7 Their model of ‘vested interest’ actually gives employees a lower weight than under pure welfare maximisation, where employees, consumers and companies get the same weight. 8 For example, the SOC can break even in De Fraja (1993b), who assumes diminishing returns in an otherwise similar model. Welfare maximising would then actually cause wages to be lower than under profit maximisation, but would depress the wages of the private firm in a mixed market. This leads to a wage premium in the public firm. Also see the discussion in chapter 3. 9 The facts about SOCs in Finland are based on the annual report Valitionyhtiöt (1995), Tandem (1977) and a government proposal of 23 June 1994. 10 A less successful example was Valco, which was jointly owned by Hitachi and which was to make TV tubes. 11 The government now includes right-wingers and former Communists, in addition to Social Democrats, Greens and a non-socialist party targeting the Swedish speaking population. 12 Table 10.1 is based on the annual report for the state-owned companies (Valtionyhtiöt, 1995) and government press releases of 2 August and 18 September 1996. 13 As a study by Willner and Ståhl (1992) suggests, there is a substantial potential for oligopolistic welfare losses in Finland and privatisation has reduced competition in

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14 15 16 17 18 19

20

21

22

23 24 25

26

27

a couple of cases. For example, a catering company and a coach and bus manufacturer were sold to their largest private competitors. Some decision makers might also want to signal that Finland, having the former Soviet Union as its neighbour, is now uncontaminated by communist principles. Seppo Kääriäinen was Minister for Trade and Industry 1991–5 during the period of right-wing rule. This overview of state ownership in Sweden is based on Vad skall staten äga? (1989), Parris et al. (1987) and the government proposals of 1991/92: 69 and 1995/96: 141. The car manufacturer Volvo was another shareholder, with 27.5 per cent of the shares in 1996. It has been estimated that SAF spent the equivalent of about £7–12m on propaganda directed at ordinary citizens and on lobbying political parties (Hansson and Lodenius, 1989). Employees and the general public were offered 5–10 per cent lower prices than institutional investors. Share prices for the former increased by on average 10.9 per cent the day after privatisation, and by 5.8 per cent for the latter group. This can be compared to an average of 18.02 per cent in Britain. The approach was even more pragmatic in Finland, where the intention was to sell gradually and to get as high a price as possible. For example, Anders Johnson at the SAF criticises the Social Democrat privatisation policy for being excessively focused on business companies rather than public goods or welfare services (Johnson, 1994). In his view, selling companies is a device to make voters prefer secure property rights to cheap public services rather than being an end in itself. In municipalities dominated by Social Democrats, 61 per cent of the privatisations were successful, 21 per cent unsuccessful and 18 per cent were disasters. If the nonsocialists dominated, the corresponding numbers were 42 per cent, 32 per cent and 26 per cent. The facts about Denmark are based on the report Erfaringer med Statslige Aktieselskaber 1993), the government bulletin The Danish Policy on Privatisation, 26 November 1996 and comments from the Ministry of Finance on a first draft of this chapter. The frequency of the bus services in Greater Copenhagen seems to have increased, in contrast to experience in Sweden and Britain. Some recent evidence suggest that SOCs in Finland do not maximise welfare (Stenbacka and Tombak, 1997). Some comparisons of public and private profitability are available in Finland. Before the crisis in the 1990s, profitability was roughly similar in each sector (Valitionyhtiöt markkinataloudessa, 1989). This was true in 1994 as well, as is evident from a yearbook of listed companies (Julkiset noteeratut yhtiöt, 1996). Net profits as a percentage of turnover were on average 4.8 per cent in basic metal industries including mining, 2.6 per cent in metal products and 4.8 per cent in the forest industry. The levels for the SOCs were 5.0 per cent and 7.5 per cent (Outokumpu Oy and Rautaruukki Oy), 2.4 per cent (Valmet), and 8.7 per cent (EnsoGutzeit Oy). If expectations are rational, current share prices would reflect the anticipated effects of more intense competition. Privatisation would then cause no net gain and might even be harmful if proceeds are used for consumption. If, on the other hand, expectations are not rational, the state might benefit from selling rather than waiting for dividends to fall, but in such a world the case for relying on market forces is weaker. Finland’s monopoly has now developed into Alko-Yhtiöt, with prominent (and completely commercial) subsidiaries in hotels and restaurants (Arctia).

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28 For example, if the public firm maximises the area under the demand curve minus wages and other costs, management and workers might negotiate about the division of the sales revenues. The public firm could then be more profitable than the private firm, which might face bankruptcy (see Willner, 1997).

REFERENCES Alexandersson, G., Hulten, S., Fölster, S. (1996) ‘How Efficient is Competitive Tendering in Sweden? An Evaluation of the Deregulation of the Market for Public Bus Services’, mimeo, Stockholm School of Economics. Bös, D. (1993) ‘ Privatisation in Europe: A Comparison of Approaches ’, Oxford Review of Economic Policy, vol. 9, no. 1, 95–111. Boyd, C.W. (1985) ‘ The Comparative Efficiency of State Owned Enterprises ’, in A. R. Negandhi (ed.) Multinational Corporations and State-Owned Enterprises: A New Challenge in International Business, Greenwich, CT, and London: Research in International Business and International Relations, JAI Press. Bussiammattilainen (1994) no. 5, pp. 8–9 and 10–11. Cremér, H., Marchand, M. and Thisse, J.F. (1989) ‘ The Public Firm as an Instrument for Regulating an Oligopolistic Market ’, Oxford Economic Papers, vol. 41, April, 283–301. The Danish Policy on Privatisation (1996) 26 November 1996, Copenhagen: Finansministeriet. De Fraja, G. (1993a) ‘ Productive Efficiency in Public and Private Firms ’, Journal of Public Economics, vol. 50, no. 1, 15–30. De Fraja, G. (1993b) ‘ Unions and Wages in Public and Private Firms: A Game Theoretic Analysis ’, Oxford Economic Papers, vol. 45, no. 3, 457–69 De Fraja, G. and Delbono, F. (1990) ‘ Game Theoretic Models of Mixed Oligopoly ’, Journal of Economic Surveys, vol. 4, no. 1, 1–18. Erfaringar med Statslige Aktieselskaber (1993) Copenhagen: Finansministeriet, Budgetdepartementet. Estrin, S. and Pérotin, V. (1991) ‘ Does Ownership Always Matter? ’, International Journal of Industrial Organization, vol. 9, no. 1, 55–72. Fölster, S., Barkman, C., Meyerson, E. and Pyddoke, R. (1993) Sveriges systemskifte i fara? Erfarenheter av privatisering, avreglering och decentralisering, Stockholm: Industriens Utredningsinstitut. Goodwin, P.B. (1993) ‘ Car Ownership and Public Transport Use: Revisiting the Interaction ’, Transportation, vol. 27, no. 1, 21–33. Hansson, S.O. and Lodenius, A.-L. (1989) Operation högervridning, Borås: Tiden. Haskel, J. and Szymanski, S. (1992) ‘ A Bargaining Theory of Privatisation ’, Annals of Public and Cooperative Economy, vol. 63, 207–28. Johnson, A. (1994) ‘ Hur gick det med systemskiftet? ’, Svensk Tidskrift, no. 4, 229–33. Julkiset noteeratut yhtiöt (1996) Lahti: Opstock, Oko-Osuuspankit. Kääriäinen, Seppo (1994) ‘ Omistuspohjan laajentamisesta voimaa teollisuuden kehittämiseen ’, undistuva teollisuus, valtionyhtiöt ja yksityistäminen, Helsinki: Kauppa-ja Teollisuusministeriö. Kivinen, K. (1996) ‘ Svårt dansa vals till tango ’, Åbo Underrättelser, 28 December. Millward, R. and Parker, D. (1982) ‘ Public and Private Enterprise: Comparative Behaviour and Relative Efficiency ’, in R. Millward, D. Parker, L. Rosenthal, M. T. Sumner and N. Topham (eds) Public Sector Economics, London: Longman. Parris, H. Pestieau, P. and Saynor, P (1987) Public Enterprise in Western Europe, London: Croom Helm. Pint, M. (1991) ‘ Nationalisation vs. Regulation of Monopolies: The Effects of Ownership on Efficiency ’, Journal of Public Economics, vol. 44, no. 2, 134–64. ‘ Privatiseringsrapporten ’ (1994), mimeo, Stockholm: Näringsdepartementet.

190 Johan Willner Regeringens proposition 1991/92: 69 (1991) om privatisering av statligt ägda företag m.m., Stockholm, 7 November. Regeringens proposition 1995/96: 141 (1996) Aktiv förvaltning av statens företagsägande, Stockholm, 7 March. Stenbacka, R. and Tombak, M. (1997) ‘ Public Enterprise Objectives: Theory and Observations ’ in E. Lehto (ed.) Yksityistämisen rajat ja mahdollisuudet, Helsinki: Sitra. Tandem (1996) Tasa-arvon ja demokration tutkimus, Porvoo: Werner Söderström Oy. Vad skall staten äga? Det statliga företagandet inför 90-talet (1989). Rapport av Jan Olsen till Expertgruppen för studier I offentlig ekonomi (ESO), Ds:23, Stockholm. Valtionyhtiöt markkinataloudessa (1989), Liiketaloustieteen tutkimuslaitos, Helsinki. Visio yksityistämisestä Suomessa (1991) Kauppa-ja Teollisuusministeriö (Ministry of Trade and Industry) 12.2, Helsinki. Willner, J. (1994) ‘ Welfare Maximisation with Endogenous Average Costs ’, International Journal of Industrial Organization, vol. 12, no. 3, 373–86. Willner, J. (1996a) ‘ Social Objectives, Market Rule and Public Policy: The Case of Ownership ’, in P. Devine, Y. Katsoulacos, and R. Sugden, (eds), Competitiveness, Subsidiarity and Objectives: Issues for European Industrial Strategy, London: Routledge. Willner, J. (1997) ‘ Policy Objectives and Performance in a Mixed Market with Bargaining ’, International Journal of Industrial Organisation (forthcoming). Willner, J. and Ståhl, L. (1992) ‘Where are the Welfare Losses of Imperfect Competition Large?, European Journal of Political Economy, vol. 8, 477–91.

11

The privatisation of state enterprises in the Spanish economy Vicente José Montes Gan and Amadeo Petitbò Juan

INTRODUCTION In recent years, successive announcements of imminent privatisation campaigns have provoked a new debate – insufficient and poorly developed despite the issues at stake – on the role of the state-owned company. Two main conclusions have arisen from this process. First, that although from a theoretical standpoint entrepreneurial efficiency is independent of the ownership status of the productive unit, empirical evidence all too frequently shows up the deficiencies of public sector business management. Second, even assuming privately owned companies have more incentives to perform efficiently than state enterprises, it is still undoubtedly the case that privatisation is not the definitive solution to all management deficiencies. This is because, on the one hand, a company’s future depends on its long-term ability to stay competitive and, on the other, the supposedly beneficial effects of privatisation may be curtailed if the markets privatised companies operate in are not truly competitive. The solution, therefore, is to liberalise before privatising. Spanish state enterprises operating in goods and services markets are the product of fifty years of state intervention in the economy. According to estimates by the European Centre of Enterprises with Public Participation (ECEP), the state-run sector in Spain is small in relative terms (see CEEP, 1994). In 1991, at the time of the last ECEP comparative study, Spanish public sector companies accounted for 8 per cent of the value added generated within the Spanish economy, 6 per cent of non-agricultural employees and 13 per cent of gross fixed capital formation, as compared with the 11 per cent, 9 per cent and 16 per cent averages respectively recorded in the European Union. Again, according to ECEP calculations these three indicators together give the Spanish state enterprise sector a weight in the overall economy of 9 per cent, that is 3.5 percentage points less than in 1985 and 3 percentage points below the EU average. Table 11.1 details the composition of the state enterprise sector in Spain; while Tables 11.2 and 11.3 provide data relating to the sales of state enterprises, their economic contribution and profitability. Furthermore, the data analysed show that Spanish public sector companies, taken at an aggregate level, are characterised by lower efficiency versus

192 Vicente J.Montes Gan and Amadeo Petitbò Juan Table 11.1 Composition of the state enterprise sector in Spain: invested groups and companies, 1997

Source: Intervención General de la Administración del Estado, Ministerio de Economía y Hacienda

Table 11.2 State enterprises in Spain,

Source: Intervención General de la Administración del Estado, Ministerio de Economía y Hacienda. Notes: amillion dollars at current rates; bgross domestic product at market prices; cthousand dollars

Table 11.3 Non-financial state enterprises in Spain: main economic variables by business sector, 1994 a

Source: Intervención General de la Administración del Estado, Ministerlo de Economía y Hacienda Notes: amillion dollars; bthousand dollars

194 Vicente J.Montes Gan and Amadeo Petitbò Juan

private sector counterparts, as well as a high cost to the national budget. Labour cost evolution and earnings performance have often been used to justify this negative appraisal of public sector entrepreneurship. As regards the former, labour costs per employee in Spanish public sector firms as a whole were 20 per cent higher than in the private sector in 1994.1 This gap is excessively wide in an environment of intensifying competition and, if not substantially reduced, will jeopardise the future of Spain’s public enterprises. Table 11.4 lists the main profitmaking and loss-making sectors. Turning to public sector earnings performance and capital stock, the information furnished by the Bank of Spain is particularly revealing: 100 pesetas invested in the Spanish state sector in 1982 was worth 124.9 pesetas2 a full twelve years later. The scant revaluation of these companies is undoubtedly largely due to the negative impact of a group of long-term loss-making enterprises. Indeed, state contributions to public sector companies over 1983–95 totalled more than eighty billion dollars (see Table 11.5). Meanwhile, losses accumulated since the outset of the 1980s sum to over $20bn at constant 1994 rates. These figures do not include the subsidies granted to companies running programme-contracts or in respect of one-off projects, nor the opportunity cost of the capital invested. In 1993 alone, the state-owned companies, taken as a whole, recorded losses after taxes to the tune of £4.79bn dollars,3 equivalent to 1 per cent of Spain’s GDP. By 1994, due to privatisation among other factors, this figure was down to a negative $1.74bn. Despite this poor earnings performance overall, a more detailed analysis throws up quite different conclusions about the efficiency of Spain’s public sector companies and, as a corollary, of the supposed efficiency gains to be secured through privatisation. In fact many state-owned firms are currently generating healthy profits (see Table 11.4) and many privatisation candidates have only a small proportion of their capital under public ownership.4 For this reason, in defining privatisation processes, we have to look beyond short-term gains and Table 11.4 The financial position of Spanish state enterprises by sector, 1994 (million dollars)

Source: Intervención General de la Administración del Estado, Ministerio de Economía y Hacienda

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Table 11.5 State contributions to public sector companies, 1983–95a

Source: Ministerio de Economía y Hacienda Notes: aMillion dollars at current rates; bcredits granted by central government; cparticipation in rights issues; dfigures in dollars at 1995 rates

think of the future consequences for the Spanish economy based on the likely strategies of the purchasing companies or corporate groups, the extent of competition in each market, the long-term competitive standing of the firms in question, and so on. A more detailed study of these aspects often shows that, in dealing with state-run enterprises, aggregate analyses fail to take into account the specific situation of each company. This is the reasoning behind the case-bycase approach to privatisation now being taken in Spain. Finally, it is worth underlining one particular feature, this is the effect that the progressive decentralisation of public activity in Spain may have on the makeup of state enterprises. The following paragraphs relate exclusively to companies run by central government. Nevertheless, the current evidence is that the increasing transfer of powers to sub-central authorities is spurring the dispersion of public sector companies in just the opposite direction from the privatisation process embarked on by the government.5 The aim of this chapter is to set out the recent evolution of Spain’s public sector companies and to identify the main characteristics of the privatisation process now gathering force. To this end, we first look at the structure of the Spanish state-run sector from its inception to the restructuring programmes of 1995 and 1996. Second, we define the different approaches being taken to privatisation, their aims, methodologies and instrumentation. Finally, we study the necessary integration of privatisation strategies and policies to introduce or boost competition.

196 Vicente J.Montes Gan and Amadeo Petitbò Juan

THE SPANISH STATE ENTERPRISE SECTOR The composition of the Spanish state-run sector has undergone quite radical changes in recent years. We now have four big public sector conglomerates comprising companies engaged in a wide range of activities. These are: the Agencia Industrial del Estado (AIE), the Sociedad Estatal de Participaciones Industriales (SEPI), the Sociedad Estatal de Participaciones Patrimoniales (SEPP) and a fourth group which does not belong to any particular conglomerate (see Table 11.1). This structure, however, does not follow any predefined theoretical framework of reference. Looking exclusively at the specific characteristics of each component of these holding companies, we can divide Spain’s state enterprise sector into five groups. These groups are, first, public sector companies competing with private enterprise and which are neither instruments of social nor regional protection. These include, for example, financial and insurance firms like Argentaria and Musini, construction companies like Auxini or industrial concerns like Ence, Grupo Potasas, Inespal6 or Babcock Wilcox. Current policy here is to sell off companies’ non-priority business divisions or to initiate progressive privatisation. Second, state companies formerly enjoying monopoly status in sectors like energy, telecommunications or air transport.7 The deregulation under way in such sectors necessitates their adaptation to the competitive conditions laid down in the new regulatory framework. This affects companies like Repsol, Iberia, Empresa Nacional de Electricidad (Endesa), Compañiá Telefónica de España (Telefónica) or Retevisión, where competitive strategies were already in place prior to privatisation. We can also include enterprises like Aeropuertos españoles y navegación aérea (Aena), Tabacalera, Red Nacional de Ferrocarriles Españoles (Renfe) or Correos y Telégrafos, these last two are already the subject of debate regarding, respectively, the privatisation of postal services,8 and the introduction of competition9, and privatisation of commercial railway transport operations on certain tracks or in certain segments of this market, such as commuter train lines or the high-speed service. Third, a number of Spanish state enterprises are engaged in hightechnology, fast-growth industrial sectors. This is the case of the Grupo Indra and the space and aeronautics construction firm Casa. Such companies fulfil an important role in the generation of new technologies, in providing skilled employment and in terms of value added. In the past, efforts have been made to use the leadership status of such firms in determined market segments to create a filterdown effect on other industrial firms. The filter-down effect is to occur through large-scale projects developed jointly with private enterprise or participation in international industrial and technological programmes. The current view, however, prefers their privatisation with the involvement of partners equipped to maintain and develop their technological projects.10 A good example is the entry of new investors in the electronics group Indra.11 Fourth, we have manufacturers of military equipment where public

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ownership was traditionally grounded on reasons of strategic production for national defence. In this sector too international economic reality has imposed itself in the form of a search for new, diversified activities, productive specialisation and industrial cooperation. This was precisely the project which was attempted, though without success, at Empresa Nacional Santa Bárbara, now in technical bankruptcy, and at Astilleros Publicos Bazán. In both cases the original objectives, of, for example, ensuring sufficient military production have given way to criteria of economic efficiency and business competition. These companies must now prove their viability or face final closure. Finally come the public sector companies in industrial sectors like shipbuilding, steel and coalmining, characterised since the 1970s by a process of ongoing structural adaptation to changing international competitive conditions. Examples here include CSI Corporación Siderúrgica, Astilleros Españoles, Astilleros y Talleres del Noroeste (Astano) and Hulleras del Norte (Hunosa), all of them present in problem sectors Europe-wide. They are also subject to EU directives and affected by international agreements under the auspices of the OECD and GATT. Their viability depends on the successful application of restructuring plans emanating from Community institutions as the only route to business survival and the conservation of jobs. Nevertheless, looking to the medium and long term, these companies are also being targeted for rationalisation and privatisation. ORIGINS AND DEVELOPMENT OF THE STATE ENTERPRISE SECTOR IN SPAIN UP TO 1995 From a historical perspective, we can date the first state intervention in the production of goods and services in Spain from the creation of the Fábricas Reales (royal workshops) during the period of enlightened despotism12 in the early part of the nineteenth century. However, the present structure of state enterprise was laid down in two crucial decades of the twentieth century, the 1920s and the 1940s. During the six-year dictatorship of the 1920s, the central government, inspired by the doctrine of regenerationism, created a core of public sector companies with differing objectives. Foremost among these were the Compañía Arrendataria del Monopolio de Petróleos (Campsa) and the Compañía Telefónica Nacional de España, founded to manage, respectively, the oil monopoly in the Iberian peninsula and the telecommunications monopoly in Spain. This was also the time of the creation of flagship companies in the financial, tourist and mining sectors, such as Banco Exterior de España, the Paradores de Turismo and the extraction company Hunosa, incorporated to keep up production in the coalfields of the northwest. The second period followed on from the 1936–9 Civil War. This was the beginning of the era of economic development known as autarky – a barracksbased economy – structured around the planning by targets of economic growth, the substitution of imports, and a protectionist approach to domestic

Table 11.6 Historical development of state-owned companies in Spain: industrial and energy sectors, 1941–96

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production.The aftermath of the conflict, which hit hard at basic infrastructures and geographical areas with a more developed industrial base, was used to justify state intervention in the reconstruction process. One essential instrument of this policy was to be the state-owned company. This, therefore, was the period in which the structure of the state enterprise sector was laid down, which survived, with various modifications, until 1995 (see Table 11.6 for a summary). The 1940s saw the birth of companies like Renfe, to this day running the monopoly of standard-gauge railway transport. It also saw the birth of the Institute Nacional de Industria (INI), the state holding company which was to act as an umbrella for a wide range of industrial and energy firms, with the objective to boost the country’s economic development at a stage when autarky was the fundamental economic reference point.13 In an economic system which had turned its back on the essential elements and mechanisms of a market economy, the government sought to use INI as an instrument to establish an industrial platform with galvanising effects on remaining sectors. The INI companies formed fifteen divisions: steel, aluminium, coal, shipbuilding, defence, capital goods, fertilisers, food, electronics and information technology, oil and petrochemicals, gas, electricity, transport, engineering and construction and miscellaneous enterprises (see Grupo INI, 1992–3). This structure (see Table 11.6) was modified in 1981 with the creation of the Institute Nacional de Hidrocarburos (INH),14 after the spin-off from INI of companies engaged in the hydrocarbons sector.15 These companies operated in the areas of exploration, production, refining, distribution and retailing of petroleum products and natural gas.16 Nonetheless, the legal status of INI was left unchanged until 1988, when the hitherto autonomous authority became a state enterprise with its own legal status and decision-making powers, governed by private law, but under the Ministry of Industry and Energy. The 1988 reform also redefined the Institute’s aims. Henceforth INI’s role would be to boost, coordinate and control and, where necessary, carry out the business activities undertaken under state ownership, acting in accordance with the principles of profitability and efficiency in the allocation of resources and without neglect of such objectives of general interest as might be assigned to it. The government would establish the directives to be followed in line with these objectives. In 1992 a new corporate design was drawn up with the aim of putting resources behind firms able to compete in normal market conditions. To this end a new subholding company came into being, Téneo, to group together INI’s participations in these companies (see Grupo Téneo, 1992–4). INI, meantime, retained its function as a state-owned company with stakes in the steel, shipbuilding, defence and mining sectors, as well as in Téneo. The first group comprised companies in sectors undergoing reconversion or in defence. Many of them, subject to specific regulations emanating from the European Union, required financial support from the state. The Téneo holding company, meantime, grouped together economically viable concerns and received transfers neither from the National Budget nor from the INI. Furthermore,

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during its consolidation phase Téneo made a commitment to zero indebtedness. The funds needed for investments would be found out of cash flow and, if this proved insufficient, through the disposal of assets. Téneo was thus regarded as a long-term project irrespective of its eventual ownership, public, private or mixed, as considered appropriate. Until 1995 Téneo centred its efforts on the rationalisation of its diversified structure and in opening up the capital of its member companies to new investors. The result was the forging of a number of strategic alliances, enhanced access to financial resources, and greater submission to market discipline. Téneo was also to be self-supporting, thereby eliminating financial risk. The 1995 reform, discussed below, later changed these strategies and the Téneo group was wound up in the following year. Likewise the INH state holding company saw changes in the years 1992 and 1993 after the introduction of new regulations governing the Spanish oil industry. Specifically, the passing of new framework legislation (Ley de Ordenación del Sector Petrolero) in December 1992 brought the Spanish oil monopoly to an end. This meant the disappearance of Campsa which, after the spin-off of its commercial assets became the Compañía Logistica de Hidrocarburos (CLH). Around the same time, the Council of Ministers, in its meeting of 26 February 1993, authorised the INH to start the sell-off of Repsol shares. The INH was subsequently reorganised through a complex process of mergers, whose end result was the consolidation of the Repsol company and the formation of a powerful corporate group in the gas sector, structured around the monopoly firm Gas Natural.17 Both INI and INH and the subholding companies Repsol and Téneo underwent major modifications in 1995 and 1996.18 A large number of public sector companies, however, have remained outside the control of the Institutos Nacionales, in some cases because of their status as service providers with little relation to the industrial sector; in others, because they are subject to specific regulatory frameworks or have business objectives beyond the remit of INI or INH. The majority are state-run firms operating in the financial, transport, telecommunications and commercial distribution sectors, among others (see Table 11.1 above). One such is the business conglomerate run by the Dirección General del Patrimonio del Estado (DGPE) of the Ministry of Economy and Finance (see Grupo Patrimonio, 1991–5). The DGPE is the body which administers the state’s holdings in a range of companies engaged in industrial, agricultural and service activities. Among their number we find some of the biggest public sector enterprises in Spain, like the Corporación Bancaria de España (Argentaria), Telefónica or Tabacalera. The DGPE’s function in the business management context is to maintain the economic-financial equilibrium of component holdings and to act as a chain of transmission for the directives issued by a range of government authorities. A historical milestone in the DGPE’s development was its assumption of the administration of the private corporate group Ruíz Mateos, SA (Rumasa) following its 1983 expropriation19 and subsequent financial restructuring and

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re-privatisation.20 Also, as is explained later, in 1996 a new company, SEPP, was incorporated to head the DGPE conglomerate. SEPP is now active in 11 productive sectors through 21 companies in a far more diversified format than the other two public sector conglomerates. Nevertheless, it is important to recognise its specific weight in the financial sector, in the telecommunications monopolies and in the tobacco industry. Finally, there is a heterogeneous group of companies which depends directly on Ministerial Departments. From the management standpoint, a salient feature is that they do not belong to a specific holding company (see Table 11.1). Unlike the latter group, only a very small number have the legal status of a limited company, while the majority are what are known as entes públicos. These last companies engage primarily in service sector activities, such as passenger transport – Renfe, Ferrocarriles de Via Estrecha (Feve) and Empresa Nacional de Transporte par Carretera (Enatcar), transport-related services – Gestor de la Infraestructura Ferroviaria (Gif), Aeropuertos Españoles y Navegación Aérea (Aena), Puertos del Estado and Empresa Nacional de Autopistas (Ena); commercial distribution – Mercados en Origen (Merco) and Mercados Centrales de Abastecimiento, SA (Mercasa); or information and communication services – Radio Televisión Española (Rtve), Red Técnica Española de Televisión (Retevisión) and Explotación de Satelites (Hispasat). In short, for historical reasons the structure of the Spanish state-run sector is characterised by its heterogeneity with the origin of public ownership in each case largely determining the present situation and composition of companies and groups. In some cases this took the form of a fiscal monopoly (Tabacalera, Campsa), or a natural monopoly (Red Eléctrica, Renfe, Telefónica). In others the motive was conservation of basic infrastructures (Aena, Puertos Españoles) or autarkiel economic development (Astilleros Españoles, Ensidesa, Seat, Enasa). Other kinds of rationale included the strategic nature of specific sectors (Santa Bárbara, Casa, Endesa, Grupo Indra) or the need to socialise the losses of companies in strategic sectors (Hunosa). The reorganisation of the Spanish state enterprise sector undertaken in recent years has a double aim: first, the rationalisation of sectors and a more efficient working of the economy and, second, the release of resources for the reduction of the public deficit. We should not forget, however, that public sector industrial and services groups are the biggest ‘national’ corporations existing in Spain. These conglomerates are able to operate at an international level, wield considerable bargaining power and can successfully do business in areas which demand a minimum critical mass, all qualities which have traditionally been lacking in the Spanish business sector. It is no surprise, therefore, that in just two years, two different governments21 have evinced their concern about the sector, developing modernisation and privatisation programmes, hedged in by a series of control mechanisms, as well as measures to protect the ‘nationality’ of companies’ capital stock. As we will see in the following discussion, the main difference between the two approaches is the intensity of the privatisation process. While the Socialist

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government had a real but less explicit will to privatise, the government of Partido Popular has, for the first time, drawn up an open, step-by-step privatisation programme. THE 1995 REORGANISATION OF PUBLIC SECTOR INDUSTRIAL GROUPS In 1995 the government of the day carried out a restructuring22 of the state-run conglomerates operating in the industrial and energy sectors (see Ministerio de Industria y Energia, 1995a).23 Although this was a medium-to long-term plan (see Ministerio de Industria y Energia, 1995 b), which was never implemented in full, being subject to revision the following year by the new administration, it is interesting to take a look at its main measures, and the objectives and grounds behind them. The chief consequence of the 1995 reform was the disappearance of the Institutes Nacionales which had represented the public interest in both sectors for over half a century. The INI and INH were replaced by two new holding companies in which the state’s participations were regrouped according to the criterion of profitability. First of all, the state’s holdings in Téneo and Repsol were transferred to a new public sector company, SEPI, to be governed by private law. This new company, which grouped together all of the state’s profit-making concerns, was assigned the whole of the debt accumulated over the years by the former INI group. SEPI was, furthermore, obliged to pay off this debt by means of dividends, disinvestments or indebtedness; in addition it could no longer count on the state as guarantor. Together with the outstanding amount, approximately 700bn pesetas, SEPI took on the remaining rights and obligations of INI (company loans, payment undertakings in respect of disinvestments, return of withholding taxes, etc.) with the exception of the guarantees extended to companies formerly part of AIE, which were substituted by Treasury guarantees. The intention was that SEPI should be financially strong enough to manage the debt, including meeting the corresponding servicing charges until the debt repayment. Under the terms of this arrangement, SEPI would have access throughout 1996 and 1997 to two main sources of financing. First, Repsol’s annual dividend and the tax revenues arising from the fiscal consolidation. These would give a slight profit and allow annual debt reduction in the region of 40 billion pesetas. Second, access to the dividends of Téneo, producing a far healthier cash position because of the dwindling to near-zero of contributions to component companies.24 SEPI then had to cut its debt by a further 300 billion pesetas over 1989–99 out of income in respect of Repsol dividends and tax revenues and a hefty contribution from Téneo. The latter would transfer its cash surplus to SEPI through a share capital reduction and at the same time start up dividend payments. As of the year 2000, SEPI would, according to official calculations, be receiving dividends from Téneo and Repsol in excess of the financial costs of the outstanding debt, allowing its prompt cancellation. Subsequently, Téneo would resume contributions to member companies.

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The model was completed with the creation of AIE to group together the state’s participations in those loss-making companies eligible for state aid on the grounds of an ongoing reconversion process. Unlike the SEPI case, AIE component companies would have access to Budget transfers for the funding of their operations, while remaining subject to programme-contracts. Programmecontracts are a contract between the state and a given public sector company, which lays down the contributions which the former will make to cover the latter’s borrowing requirements. According to government estimates, state support to AIE over the 1996–8 period would sum to 366 billion pesetas, delivering a saving of 153 billion versus the pre-plan status quo. AIE, moreover, would not be permitted either to contract debt or take up the benefits of fiscal consolidation. In short, the creation of SEPI and AIE in 1995 had a dual purpose; first, to release the Treasury from any obligation in respect of the debt accumulated by INI and, second, to tighten up the management of state corporate groups. The measures taken, as such, combined budgetary and management considerations; the adaptation to EU rules on state aid; and the legal disassociation of public sector companies from the National Budget. Subsequently, the financing arrangements set out were reinforced by the partial privatisation of certain companies and application of the proceeds to accelerated debt reduction. Among the direct advantages of this operation on the budgetary side we can cite: a saving of 153 billion pesetas over the 1996–8 period, additional tax revenues of an estimated 38 billion over the years 1999–2000, and the release of the Treasury from the need to pay off of the 700 billion debt accumulated by the INI. Also, this assessment takes no account of the savings arising from the state’s self-imposed restriction on transfers to its companies. Among the AlE companies alone, it is envisaged that the improved financial control delivered by the programme-contract format will allow the transfer payments committed in the Budgets for 1996 to 1999 to be cut from 390 to 160 billion pesetas. As regards the future organisation of the groups, AIE companies with the potential for refloating will be transferred to SEPI (see Figure 11.1) and thereafter privatised, if the Board of Directors deems this feasible. Meanwhile, companies which continue to invoke losses will, say the government, be closed forthwith, except where mitigating social or regional factors exist. Finally, in relation to SEPI’s flagship companies, Téneo and Repsol, two options have been debated involving, first, their function as agents of government industrial policy and, second, their conduct as financial entities, as holders of the state’s interests (controlling or otherwise) in different companies. 25 On the one hand, the size of the Téneo conglomerate afforded it important advantages in the financial arena and in certain other respects (e.g. purchasing and joint tenders), which only a group on this scale could aspire to. On the other hand, capital markets were expressing doubts about the efficiency of the big holding companies by valuing them at less than the sum of the value of the companies or assets under their control. In any case, whether or not it survived as an instrument of industrial policy,

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Figure 11.1 State enterprise reorganisation: organisational model, 1995

Téneo had a central role for the government as a financial holding company. It controlled the stakes in companies belonging to or transferred to SEPI which were targeted for conservation, acting as a financial investor – studying and analysing dividend policies, rights issues, etc. Likewise, within SEPI, Téneo and Repsol were to act in representation of the state at the annual shareholders’ meetings of investee companies. However, with the election of the new Partido Popular government in 1996, Spanish public sector policy underwent a change and with it the strategies set out above for the subholding company Téneo. THE STATE ENTERPRISE SECTOR MODERNISATION PROGRAMME OF 1996 On 28 June 1996, the Council of Ministers approved a new State Enterprise Sector Modernisation Programme (see Ferreras, 1997). With this programme, the Partido Popular government sought to speed up the modernisation of the public sector and the liberalisation of the economy, while fostering greater efficiency and competitiveness and furthering the job creation process. To achieve these aims a series of instruments were brought into play, notably the privatisation of state-run companies, the reduction of subsidies to state firms and measures to boost the profitability of firms remaining in the public sphere.26 In defining the sell-off process, the government has declared its intention of favouring the entry of Spanish investors; while it has also stated that privatisation proceeds shall on no account be put to meeting the current expenditure of

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central government. Instead, they are to be earmarked, in full, for the reduction of public debt or the financing of investments. Within this framework, the government’s first move was to change the structure of state corporate groups from the top. First, Téneo, the SEPI holding company, disappeared and its assets were transferred directly to SEPI.27 Second, a new Sociedad Estatal de Participaciones Patrimoniales (SEPP) was incorporated under the DGPE. The management of the privatisation process thus passed to AIE, SEPI and SEPP (see Figure 11.2), in conjunction with a group of expert advisors with the name of Consejo Consultivo de Privatizaciones.28 SEPI and SEPP, meantime, took on the administration of the sell-off. The privatisation calendar has been designed with a view to each company’s situation in its respective market. Taking this as its basis, the government has defined three groups of companies, though the lines drawn are somewhat hazy. The first group includes companies regarded as consolidated in their respective markets and thus immediate privatisation candidates (Argentaria, Repsol, Gas Natural, Telefónica de España, Auxini, Musini, Grupo Potasas, Grupo Inespal, Tabacalera, Transmediterránea and Enagas). The second is made up of two electric utilities (Endesa and Red Eléctrica de España) to be subjected to a degree of competition before privatisation goes ahead. And finally, the third group comprises companies reliant on the state budget whose sale will not take place during the present legislature (Iberia, Casa, Babcock Wilcox), although they may be partially privatised as a route to developing strategic alliances. This group

Figure 11.2 State enterprise modernisation programme: decision-making process, 1996 Source: Ministerio de Industrial y Energía and Ministerio de Economía y Hacienda Note: aWithout prejudice to any subsequent review by the Audit Office

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also includes those companies which need further restructuring to guarantee their viability before any future privatisation will occur (Hunosa, Astilleros, Santa Bárbara, Bazán and CSI). If we analyse this classification we can conclude that groups are not defined solely on the grounds of the degree of competition or deregulation reigning in the markets in which they operate, but much more in terms of their profitability. Indeed, the groups mentioned unite companies with very different characteristics. Some belong to sectors in which, despite some recent liberalisation moves, major deregulation is still required. Others operate in largely deregulated markets; and finally we find companies engaging in sectors where liberalisation is advancing full sail, though it is not yet concluded. In whatever case, even companies in the third and fourth groups could be affected by some degree of privatisation in the short or medium term, by bringing in new investors with small stakes,29 or selling off certain divisions which can be spun-off from the main company and more easily disposed of as separate concerns. Meanwhile, INI’s historical debt, brought down by 158 billion pesetas in 1996, will be reduced by a further 250 billion in 1997, for a year-end balance of 173 billion pesetas, and paid off in full in 1999. Financial support to AIE, to ease its disassociation from the national budget, will take the form of a 230 billion loan to be granted in 1997. Finally, SEPI’s contribution to public deficit reduction will materialise in the form of a 100 billion contribution towards the restructuring of the mining sector, in addition to corresponding dividend payments to the state (see Ferreras, 1997). Lastly, as regards the supervision of the privatisation process, the controlling bodies are the Intervencion General de la Administración del Estado (State Comptroller’s Office), the Tribunal de Cuentas (Audit Office), the Congreso de los Diputados (Parliament) and the advisory Consejo Consultivo de Privatizaciones. THE PRIVATISATION OF STATE ENTERPRISES The privatisations carried out in recent years have responded to a variety of objectives, among them: the financing of a spiralling public deficit, the achievement of strategic alliances of a technological or commercial nature, or the obtaining of results which, while technically and economically viable, are politically complex. In general, privatisation has sought to correct three primary defects of the state-run enterprise: first, the scant sensitivity to varying returns on capital; second, the asymmetrical behaviour of social partners as regards the negotiation of work conditions; and, lastly, submission to a dual legal framework, private and administrative, which impairs management agility and efficiency. In defining the privatisation process, varying options have come to the fore. In some cases privatised companies have been allowed to operate freely in their respective markets, while in others the state has reserved to itself a degree of control. This second course, normally justified in terms of the defence of

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national interests and, in particular, social or strategic criteria, has been exercised using a variety of instruments, like shares with special rights or the formation of a hard core of shareholders. Perhaps a lack of faith in the market mechanism as a resource allocator is one of the reasons behind this thinking. Privatisation methodology: criteria and modalities In recent privatisation history, in line with the Spanish legal framework, three principal methods have been used apart from direct adjudication. These are: public auction, competitive tender and negotiated sale. The public auction system is used when the securities to be sold are not stock-market listed. It is a particularly popular instrument when the only real difference between potential investors is the price to be paid. In some cases, however, the government makes an a priori selection of auction participants – a ‘restricted access’ auction – or demands compliance with a series of conditions, as stipulated in the bidding specifications – a ‘prior admission’ auction. The tender system comes into play as an alternative to the auction when other valuation criteria apart from price intervene, for example, a guarantee of continuity of business. In the negotiated sale, the aim is to reduce the number of direct adjudications. When this mechanism has been used in the past, the government has set out a series of bidding specifications, including price and other conditions, and submitted the same to a number of different investors. This has the advantage of stimulating competition among the latter and avoiding direct adjudication by the Council of Ministers. The choice of one or other system depends on the type of company in question and the government’s objectives in each case. When the aim has been to obtain the highest possible returns, the tender offer or public auction have been the chosen routes. However, in the privatisation of an activity or service of public interest, when the government wishes to ensure its continuity and quality, the procedures followed are generally those which do not centre exclusively on bidding price, i.e. the competitive tender or negotiated sale. In the case of companies which are technologically or commercially unviable, the method used has been direct adjudication (Intelhorce, Imepiel or Enasa). In each of the above cases, the government had to decide what percentage of its stake to dispose of. In some cases, where companies’ survival depended on technologies or distribution networks which the state was unable to provide or where companies were simply unviable in public hands, the solution has been to sell off 100 per cent of the shares. Examples of this were the sale to multinational firms of Seat, Ateinsa and Secoinsa. In the case of other, partial, sales, the aims were to consolidate an enterprise through the search for a technological or commercial partner, or, directly, the obtaining of funds to reduce the public deficit via the redemption of public debt (Argentaria, Repsol, Telefónica de España, among others). In the latter case, the state has tended to dispose of a given stake while conserving a significant equity holding, without prejudicing the right of the

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general public to subscribe to shares in the remaining capital. This method achieves both a reduction of the public deficit and political benefits from the distribution of property ownership, in what has become known as ‘popular capitalism’. Other formats aimed at boosting productivity through worker and management participation in company capital have barely been applied.30 Deciding between the methods requires clearer criteria than those set out in the modernisation programme, as well as close consideration of the exact phase of privatisation the companies affected are in, especially since many had already embarked on the process prior to the announcement of the new plan. PRIVATISATION AND COMPANY CONTROL Legal rules on company control The instrument of control wielded by the Spanish state in certain privatisation processes is known as the specific-rights share.31 It is used where the government perceives the need to establish a procedure of prior authorisation before the adoption of certain company agreements which may impact on business continuity after privatisation. The scope of this legal provision extends to companies in which the state directly or indirectly held more than 25 per cent of the share capital on the date of its enactment, provided such percentage constitutes a controlling interest. The law, likewise, covers subsidiaries under the control of the companies affected. However, in order for the specific-rights or ‘golden’ share method to come into play, certain conditions relating to the public interest must be present. In other words, the companies in question must engage in essential activities or provide public services, be subject to an administrative regime of control or represent exceptions to the application of EU competition rules. The state, as shareholder, can only apply the administrative authorisation procedure when its stake in the privatised concern falls to below a determined threshold level. Specifically, disposal of the aforementioned stake must represent a reduction of 10 per cent or more of the company’s share capital, provided that prior to or as a result of the operation the state holding is less than 50 per cent. This instrument may also be used whenever the state’s interest in share capital is brought down, directly or indirectly, to less than 15 per cent. The acts and agreements subject to authorisation are those affecting the continuity of business operations and the composition of share capital: voluntary liquidation, merger or split-up of the company; disposal or encumbrance of assets; equity stakes necessary for the fulfilment of the corporate purpose, and the modification of corporate purpose. Also subject to authorisation are all operations involving acquisition of shares or other securities where these affect at least 10 per cent of the share capital. The legal formula for the authorisation is set out in Royal Decree. The provisions are not permanent but rather are set for a fixed period of time on a case-by-case basis. In order to avoid any disruption of corporate activity the law additionally stipulates a speedy

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procedure for dispute resolution of one month. As regards sanctions, any agreement within the scope of the law not in receipt of the corresponding authorisation will be deemed null and void. To avoid disruption of corporate activity, however, the acquisition of equity stakes beyond the established limits shall be permitted, although the rights associated to unauthorised holdings may not be exercised. The policy of hard cores in Spain Shareholder hard cores can be defined as stable shareholder groups which assume control of state-run companies in the process of privatisation with the aim of maintaining them under national ownership and safe from speculative movements. In theory, the participating companies share the same interests and are headed by management teams with a similar outlook. This is not a new idea, nor one which has been applied exclusively in the case of state-run companies; indeed, private firms often use the same mechanism to avoid hostile takeovers. The candidates for the hard core are chosen from among Spain’s biggest companies so as to be of sufficient scale to defend successfully the interests of the core group. In Spain, the only companies with these characteristics are the banks and savings banks, the electric utilities, some construction firms and other state-run concerns. To create the core, these companies, directly or indirectly, acquire stakes in the share capital of the privatised firms or develop strategic alliances with them. Thus, the creation of such cores brings into being a complex web of crossover shareholdings in the hands of a small number of private and public sector corporate groups. These thereby gain a significant power base in key sectors of the Spanish economy. The best-known shareholder cores are those which have arisen in energy and telecommunications; in both cases markets with an imperfect structure of competition and in which state-run companies have traditionally enjoyed monopoly concessions. With the start of liberalisation in these sectors, these companies have been partially privatised with the aim of guaranteeing their competitive position, in what amounts to being a ‘controlled’ privatisation. In the energy sector the most important cores are those formed around Endesa, Repsol and Gas Natural. The electric utility Endesa has four participants in its hard core: three financial institutions, the state-run banking corporation Argentaria with 3 per cent of share capital, Banco Central Hispano (BCH) and Banco Santander (BS)32 with 2.1 per cent and 2.78 per cent respectively and the German electricity company RWE with 0.5 per cent. Meantime, Banco Bilbao Vizcaya (BBV), with its 7 per cent stake, heads the hard core of Repsol, followed by Mexico’s Pemex and the La Caixa savings bank with 5 per cent and 5.3 per cent respectively. Repsol in turn constitutes the hard core of Gas Natural together with La Caixa (figures are as at 1 December 1996).33 Telecommunications is a sector in rapid expansion subject to a liberalisation programme coordinated at EU level. The state-run firm Telefónica will thus

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shortly have to compete in a market which has hitherto been its exclusive domain. Competition has already been introduced in certain segments, such as cellular telephony, via the entry of a second operator, the Airtel consortium, controlled by BCH, BS and the state-owned Endesa. With one eye on the startup of a second operator in the remainder of the telecoms market and the other on the full liberalisation of the sector scheduled for December 1998, Telefónica has stepped up its privatisation process, creating a hard core with BBV, La Caixa and Argentaria. Telefónica has also recently forged a strategic alliance with the construction and services conglomerate Fomento de Construcciones y Contratas (FCC). Thus, Telefónica has created a stable shareholder body and consolidated its presence in the face of competition from a future second operator, which in all probability will be structured around the Airtel consortium and Optel (whose shareholders include Redesa, Endesa and Unión Fenosa), a subsidiary of the state enterprise Retevisión (see Figure 11.3).34 These are not the only sectors affected. Other business areas in which stateowned companies play a pre-eminent role may also see similar reshuffles. This may be the case for companies like Tabacalera, Iberia, Casa, Paradores Nacionales or the Indra group. One consequence of this policy of alliances and crossover shareholdings has been the concentration of business ownership in the hands of two major entrepreneurial groups, headed by two private sector banks with strong industrial traditions, BCH and BBV, and the state-owned banking corporation, Argentaria. 35 Recently, however, two more financial companies have joined the fray – La Caixa and BS – who together with BBV and BCH respectively make up the two main financial nuclei participating in the privatisation process.

Figure 11.3 Shareholder hard cores in Spain: a few examples in the energy and telecommunications sectors, 1997a Notes: a Based on data as at 1 January 1997;b the second operator in the Spanish telephone market will not be a state enterprise, but will nevertheless in all probability be structured around the state-owned Retevisión with the public sector companies Endesa and Redesa and the Airtel consortium headed by BS, BCH and Endesa directly or indirectly participating as shareholders

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The group headed by BCH and BS includes the state electric utility Endesa, which has recently increased its participation in Fecsa and Sevillana de Electricidad, together with other private sector partners, like the electricity company Unión Fenosa, the oil company Cepsa, the Airtel consortium, Antena 3 television and Cableuropa. The BBV and La Caixa group, meantime, includes Repsol, Gas Natural and Telefónica among its allies, as well as the electric utilities Iberdrola (partner to BBV in the IBV industrial corporation) and Hidroeléctrica de Cantábrico. Finally, Argentaria has important interests in Telefónica and Endesa, and through them both with BCH and BBV. As is evident, the complex network of interrelated ownership means the dividing lines between the groups are inevitably blurred.36 The policy of hard cores has attracted a good deal of criticism. As a rule, to the extent that hard cores make big corporations impervious to the discipline of the capital market, they tend to erode efficiency. Indeed management teams, aloof from the spur of capital market competition, may be less careful in formulating their policies, creating a situation where workers, and shareholders, try to grab as much as they can from the proceeds of the productive process. This kind of inefficient behaviour is exacerbated by the fact that, in many cases, these are companies which enjoy, or have continued access to, monopolistic advantages in sectors where phased privatisation has gone hand in hand with the liberalisation process. Undoubtedly, the persistent inefficiency present in many sectors will hamper, though it should not stop, the farreaching changes companies must make in order to face a newly competitive environment. Empirical evidence on the French case of core shareholdings (see chapter 5; also Cartelier, 1994) highlights that the network of crossover holdings can divert resources away from much-needed measures to ensure the long-term competitiveness of the companies and groups affected. Second, inefficient performance and the erosion of profitability in these companies may alienate noncore shareholders. We should not forget, moreover, that capital markets are not perfect resource allocators and that participants tend to focus solely on those returns from business performance attributable to the holders of ownership rights. For this reason investments which require the mobilisation of large amounts of cash and which generate important external benefits may be undervalued by the market, to the detriment of the competitiveness of the economy as a whole. COMPETITION AND PRIVATISATION We can draw three main conclusions from all the above: first, that state entrepreneurial action should not be confused with regulation or the exploitation of national monopolies; second, that the criteria by which state-run companies operate, while they continue, should be the same as those governing the private sector, and, finally, these criteria can be summed up as efficient company management in pursuit of the highest possible returns. One instrument to achieve these ends and reduce inefficiency is privatisation. The transfer of assets from state to private ownership, be they companies or public services, is a legal act with major economic implications. If it is not accompanied by the review and

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modification of market regulation in line with the changed situation, privatisation may fail to deliver the efficiency gains pursued. The Spanish Privatisation Plan, as previously indicated, takes as a general principle the need to introduce competition into the markets where companies due for privatisation operate. For the moment, however, the privatising urge seems much stronger than the liberalising urge. We should remember that if privatisation is not preceded by the opening up of markets to competition, the normal difficulties involved in this last process are greatly exacerbated, as is evident from some specific cases. First of all the fuel distribution sector is an example of the transition from a legal monopoly to a regulated market system, in the course of which the former state-run company, holding a monopoly concession, has been progressively privatised. The impact of liberalisation on sectoral efficiency and competitiveness has not, however, been wholly satisfactory. Despite the entry of new competitors and the partial privatisation of Repsol, the market has been slow to evince the effects of competition. Although direct sales of gas oil now show important discounts to the official maximum price, price competition in the traditional service station network has been largely cosmetic. Nevertheless, the entry of some shopping complexes and hypermarkets at the retail end of the market, in the face of major barriers and the opposition of traditional channels, has unsettled the previous ‘calm’ of the oligopoly. It is clear, therefore, that the ownership of a company is only one factor influencing business competitiveness and market efficiency. Second, in the case of the gas sector and the privatisation of Gas Natural, the main problem from a competition standpoint is the regulation of access to distribution networks. The liberalisation measures of 1996 refer to natural gas infrastructures (gas pipeline network and regasification services) with some ambiguity and imprecision. Before the full privatisation of Gas Natural, what is needed is to press on with sector reorganisation and carry out simulation exercises to identify the possible results of different scenarios. The National Gas Pipeline Network, regasification plants and warehousing facilities should without any doubt be taken as essential services to which all operators may have access on payment of the corresponding fees. Moreover, the privatisation of Repsol and Gas Natural could too easily boost the monopoly power of certain corporate groups or the degree of concentration in the sectors and markets in which their component companies operate. It is no accident that both firms, controlled by the same entrepreneurs, market alternative products. Third, the privatisation of Endesa is a fine example of a pre-privatisation strategy in an oligopolistic market like electricity. In October 1996 Endesa launched a takeover bid for the companies Sevillana de Electricidad and Fecsa. This operation, whose object was to strengthen Endesa’s market position in the run-up to privatisation, led to a significant increase in the degree of concentration in the Spanish electricity market. Fourth, regarding the privation of Aldeasa,37 the government’s intention as announced in the press is to sell off 80 per cent of the company’s share capital, leaving the sectoral regulator Aena with its current holding of 20 per cent. If

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the operation goes ahead under these terms, we will have a rerun of the present situation in which the regulatory body, which grants operational concessions for determined services, has an interest in the concessionaire firm. In this way, not only will duty-free shops remain aloof from competition, but the possible favoured status accorded to Aldeasa will persist. Fifth, press articles on Tabacalera talk of the privatisation of 52.3 per cent of the company’s share capital. They make no reference, however, to the removal of its monopoly on tobacco manufacturing or on the import and wholesale distribution of manufactured tobacco from outside the EU, nor again its monopoly on the wholesale distribution of official paper and postage stamps. These are all monopolies currently administered and run by Tabacalera and which would thereby pass into the hands of the eventual private sector purchaser. All these examples point to the fact that privatisation could have two opposing outcomes: either the strengthening of competition or the strengthening of dominant positions acquired in the past. For this reason, the criteria to be followed in adjudicating state-owned assets should not rest exclusively on the principle of maximising income, but on an analysis of what will be the final make-up of the companies and corporate groups privatisation gives rise to, and whether this process can contribute to improving competition by permitting the entry of new players. The idea is to defend competition, not competitors. While in the past we saw how loss-making private enterprises passed into state hands, we now have a reverse situation in which profitable or potentially profitable public sector firms return to the private sector. But economic efficiency demands the progressive elimination of company monopolistic power, the more so as the evidence is that private sector monopolies do even greater damage than state-run ones, where administrative and political control is tighter. When certain activities imply a monopoly structure or dominant position without possible recourse to competition, these should be regulated accordingly in order to ensure efficiency benefits. In other words, after privatisation the market is responsible for allocating resources and maximising efficiency. The state controls the correct functioning of the market, the elimination of flaws and, finally, the achievement of a balance between the twin aims of equity and economic efficiency. CONCLUSION Spain’s privatisation process has responded to a number of objectives, foremost among them achieving improved efficiency in the business sector and a reduction of the public deficit. Different routes have been used to achieve these ends. In some cases, privatised companies have been allowed to operate freely in the market; in other cases the state has retained a degree of control through instruments like specific-rights shares or has defined shareholder hard cores. The government’s Privatisation Plan represents the first explicit programme of privatisation drawn up in Spain and takes as its natural limit the transfer of all state-owned companies into private hands.

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A country is competitive when its companies are competitive and there is no doubt that privatisation can make a vital contribution to this end. Thereafter, it will be the market which determines the most efficient allocation of resources, provided privatisation is preceded by the liberalisation of the sectors in question. If this is not achieved then privatisation may fail to meet the efficiency objectives pursued. From a competition standpoint, it is taken as read that the most perverse effects arise when the privatisation process leads to or reinforces a monopoly situation, or strengthens the dominant position of the acquiring companies. The Privatisation Plan recently approved in Spain rests on a ‘deregulation before privatisation’ model. The direction is the right one, but the chosen route is by no means free of problems, which will need to be overcome with conviction and strength of purpose. This will be the only way to combat the pressures of the vested interests in Spain which are seeking to consolidate their positions in the markets and companies concerned. NOTES 1 2 3 4

5

6 7

8

9

According to the Bank of Spain’s Balance Sheet Centre (see Banco de España. 1995), labour costs per employee in 1994 amounted to 5.5 million pesetas in state-run companies (4.91 million according to the State Comptroller) versus 4.6 million in the private sector. This is a particularly significant result as it assumes the ongoing reinvestment of stateowned company earnings. ‘El Sector Público Empresarial en España. informe provisional de 1994’, Intervención General de la Administración del Estado (State Comptroller’s Office), Ministry of Economy and Finance. The state’s shareholdings in top Spanish public sector firms as at 1 January 1997 were: Repsol, 10 per cent, Gas Natural, 3.8 per cent (pending the decision of the advisory Consejo Consultivo de Privatizaciones on its full disposal), Telefónica, 20 per cent and Argentaria, 25 per cent. According to the Census of Regional and Local Public Enterprise Entities (see Ministerio de Economia y Hacienda. 1996), in 1996 there were 1,087 such institutions belonging to Spain’s Autonomous Regions and Local Authorities. Of this total, 352 were public enterprises and entities adscribed to the Autonomous Regions and a further 674 were corporations run by Local Authorities. The rationale for these companies remaining in state hands has been that Inespal is Spain’s only producer of aluminium and that Ence and Grupo Potasas have shares in their respective markets of 66 and 84 per cent. As the Industry and Energy Minister recently stated (see Piqué, 1997), ‘while a few years back the formation of state-owned companies could find some justification in the existence of natural monopolies . . . nowadays it is clear . . . that technological advances and the broadening of markets have done away with many natural monopolies (and those which survive do not necessarily have to be state-owned to work properly)’. As regards postal services. the telecommunications ministries of EU member states passed a directive in December 1996 allowing the distribution of inter-city mail of over 350 grams, but incoming and outgoing cross-border mail is to remain as a public monopoly service until 1 January 2003 (see the discussion in chapter 2). In Spain’s case, this directive allows Correos y Telégrafos to continue exploiting the market segment under its control as a full monopoly until the above-mentioned deadline. Renfe’s new statute envisages access to infrastructure via payment of a fee. As of 1997, the rail network will be managed by the new state entity, Gestor de Infraestructura

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12 13

14 15 16 17

18 19 20 21 22 23 24 25

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Ferroviaria (GIF), whose incorporation marks the first step to the separation of train operations from rail infrastructure. In any case, the recent transfer to Renfe of GIF’s management does not seem the most sensible course from a competition standpoint. There is currently speculation that Telefónica may take control of Grupo Indra. As regards Casa, one of the takeover candidates might be Corporación lBV, already present in the aeronautics sector though Gamesa. The share capital of Grupo Indra as at 1 January 1997 had the following distribution: SEPI with a controlling interest of 66.7 per cent, followed by the French multinational Thomson with 24.9 per cent, the banking institution BBV and the electronics group Perez Nievas each with 3.5 per cent, and the remainder in the hands of small shareholders (see Grupo Indra, 1995). We can also find interesting antecedents in the Imperial period, including the ‘Casa de Contratación’, created to channel trade with the Américas. The law of 25 September 1941 which founded the INI sets out this Institute’s purpose as, ‘to promote and finance, in the service of the nation, the creation and resurgence of our industries, in particular those whose chief object is the undertaking of the practices imposed by the demands of the country’s defence or which seek to further our economic autarky, offering a safe and attractive investment for Spanish savings’. Royal Decree Law 8/1981 of 24 April. Repsol, the group’s flagship since the time of its foundation, is an oil, chemicals and gas company engaged in the oil and derivative products, petrochemicals, liquefied gases and natural gas sectors (see Repsol, 1987–94). Also involved were the state’s shareholdings in a number of oil companies outside the INI group. Repsol’s earnings and turnover place it among Europe’s top-ranked companies in the hydrocarbons sector. Since its incorporation in 1987, its profits have advanced at an average annual rate of 10 per cent. The company centres its activities in the energy sector and has directed its strategies towards cost containment, the reinforcement of its position in the domestic market and the intensification of its international expansion programme. Foremost among recent developments is the progressive entry into the company’s share capital of small and large-scale investors, taking the state’s holding down to 10 per cent by 1996. See below. Royal Decree 2/1983 of 23 February. The Rumasa expropriation (involving 700 companies) was the first ‘forced’ nationalisation undertaken by the newly elected Socialist Government. The Government of the Partido Socialista Obrero Español in 1995 and that of Partido Popular in 1996. Royal Decree Law 5/1995 of 16 June on the creation of certain public corporations. Also affected were companies present in other economic sectors, notably transport. As explained below, Téneo was wound up in 1996. The Ministry of Industry and Energy’s 1995 ‘White Book’ sets out what was to be the competitive strategy of state-owned industrial companies in these terms: ‘strengthening of capabilities in commercial, technological and industrial R&D, the take-up of new opportunity niches, the fostering of corporate groups with a strong market presence, like Téneo and Repsol, and the culmination of re-structuring or disinvestment processes in the specific sectors which so require’. In recent declarations the Industry and Energy Minister (see Piqué, 1997) stated that, ‘the trend towards the full privatisation of companies wholly or partially owned by the state and which operate in a market context is unstoppable and, as such, has its natural limit in the transfer of all state-owned companies into private hands . . .’ By this time Téneo grouped together such major companies as Endesa, Red Eléctrica, Iberia, Aviaco, Casa, Indra, Inespal and Ence.

216 Vicente J.Montes Gan and Amadeo Petitbò Juan 28 The advisory Consejo Consultivo de Privatizaciones recently issued a favourable opinion on proposals involving the companies Almagrera and Longraf (part of Grupo Inespal) and is now studying the proposals submitted on Sodical and Repsol. Meantime, disinvestment is already under way at Auxini, Musini (following its conversion from friendly society to limited company), El Cano, Grupo Potasas and Grupo Inespal. 29 Examples here would be the possible development of an international strategic alliance for Iberia or the search for a technological–commercial partner for the aeronautics firm Casa. 30 This option has, however, been considered in the past, and could still be, to some extent, the eventual solution for companies like Tabacalera or Enatcar. In some cases employees have been sold shares at a discount to their asking price, Telefónica, for example, offered a reduction of 8 per cent, while Argentaria granted low-interest loans of 4 per cent to employees wishing to acquire its securities. 31 In the case of Telefónica de España, for instance. 32 In December 1996 BBV acquired 1 per cent of the company’s share capital and BS began its withdrawal. Some investors, therefore, do not seem too sure about the longterm stability of the core. 33 Repsol’s main shareholder is the Spanish state which controls 10 per cent of share capital through SEPI. 34 The shareholder body of the likely second operator is still open to new entrants, possibly including a European or North American telecoms group. 35 This represents a major switch in the strategy of Spanish banks, which had shown little interest in participating in the capital of Spanish firms after the bad experience of the mixed bank phenomenon of the mid-1970s. 36 Each of these conglomerates includes state-owned companies. A good example is the relationship between Telefónica and Endesa. In 1995, Endesa purchased an 8 per cent stake held by the private electric utility Fecsa in Telefónica’s competitor Airtel, and reached agreement with BCH to join the core group of shareholders behind the second Spanish telephone operator. 37 Aldeasa holds the concession from Aena for the running of duty-free shops in Spanish airports up to June 1999. It also operates official shops in palaces and museums.

REFERENCES Banco de España, Central de Balances (1995) Resultados anuales de las empresas no financieras en 1994, Madrid: Servicio de Publicaciones del Banco de España. Cartelier, L. (1994) ‘ L’Expérience française de privatization 1986–1988: Bilan et enseignements ’, Problemes Economiques, vol. 2, p. 362. Centre Européen des Entreprises a’ Participation Publique, (1994) Les Entreprises à participation publique dans l’Union Européenne, Brussels: CEEP. Ferreras, P. (1997) ‘ Antecedentes y lineas estratégicas del Plan de Privatizaciones ’, Cuadernos de Información Económica, vol. 119, pp. 24–38. Grupo Indra (1995) Informe de Actividades, Madrid: Dirección de Comunicación y Relaciones Corporativas del INI. Grupo INI (1992–3) Informe Anual, Madrid: Dirección de Comunicación y Relaciones Corporativas de Indra. Grupo Patrimonio (1991–5) Memoria, Madrid Centro de Publicaciones y Documentación del Ministerio de Economía y Hacienda. Grupo Teneo (1992–4) Informe Anual, Madrid Dirección de Comunicación de Téneo. Ministerio de Economía y Hacienda, Dirección General de Coordinación de las Haciendas Territoriales (1996) Censo de Entes del Sector Público Empresarial Autónomico y Local, Madrid: Centro de Publicaciones y Documentación del Ministerio de Economía y Hacienda.

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Ministerio de Economía y Hacienda, Intervención General de la Administración del Estado (1984–94) Informe Económico-Financiero del Sector Público Empresarial, Madrid: Centre de Publicaciones y Documentación del Ministerio de Economía y Hacienda. Ministerio de Economía y Hacienda, Intervención General de la Administración del Estado (1989–94) Memoria, Madrid: Centro de Publicaciones y Documentación del Ministerio de Economía y Hacienda. Ministerio de Industria y Energía (1995a) Real Decreto de Creación de Determinadas Entidades de Derecho Público. Memoria justificativa, Madrid: Centro de Publicaciones y Documentación del Ministerio de Economía y Hacienda. Ministerio de Industria y Energía (1995b) Papel de la Empresa Pública, Libro Blanco de la Industria, Madrid: Servicio de Publicaciones del Ministerio de Industria y Energía, pp. 145–53. Piqué J. (1997) ‘ Redefiniendo el papel económico del Estado ’, El Euro y las reformas que necesita la economía española, Madrid: Circulo de Economía. Repsol S. A. (1987–94) Informe Anual, Madrid: Centro de Publicaciones y Documentación del Ministerio de Economía y Hacienda.

12

Privatisation in the UK Policy and performance Paul Cook

INTRODUCTION Prior to 1979, the United Kingdom possessed one of the largest public enterprise sectors in Europe. In the years after, the Conservative government undertook an extensive privatisation programme. Between 1979 and 1997 in excess of £60 billions of state assets (excluding proceeds from the sale of council houses) were sold to the private sector and the share of employment accounted for by publicly owned industries fell from over 7 per cent to under 2 per cent. Despite the size and speed of the privatisation programme in the 1980s, large-scale privatisation had not been a part of the Conservative government’s economic policy when it was elected in 1979. Nevertheless, the signs of change were evident as the economic and political motives which underlay the original nationalisation programme were much weaker by the late 1970s. Public opinion in the 1970s also seemed less convinced of the merits of public ownership, as revealed in a MORI opinion poll at the time which indicated that a growing number of people believed that private enterprises were more efficient than nationalised industries (Heald, 1988). In defining the issue of privatisation in the UK a useful distinction can be made between the public market sector, i.e. the public or state-owned enterprises, and the public non-market sector, commonly referred to as the welfare state. Generally the distinction relates to institutions, reflecting past political choices about financing, and the characteristics of the goods and services supplied. However, even goods and services in the public non-market sector, such as health-care, are increasingly being marketed and considered for privatisation. Clearly, in the UK context, there has been considerable support (or little resistance) to privatisation in the public market sector dominated by a perception, at least, that public enterprises are inherently less efficient than their counterparts in the private sector. In contrast, a significant proportion of the public non-market sector commands popular support from the general public. This is particularly the case with the National Health Service. The privatisation programme which began in 1979 evolved through several phases. In the first phase of privatisation, which occurred between 1979 and

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1983, the government sold public sector assets and public enterprises that were small and largely operated in competitive markets (Bishop and Kay, 1989). In this phase the sale of publicly owned property was more significant than the sale of shares. In the period over one million publicly owned houses, fetching £15 billion, were sold under the ‘right to buy’ scheme. The second phase of the privatisation programme concerned the extension of denationalisation into the public utility sector. This consisted of a mixture of attempts to liberalise monopoly markets and denationalise the large public sector monopolies. It began with the sale of British Telecom, and continues today with the privatisation of the railway industry. This phase is distinguished from the first because separate regulatory offices have been established for each of the major privatised utilities. The third phase overlapped the second but represented a new direction for the privatisation programme. It gained momentum when a significant number of publicly owned companies had already been sold and those remaining were proving to be difficult to sell or were unlikely to generate large sums of revenue. Faced with this situation the Conservative government switched attention to new areas for privatisation which principally involved contracting out, the imposition of user charges, and the introduction of consumer-driven initiatives to simulate market controls on state-owned bodies (Curwen, 1995). It also involved to a much greater extent new in-roads into the public non-market sector. PUBLICLY OWNED ENTERPRISES Importance of nationalised industries Prior to 1979 government policy favoured keeping enterprises under public ownership. This trend was sharply reversed in the 1980s. Although it was the Labour government which created most of the larger public enterprises between 1945–51, successive governments of either political complexion continued to nationalise, including the steel, automotive, aeroengine, shipbuilding and aircraft industries. The importance of the nationalised industries in the UK in 1979 is shown in Table 12.1. This table shows only production from public corporations and excludes the goods and services provided by other UK public sector organisations such as local authorities and the National Health Service (NHS). It indicates that public enterprises have been relatively more capital-intensive than other sectors of the economy, capital accounting for a larger share of national totals than output, while the employment share has been relatively low. Performance of public enterprises Overall, the economic and financial performance of UK public corporations prior to 1979 was weak. Rates of return for public corporations had been

220 Paul Cook Table 12.1 UK: public corporations, 1979

Source: National Income and Expenditure (1984 edn) cited in Vickers and Yarrow (1988: 140)

substantially below their private sector counterparts. Detailed analyses of pricing behaviour of individual nationalised industries had indicated that efficiency objectives had not been met and this had been attributed to a combination of overinvestment and internal inefficiencies. With respect to the measurement of internal efficiency, comparative approaches had been adopted: comparing public corporation performance to other UK industries and to firms abroad. Efficiency audits had also been conducted by bodies such as the Monopolies and Mergers Commission. In general, results had revealed a disappointing performance for UK public corporations. Performance assessment had, however, been complicated by methodological difficulties of choosing appropriate indicators of performance, finding appropriate benchmarks against which to compare performance, and in assessing the importance of market structure as a determining factor for performance. The disappointing performance and the perception of failure among public enterprises in the 1970s can, in part, be explained by the lack of clear objectives given to public enterprise management by government. It was not clear to what extent managers should reduce costs, promote regional development, maintain employment or use their enterprises as instruments to fight inflation. UK PRIVATISATION Objectives of privatisation In general, there was a feeling that ministerial and civil service cultures were not compatible with running enterprises that required heavy investment programmes (Heald, 1988). As a result, discussion of privatisation in the UK began in the 1970s with policy analysis by the Conservative opposition (Bishop and Kay, 1989). Nevertheless, the rationale for the privatisation programme appears to have been invented after the process began (Veljanovski, 1987). Four motives were identified by Heald and Steel in 1982 before the government had fully articulated the programme’s rationale. These included increasing efficiency, enhancing freedom of choice and promoting people’s capitalism through

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wider share-ownership, relieving budgetary pressure, and weakening trade unions. Vickers and Yarrow (1988) have added a few more. These include encouraging employee share-ownership, reducing government involvement in enterprise decision-making, easing public pay determination, and gaining political advantage. Most have been reiterated at some stage or other in official sources even if they have been expressed differently. A recent Treasury publication lists efficiency, wider share-ownership and obtaining the best value for each industry or service sold as the most important objectives (HM Treasury, 1995). Extent of privatisation Table 12.2 provides a list of the major enterprises sold by the government. In some cases shares were sold in tranches. For example, in the case of British Petroleum the first sale of shares was in 1977 when the government’s holding was reduced from 68.3 per cent to 51 per cent (HM Treasury, 1990). The magnitude of sales can be seen in Table 12.3 which shows the accumulated share of privatisation proceeds Table 12.2 Major enterprise sales in the UK

Source: Parker (1995)

222 Paul Cook Table 12.3 The scale of privatisation in OECD countries, 1979–91

Source: Stevens (1992) Note: cumulative privatisation proceeds are measured in current prices and recorded as a % of each country’s GDP (calculated as an average over the privatisation period)

in terms of GDP. The table emphasises the sheer scale of UK privatisation in the 1980s in relation to other programmes of OECD countries. Methods of privatisation in the UK A wide range of methods of sale have been used in the UK. The most important have been share flotation, direct sale, management buy-outs and forms of contracting-out. Principally, two methods of share flotation have been used in the UK and sometimes combinations of both approaches have been undertaken. Public share offerings have been typically used to sell profitable, large-scale public enterprises. Often the share offer is used as a means to raise additional capital, as well as transferring ownership of the enterprise (UNCTAD, 1995). It can also aid the objective of promoting transparency and widespread shareownership through the allocation of a proportion of shares to small investors. First, under an offer for sale the share price is established by the financial advisors acting on behalf of the government (HM Treasury, 1995). Second, using a sale by tender the actual selling price is not determined until all the investors have made their bids. Potential investors indicate how many shares they will be willing to buy at different prices. The strike or actual price is then established on the basis of the highest level that allows for all the shares on offer to be sold. Obviously, this method reduces the risk that the sale price will be too high, resulting in unsold shares, It also goes some way to ensuring that it is not too low, preventing the government from losing potential revenue. The government has generally favoured the offer for sale method because it is easier for investors to understand and encourages smaller investors to a greater extent than other approaches (Parker, 1995). In practice, the offers have often

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resulted in large-scale oversubscriptions which indicate that the share prices had been fixed too low (HM Treasury, 1990, reports details on the number of share applications and the number of successful applications). Further, a large number of investors who obtained none or few shares have been disappointed, while those gaining shares have taken advantage of their initial undervaluation and made spectacular capital gains by quickly selling them once trading on the open stock market has begun. Premiums on the first day’s trading for a number of leading enterprises sold by share flotation have been in the order of over 80 per cent for British Telecom in 1984, over 30 per cent for British Gas in 1986, and around 70 per cent for British Airways and Rolls-Royce in 1987. The sale of a public enterprise to an existing private sector business (or to a group of institutional buyers, known as a trade sale) has occurred on a smaller scale than share flotations. The sale of Rover Cars to British Aerospace is an example of this type of sale. In December 1994, British Coal was privatised in an £850 million trade sale. Finally, management buy-outs have also been significant in the sale of central-government-owned and municipal bus companies. It was also the basis used for the sale of the UK’s single largest freight company, the National Freight Corporation, in 1982 (Parker, 1995). Privatisation in local government Privatisation defined as the transfer of ownership of assets from the public to the private sector has not, with the exception of housing, been significant in local government. But there has been considerable emphasis on the introduction of competition in the provision of services, and upon a reduction of regulation by local authorities. Sale of assets The ‘right to buy’ initiative, gave public sector tenants the right to purchase their rented homes from the local authority owner, at a discounted value. Introduced under the Housing Act 1980 and extended by further legislation in 1985, 1986 and 1988, this initiative has promoted the purchase of four million homes between 1979 and 1995, raising the national level of home ownership from 50 to 80 per cent. In the same period, public housing stock has declined from 30 per cent of total households to less than 20 per cent. Though the initiative has generated, nationally, approximately £28 billions, the 1980 Act stipulated that local authorities could not use these funds to support other parts of the local authority budget, or on new house building, regardless of need. Compulsory competitive tendering Compulsory competitive tendering (CCT) was introduced through the Local Government Planning and Land Act (1980), which required local authorities

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to put out to competitive tender a specified range of services (construction, building maintenance, and road works) normally provided by their own workforces. The Local Government Act (1988) extended this competitive process to a range of so-called ‘blue collar’ services, including refuse collection, street cleansing, schools and welfare catering, and vehicle repair and maintenance; in December 1989, sports and leisure management was added to the list. The Local Government Act (1992) brought in ‘white collar’ services: finance, computing, personnel, architectural services, legal services, and housing management. Experience has been mixed. Central government claims that the system has reduced the costs of providing local services (pointing to research evidence that the 1988 Act has produced overall annual savings of 6 per cent of costs); and has improved the efficiency of direct service provision by exposing public workforces to competition, producing productivity gains of up to 25 per cent. There has been a relatively low success rate of private sector bidders. Research showed that of 1,609 contracts awarded by 1991, only 412 had been won by the private sector, i.e. approximately 75 per cent of contracts remained ‘in house’ (Shaw, Fenwick and Forman, 1994). In leisure services, 86 per cent of all contracts have remained in house. Meanwhile, it is generally accepted that the 1992 Act has so far been largely ineffective in promoting competition in white-collar services; though the private sector won 40 per cent of legal services contracts, it won only 10 per cent of housing management contracts, and generally could not compete on price with internal providers. CCT remained a disputed area of policy during the Conservative administrations. It encompassed a conflict between a determined central government prepared to compel often resistant local authorities to introduce competition into their services provision. It exposed a divide between local authority managers who saw the legislation as an opportunity, and local trades unions who saw it as a threat. It tended to reflect party political divisions; most Conservative authorities (and the Conservative central administration) promoted the system, while most Labour authorities opposed it. But the leadership of the Labour Party have now endorsed the principle of competitive tendering, so that it is likely to continue as a major feature of local provision under the new Labour government. Deregulation Deregulation in local government has involved both the deregulation of specific services to permit competition in those services; and more generally, efforts to relax regulatory regimes in order to reduce restrictions on private sector businesses. The clearest example of service deregulation is in public transport, with the deregulation of bus services. Up to this point, 90 per cent of bus services were provided by local authorities; the cost of subsidy had risen from £10m

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in 1972 to £530m 1982; at the same time, usage had declined. To halt this spiral of falling usage and rising subsidy, the 1985 Transport Act sought to introduce competition through restructuring the industry and encouraging new entrants. Local-authority-owned companies could still compete with private operators, but as ‘arm’s length’ trading organisations, preferably privatised. Eighty per cent of all routes are now classified as commercial, and so ineligible for subsidy; subsidised routes are subject to a competitive tendering process. The 1985 Act effectively ended the direct role of local authorities in public transport provision, except in London. Again, the outcome of this initiative is disputed. Local authority spending has been reduced from £550m in 1985 to £280m in 1994–5, and there were significant numbers of new entrants into the sector. On the other hand, the wages of bus drivers have declined by 20 per cent, and critics argue that competition is being inhibited by the creation of large group companies; public monopoly, they say, is simply being replaced by private monopoly. REGULATION AND PRIVATISED UTILITIES The UK has more privatisation experience of major utilities than any other Western European economy. In chronological order, telecommunications, gas supply, water and sewerage services, electricity supply and the railways have been subject to privatisation. British Telecom, privatised in 1984, became the model for the regulation of all the public utilities. The ‘BT model’ can be described in terms of three principal characteristics. First, there have been no major independent investigations into the future structure of each of the privatised utilities. Royal Commissions were not used for this purpose. In part this was avoided so as not to alienate top management in public enterprises who might have resisted privatisation. Such extensive investigations would also have added to the implementation timetable. The second characteristic has been the establishment of separate regulatory offices with responsibilities for policing and monitoring the licences that are granted to guide the operation of the privatised enterprises. The initial regulatory office for the telecommunications sector (OFTEL, the Office of Telecommunications) was initially based on the model of the Office of Fair Trading. It has been described as a non-participatory model, with none of the public hearings associated with US regulation (Heald, 1988). Third, each regulator uses a price-control formula. The regulatory system for the major public utilities between 1945 and 1983 was based on cost-plus pricing principles. In 1984 the UK introduced price cap regulation in the form of ‘RPI - X’ (retail price index with an exogenous estimate, the X factor, to reflect potential productivity growth). Under this form of regulation prices can only rise by retail price inflation minus (or in certain cases of rising cost, plus) a fixed factor X to be determined by the regulator. The X factor reflects

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the regulator’s prediction of the efficiency gains that the company is likely to achieve. The catalyst for the development of RPI - X regulation in the case of utilities was the Littlechild Report (1983) on the regulation of BT’s profitability after privatisation. Littlechild argued (p. 6) that ‘the primary purpose of regulation is to protect the consumer’ and that competitive entry, where feasible, was to be preferred to regulation. The price cap formula was selected after a review of alternative schemes, including no explicit regulation (Armstrong, Cowan and Vickers, 1994). The other major contender for regulation, namely, rate of return control, was rejected because, more so than price cap regulation, it was thought to reduce incentives for efficiency and innovation. A price cap could also be more easily targeted on particular services. Table 12.4 UK regulatory watchdogs

Source: Updated and adapted from Veljanovski, 1991 Notes: a There is also an Office of Passenger Rail Franchising (established in 1994), which regulates the contracting of rail services and an Office of Regulation responsible for electricity and water regulation in Northern Ireland; b These two agencies were merged into the Environment Agency in April 1996

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Regulatory Institutions The array of regulatory institutions that have been established for different industries, both before and as a consequence of privatisation, are presented in Table 12.4. One recent addition is the Office of the Rail Regulator, which has responsibility along with the Office of Passenger Rail Franchising for regulating an industry that is currently completing a large and complicated process of privatisation. THE CASE OF TELECOMMUNICATIONS Pre-reform period The telecommunications sector in the UK became a state activity in 1880 and later a state monopoly under the Post Office (except for services in Kingstonupon-Hull which retained its municipal operator). The Post Office was a government department until the late 1960s, when it became a state corporation. From 1960 to 1980 there had been agreement on the need to commercialise the Post Office. First it was separated from the civil service, and then separate postal and telecommunications units were established. British Telecommunications (BT) was created from the telecommunications division in 1981 as a state corporation. Until liberalisation of the sector, the privately owned domestic apparatus manufacturing industry had effectively been operating as a cartel with BT (Laidlaw, 1994). Pre-reform regulatory regime The Post Office was given a statutory monopoly of inland postal business as far back as 1869 and eleven years later its remit was extended to telephone services. Under this remit the government was to run the industry according to public interest objectives rather than profit maximisation (Vickers and Yarrow, 1988). Licences were given to private companies and municipal authorities but little real competition emerged. In 1913 telecommunications became a state monopoly. The monopoly of telecommunications suppliers remained intact, in terms of running the network, approving, supplying, installing and maintaining equipment until the 1981 British Telecommunications Act paved the way for the introduction of competition. Sectoral reform process A change of policy in 1980 liberalised the telecommunications sector by opening it up to competition. This policy shift derived in part from complaints from BT’s customers about restrictive practices, but was also driven to a large extent by the ideological conviction of the new Conservative Thatcher government of the inefficiency of nationalised monopoly industry. Liberalisation of the apparatus market had been considered by the previous Labour government but had been dropped due to union opposition.

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A duopoly policy was born in 1981 on the acceptance of a proposal by Cable and Wireless with British Petroleum and Barclays to lay the digital transmission network that became the basis of the Mercury project (BP and Barclays later withdrew from the project). Since then, Cable and Wireless has played a central role in policy on voice telephony. In addition to Mercury’s licence to compete with BT, Racal was selected to develop a rival mobile network. Competition was also sought in cable TV, with hopes of an interactive and telecom capability, but this was not initially realised. The decision to privatise BT accelerated the liberalisation policy in order to strengthen competitors against potential abuse by BT of its monopoly position. The decision to privatise was announced in July 1982, on the basis of the need to modernise the network while controlling government spending. Fiftyone per cent of BT’s share were sold in a public stock issue in 1984, then a further 27 per cent in 1991 and the final 22 per cent in 1993 (Mason, 1994). Demand for shares was generated in an international offer made by a syndicate of merchant banks (HM Treasury, 1996). Since 1984 the government had not exercised the voting rights of its remaining shares, but even after 1993 it still retains a ‘golden share’ that entitles it to appoint two directors, and to block changes to the Articles of Association that limit any shareholder to a maximum 15 per cent holding. Post-reform period BT’s licence area covers all of the UK except for 200 sq. km of Kingstonupon-Hull, which for historical reasons is covered by Kingston Communications (Hull) plc, owned by the local council. Each company is required to provide voice telephony services everywhere in their area, subject to price control. Regulators have had to find niches for competitors to counter BT’s advantage of an advance knowledge of the territory in a newly competitive market. The initial restriction to a duopoly in fixed-link services allowed Mercury to develop its challenge to BT with a government assurance that no new competition would be allowed until 1990 at the earliest. With the responsibility of continuing the government’s liberalisation experiment, Mercury focused on digital service for business customers. High fixed charges were offset by an average discount of 20 per cent on BT’s call rates. A 1990 review of the duopoly policy concluded that more action was needed to speed up the pace of competition. This led to an opening up fully of the domestic market while restraining competition in international services, maintaining BT price controls and revising interconnection terms to BT’s network to level the playing field for new competitors. In 1996 the international calls market was liberalised too. The domestic market was opened up with licences provided at the discretion of the regulator and the Department of Trade and Industry. The government’s greater reluctance to liberalise the international market, where charges were well above costs, is explained by its desire to offer further protection to Mercury

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during the transition to full domestic competition. Licences stipulated obligatory interconnection, subject to payments to the fixed-link provider negotiated by the parties involved and arbitrated by the regulator. Interconnection terms were critical to Mercury’s entry into public network operation. Terms were agreed in June 1984 just prior to the privatisation of BT, but later Mercury sought and obtained better terms from OFTEL. Licences of new service providers also contain service obligations, but more limited than those of BT. Competition has now been opened up in all areas and there is no significant state ownership. BT and Mercury compete on national and international services, and new providers are developing plans to enter the market or have already entered (e.g. Ionica). The initial failure to achieve competition from cable companies was the result of the deliberate fragmentation of the market through the duopoly policy, now corrected by a concentration of cable interests in hands of US telephone companies. Cable TV companies now provide local telephone services in most towns in competition with BT, and four mobile phone operators are also well established at the national level. BT still retains a 90 per cent share of the total UK telecommunications market (though a much smaller percentage of the business and international call markets). Mercury (from 1997 called Cable and Wireless) has established itself as second national network, although more slowly than initially hoped. Post-reform regulatory regime The Telecommunications Act of 1984 now governs the sector, with the aim of promoting competition and preventing BT from abusing its market power. The Act created the post of the Director General of Telecommunications and his office OFTEL, staffed by civil servants (HM Treasury, 1996). It also defined the licensing system and the regulatory roles and duties of the Director General and the Secretary of State for Trade and Industry. The Director General is mandated to advise the Secretary of State on the granting of licences, to enforce respect of the licence system, to modify conditions of licences and to investigate consumer complaints. The Competition and Service (Utilities) Act 1992 later amended the Telecom Act 1984 by granting OFTEL the power to also set service standards and seek compensation for failure to meet them, and to approve operators’ complaints handling procedures and resolve certain disputes. OFTEL has not set quality-of-service targets, but encourages BT to do so and to publish quality-of-service information. BT and Mercury now publish regular reports on their services which are monitored by OFTEL, and OFTEL commissioned an independent survey of cellular networks services in 1992. BT offers customer compensation for below-par service (failure to meet service targets agreed with OFTEL). OFTEL is empowered to prevent cross-subsidy or linked provision of licence-required and non-required BT services, to ensure that BT does not discriminate unduly or drive out competition by price-cutting and to ensure that all networks have fair and reasonable access to each other. It is also

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involved with approvals and standards, numbering, international activities, maintaining a public register and public consultation. A system of price-cap regulation is specified in the licence of BT, but does not apply to other providers. Maintaining price controls on BT is considered particularly important because its market share is so high. An RPI - X formula of price control regulates a basket of BT prices, weighted according to their contribution to BT revenues. Although the method allows some flexibility to BT in setting individual elements of tariffs, a separate limit is maintained for the residential rental charge. This regime is intended to both substitute for competition and stimulate new competitors to the sector. The first cap of RPI - 3 per cent, from 1984 to 1989, covered line rentals and local and national call charges (Spiller and Vogelsang, 1994). In 1989 the cap was tightened to RPI - 4.5 per cent until 1991, when international charges were included and the cap was adjusted to RPI - 6.25 per cent. A new cap of RPI - 7.5 per cent came into effect for a four-year period from August 1993, since when no individual price in the basket apart from line rentals can increase by more than the RPI.1 In addition to the main price cap there has been, since 1990, a cap of RPI - 0 on private circuit prices, RPI+2 on domestic line rentals and RPI+5 on business multi-line rentals. The 1993 price cap regime assumes a rate of return of 16.5–18.5 per cent. It is apparent that regulators’ views about their role have evolved over time. In the case of the telecommunications sector, regulation has moved from a ‘light rein’ after the initial privatisation legislation to a tighter regime in recent years with greater attention paid to tackling the uncompetitive structural arrangements inherited on privatisation (Nwankwo and Richardson, 1996). Post-reform performance Following the first heavily oversubscribed share issue of 1984, BT shares appreciated immediately in the stock market and performed well afterwards, except for the third tranche of shares issued in 1993 where the yield has been more modest.2 Whether privatisation itself caused a significant improvement in BT’s performance remains unclear. The clearest gains were the absence of Treasury interference in the modernisation programme and avoidance of major errors in BT’s investment and diversification, at least in the UK. Although now profitable and impacting on BT to the benefit of the consumer, Mercury cannot be considered a fully successful commercial investment. A review of BT’s performance by Parker (1994) indicates that gains have been achieved with respect to levels of service, prices, profitability and productivity but that these must be treated with some caution. Although overall telecommunications prices have fallen by around 11 per cent in real terms since privatisation, the average conceals wide variations in the prices of particular services, for example residential connection charges (which are not price capped) have risen by an annual average of 7.2 per cent.

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A large-scale survey of service levels was conducted by OFTEL in 1987. The report was critical of certain aspects of British Telecommunication services, in particular the condition of public telephones. British Telecommunications responded by setting a target of maintaining 90 per cent of its public telephones in operation by March 1988. Service was improved to around 95 per cent operational in 1992. While rates of return on net assets for British Telecommunications have risen since the early 1980s, rising from an average pre-privatisation level of 18.3 per cent to 20.7 per cent in the post-privatisation period, employment, research and development expenditure and overall investment have not. Employment initially rose a little after privatisation but since 1990 has dropped by 37 per cent and a further 100,000 employees are scheduled for redundancy by 1998 (Parker, 1994). The consequence has been sharply improved labour productivity but more disappointing results for total factor productivity compared with performance in the years immediately preceding privatisation. An effect of the price cap is that prices have fallen although businesses have benefited more than residential customers. Mercury’s focus on business needs reoriented BT the same way, encouraging it to modernise first those areas exposed to Mercury competition and causing long-distance charges to fall and rental and local charges to rise. There have been claims that ‘light rein’ regulation reflects some kind of regulatory capture by industry interests. This proposition has been difficult to test since postprivatisation regulation has not been uniform. One recent approach to test whether the regulatory process has been captured has been to compare the stock market returns for the regulated companies over a specific period with the returns for a comparable sample of businesses not subject to regulation. Abnormally high returns could conceivably indicate that capture has occurred if they are statistically associated with changes in regulation, commonly referred to as ‘regulatory events’. Dnes and Seaton found, looking at regulatory events that might have impacted on performance, that BT’s average daily returns were not significantly higher than the market index, thus ruling out capture of the regulatory system (Dnes and Seaton, 1995).3 Dnes concludes that regulation has checked monopoly power and that the impact of the regulator’s decisions has been heterogeneous – with some decisions favouring consumers and others favouring BT and its competitors (Dnes, 1995: 1). THE CASE OF ELECTRICITY Pre-reform period The electricity industry in the UK was decentralised up until 1926. Generation provided by private and municipal suppliers was loosely regulated. A high-tension grid was created in 1926 with the establishment of the Central Electricity Board. The electricity industry was nationalised in 1947 in response to the problems of rationalising municipally and privately owned local distribution companies, and to overcome the difficulties resulting

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from the maturing of the franchises of private undertakings (Newbery, 1994). The numerous distribution companies found it difficult to agree voluntarily to merge and coordinate their activities and came into conflict with municipalities who could acquire maturing franchises. The industry was eventually nationalised since public ownership at a national level appeared to be a preferred option to a complex and disjointed system of public ownership at the municipal level. Pre-reform regulatory regime Under public ownership in England and Wales the Central Electricity Generating Board operated all generation and transmission as a vertically integrated statutory monopoly, with twelve Area Boards acting as regional distribution monopolies. The organisation acted as a classic example of a cost-of-service regulated public utility, with high capital costs, heavy dependence on locally mined coal and nuclear power, disappointing productivity and a low rate of return on assets (Newbery and Green, 1996). This state of affairs reflected the political games that were being played in attempting to balance a range of vested interests – the coal miners, domestic voting consumers, industrial consumers, the power industry, and the Department of Energy and the Treasury (Newbery and Pollitt, 1996). Unfortunately, nationalisation did not provide the industry with a clear enough direction making it easy for numerous interest groups to influence the outcomes. In particular, the coal industry’s interests were linked to electricity supply. In the 1960s, the domestic coal industry supplied about 80 per cent of the fuel for generation and this figure remained significantly high even in the late 1980s prior to privatisation (Newbery, 1994). Domestic coal was protected against imported coal and highly subsidised throughout the 1970s and 1980s. The Department of Energy and the Treasury had regulatory oversight of the industry. They employed few measures other than establishing financial limits for the sector. Information gathered to monitor the performance of the industry was of a poor quality. Pre-reform performance Under public ownership electricity prices were held down from time to time as an anti-inflationary measure, and investment was constrained to control the Public Sector Borrowing Requirement (PSBR). The effect of these policies on the electricity supply industry was damaging. Reduced electricity prices and high input costs kept average real rates of return under public ownership below 2.5 per cent. Rates of return for UK industrial companies were, on average, much higher.

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Sectoral reform process The proposals for privatisation of the electricity supply industry were published in 1988 and envisaged a break up of the vertically integrated state electricity industry in England and Wales.4 The British government proposed that electricity generation be split between two companies: nuclear generation and 60 per cent of the conventional power stations forming a large company, referred to as ‘Big G’ and, the remaining conventional stations in ‘Little G’. However, the government was unable to sell nuclear stations despite financial subsidy through a fossil fuel levy (Newbery and Pollitt, 1996). Revised proposals became law with the Electricity Act 1989. By 1990 16 companies were established as public limited companies. The CEGB was divided into three generators – National Power, PowerGen and Nuclear Electricity – and the National Grid Company, a monopoly controlling the high-tension transmission grid. Nuclear Electricity had all the nuclear power stations. National Power and PowerGen settled with the division of conventional power stations along the lines of the initial ‘Big G–Little G’ proposal. The 12 Area Boards became Regional Electricity Companies responsible for electricity supply and distribution in their areas and at first jointly owned the National Grid. Privatisation began in 1990 with sale to the public of the Regional Electricity Companies. In 1991 the public were offered 60 per cent of National Power and PowerGen. The remaining shares were sold to the public in 1995. The Regional Electricity companies floated the National Grid Company as an independent concern in late 1995. Nuclear Electric was amalgamated with Scottish Nuclear and restructured to form British Energy and Magnox Electric. The former was privatised in 1996 while the old magnox stations with negative net value remain in the public sector. A mechanism for coordinating the activities of generation, transmission and distribution was required following their separation during restructuring. To assist this, a wholesale pool, a kind of spot market for bulk purchases, was established and operated by the National Grid Company. Generators are paid a pool purchase price for electricity that they supply and users of electricity pay a pool selling price. This includes the Regional Electricity Companies, large users and retail suppliers. The pool operator ranks the generating units by their offer price and constructs a merit order according to the time of day. This is combined with estimates of demand to provide a market clearing price (Armstrong, Cowan and Vickers, 1994). The post-reform regulatory regime A form of RPI - X price cap was applied separately to transmission, distribution and the Regional Electricity Company supply charges. The pool charges are principally unregulated. The price cap applies to the average charge per kWh. Initially, consumers of electricity whose demand did not

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exceed 1 MW were supplied at published tariff rates, while larger consumers could negotiate contract terms. This level has since been reduced to 100kWh and free competition even in the lower-use domestic market is planned for 1998 making the electricity supply market fully liberalised in the UK (similar liberalisation is occurring in gas supply). Regulation is carried out by a Director General heading the Office of Electricity Regulation (OFFER). A clear objective of the regulator is to encourage efficiency through price control rather than profit control and through promotion of competition. The regulator sets the X factor, which in principle is fixed for five years to provide some regulatory certainty. 5 This permits companies to improve efficiency beyond the level implied by the X factor and correspondingly build up profits over the five years. This represents an incentive form of regulation. Shareholders receive profits made from further efficiency gains achieved by management once the X factor has been established. When the X factor is reset in the following period, the regulator can tighten the price cap and thereby pass the gains to consumers in the future. The price control initially set for transmission and supply was X = 0 per cent and for distribution between 0 per cent and 2.5 per cent. Between 1993 and 1995 new price controls were set. They consisted of a one-off real decrease in prices of between 11–17 per cent in distribution in 1995 and a price cap of RPI - 3 per cent for transmission and RPI - 2 per cent for supply and distribution (Burns, 1995). In 1996/97 the RECs were required to reduce distribution charges by a further 10 to 13 per cent and the X factor was raised to -3 per cent. Post-reform performance Two factors affect the assessment of the performance of the electricity supply industry in England and Wales. First, it is unlikely that a clear picture will emerge from the performance data that is available simply because privatisation was recent and the full effects will not have worked themselves through yet. Second, many of the changes in performance are likely to be attributed to the restructuring process which began before privatisation and not solely to privatisation alone. Privatisation alone was not expected to yield significant improvements in the electricity industry. It was expected that restructuring would increase the scope for competition and surrogate forms of competition. Any anticipated adverse effects arising from the duopoly in non-nuclear power generation were expected to be mitigated by an appropriately operating electricity pool, where under normal competitive market circumstances, bids would reflect marginal costs. However, the industrial structure initially selected for generation at privatisation was unlikely to produce these conditions and, therefore, was inherently inefficient. It has been calculated that the duopoly equilibrium price was about 80 per cent higher than the level implied by

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marginal cost bidding (Green and Newbery, 1992). A review by OFFER in 1991 found that the generators were able to influence pool prices which constituted anti-competitive behaviour on their part. This resulted in large profits but substantial welfare losses. More generators would bring the equilibrium price closer to marginal cost and it has been argued that persistent excess of profits will, in the longer run, lead to new entrants and lower prices. However, this may also result in inefficient excess capacity (Armstrong, Cowan and Vickers, 1994). A number of other factors have affected costs and prices for electricity in the post-restructured period. First, the cost of coal in generation represented about 43 per cent of costs of the CEGB in 1988–89 (Newbery and Pollitt, 1996). The substitution of imported coal for domestic coal resulted in large savings for generators. Second, fuel costs to electricity generators have changed because of a change in the fuel input mix. Coal-fired capacity has been reduced while that of gas has been increased. Natural gas-based generation of electricity using CCGT (combined cycle gas turbine) technology has risen from 0 per cent in 1988 to over 13 per cent being sold in pooling arrangements. Third, the closing of less productive power stations and the change to newer gas-fired plants with more efficient operation and the reduction in labour force that accompanied these changes have led to substantial increases in labour productivity. Overall the efficiency record of enterprises after privatisation and under regulation appears to be mixed. Table 12.5 shows comparative productivity growth rates for the Regional Electricity Companies. While average industry productivity has improved, there are wide variances Table 12.5 UK: comparative productivity growth rates for the regional electricity companies, 1971–93

Source: Burns and Weyman-Jones (1994: 26)

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among enterprises and over time. Productivity growth averaged 3.1 per cent for the period 1991–93, but with a range from -3.9 per cent to a high of 11.7 per cent. The actual price controls contributed to the build up of profits. The return on capital in the electricity distribution sector was higher than that achieved by other privatised utilities. Indeed overall rates of return have improved over their pre-privatisation levels. In the case of generation this is possibly due to the lack of competition, while in the case of distribution it is probably partly due to a lax or overgenerous regulatory environment (Button and Weyman-Jones, 1994; Burns, 1995; Newbery and Pollitt, 1996). In the aftermath of privatisation increasing attention is also being focused on the effects on consumers. In December 1992 a MORI survey commissioned by OFFER found that 87 per cent of respondents believed that customer care had not changed since privatisation (Ernst, 1994). Customer complaints to OFFER increased by 19 per cent between 1991 and 1992. In many respects the expectation of a more stringent approach to handling customers, particularly in relation to consumer debt, as a result of the move to a more explicit commercial regime following privatisation, has not materialised. There has been a downward trend in the number of disconnections as a means to deal with consumer payment difficulties and defaults. This experience has been in contrast to that in the gas and water industries (Ernst, 1994). In part this is due to the improved powers given to the regulator over codes of practice for companies (Graham, 1992). PERFORMANCE UNDER PRIVATISATION Despite the widespread adoption of privatisation measures in recent years, the body of knowledge on the impact of privatisation is rather limited (Cook and Kirkpatrick, 1994 and 1995).6 To some extent this reflects a failure on the part of policy makers to specify clearly the objectives of privatisation prior to implementation that could be used to assess performance. But it also reflects the paucity of performance indicators which can be applied systematically across enterprises and sectors to allow a comparative analysis of performance to be undertaken. The evaluation of the effects of privatisation encounters various methodological constraints which are common to all forms of impact assessment. The basic question is simple enough: is the economy better or worse off as a result of privatisation? But a comprehensive answer to this question requires answers to a number of subsidiary questions: what variables should be used to assess performance? What changes occurred as a result of privatisation? What changes are important? Each of these subsidiary questions raises serious methodological difficulties.7 Clearly, the choice of impact indicators is important. A range of macro and micro performance indicators have commonly been used to assess the impact of privatisation. Macro indicators have included fiscal impacts, capital market

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development and effects on employment; while micro indicators refer to enterprise level technical efficiency and profitability. Most of these, including profitability, technical efficiency, pricing, quality, revenue and employment have been used to infer gains (or losses) to the various interested groups, i.e. government, producers and operators, and consumers and workers. A wide range of studies have shown improvements in profitability of enterprises in the UK after privatisation. Deciding whether or not increased profitability is accompanied by increases in efficiency as a product of ownership change is decidedly more difficult to decipher, however, because increased profitability may have arisen as a result of market power, technical change or other causes. For example, there is little doubt that profitability in British Telecommunications increased around the time of privatisation, as shown in Table 12.6. What is less clear is what has happened to technical efficiency and the level of service. The former is complicated because it is difficult to separate the effects of technological change in the industry from those attributable to privatisation. While it can be claimed that real prices have fallen, quality improved and productivity increased in the telecommunications industry, the same story cannot be told for the gas industry, where total factor productivity (TFP) growth for gas declined from 4.4 per cent per year between 1983–89 to 0.4 per cent between 1990–94 (Bishop and Green, 1995).8 The same sort of picture emerges in relation to productivity in the electricity industry after privatisation (Burns, 1995). The picture is equally mixed with respect to the enterprises that were privatised into more competitive markets (Martin and Parker, 1997). A study by Hutchinson (1991), examined the efficiency of such privatised enterprises and suggested that privately owned enterprises generally outperformed comparable government-owned firms. The study concludes, however, that the evidence is not clear cut when it comes to evaluating the performance of state enterprises after they are privatised. The comparative study revealed that although British Airways and National Freight outperformed their privately owned rivals after privatisation, the results for the aerospace and automanufacturing industries produced different conclusions for the impact of an Table 12.6 The performance of British Telecom, 1981–5

Source: Armstrong, Cowan and Vickers (1994) Notes: aCapital employed is defined as total assets less current liabilities; binvestment is defined as the purchase of tangible fixed assets

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ownership change on performance. Labour productivity growth and profitability in the aerospace sector did not significantly change as ownership was switched. Further, labour productivity appears to have eroded when compared to a reference group of enterprises, even though it rose in absolute terms after privatisation. The study further highlights the difficulty of finding the cause of enhanced performance after privatisation, which may be due to changes in ownership, but could also reflect changes in market structure and in the macroeconomic environment. The employment consequences of privatisation need to be viewed against a background of substantial change within the public enterprise sector. Between 1979 and 1989, there was a 27 per cent fall in the total labour force in the eight major public utility enterprises from 1.07 million to 0.67 million (Bishop and Kay, 1989). In contrast, there had been little reduction in employment in those public sector companies transferred to private ownership, indeed employment actually increased in many enterprises up to 1988. It is difficult, however, to interpret trends in employment in privatised enterprises. While employment in some industries, such as the electricity industry have declined (employment in National Power falling from 15,713 in 1990/91 to 6,955 in 1993/94, Nuclear Electric from 13,924 to 10,728 and Powergen from 8,840 to 4,782 over the same period), some other sectors have not reported corresponding downward trends. A summary of recent experience

Table 12.7 UK: employment in selected privatised enterprises

Source: Adapted from Martin and Parker (1997: 157) Note: aLater figures are not available for Jaguar, which was purchased by Ford in 1989 and for which no accounts have been published since 1992

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is shown in Table 12.7. In all cases bar one the figures compare employment in the first year of privatisation with levels by 1994 or 1995. The conclusion reached in the research by Parker (1995) is that ‘privatisation can improve performance but performance improvement is much more about changing the internal workings of companies, including their business cultures than simply about changing ownership’ (p. 28). In relation to privatised monopolies, the initial change in ownership is likely to be less important for creating the incentive for performance improvement, than subsequent measures to liberalise the market and changes in the regulatory regime, as evidenced by the experience of British Telecommunications and British Gas in particular. CONCLUSION Privatisation is a policy that can be used to bring about significant economic gains. However, it needs to be used in a selective and pragmatic manner. Experience has indicated that there is a host of constraints to successful privatisation that need to be recognised and controlled; that a variety of forms and types of privatisation are required; and that serious consequences for the credibility of the broader economic management of the economy arise if privatisation is mismanaged. The UK experience has shown that privatisation alone cannot be relied upon to ensure that there are significant gains to the economy over and above those achieved under state ownership. The development of a regulatory environment to curb monopoly abuse and ensure that a wide variety of interests, consumer, industry and government, are taken into consideration, has been a necessary accompaniment to privatisation. The UK’s experience with post-privatisation regulation has not been without faults. The process of simultaneously attempting to limit monopoly power and encourage competition has proved difficult. On balance, the scrutiny of performance by the regulatory agencies and the adoption of the price-capping formulae are proving that monopoly public enterprises, once privatised, do not necessarily become abusive private monopolies. As a result, improvements in economic performance and levels of service can be achieved, but not without the vigilance and authority of an array of regulatory institutions designed to facilitate privatisation. NOTES 1 In 1997 a new limit of RPI - 4 per cent was introduced to apply until the year 2000 and with a more restricted coverage (40–45 per cent of BT’s network services). This reflects growing competition in some parts of BT’s businesses and hence the reduced need for regulation. 2 Recent estimates by the CRI in London show an average annual real return to investors up to 31 January 1997 of 14 per cent for the shares sold in 1984, 10 per cent for those sold in 1991 and 7 per cent for those sold in 1993 (CRI, 1997). 3 For more on regulatory capture, see chapter 2. 4 Separate restructuring was introduced later for the electricity industries in Scotland and Northern Ireland. The Scottish industry was divided into two vertically integrated electricity

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5

6 7 8

suppliers, both of which were floated in the stock market. In Northern Ireland privatisation involved some vertical separation, as in England and Wales, to promote competition. However, the regulator can intervene outside these periods and has done so. In 1995 the Director General of Electricity Supply reopened the distribution price cap review settlement of the previous year after evidence appeared suggesting that the cap had been set too generously. For an attempt to fill the void, see Martin and Parker (1997) who provide a detailed study of the impact of privatisation on the performance of eleven UK companies. For a further discussion of the difficulties facing an economic assessment of privatisation, see chapter 2. Martin and Parker (1997:101) present a similar picture of disappointing TFP growth alongside a much better labour productivity performance, especially in recent years.

REFERENCES Armstrong, M., Cowan, S. and Vickers, J. (1994) Regulatory Reform: Economic Analysis and British Experience, Cambridge, MA: MIT Press. Bishop, M. and Kay, J. (1989) ‘ Privatisation in the United Kingdom: Lessons from Experience ’, World Development, vol. 17, no. 5, pp. 643–57. Bishop, M. and Green, M. (1995) ‘ Privatisation and Recession – the Miracle Tested ’, CRI Discussion Paper no. 10, London: Centre for the study of Regulated Industries, Chartered Institute of Public Finance and Accountancy. Burns, P. (1995) ‘Evaluating Privatisation in the UK Utility Industries’, paper presented to the British Council/Rolls-Royce plc seminar on privatisation, London, 22 November. Burns, P. and Weyman-Jones, T. (1994) ‘ The Performance of the Electricity Distribution Business in England and Wales, 1971–1993 ’, CRI Discussion Paper no. 8, London: Centre for the Study of Regulated Industries. Button, K. and Weyman-Jones, T. (1994), ‘ Impacts of Privatisation Policy in Europe ’, Contemporary Economic Policy, vol. 12, October, pp. 23–33. Cook, P. and Kirkpatrick, C. (1994) ‘Assessing the Results of Privatisation: A Review of Methodologies and Evidence’, report prepared for the Privatisation Unit, Geneva: UNCTAD, November. Cook, P. and Kirkpatrick, C. (1995) Privatisation Policy and Performance: International Perspectives, London: Prentice Hall. CRI (1997) How Well Has Sid Done? Memorandum for the Select Committee on Trade and Industry, London: Centre for the study of Regulated Industries. Curwen, P. (1995) ‘ New Directions in Privatisation ’, paper presented to seminar on privatisation, Management Centre, University of Bradford. Dnes, A. (1995) ‘ Post-Privatisation Performance – Regulating Telecommunications in the UK ’, Public Policy for the Private Sector: FPD Note no. 60, Washington, DC: World Bank. Dnes, A. W. and Seaton, J. S. (1995) ‘ The Regulation of British Telecom: An Event Study ’, Loughborough University of Technology Department of Economics Research Paper no. 9/ 95, Loughborough University. Ernst, J. (1994) Whose Utility? The Social Impact of Public Utility Privatisation and Regulation in Britain, Buckingham: Open University Press. Graham, C. (1992), ‘ Consumers and Privatised Industries ’, Utilities Law Review, spring, pp. 38–44. Green, R. and Newbery, D. (1992) ‘ Competition in the British Electricity Spot Market ’, Journal of Political Economy, vol.100, no. 5, pp. 929–53. Heald, D. (1988) ‘ The United Kingdom: Privatisation and its Political Context ’, West European Politics, vol. 11, no. 4, pp. 31–48. Heald, D. and Steel, D. (1982) ‘ Privatising Public Enterprises: An Analysis of the Government’s Case ’, Political Quarterly, vol. 53, pp. 333–49.

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HM Treasury (1990) Privatisation in the United Kingdom: Background Briefing, London: HMSO. HM Treasury (1995) Privatisation – Sharing the UK Experience, London: HMSO. HM Treasury (1996), ‘ Privatisation in the United Kingdom ’, in Privatisation in Asia, Europe and Latin America, Paris: OECD. Hutchinson, G. (1991) ‘ Efficiency Gains through Privatisation of UK Industries ’, in A. Ott and K. Hartley (eds) Privatisation and Economic Efficiency, Aldershot: Edward Elgar. Laidlaw, B. (1994) ‘ The Evolution of Telecommunications Policy in the United Kingdom ’, in B. Wellenius and P. Stern (eds) Implementing Reforms in Telecommunications Sector: Lessons From Experience, Washington DC: World Bank. Littlechild, S. (1983) Regulation of British Telecommunications’ Profitability, London: HMSO. Martin, S. and Parker, D. (1997) The Impact of Privatisation: Ownership and Corporate Performance in the UK, London: Routledge. Mason, D. (1994) ‘ The Argentine Telephone Privatisation ’, in B. Wellenius and P. Stern (eds) Implementing Reforms in Telecommunications Sector: Lessons From Experience, Washington DC: World Bank. Newbery, D. (1994) ‘ Regulatory Policies and Reforms in the Electricity Supply Industry ’, DAE Working Paper no. 9421, Dept of Applied Economics: University of Cambridge. Newbery, D. and Green, R. (1996) ‘ Regulation, public ownership and privatisation of the English electricity industry ’, in R. Gilbert and E. Kah (eds) International Comparisons of Electricity Regulation, Cambridge: Cambridge University Press. Newbery, D. and Pollitt, M. (1996) ‘ The Restructuring and Privatisation of the CEGB: Was it Worth It? ’, DAE Working Papers Amalgamated Series no. 9607, Dept of Applied Economics, University of Cambridge. Nwankwo, S. and Richardson, B. (1996) ‘ The UK’s Privatised Utilities Experience: Why the Regulators are Under Attack ’, International Journal of Public Sector Management, vol. 9, no. 3, pp. 26–39. Parker, D. (1994) ‘ A Decade of Privatisation: The Effect of Ownership Change and Competition on British Telecom ’, British Review of Economic Issues, vol. 16, no. 40, pp. 87–114. Parker, D. (1995) ‘Government Policies on Privatisation’, paper presented to British Council/ Rolls-Royce plc seminar on Privatisation, London 22 November. Parker, D. (1995a) ‘Measuring the Efficiency Gains from Privatisation’, paper presented at the IEIF, Europazentrum der Waseda Universität, Einladung zu einem Symposium, Deregulation and Privatisation of Public Enterprises in Europe and Japan, Bonn, Institut für Europaische Integrationsförschung ev, 14–15 December. Shaw, K., Fenwick, J. and Forman, A. (1994) ‘A Compulsory Competitive Tendering for Local Government Services: The Experience of Local Authorities in the North of England 1988–1992’, Public Administration, vol. 2, summer, pp. 201–17. Spiller, P. and Vogelsang, I. (1994) ‘ Regulations, Institutions and Commitment in the British Telecommunications Sector ’, Policy Research Working Paper 1241, Washington, DC.: The World Bank. Stevens, B. (1992) ‘ Prospects for Privatisation in OECD Countries ’, National West-minster Bank Quarterly Review, August, pp. 2–22. UNCTAD (1995) Comparative Experiences with Privatisation: Policy Insights and Lessons Learned, New York and Geneva: United Nations. Veljanovski, C. (1987) Selling the State – Privatisation in Britain, London: Weidenfeld and Nicolson. Veljanovski, C. (1991) Regulators and the Market: An Assessment of the Growth of Regulation in the UK, London: Institute of Economic Affairs. Vickers, J. and Yarrow, G. (1988) Privatisation: An Economic Analysis, Cambridge, MA: MIT Press.

13

Privatisation and deregulation in the Netherlands Willem Hulsink and Hans Schenk

INTRODUCTION The Dutch have a small open economy of about 15 million people and a GDP of approximately ECU 325 billion (1996 data). The Netherlands’ economy is heavily dependent on international trade, especially with its European Union (EU) partners Germany, Belgium, the UK and France. The high levels of exports and imports (about 60 per cent of GDP) illustrate both its openness and its sensitivity to foreign political and economic developments. The Dutch economy is strongly internationalised and concentrated, having an important presence of ‘incoming’ and ‘outgoing’ multinational firms. Both its mercantile tradition and the small size of its home market have stimulated Dutch companies to enter foreign markets and have encouraged the development of big (Anglo-) Dutch multinational companies, such as Royal Dutch Shell, Unilever, ReedElsevier, Philips, DSM, and AKZO-Nobel, that dominate production, employment, R&D expenditures, and the Amsterdam Stock Exchange (Schenk et al., 1997). Most notable, perhaps, is that Dutch firms have been very active as acquirers of foreign, especially British and American firms. The Netherlands has consistently ranked amongst the three or four largest foreign investors in the US since the early 1980s. During the early 1990s, approximately 20 per cent of investment by Dutch firms was done abroad. Foreign-based firms that presently have a strong foothold in the Dutch market have been attracted by the country’s ideal geographical location for distributive activities, its efficient main ports Rotterdam (sea) and Amsterdam (air), its highly educated and strikeaverse workforce, its favourable corporate tax conditions and the international orientation of its firms as well as its population. The activity profile of the economy is centred around a small set of key sectors: transportation and logistics, agri-business, chemical and refining industries, information-related services (printing, publishing, banking and insurance) and electronics. Thus, the Dutch economy has some definitive characteristics which are not similarly present in other countries. These characteristics will be related below to the Netherlands’ industrial policy. It will be seen that privatisation, though being a familiar headline in the Dutch press, has not been very substantial – simply because the incidence of state-owned enterprises has been relatively

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small. The paper will therefore focus on the changing interventionist regime in the utilities sectors in which corporatised and privatised operators and new entrants are now active. We will start by introducing the industrial policy background to recent programmes and their political-economic foundations. After a discussion of the institutional transition in three selected sectors, namely electricity, gas, and telecommunications, we will address whether the Dutch experiences so far fit within the apparent EU-wide shift from government intervention to administrative regulation and whether there is a unique Dutch way of restructuring the industries mentioned and of reforming utility legislation. BACKGROUND TO INDUSTRIAL POLICY IN THE NETHERLANDS Being a small and open economy, the Netherlands would seem to lack the political and economic clout to control major industrial developments. Indeed, Dutch industrial policies are presently characterised by a virtual absence of ambitious projects, including projects in high-technology areas. Also, firms, including small and medium-sized enterprises, have simply been encouraged to join collaborative R&D programmes at the pan-European level like ESPRIT and EUREKA. However, the existence of large multinationals has definitely left its mark upon industrial policies. For the industrial policy authorities have consistently supported the ongoing activities of the Netherlands’ largest firms with substantial financial donations. In the 1970s and early 1980s, large-scale financial support mainly benefited ailing and/or smoke-stack firms. Well-known in this respect was the one billion plus DG (Dutch guilders) support of the shipbuilding conglomerate RSV (approx. 750 million ECUs at 1997 rates). Similarly to the support that was given to large manufacturers elsewhere, most notably in the UK, these forms of support normally did not require the replacement of top management and the development of innovative strategies so that the results have predictably been miserable. RSV, for example, went bankrupt in 1983 (for an extensive analysis, see Wassenberg, 1983). Although the rhetoric has changed since then (financial support is now – under the influence of Porter (1990) – couched in terms of the stimulation of networks and clusters), the largest enterprises have continued to enjoy sizeable financial support during the 1980s as well as the 1990s (see e.g. General Auditor’s Office of the Netherlands, 1996), most recently by means of so-called ‘technolease’ schemes (see below). Given the dominant position of the large internationally operating firms within the Netherlands, the country has had to rely – and still does – on exportoriented and free-trade strategies, supported by collaboration between national producers and compensation schemes among the ruling political and socio-economic coalitions at home. These economic conditions have fostered a business culture which is characterised by concerted action on the part of the major interest associations and extensive negotiation in the formulation of socio-

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economic policies, together with the active promotion of exports and trade liberalisation abroad. As a natural complement to this ‘power sharing’ tradition, the Netherlands has had but a very weak and leniently enforced competition policy. A form of merger control has been absent until very recently – see below – despite the fact that Dutch firms are among the most active in the area of mergers and acquisitions. On the contrary, and similar to other Western governments, the Dutch government has frequently, and with the consent of the unions, encouraged even large firms to undertake mergers, mostly with negative effects on the performance of the firms in question. Thus, the financial support of RSV was conditional upon the formation of this conglomerate by means of a merger of several formerly independent large-scale shipbuilding firms. More recently, the now bankrupt aircraft manufacturer Fokker was forced into a takeover by Germany’s Daimler-Benz, and when this turned out to be a disaster a few years later, merger of the firm into another huge conglomerate, Korea’s Samsung, was tried unsuccessfully. The search for a takeover candidate took almost a year. In the meantime, the firm’s management was kept in place and the firm was supported by both subsidies and equity. One of the innovations that has come forward as a result of the cosy relationships between government, big business, labour and the financial community has been the above-mentioned technolease scheme which was applied most conspicuously, though at first secretively, in the Fokker drama (1994) and as an emergency backing for Philips (1993). Under this scheme, which is equivalent to the sale-and-lease-back schemes which are widely used for tangible assets, a firm sells (part of) its as yet undepreciated know-how to another firm, usually a bank, from which it is then leased back. The bank enjoys considerable tax benefits as the purchasing costs can be deducted from profits, while the firm immediately receives a substantial cash flow. Evidently, the scheme is most attractive if the firm’s profits are not sufficient to allow full depreciation while the buying firm’s profits are sufficent. The indirect state subsidy amounts to an opportunity loss as a result of lower and/or postponed tax collections. The gross cash flows for the two firms mentioned alone amounted to at least one billion ECU, but perhaps to as much as 1.7 billion ECU, whereas the attendant risks were largely covered by complex vice-versa payments and put-option clauses. Meanwhile, the scheme has become the subject of controversy between lower-echelon fiscal authorities and even the European Commission, on the one hand, and those responsible for industrial policy on the other. The strong dependence of the Netherlands as well as its most influential firms on the world economy has also fostered a pro-European attitude and a major interest in the further integration of national markets into a free trade regime. Dutch foreign policy explicitly supports the broader goal of international cooperation through the creation of a web of international affiliations. The Dutch have always been strong advocates of European integration, being one of the six founding members of the EC and playing a relatively important role in the establishment of the common market and the move towards closer economic, monetary and political union. The Netherlands

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has developed a strong commercial interest in the European Union with approximately three-quarters of its exports and imports being exchanged with its EU partners. The economic gains from European integration have been high: agriculture, transportation and financial services and communications clearly have benefited from EU policies. Now that the EU has been gripped by promarket ideology, and has started to emulate the Anglo-Saxon approach towards administrative regulation, it is therefore quite natural that the Netherlands is also moving towards a system in which deregulation and privatisation are combined with stronger (but still quite ineffectual) competition policies (see below). The share of public enterprise, made up of state enterprises and state participations, has traditionally been small in comparison with countries such as France and Italy where central governments owned substantial stakes in industrial and commercial enterprises and banks. An economic reason for this can be found in the openness and small size of the Dutch economy, which makes it difficult to use public enterprise as an instrument to accomplish national economic objectives such as innovation and growth. An additional political explanation refers to the moderate attitude of the Social-Democrats, one of the four main parties, towards nationalisation. Immediately after the Second World War, and inspired by the works of the first Nobel prize-winning economist J. Tinbergen, they dropped nationalisation in favour of indicative planning and functional decentralisation. Apart from some minority state shares in the steel industry going back to the economic recovery following the Second World War (Hoogovens), and the chemicals/mining industry which can be traced to the days of coal mining (DSM), as well as miscellaneous participations in ailing firms (like, until very recently, Fokker Aircraft and DAF Trucks), public enterprise in the Netherlands has largely been restricted to the traditional public utilities (post and telecommunications (PTT), energy, railways, airlines, airports, etc.), some development agencies and banks, and the Central Bank. As a rule, government interference in the daily operations and long-term planning of public enterprises has been low. The main exception was the PTT (and to a certain extent NS Dutch Rail), where the government actively intervened in decisions on tariff setting, wages, labour conditions, and investments. PROGRAMMES FOR REDEFINING THE DUTCH STATE Public policy making in the Netherlands throughout the 1980s has demonstrated an increasingly pervasive conviction that state intervention in the national economy had been overambitious and that a retreat of the state in favour of market forces was necessary. In 1981/82 the Lubbers I Cabinet implemented the Major Operations programme to facilitate a structural reform of the public administration and a retreat of the state. The Major Operations programme consisted of the following sub-programmes: a reconsideration of public expenditures, a reorganisation and decentralisation of the government administration, deregulation, ‘de-bureaucratisation’ (cuts in civil service salaries

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and/or staff) and privatisation. The centre-right Lubbers I Cabinet (1981–5) introduced the Reconsideration Programme to reduce the high level of public expenditure and restructure the public sector and the welfare state. In this programme deregulation was perceived as one of the remedies for extensive and ineffective legislation, in that it would further market liberalisation and competition. The privatisation programme had no explicit ideological motivation. Unlike in the UK, the notions of mass public shareholdings, popular capitalism and free-market doctrines were not regarded as important elements. Denationalisation was considered just another pragmatic instrument to economise on the state budget and to strengthen the market sector. Officially, the objectives were to reorganise the public bureaucracy and improve efficiency within government, to reduce public expenditure and the budget deficit and to stimulate entrepreneurship and market-responsiveness to economic revitalisation. The budgetary motive to trim the public sector was prevalent in the privatisation programme, and the Treasury was the driving force in its implementation. The final results were somewhat disappointing. First, although characterised by a large public sector, the Dutch economy had only a small number of state enterprises that could be privatised. The explanation for this paradoxical phenomenon can be found in the availability of a large non-profit sector, in which private associations, performing public tasks in health-care, education, social welfare and social security, are subsidised by the state. Leaving aside the hiving off of some smaller state-owned services and the sale of minor shareholdings by the state (notably KLM, DSM, Hoogovens, ING/NMB Postbank, Volvo Car and Fokker Aircraft), only two large companies were privatised between 1981 and 1994, namely KPN/PTT (the biggest corporate employer in the country with about 100,000 employees) and the Postbank (a former PTT subsidiary with about 10,000 staff). Second, the Dutch government showed a clear preference for reorganising the public sector by retaining the core competencies of policy making and by privatising in a gradual way. Privatisation met with little political opposition and legal-constitutional problems were only minor. The government’s pragmatic approach to the privatisation proposals prevented political opposition: the Christian-Democrats, the Liberal-Conservatives and the centre-left D66 were cautiously in favour and the main opposition party of the 1980s, the Social-Democratic PvdA, in principle was not against the proposals. The privatisation programme was opposed by the civil service unions. They saw privatisation as an excuse for restructuring an inefficient and ineffective civil service and feared a loss of jobs, income and pension rights. The public sector unions (with a unionisation rate of about 50 per cent) argued that alternatives like decentralisation and industrial democracy were more appropriate for making the civil service and public management more flexible. When their rank and file did not wholeheartedly support these views, the public sector unions became more moderate and cooperative. If particular labour conditions, such as job security, wages and social security (such as the breach in pension schemes) were safeguarded,

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the civil servants themselves were not necessarily against privatisation. Furthermore, the two major labour union federations FNV (with a socialist past) and CNV (with a Christian heritage) did not support their civil service unions very strongly. Privatisation did not have an influence on their total unionisation rate. It only implied a (possible) transfer of members from public sector to private sector unions. The employers’ associations regarded the sale of government shares and the contracting out of public services as belonging to an overall market-oriented economic policy aimed at stimulating the business spirit and encouraging market forces. The centre-left Lubbers III Cabinet, which came into office in 1989, went ahead with the difficult tasks of trimming the welfare state and establishing a smaller and more effective public sector. Policy-making processes focused, it was agreed, too much on the feasibility and acceptability of alternatives, thereby overlooking flexible decision-making procedures and innovative programmes that challenged laborious consensus-seeking and disturbed the status quo. To remedy that, measures were put forward to improve the efficiency and effectiveness of the government administration: a separation between policy formulation and implementation by the creation of semiindependent administrative agencies to deal with executive and regulatory tasks, territorial decentralisation and policy reduction in some fields. The installation of the ‘purple’ Kok Cabinet in the summer of 1994, consisting of Liberal-Conservatives, Liberal-Democrats and Social-Democrats, so far has not led to any big changes in public policy. Emphasis is still on balancing public expenditures to reduce social security costs and promote public investments and increasing participation levels in the labour market by the implementation of deregulatory measures. One of the main action lines set out by the Kok Cabinet has been the introduction and further elaboration of the so-called ‘Competition, Deregulation and Quality of Legislation’ project. This project is aimed at reinvigorating the market, reconsidering existing rules as regards their effect on the dynamics of the economy and examining the quality of the various legal provisions in the light of changing demands. The results within the framework of this project have been various. Initially, Dutch policy makers underestimated the consequences of increasing European integration on domestic socio-economic policies. The rapid implementation of the Single Market Programme by 1993, and the concomitant irreversible shift of decision-making powers towards the European level, took most Dutch ministries and key industries by surprise. The EC had simply been regarded as a large market outlet, rather than an institution in its own right with substantial powers to constrain the political and economic manoeuvrability of its member states. Since 1990, Dutch public and private policy makers have been more aware of the significance of the draft phase of negotiations and the need to anticipate the final phase of decision making. In the Netherlands, the harmonisation of national policies to form one common policy and the enactment of guidelines, regulations and directives in order to establish the Common Market were widely regarded as

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major consequences of European integration. The fact that the Internal Market programme also instigated a process of international deregulation and policy competition between the national institutional frameworks, however, was underestimated. The emphasis in the Dutch political debate has been too much on the process towards European policy convergence, overlooking the fact that not only European businesses, but also governments are competing against each other for capital, labour and technology. In such a market environment the member states could optimise their comparative advantages by encouraging entrepreneurship, improving the quality of the industrial and educational infrastructure, and strengthening other competitive factor conditions. In 1993, in order to make the Dutch business environment more attractive to domestic and foreign investors, the Ministry of Economic Affairs supported a reshuffle of the government’s budget (reducing the public deficit and collective burden, and increasing infrastructural investments), promotion of labour market flexibility and overall deregulation, and a revision of competition policy. The 1956 Competition Act (WEM), at the time of writing still partly applicable, has left more room for explicit and implicit collusion between firms and market dominance than the anti-trust legislation of the European Union. Unlike EU law, Dutch competition policy does not prohibit anticompetitive practices, but sets out to limit abuse of economic dominance and collusion in the marketplace. Furthermore, legislation on the ex ante scrutiny and control of mergers and acquisitions was absent. The only existing regulation required merger candidates to inform their employees’ council and/or the pertinent trade unions. Competition legislation in the Netherlands has been based on a caseby-case judicial review and the enforcement by law of privately conducted cartel-agreements. Thus, by the early 1990s, when hundreds of cartels were officially registered at the Ministry of Economic Affairs, and probably many hundreds more existed ‘illegally’, the Netherlands was close to what some would call a paradise for cartels (e.g. De Jong, 1990). Although this may seem exaggerated, since many of these cartels applied to unimportant product or services markets and others merely concerned matters which from a welfare point of view would be seen as rather insubstantial, it cannot be denied that competition in sheltered industries, in particular, was rather muted (e.g. in both wholesale and retail distribution, hotel and catering, car retailing, business services and banking, construction). The 1956 Competition Act provides that only the Ministry of Economic Affairs is competent to apply the competition rules. In particular cases and policy domains, however (e.g. telecommunications, water, broadcasting), the Ministry may act in consultation with other departments. In practice antitrust policy has often been subject to the more cooperation-oriented objectives of industrial and regional policy. The reason for this clear preference for business self-regulation over competition policy can be found in the negotiation characteristics of the Dutch economy, with its strong international economic dependence requiring collaboration at home between business, state and labour.

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However, government authorities as well as politicians generally shared a wideranging admiration for captains of industry too. The international success of the Netherlands’ largest firms was generally taken as evidence of talent that was superior to government capabilities. Indeed, many industrial policy advisory committees were chaired by (former) executives from the major multinational firms and were mainly composed of industrialists, while, for example, industrial organisation economists and policy experts were largely excluded. Until recently, there was no political desire to review domestic competition policy in the light of the more stringent EU rules, but that situation has changed. As a consequence of recent attacks by both the OECD and the European Commission on the ‘cartel-friendliness’ of their economy, the Dutch public and private authorities suddenly realised that a complete revision of the Competition Act was needed to align it with the prohibitive EC rulings. From 1992 onwards a series of anti-trust measures, referring to prohibitions on horizontal price agreements, market-sharing agreements and transparent public procurement, were effectively implemented. In May 1996 a Bill for a new Competition Act was put forward in parliament; it was passed in early 1997. The material provisions of this new Competition Act have brought Dutch competition law into line with Articles 85 and 86 of the Rome Treaty. Furthermore the Bill introduces a full-fledged framework of merger control provisions, which is heavily inspired by the EU’s Merger Control Regulation, albeit that the thresholds for notification are naturally much lower. 1 Unfortunately, the EU Regulation – and therefore also the Dutch Regulation – has to be categorised as a half-hearted regulation only as it can merely test for allocative effects – a test which itself is already extremely difficult to do properly – whereas productive and dynamic effects of merger are likely to be much more incisive (Schenk, 1998). Compliance with the new competition rules will be enforced by a newly established anti-trust authority, which will act independently, but still will be answerable to the Minister of Economic Affairs. The Competition Act, which also gives the courts competence in appeals against decisions taken on the basis of the new Act, is planned to come into force by 1998. CASE 1: ELECTRICITY REGULATION Until 1989 and the adoption of the Electricity Act in that year, the Dutch electricity industry was regulated on the basis of a series of semi-public agreements between the Ministry of Economic Affairs and the joint organisation of electricity producers, SEP, as well as on the basis of an Act dating from 1948, the greater part of which was never enforced. There was little centralised control or direction of the industry. The 1989 Electricity Act was meant to codify the existing legislation as well as to confer statutory status on the semipublic arrangements. It was primarily concerned with production activities and transmission. It introduced a limited degree of competition into the sector, in part by allowing large industrial users to import for their own uses and in part

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by encouraging decentralised electricity generation. It also rationalised planning in the sector and conferred certain powers on the Minister of Economic Affairs, for example, to approve tariffs and to issue licences for new generation capacity above a certain size. According to the Act its provisions were to be reviewed after five years and, if necessary, further changes were to be recommended. In fact this review process has resulted in a complete overhaul of the present system, partly in order to restructure the industry and to bring the Dutch legislation more closely in line with the regulatory framework now required by the recently adopted EU Directive on the internal market for electricity. Between 1989 and 1995 the industry has radically restructured itself. The production companies, which are in turn owned by the distribution companies and by local government, merged with one another so that only four have remained in operation. The distribution companies have also merged with one another so that only some 30 of the original 80 are now in business. Of these, some seven companies have 90 per cent of the market. The government first drafted a regulation governing distribution in 1990, but this was only adopted in January 1997. This legislation will liberalise electricity distribution and will require energy companies to operate any ancillary activities, e.g. in the telecommunications or water sectors, separately. A new Electricity law is to be adopted by the end of 1997: in accordance with Dutch tradition there will be extensive consultation with the sector on the content. In the meantime the government has issued a third White Paper on Energy Policy, in which it has outlined its plans for further electricity and gas market liberalisation. This was followed by a set of guidelines in an official policy document (called Stroomlijnen) published on 6 July 1996 and a detailed letter dated 8 November from the Minister of Economic Affairs to Parliament, setting out the results of his consultations on the future structure and regulation of the industry. Four production companies jointly produce some 75 per cent of the electricity consumed in the Netherlands. Two (UNA and EZH) are owned by the local authorities, while EPON and EPZ are owned jointly by the distribution companies and the local authorities. The distribution companies are in turn owned by the local authorities. Although in theory the latter are perfectly free to privatise or otherwise transfer their shares in the distribution companies, this has not yet happened on any large scale. The third White Paper on Energy Policy did not take any firm stand on privatisation, considering this to be a matter for local government. However, the Minister’s letter of 8 November 1996 contains a veiled threat that a privatised electricity company might not receive a licence to supply franchised customers. The production companies coordinate their activities through their jointly owned subsidiary, SEP. SEP is responsible for economic and technical dispatch as well as transmission. It also draws up the statutory Electricity Plans and coordinates fuel purchases for generation. In accordance with the 1989 Act, the production companies have a duty to supply electricity to the distribution

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companies at the lowest possible cost. Electricity is sold to SEP, which then pools it and sells it back to the production companies at a single price. The latter then sell it at a regionally differentiated tariff to the distribution companies. The distribution companies have a right to buy from the producer of their choice but cannot import electricity. SEP has a statutory right to import electricity for public supply. Only large users – i.e. with an annual consumption greater than 10 million kWh – can import for their own use and they must obtain access to the SEP grid to do so. Distribution companies may, however, cooperate with large consumers in building Combined Heat and Power (CHP) plants and this has been the unexpected success of the 1989 Act: decentralised electricity generation now accounts for between 25–30 per cent of total capacity in the Netherlands. The 1989 Act, and particularly SEP’s import monopoly, has been attacked under EU law, although the various proceedings have not yet been concluded. The Minister has recommended a complete restructuring of the industry. The four production companies should merge into a single national production company in a (probably hopeless) search for economies of scale. Full competition is to be phased in in three stages: first for large consumers; second for medium-sized consumers as of 2002; and for the remainder in 2007. The grid is to be transferred to a separate company. Access for all suppliers to eligible customers is to be free and is to be supervised by an independent authority, which will, in the first instance, be a separate department within the Ministry of Economic Affairs. The planning functions of the Ministry will be replaced by periodic energy notices. The Minister will remain empowered to impose a maximum tariff for the various categories of captive customers. It is expected that these proposals will become law by 1998. CASE 2: GAS REGULATION The Netherlands has large natural gas reserves and, as such, gas has become a major source of energy both as a primary fuel and for the generation of electricity. The Dutch state has traditionally been closely involved in the industry. Exploration and production permits are granted by the state, and a state participation in development and production of between 40 and 50 per cent, through Energie Beheer Nederland (EBN), is guaranteed. The state also directly holds 10 per cent of the shares in Gasunie – the national gas merchant company – and a further 40 per cent indirectly through EBN. The remaining 50 per cent is held equally by Shell and Esso. By virtue of this shareholding and a private law agreement between the state and Gasunie, the Minister of Economic Affairs can exert considerable influence over the sector – in particular over distribution and exports. Unlike the electricity sector, there is no comprehensive legislation on gas. The third White Paper on Energy also aims to introduce more competition in the gas market, although both this document and the later guidelines, as referred to in the official Stroomlijnen document, emphasise the substantial

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differences between the two markets. Security of supply in the gas sector will continue to play a key role especially if, as is expected, the Netherlands becomes more dependent upon imports. Further, although the European Commission has issued a draft directive on liberalisation of the Community gas market, little progress towards its adoption has occurred. Liberalisation at the national level will therefore proceed at a more cautious speed. Gas suppliers will be entitled to non-discriminatory access to Gasunie’s transportation network and customers will gradually become free to choose their own supplier. The Act on Distribution of Energy will also liberalise gas distribution. However, Gasunie will not be required to transfer its transmission network to a separate company, nor will an independent supervisory authority be created for the gas sector. Although privatisation of the electricity and gas sector is not yet planned, extensive liberalisation should be introduced within the next decade. This will bring the Netherlands into the lead group of European nations as regards the openness of its market to new entrants. At the same time, there are obvious concerns about the consequences of liberalisation for security of supply and for environmental protection, as well as for the future of the Dutch energy industry itself. It remains to be seen whether, in fact, the Ministry of Economic Affairs will regulate with as light a hand as sketched out in the 1995 White Paper. CASE 3: TELECOMMUNICATIONS REGULATION The Netherlands is preparing its telecommunications sector for full competition. In its implementation of liberalisation measures, the Dutch government closely follows the European directives, which seek to create an open and competitive telecommunications market by 1998 at both member state and European levels (see chapter 2). The final steps, yet to be taken, are to permit (limited) entry for new players in the key voice telephony market (accounting for approximately 80 per cent of KPN/PTT Telecom’s revenues) and to promote and safeguard competition through an appropriate regulatory framework.2 In July 1997 the exclusive rights of KPN/PTT Telecom to provide voice services were withdrawn and replaced by a licensing regime in which new national and regional service providers compete with KPN/PTT Telecom. Also, in 1997 an independent telecommunications authority will be established that will be responsible for supervision (e.g. licence compliance), conflict resolution (e.g. competition issues and interconnection disputes), quality of service and consumer protection. The post-1998 open market and regulatory framework will be governed through a new revised Telecommunications Bill, which is due to be completed and passed in Parliament before the end of 1997. This future revised Telecommunications Act will replace the 1989 Telecommunications Act and the 1996 Interim Act. The latter is an amendment to allow a managed and staged transition from monopoly to competition. The Dutch telecommunications regime, based on the 1989 Act (and to some extent on the 1996 legislative amendments), relied upon a core PTT ‘monopoly’

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of infrastructure provision and the supply of the basic telephone, telex and data services. For that purpose, KPN was granted an exclusive concession for the construction and operation of the public network and the provision of key services. KPN, however, was obliged to ensure that its infrastructure would allow an efficient provision of leased lines and would provide the basic services on a non-discriminatory basis. In addition to the liberalisation of the markets for telecommunications services and terminal equipment, already enacted in 1989, the scope of KPN’s exclusive concession was gradually reduced to the ‘core’ of providing voice telephony services. Between 1989 and 1996 the Dutch government liberalised the following markets: satellite communications (1991), data bearer services (1993), mobile communications (1994) and the fixed infrastructure (1996). Voice telephony was eventually opened to competition in July 1997, just before the EU’s 1998 liberalisation deadline. In the same year, competition in the GSM market duopoly (PTT Telecom and Libertel) was stimulated by the granting of two more franchises. In the period 1993–95, the government sought to prepare new legislation that would succeed the 1989 Act, based on the establishment of an infrastructure duopoly between PTT Telecom and a second franchisee. This would have included all of the alternative network operators in the country (e.g. energy, railways and cable companies). In order to be awarded the second franchise to compete at the different levels of the network with PTT, far-reaching collaboration and consolidation was required in an Enertel/Telecom-2 joint venture. The Enertel/Telecom-2 collaboration fell apart because some of its demands could not be met by the Dutch government (e.g. terms of its licence and terms of regulation), but also because of internal disagreement in the joint venture. While NS Dutch Rail and the energy utilities without cable networks preferred the strategy of constructing and operating trunk networks, the cable network operators and the utilities with a stake in cable networks gave priority to the promotion of local/regional services. In July 1996, with the adoption of the Interim Act, the fixed infrastructure was liberalised, permitting alternative networks to have a competitive edge over new service providers before full competition would develop (from July 1997). Furthermore, the Interim Act introduced ‘permits’, based on registering network/services, and ‘licences’ based on licensing of network/services with special rights and obligations. Besides treating a permit holder and a licensee differently, the new licensing regime makes a distinction between a licence without territorial restrictions and one with territorial restrictions. When granted a licence after a competitive tender, the infrastructure licensee will be entitled to provide all kinds of services on the basis of a system of rights and obligations (i.e. rights of way, interconnection rights and obligations, and Open Network Provision obligations). The permit holder will be allowed to provide services after simple registration with no special rights and obligations. After a competitive tender, national infrastructure licences have been granted to Telfort (BT and NS Dutch Rail) and Enertel (an association of regional utility companies); these two groups are now competing with the concession holder

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KPN/PTT Telecom in the market for network provision. Existing alternative infrastructure providers (e.g. cable network operators) are given preferential treatment in the allocation of regional licences. The licensing instrument has been used by the Minister to curtail dominance in the domestic telecommunications market. She refused to grant a licence to an integrated KPN conglomerate and made it divest itself of the cable subsidiary KPN Kabel/ Casema. The 1989 legislation also revised the close links between KPN/PTT and the government by hiving off the company from the state apparatus and separating the carrier’s operational and administrative activities. KPN was given corporate autonomy and became a joint-stock company. This process of ‘corporatisation’ was followed by privatisation through a public flotation. In 1994, the sale of the first tranche of 30 per cent of KPN shares raised almost seven billion guilders, and a year later the second tranche of 25 per cent generated six billion guilders. Given the stipulation in the present legislation that the government will retain at least a third of KPN shares until 2004 and that the government currently holds a 45 per cent minority stake, flotation of a third tranche of KPN shares can be expected in the future. Government influence in KPN’s corporate evolution is ensured through a golden share construction, implying that for ‘critical’ issues, like the sale of a new tranche, mergers and acquisitions, large investments, and substantial tariff increases, KPN needs political approval. In the 1989 Act, a separation was made between the PTT’s former operational and regulatory functions. The administrative tasks of the PTT, like frequency allocation, normalisation, sectoral supervision and drafting legislation, remained within the Post and Telecommunications Directorate of the Ministry of Transport and Public Works. In 1995, the Supervision Networks & Services Unit (TND) was established next to the Policy Unit and the Operational Affairs Unit of the Ministry. It will eventually be spun off from the government administration and set up as an independent regulator. A new unit, separate from the policy and shareholdings functions in the Ministry, was required by the implementation of the EU directives on open network provision (ONP) to ensure effective regulation and supervision through objective and transparent conditions (e.g. for dispute settlement). Supervision of fair competition is the joint responsibility of the Ministry of Transport and Public Works on the basis of the 1989 Telecommunications Act (KPN’s exclusive rights and duties: open network provision, prevention of cross-subsidies) and the Ministry of Economic Affairs on the basis of the general competition rules (for any other matters). In the post-1998 setting, safeguarding fair competition will be shared between the future Independent Telecommunications Authority and the future semiautonomous Anti-trust Authority (see above). A precise division of labour between the two institutions still needs to be elaborated. TND was set up to monitor compliance by KPN and other companies with the 1989 Telecommunications Act, and to prepare the domestic market for full competition by the 1998 EU deadline. Initially, the Minister made it clear that such an independent regulatory authority would not be established before 1998,

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when all service monopolies would have been abolished. The reason for the postponement was the legal–administrative obstacles over the definition of ministerial responsibility and the authority’s legal basis and remit. The alternative of an autonomous regulatory authority, to be installed as soon as possible, was strongly pushed by a majority in Parliament, which criticised the slow implementation of the open network provisions and lack of market transparency. After complaints put forward by service providers and large business customers, about KPN/PTT Telecom overcharging for leased lines, the Minister responded in 1996 by forcing the incumbent to cut its charges for the lines by about 25 per cent (after having consulted an ad hoc committee of experts). She also decided, eventually, to endorse the setting up of an independent telecommunications authority ahead of the 1998 deadline. CONCLUSION The largest Dutch employers’ organisation, VNO-NCW, although officially committed to privatisation, once argued that privatisation would be unnecessary from an economic point of view because many public enterprises already conform to market conditions, a large-scale sale of government shares might upset the market, and the proceeds might be used for increased government spending (Andeweg, 1994). Indeed, the economic record of public utilities in the Netherlands is excellent by any international standards. However, once a privatisation movement is on its way in neighbouring countries and the economy is booming, so that many potential market entrants appear on the scene, what is to be done? If, moreover, the stock market keeps on reaching new highs day after day and the economy is in excellent shape, then why shouldn’t privatisation be tried? Certainly for a small, extremely open economy such as the Netherlands it would be difficult to ignore developments elsewhere in Europe. Thus, the Dutch privatisation programmes can be interpreted as a ‘curtsy to the times’ rather than the result of a positive, grand design to revitalise the economy. Although the caretakers of the process may not be aware of it themselves, they may simply have been affected by one of the most influential viruses that periodically affects their largest of private firms, a mergers and acquisitions bandwagon. In this chapter we have pointed to the fact that the Netherlands’ largest commercial firms are amongst the most active in mergers and acquisitions. The only way for government enterprises to participate in the ongoing merger wave, however, is to privatise them. Thus, we have been able to witness the 1.4 billion ECU takeover of Australia’s TNT by KPN soon after it was privatised. Certainly we should see the amalgamation of the four remaining Dutch electricity firms, if only to prevent a takeover by Electricité de France – despite overwhelming evidence from the empirical literature that most mergers and acquisitions are not able to produce synergy and expected cost savings (for a recent account, see Sirower, 1997). As Scherer once argued, in this age of widespread neurosis and psychosis, the line between rationality and irrationality

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is not at all easy to draw (Scherer, 1980). To which Kuttner appropriately added: ‘In a world where whole corporations are prey, the manager who plans for the long term is a sucker’ (Kuttner, 1986: 19). Yet, there is something typically Dutch in all this. The Dutch way of privatisation is characterised by a two-stage approach, emphasising an incremental adjustment of the public enterprises to the new market conditions and avoiding the radical option of selling a majority of the state assets immediately. As a first step, state enterprises are restructured and brought under private law, without touching upon ownership and market conditions. Next, the independent state-owned company is given some breathing space to become a market-driven corporation, before (some of) its shareholdings are sold off. Employment levels are protected as much as possible to overcome any resistance to change on the part of the employees. The transitional period of pseudoprivatisation (in Dutch, verzelfstandiging or corporatisation) helps to improve the value of a private share offering by gradually building up the tension and allowing the players-to-be to get used to the modes of doing business in a modern economy, sheltered from disruptive market forces (though the official argument is to enable the operator to become more efficient). Infrastructure competition and third-party access to the public network are either non-issues yet (e.g. gas, electricity and also water) or started to feature on the policy agenda only when the privatisation of the utility was scheduled and the flotation executed (e.g. KPN/PTT Telecom). Regulatory issues to be negotiated and settled at the industry level, like universal service requirements, consumer protection, interconnectivity, third-party network access, and fair competition, play either a minor role (e.g. telecommunications and electricity) or are not considered at all in the policy process. NOTES 1 Dutch merger control applies to concentrations which (1) entail a merger of firms that together have a worldwide turnover of 250 million Dutch guilders (approx. 125 million ECU) or more, on the condition that (2) at least two of the firms concerned in the concentration have a turnover within the Netherlands of at least 30 million Dutch guilders. Different thresholds, and in some cases regulations, apply to the financial services industry. 2 KPN is the newly adopted name for Koninklijke PTT Nederland; it is the parent company of PTT Telecom and PTT Mail. It has recently been announced that the two subsidiaries will be separated and floated soon.

REFERENCES Andeweg, R. B. (1994) ‘ Privatization in the Netherlands: The Results of a Decade ’, in: Wright, V. (ed.), pp. 198–214. De Jong, H. W. (1990) ‘ The Netherlands: A European Paradise for Trust-Mongers? ’ (in Dutch), Economisch Statistische Berichten, 73, pp. 244–8. Den Hertog, J. (1996) ‘ The Policy of Deregulation in The Netherlands ’, European Economic Review, 40, pp. 979–87.

The Netherlands: privatisation/deregulation

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General Auditor’s Office of the Netherlands (1996) Financial Relations with Large Firms (in Dutch), The Hague: Sdu Publishers. Hancher, L., Hulsink, W. and Sevinga, K. (1997) ‘ Netherlands ’, in I. Lewington (ed.), pp. 125–131. Hulsink, W. (1996) Do Nations Matter in a Globalising Industry? The Restructuring of Telecommunications Governance Regimes in France, the Netherlands and the United Kingdom (1980–1994), Delft: Eburon. Kuttner, R. (1986) ‘ The Truth about Corporate Raiders ’, New Republic, no. 194 (20 January), pp 14–19. Lewington, I. (ed.) (1997) Utility Regulation 1997, London: Centre for the Study of Regulated Industries/Privatisation International. Porter, M. E. (1990) The Competitive Advantage of Nations, London: Macmillan. Schenk, H., (1998) Mergers, Efficient Choice, and International Competitiveness: Bandwagon Behaviour and Implications for Government Policy, Cheltenham: Edward Elgar (forthcoming). Schenk, H., Renirie M., Koene, R. and Chan, C.-W. (1997) ‘Large Manufacturers from the Triad: Aggregate Concentration and Ex Post Competitiveness. With References to the Position of Dutch Firms’, Management Report, Rotterdam: GRASP, Erasmus University Rotterdam. Scherer, F. M. (1980) Industrial Market Structure and Economic Performance, 2nd edn, Chicago: Rand McNally. Sirower, M. L. (1997) The Synergy Trap: How Companies Lose the Acquisition Game, New York: Free Press. Wassenberg, A. (1983) The RSV Files: Industrial Policy Diversions in the Netherlands (in Dutch), Leiden: Stenfert Kroese. Wright, V. (ed.) (1994) Privatization in Western Europe: Pressures, Problems and Paradoxes, London: Pinter.

ACKNOWLEDGEMENT The three case studies in this chapter draw upon Hancher et al. (1997).

Index

accounting principles 99(n15) acquisitions 242 Agence de Réglementation des Télécommunications 30 Agencia Industrial del Estado 192, 196, 198, 202–4, 205, 206 agent–principal theory 2, 6, 31, 38, 49– 51 Aharoni, Y. 30, 31 Aiginger, K. 85(n4) air transport: deregulation 25; EU rules 24–5; Germany 109–10; Ireland 140, 141–2, 147–8; Netherlands 244, 245; Scandinavia 14, 172; UK 237 Airbus 109–10 Alchian, A. 124 Aldeasa 213, 216(n37) Alexandersson, G. 179 AMAG, Austria 75, 77 Anastassopoulos, J. P. 10 Andeweg, R. B. 15, 35, 255 Andreff, W. 12, 37 Andréosso-O’Callaghan, B. 11 antitrust authorities 164–5, 249, 254–5 Arbeitsgruppe 117, 118 Armstrong, M. 226, 233, 235 asset sales 12, 19–20, 70, 208–9 Austria: AMAG 75, 77; banking 37, 71, 73, 74, 79–81, 84, 85(n6); BUAG 77, 78; bureaucracy 71; deregulation 81–3; electricity industry 81–2; nationalisation 84; ÖIAG 18, 74, 75–6, 77; OMV 76; ownership/ regulation 72, 81, 82–3; political parties 71–2; post office 81; privatisation 3, 17–18, 70–1, 74–9, 222; privatisation agency 78; privatisation receipts 18, 20, 83–4;

public sector 105; public utilities 73–4; railways 73, 82; reform 72–4; state intervention 30, 71–2; telecommunications (PTO) 81, 82 Austrian Industries 74 Aziende Autonome 153, 154, 170(n5) Bacon, R. 125 Balladur, E. 93 Bank Austria 80, 85(n6) banking: Austria 37, 71, 73, 74, 79–81, 84, 85(n6); Denmark 181; Germany 102–3, 106–7, 109, 117; Greece 128, 133; Ireland 148; Italy 13, 152, 164, 165, 170(n9); Scandinavia 172; Spain 194, 209 bankruptcy 10, 139, 140, 162 Barca, F. 164 Barrett, S. 141, 142 Baumol, W. J. 49 Bavaria 108, 110, 115 Belgium: favoured investors 36; privatisation 17; privatisation revenues 84; public enterprises 11; state-owned companies 151 Birnie, J. M. 137 Bishop, M. 34, 219, 225, 237, 238 Blanc, G. 10 BMPT 113 Bös, D. 11, 31, 50, 56, 58, 61, 62, 64, 174 Boycko, M. 31 Boyd, C. W. 173 British Airways 237 British Energy 233 British and Irish Steam Packet Company 146 British Telecom: duopoly 228; performance 237; privatisation 27,

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219; regulation 225; RPI-Xregulation 56, 225 BUAG, Austria 77, 78 Bundesanstalt für vereinigungsbedingte Sonderaufgaben 117–18 Bundesminister der Finanzen 105, 115 Bundesregierung 117 bureaucrats 52, 53, 57–8 Burns, P. 28, 234, 235, 236, 237 bus industry 178, 225 Bussiammattilainen 179 Button, K. 236 CAA 142 cable networks 229, 253 cabotage services 25 Campsa 197, 200 Canada, privatisation 222 capital markets 36, 37–8, 42 capitalism: French 94–5; popular 107, 208 Cartelier, L. 211 centrally planned economies 123 CEPS Working Party on Utilities 23 Chevènement, J. P. 99(n8) Chicago School 124 Chubb, B. 139 CIE, Ireland 139 civil service status, state employees 35–6, 45(n19), 67(n21), 115 Clarke, T. 126 coal industry 60–1, 232, 235 Coast Lines Ltd 146 collaborative research and development 243 commercial distribution 192, 201 commercialisation 111 communication services 201; see also telecommunications company control, legal rules 208–9 competition: European Union 6, 38, 78; and liberalisation 22; Netherlands 244; ownership 32; privatisation 8, 177, 211–13; public ownershp 5, 182–6; regulation 226; telecommunications industry 28, 30, 210 competitive tendering 207, 224 Conservative party 12, 45(n28), 218 consumers, privatisation 39 contestability theory, market entry/exit 140 context setting 40–1

259

contracting out 43(n5), 70, 83, 219, 222, 224 control: national 41; privatisation 37, 41, 208–11; public/private 187(n3) control inputs 57–9, 60 Cook, P. 236 corporate governance 163–4 corporatisation 36, 70, 159, 161, 256 Corte dei Conti 154, 170(n8) Cosh, A. D. 34 Cowan, S. 226, 233, 235 creative destruction 101 Creditanstalt, Austria 79–81 Cremér, H. 174 Cullen, L. M. 137 Curwen, P. 28, 219 Czada, R. 106 Daly, M. E. 136–7, 138, 144 Dasgupta, P. 127 Davy Research 144, 145 De Fraja, G. 57, 62–3, 64, 173 De Jong, H. W. 248 decentralisation 11, 195 democratisation of public sector 97 Demsetz, H. 124 denationalisation 107, 246 Denmark: GiroBank 181; privatisation 4–5, 16–17, 179–80; privatisation receipts 18, 84; public enterprises 11; public ownership 172, 180; railways 179; state-owned companies 151; telecommunications 16–17, 179; transport 179–80 deregulation: air transport 25; Austria 81–3; EU 23–4; Germany 102, 110–15; Spain 196; UK 224–5 Deutsche Bundesbank 107, 117 Deutsche Bundespost 111–13 Deutsche Telekom xiv, 15, 28, 43(n4), 111–12, 113, 114, 119 devolution of power 119 Dirección General del Patrimonio del Estado 200–1 distribution policy 54–6 Dnes, A. W. 231 Donahue, J. D. 30 Dunning, J. H. 106 duopoly 62–3, 64–5, 228 Dussauge, P. 10 EBN, Netherlands 251 economic policy 1–2, 6–7

260 Contents economic welfare 39–40, 126 The Economist 103 efficiency: allocative 33, 53, 70; audited 220; privatisation 2, 7, 19, 32–3; productive 33; public/private sector 30, 32–3, 34, 125–6, 173–4; public services 157; regulation 7; socially optimal 168; state-owned companies 174, 191 Eggerston, T. 124 The EIU Global Privatisation Manual 147 Electricidade de Portugal 13 Electricité de France 27 electricity industry: Austria 81–2; and coal supplies 232, 235; crosscountry comparisons 26–7; Ireland 140, 142; miners’ union 60–1; nationalisation 232; negotiated third party access scheme 27; Netherlands 249–51; Portugal 13; prices 232, 233–4; profits/welfare losses 234–5; regulation 249–51; restructuring 234; Spain 209, 212–13; UK 26, 38, 60–1, 231–6 electronics industry 196 Elf Aquitane 12, 13 Ellwein, T. 119 Eltis, W. 125 employees: civil servant status 35–6, 45(n19), 67(n21), 115; privatised industries 238; as shareholders 61– 2, 94 employment: Ireland 136; restructuring 73; state industries 30; state-owned companies 151–2; state ownership 10–11; trade unions 61 employment policy 56–7, 165 Endesa 14, 209, 212–13, 216(n36) energy industries: see coal/gas/ electricity industriess entes públicos 201 Enti di gestione 154, 157, 158 Enti Pubblici 154, 158 EOT, Greece 130 EPON, Netherlands 250 EPZ, Netherlands 250 equity 36, 208–9 Ernst, J. 236 Esser, J. 110, 111, 115, 120 Estrin, S. 173 European Centre of Enterprises with Public Participation 191

European Commission: liberalisation of markets xiv; negotiated third party access scheme 27; public utilities 23–4; telecommunications industry 28–9; transport 24–5 European Economy 133 European Monetary Union xiv, 1, 44(n8) European Single Market 1, 247–8 European Union: air transport 24–5; competition 6, 38, 78; cross-country comparisons 12–19; deregulation 23–4; industrial restructuring 41–2; Ireland 137, 138, 140; Merger Control Regulation 249; Netherlands 245, 247–8; ownership 1, 20–2; privatisation 20–30; voice telephony liberalisation 30, 113, 253 expropriation 54, 72 externalities 38, 124, 126 EZH, Netherlands 250 Fábricas Reales 197 Feldstein, M. 56, 125 Fenwick, J. 224 Ferreras, P. 204, 206 Fianna Fail 138, 143 financial advisers 40 Financial Times Survey 25 Fine Gael 143 Finland: air transport 14; governments 174–5; post office 26; privatisation 4–5, 14–15, 174–6; privatisation receipts 18, 84; public ownership 172, 174–6; public/private profitability 188(n25); state industries 44(n7); state intervention 30; telecommunications 176; transport 176 Finnair 14 Fitzgerald, G. 139–43 flagship companies, Spain 197, 203–4 Fokker Aircraft 244, 245 Fölster, S. 179 Fomento de Construcciones y Contratas 210 Foray, D. 29 Forman, A. 224 Foy, M. 140, 143 France: accounting principles 99(n15); capitalism/financial structures 94–5; electricity industry 26, 27; foreign ownership 37; industrial policy 88– 9, 96–7, 99(n8); investment 98(n3),

Contents

99(n7); legislation 12–13, 91–2; nationalisation 40, 89–92; noyaux durs 37, 38, 43, 94, 99(n18); party politics 12–13, 89–90, 92, 96; post office 25; privatisation 1, 3, 12, 19, 40, 92–6, 222; privatisation receipts 18, 20, 84, 95–6; public enterprises 11, 151; public/private sector industrialists 35; public sector 10, 90, 105–6, 157; public utilities 93; railways 24, 44(n11); state intervention 30, 97; state ownership 10, 12; telecommunications industry 13, 28, 30; trade unions 35 France Télécom 13 franchising 70 free trade 21–2, 243–4 Friedman, M. 124 fuel distribution sector 212 Galal, A. 39 Gantner, M. 83 Garcia Delgado, J. L. 14, 31 gas industry: liberalisation 44(n13); Netherlands 251–2; regulation 251– 2; Spain 200, 209–10, 212; UK 237 Gas Natural 209–10, 212 Gasunie, Netherlands 251–2 General Auditor’s Office of the Netherlands 243 German Federal Bank 102–3 German reunification 15, 101, 116, 117 Germany, East 101, 115–18 Germany, West: aircraft industry 109– 10; banking 102–3, 106–7, 109, 117; decentralisation 11; deregulation 102; Deutsche Bundesbank 107, 117; Deutsche Bundespost 111–13; Deutsche Telekom xiv, 15, 28, 43(n4), 111–12, 113, 114, 119; downstream diversifying 10; electricity industry 26; industrial assets 105; neo-liberals 101, 103, 108; party politics/privatisation 107–15, 119; post office 25–6, 44(n15), 45(n19), 111–13; privatisation 1, 3, 15, 222, 101–2, 118–21; privatisation receipts 18, 84; public sector 101, 102–7; public service efficiency 157; public utilities 104; railways 114–15; regulation 114; research institutions 107; restructuring 105; state assets sold 12; state intervention 30; state-

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owned companies 151; telecommunications industry 28, 110, 111–14; trade unions 35, 61, 116, 117 Giblin, T. 137 Girobank 16, 181 golden shares 36, 208, 228 Goldmann, W. 76 Goldstein, A. 150, 152, 156, 157, 159, 161, 163 Goodwin, P. B. 179 Gouph, I. 125 government 10, 19–20, 52, 53; see also state intervention; state ownership Graham, C. 236 Grassini, F. A. 31 Greece: banking 128, 133; EOT 130; government resignation 132; legislation 129, 130, 132; OTE 17, 130, 133; privatisation 4, 17, 123, 127– 34; public enterprises 11; shipbuilding 133; state-owned companies 127, 128–9, 151; telecommunications 17, 130, 133 Green, M. 237 Green, R. 232, 234 Greencore 144, 145 Griffith, Arthur 137 gross fixed capital formation 10–11 Grossman, S. 34 Grout, P. A. 61–2, 64 Grupo Indra 196, 215(n10, n11) Grupo INI 199 Grupo Patrimonio 200 Grupo Téneo 199 Guiomard, C. 137 Haffner, R. 19 Hager, W. 10 Hall, W. 37 Handelsblatt 109 Hart, O. 34 Haskel, J. 174 Hayek, F. A. 124–5 Heald, D. 125, 218, 225, 225 Heinz, W. 104 Herr, C. 114 Hesse, J. J. 119 Hickel, R. 117 Himmelmann, G. 104 Hitchins, D. W. 137 Hitiris, T. 24 HM Treasury 221, 222, 223, 228, 229 Hohn, H. W. 107

262 Contents Holland, S. 40 Horn, M. 31 housing, public to private 74, 219, 223 Hulsink, W. 28 Hutchinson, G. 237 import substitution 144 income distribution 34 industrial policy: France 88–9, 96–7, 99(n8); Italy 170(n2, n13); market failure 38; Netherlands 243–5; privatisation 6–9, 88–9 industry: privatisation effects 8, 74–9; restructuring 41–2; technology 10, 196 industry failure, state takeover 10 information: agent–principal theory 31; asymmetric 53, 65–6 information services 201 Institute of Economic and Industrial Research 133 institutions, hierarchies 51–3 Instituto Nacional de Hidrocarburos 199, 200, 215(n13) Instituto Nacional de Industria 198, 199, 206 international cooperation, Netherlands 244–5 internationalisation 39 investment: France 98(n3), 99(n7); inadequate 38; privatisation 19 investors, favoured 36–7, 43; see also noyaux durs IPIC 76 Ireland 136–9; air transport 140, 141– 2, 147–8; banking 148; electricity industry 140, 142; employment statistics 136; in EU 137, 138, 140; Fianna Fail 138, 143; Fine Gael 143; Insurance (Amendment) Act (1938) 145; monopolies 148; National Prices Commission 141; nationalisation 140; political patronage 143; population 137; price control 141; privatisation 4, 17, 143– 7; privatisation revenues 84; protectionism 138, 141, 147; public enterprises 11; shipping industry 140; state assets sold 12; state enterprises 138–43, 151; state intervention 30, 136–8, 147; state ownership 17; subsidies 139–40; tariffs 138; telecommunications 142;

trade unions 147; transport 141–2, 148; and UK 137, 138 Irish Ferries 146 Irish Life Assurance Company 136, 144–6 Irish Life Group 145–6 Irish Shipping/B and I Line 146–7 Irish Shipping Company 140 Irish Steel 139, 141 Irish Sugar Company 136, 143–4, 145 Irish Sugar Manufacturing Company 140 ISDN 112 Istituto Nazionale della Assiurazioni (INA) 13 Istituto per la Ricostruzione Industriale (IRI) 13, 152, 162, 163, 170(n2) Italian Corporation Law 157, 162 Italy: Amato government 158; Antitrust Authority 164–5; Aziende autonome 153, 154, 170(n5); banking 13, 152, 164, 165, 170(n9); bankrupt industry 10; EFIM 162, 163; electricity industry 26, 27; employment/value added 151; ENI 162, 163; Enti di gestione 154, 157, 158; Enti Pubblici 154, 158; foreign ownership 37; industrial policy 170(n2, n13); IRI 13, 152, 162, 163, 170(n2); job cut limits 35; legislation 157, 158–9, 160, 162; noyaux durs 37; ownership 163–4; parliamentary system 151; post office 25; price controls 159; privatisation 1, 4, 13, 40, 150–1, 158–64, 165–9, 222; privatisation receipts 18, 20, 84; public debt 157– 8; public enterprises 11; public sector 105, 151–5; public service efficiency 157; public utilities 164; regulatory structure 159, 164–5, 169; shareholding 45(n24); state assets sold 12; state enterprises 151, 153–6, 161; state intervention 30, 152–3; state ownership by sectors 152; telecommunications industry 28, 170(n10); trade unions 35 IVG, Germany 106 Jacbson, D. 11 Jahreswirtschaftsbericht der Bundesregierung 103, 110 Japan, privatisation 222 Jenkinson, T. 34

Contents

Jensen, M. C. 31 Jones, L. P. 39 Juppé, A. 93

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labour conditions 247 labour productivity 237–8, 240(n8) Laffont, J.-J. 53 Laidlaw, B. 227 Länder 102–4 Lane, J. E. 16 Lee, J. J. 140, 142–3 legislation for privatisation: France 12– 13, 91–2; Greece 129, 130, 132; Italy 157, 158–9, 160, 162 Lehmbruch, G. 119, 120 Lehmkuhl, D. 114 leisure services 224 liberalisation: airline industry 25; competition 22; gas industry 44(n13); markets xiv, 8–9, 12, 30–8, 39; monopolies 70; sectors 212, 227–8; telecommunications equipment market 29; trade 21–2; voice telephony 30, 113, 253 licence tendering 83 licenses, telecommunications 229 liquidation, voluntary 208–9 Littlechild Report 226 local government 223–5 localisation 154, 165 Lufthansa 109–10, 115 Luthje, B. 111 Luxembourg 11, 17, 151

management: accountability 31–2; nationalised firms 90–2; public/ private sectors 31–2, 34, 125–6, 127, 173–4; risks 44(n17); utility functions 50, 52– 3, 57–60, 166 management buy-outs 222, 223 Manning, M. 140 manufacturing, public ownership 70, 86(n10) market liberalisation xiv, 8–9, 12, 30– 8, 39 market, mixed 64–5 market entry/exit 140 market failure 8, 38, 104, 126–7, 173 Martin, S. 8, 34, 36, 42, 237 Martinelli, A. 31, 165 Marxism, state/capitalism 124, 125 Mason, D. 228 Mayer, C. 34 Meckling, W. H. 31 Mediobanca 164 Meenan, J. 137 Mercury 28, 228, 229 merger 208–9, 249, 255–6(n1) Meth-Cohn, D. 19 Miliband, R. 125 military equipment 197 Millward, R. 34, 173 minister/regulator 53 Ministerio de Industria y Energia 202 Mitchell, W. C. 30 Mitterrand, François 92, 93 monetary policy 49 monopolies: fiscal 201; Ireland 148; liberalised 70; market failure 38, 126–7; market forces 32; natural 1, 22, 27, 42, 49, 72, 111; public 165, 183, 184–5, 196; regulation 231; utilities 51–4 Monopolies and Mergers Commission 220 Monopolkommission 103, 109 Monsen, R. J. 10 Morin, F. 94–5, 100(n19) Mueller, D. C. 123 Muller, W. 19 multinational companies, Netherlands 242, 243

M-form organisation 126 Maastricht criteria 19–20, 22, 44(n8) McDowell, M. 137, 140, 143 McHugh, D. 137 Magnox Electric 233

Nash bargaining for wages 62, 63, 64, 182 national control, diminishing 41 National Freight 237 National Grid Company 233

Kääriäinen, S. 176 Kay, J. 126, 219, 225, 238 Kay, J. A. 6, 126 Kennedy, K. 137 Keogh, D. 143 Kingston, W. 138 Kingston-upon-Hull 227, 228 Kirkpatrick, C. 236 Kivinen, K. 176 Knauss, F. 104 knowledge, dispersed 124 KPN 256(n1) KPN/PTT 246, 252–5 Kuttner, R. 256

264 Contents National Health Service 218 National Power 233 national preference clause 78 National Tourist Organisation, Greece 130 nationalisation: Austria 84; electricity industry 232; France 40, 89–92; Ireland 140; management 90–2; Portugal 10; public utilities 12; Sweden 176; UK 10, 12, 219, 220 Nazi-supporting firms 10, 17–18, 72 negotiated sales 207 negotiated third party access scheme 27 neo-liberals, German 101, 103, 108, 111 neoclassical economics: competitive capital markets 36; consumers 39; economic growth 123; privatisation 33; property rights 124; welfare/ utility functions 3, 65 Netherlands 242–3; acquisitions 242; antitrust authority 249, 254–5; Competition Acts (1956, 1997) 248– 9; competition policy 244; contracting out 43(n5); corporatisation 256; Electricity Act (1989) 249–50; electricity industry regulation 249–51; employers’ organisations 255; EU 2 245, 247–8; foreign policy 244–5; free trade 243–4; gas industry regulation 251– 2; industrial policy 243–5; Interim Act (1996) 253; mergers 255–6(n1); post office 26; privatisation 6, 15, 222, 245–7; privatisation receipts 18, 84; public enterprises 11; public utilities sector 243, 245; redundancies 35; shipbuilding 243; state industries 31, 151; state intervention 245–6; subsidies 243; Supervision Networks and Services Unit (TND) 254–5; Telecommunications Act (1989) 252–3, 254, 255; telecommunications industry 28, 252–5; trade unions 35, 246–7; welfare state 246 Nett, L. 62, 64 Neue Zürcher Zeitung 113 New York Times 115 New Zealand, privatisation 222 Newbery, D. 232, 233, 234, 235, 236 Nicoletti, G. 150, 152, 156, 157, 159, 161, 163

Niskanen, W. A. Jr 30 Noppe, R. 111 noyaux durs 37, 38, 43, 94, 99(n18), 164 Nuclear Energy 233 Nugent, N. 10 Nwankwo, S. 230 OECD (1989) 108 OECD countries: privatisation 222; state receipts/outlays 123 Office of Electricity Regulation 234–5, 236 OFTEL 29, 225, 229–31 ÖIAG, Austria 18, 74, 75–6, 77 oil industry, Spain 200; see also Repsol oligopoly, mixed 183 OMV, Austria 76 OTE, Greek telecommunications 17, 130, 133 ownership: Austria 72, 81, 82–3; collective 90; communal 124–5; competition 6, 32; cross-country comparisons 85(n7); EU policy 1, 20–2; foreign 36, 37; Italy 163–4; mixed 17; private 31–2; public 54, 173; public utilities 21, 22–3; social objectives 173–4; state 5; transferred 70, 73 Parker, D. 8, 25, 28, 34, 36, 52, 173, 223, 230, 231, 237, 238 Parris, H. 15 Partecipazioni Statali 152 partial equilibrium model 34 PDDE 140, 145 PDSE 141 Pearce, R. D. 106 Peel, Robert 137 performance, privatisation 34, 236–9, 240(n6) Pérotin, V. 173 Pestieau, P. 15 Peters, W. 58 Philips 244 Pint, E. M. 56, 57, 173 Pitelis, C. N. 123, 126, 127 political patronage 143 politics, privatisation xiv, 7, 12–13, 43(n1), 71–2, 89–90, 92, 96, 101 107–15, 218, 224 Pollitt, M. 232, 233, 235, 236 Porter, M. E. 243

Contents

Portugal: favoured investors 36–7; nationalisation 10; privatisation 13– 14, 222; privatisation receipts 18, 20, 84; public enterprises 11; revenue generation 44(n9); telecommunications 13 Portugal Telecom 13 Posner, M. V. 152, 154 post office 25–6; Austria 81; crosscountry comparisons 25–6; Germany 25–6, 44(n15), 45(n19), 111–13; Spain 196; trade unions 45(n19), 111, 112–13; UK 25, 26, 227 Postbank 111–12, 113, 246 PowerGen 233 Preussag 107 price control: Ireland 141; Italy 159; OFTEL 231; RPI-X price cap 33, 44(n18), 55–6, 225–6, 230, 233–4 prices: electricity 232, 233–4; public enterprises 55; telecommunicatons 230–1 Priewe, J. 117 principal–agent theory: see agent– principal theory private sector: management 31–2, 125– 6; and public 173–4; state holdings 10 privatisation 17, 66(n3), 70, 173, 221– 2; banking 79–81; competition 8, 177, 211–13; consumers 39; control 37, 41, 208–11; country comparisons xiv, 1–2, 3–6; economic costs 4, 8; economic factors 1–2, 40, 158–9; efficiency 2, 7, 19, 32–3; employment 238; European Union 20–30; group benefits 40; industrial firms 74–9; industrial policy 6–9, 88–9; investment 19; methods 93–4, 207– 8, 222–3; motives 70, 220–1; partial 59–60, 61, 93; performance 34, 236–9, 240(n6); politics xiv, 7, 12– 13, 43(n1), 71–2, 89– 90, 92, 96, 101, 107–15, 218, 224; profitability 237; public utilities 49, 110–11, 225–31; rationales 11, 19–20; sales techniques 159, 163–4; state intervention 3, 4, 8; state shareholding 36; symbolic 107–10; trade unions 35, 221, 60–3; and unemployment 40, 127, 129, 132, 133; see also legislation; regulation

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privatisation, by country: Austria 3, 17– 18, 70–1, 74–81, 222; Belgium 17; Denmark 4–5, 16–17, 179–80; Finland 4–5, 14–15, 174–6; France 1, 3, 12, 19, 40, 92–6, 222; Germany 1, 3, 15, 101–2, 118–21, 222; Greece 4, 17, 123, 127–34; Ireland 4, 17, 143–7; Italy 1, 4, 13, 40, 150–1, 158–64, 165– 9, 222; Netherlands 6, 15, 222, 245–7; Portugal 13–14, 222; Spain 5, 14, 194, 196, 222; Sweden 4–5, 15–16, 176–9, 222; UK 1, 2, 5, 12, 34, 218–19, 220–5 privatisation revenues 18, 20, 83–4, 95–6 Privatiseringsrapporten 177 productivity 33, 90, 237–8, 240(n8) profit maximising 67(n11), 125–6 profitability: privatisation 188(n25), 237; public ownership 181, 188(n25); Spanish state enterprises 194; wage bargaining 182–3; welfare losses 234– 5 property rights 6, 11, 31, 124 protectionism: Ireland 138, 141, 147; Spain 197, 199 PTT, Netherlands 254 public auction 207 public choice theory 30, 32–3, 38, 123 public debt 130, 157–8, 169, 207 public enterprises 12; employment/ valued added 11; France 151; to limited liability companies 16; pricing 55; UK 219–20, 223; see also public sector; state enterprises public goods 126 public housing, right to buy 74, 219, 223 public officials 52 public ownership: competition 5, 182– 6; manufacturing 70, 86(n10); measuring 85(n4); profitability 181, 188(n25); responsibility 73; Scandinavia 172, 174–80; structural objectives 173, 180–1; welfare 54; see also state ownership public-private partnership 104 public sector: Austria 105; crosscountry comparisons 105–6, 157; democratisation 97; efficiency 30, 32–3, 34, 125–6, 173–4; France 10, 90, 93, 105–6; Germany 101, 102–7; industrial 105; Italy 105, 151–5;

266 Contents management 31–2, 34, 125–6, 127, 173–4; market/non-market 218–19; Spain 191–3, 194, 195, 196, 197, 202–4; total productivity 90; trade unions 147, 246–7 public sector employees, civil service privileges 35–6, 45(n19), 67(n21), 115 public telephones 231 public transport 225 public utilities: Austria 73–4; European Commission 23–4; France 93; Germany 104; Italy 164; nationalisation 12; Netherlands 243, 245; Portugal 13; privatisation 49, 110–11, 225–31; state ownership 21, 22–3 quality regulation 226

Repsol 14, 200, 202, 203–4, 215(n15, n17), 209–10 research and development 243 research institutions 107 residual claimant’s theory 124, 125 resource allocation 49, 123, 126 resource utilisation 124, 126 restructuring 33, 41–2, 72–4, 105, 234 retail-price index 56 returns to scale, increasing 38 revenue generation 44(n9), 70, 78 Richardson, B. 230 Ricke, H. 112 Rome Treaty 21–2, 24, 249 RPI-X price cap 33, 56, 67(n11), 225– 6, 230, 231, 233–4, 239(n1) RSV, Netherlands 243, 244 Rumasa 14, 200–1, 215(n20) Rutsaert, P. 29

railways 24, 44(n11); Austria 73, 82; Denmark 179; France 24, 44(n11); Germany 114–15; Spain 196, 199; Sweden 44(n11), 178; trade unions 24; UK 44(n11), 219 Ravenscraft, D. J. 34 recapitalisation 95–6, 162–3 Redor, D. 10, 19, 35 redundancies 35 Rees, R. 126 Reeves, E. 144 Regeringens proposition 177 Regional Electricity Companies 233, 235 REGULASY-model: asymmetric information 65–6; distribution policy 54–6; privatisation/regulation 51–4; utility 49–51; utility function of manager 59 regulation: competition 226; cost-plus 72; economic 226; efficiency 7; electricity industry 234–5, 236, 249–51; gas industry 251–2; Germany 114; Italy 159, 164–5, 169; monopolies 231; privatised utilities 225–31; quality 226; REGULASY-model 51–4; telecommunications industry 29–30, 229–30, 252–5; UK 225–6, 227 regulators 50, 52, 53, 54–7 regulatory capture 169, 170(n11) Reichard, C. 104 Renfe 199, 215(n9) rent seekers 30

Sachverständigenrat 117 sale: direct 222–3; negotiated 207; partial 207; trade 223 Saynor, P. 15 Scandinavia: air transport 14, 172; banking 172; privatisation 4–5; public ownership 172, 174–80; value added statistics 187(n2); see also Denmark; Finland; Sweden Scandinavian Airlines System 172 Scharpf, F. W. 119 Schenk, H. 242, 249 Scherer, F. M. 34 Schimank, U. 107 Schneider, V. 28 Schumpeter, Joseph 101 Scott, C. 22 Seat 14, 36, 207 Seaton, J. S. 231 Seibel, W. 120 self-management, nationalisation 91–2 SEP, Netherlands 250–1 service sector 157, 201 Shapiro, C. 30, 51 share flotation 222–3 share prices 95, 99(n16) shareholders: dispersed 34; employees 61–2, 94; hard cores 209–11; Italy 45(n24); large 31–2; non-employees 62; private 52, 61; property rights 6; state 36; see also noyaux durs shares: accounting principles 99(n15); employees 61–2; specific-rights 208 Sharpe, A. 28

Contents

Shaw, K. 224 shipbuilding industry 17, 133, 243 shipping industry, Ireland 140 Shleifer, A. 31 Shonfield, A. 105 Silberston, Z. A. 126 Single European Act (1986) 22 Single European Currency 20 Sirower, M. L. 256 SKF Espanola 14 Smyth, H. 146 social market economy 3, 110, 120–1 social security, pay-as-you-go 125 social welfare 166–7 Sociedad Estatal de Participaciones Industrials 192, 196, 198, 202–4, 205, 206 Sociedad Estatal de Participaciones Patrimoniales 192, 196, 201, 205 Soete, L. 29 Spain 197–202; Agencia Industrial del Estado 192, 196, 198, 202–4, 205, 206; banking 194, 209; decentralisation 195; deregulation 196; Dirección General del Patrimonio del Estado 200–1; electricity utility 209, 212–13; electronics industry 196; entes públicos 201; entrepreneurial groupings 210–11; favoured investors 36; flagship companies 197, 203–4; fuel distribution sector 212; gas industry 200, 209–10, 212; oil industry 200; Partido Popular 204; postal services 196; privatisation 5, 14, 194, 196, 222; privatisation receipts 18, 20, 84; protectionism 197, 199; public enterprises 11; public sector 191–3, 194, 195, 196, 197, 202–4; railways 196, 199; service sector 201; shareholder hard cores 209–11; Sociedad Estatal de Participaciones Industrials 192, 196, 198, 202–4, 205, 206; Sociedad Estatal de Participaciones Patrimoniales 192, 196, 201, 205; state contributions 195; state enterprises 31, 192, 193, 194, 196–206; state-owned companies 151, 199; strategic alliances 210; telecommunications industry 28, 209, 210; transport industry 192, 201 specific-rights share 208

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Spiller, P. 230 state aid 22, 195 state assets sold 12 state enterprises 172–3; behaviour 35; employment 30; Finland 44(n7); Ireland 138–43, 151; Italy 151, 153– 6, 161; losses 156–7; modernised 204–6; Netherlands 31, 151; as political culture 147; privatisation 206–8; reorganised 201, 202–4; social goals 154; Spain 31, 192, 193, 194, 196–206; state intervention 30; technology 10; welfare maximisation 30; see also public enterprises; state-owned companies state failure 4, 9, 124, 125 state holdings, private companies 10, 36 state intervention 30–1; Austria 30, 71– 2; bankruptcy 139, 140; Finland 30; France 30, 97; inefficiencies 124; Ireland 30, 136–8, 147; Italy 30, 152–3; Netherlands 245–6; privatisation 3, 4, 8; UK 30 state-owned companies 173; efficiency 174, 191; employment 151–2; Greece 127, 128–9, 151; monopolies 196; Spain 151, 199; welfare 186–7 state ownership: agent–principal theory 31; economic importance 10–11; employment 10–11; France 10; industrial policy 5; Ireland 17; Italy 152; public choice theory 32–3; public utilities 21, 22–3; sectoral 152; telecommunications industry 28; see also public ownership state receipts/outlays 123 state-sponsored enterprises 173 state takeover, industry failures 10 Steel, D. 225 steel industry 74, 76–7, 109 Stevens, B. 222 Stigler, G. 58, 124 Stiglitz, J. E. 127 strategic alliances 45(n29), 210 subsidies 23, 25, 49, 139–40, 174, 243 Supervision Networks and Services Unit (TND) 254–5 Sweden: decentralisation 11; electricity industry 27; favoured investors 37; nationalisation 176; post office 26; privatisation 4–5, 15–16, 176–9, 222; privatisation receipts 18, 84;

268 Contents public ownership 172, 176, 177–8; railways 44(n11), 178; state intervention 30; telecommunications industry 28, 178; transport 178; welfare 178 Szymanski, S. 174 Tabacalera 213 tariffs 29, 138 technocrats, private 57–8 technolease schemes 243, 244 technological change 10, 42, 60 technologically sophisticated industry 196 Tele Danmark 16–17 Telecom Eireann 142 telecommunications: Austria 81, 82; competition 28, 30, 210; crosscountry comparisons 27–30; Denmark 16–17, 179; European Commission 28–9; Finland 176; France 13, 28, 30; Germany 28, 110, 111–14; Greek 17, 130, 133; Ireland 142; Italy 28, 170(n10); licenses 229; Netherlands 28, 252–5; prices 230–1; public telephones 231; regulation 252–5; Spain 14, 28, 209, 210, 215(n10), 216(n36); state ownership 28; Sweden 28, 178; UK 27–8, 56, 219, 225, 227–31 telecommunications equipment market 29 Telecommunications Organisations of Greece 130, 133 Telefónica 14, 210, 215(n10), 216(n36) Telia 28, 178 Téneo 199, 202, 203–4, 205 Thompson, D. 34 Thompson, D. J. 6 Tinbergen, J. 245 Tirole, J. 53 trade sale 223 trade unions: civil service 246–7; compliance 57; employment 61; France 35; Germany 35, 61, 116, 117; Ireland 147; Italy 35; Netherlands 35, 246–7; post office 45(n19), 111, 112–13; power changes 12, 63–5; privatisation 35, 60–3, 221; public sector 147, 246–7; railways 24; as rent seekers 30; TUmodel 50, 60–5, 66 tragedy of the commons argument 124– 5

transport industry: Denmark 179–80; European Commission 24–5; Finland 176; Ireland 141–2, 148; Spain 192, 201; Sweden 178; see also air transport; bus industry; public transport; railways Treuarbeit 107 Treuhand 115–18 TU-model: power changes 63–5; privatisation 50, 60–3; wages 62–3, 66 Turkey, privatisation 222 UK: British Airways 237; Competition and Service (Utilities) Act (1992) 229; competitive capital market 38; Conservatives 12, 45(n28), 218; deregulation 224–5; Electricity Act (1989) 233; electricity industry 26, 38, 60–1, 231–6; employment in privatised industries 238; favoured investors 37; gas industry 237; Housing Act (1980) 223; and Ireland 137, 138; Local Government Acts (1988, 1992) 224; Local Government Planning and Land Act (1980) 224; Monopolies and Mergers Commission 220; National Health Service 218; nationalisation 10, 12, 219, 220; party politics 218, 224; post office 25, 26, 227; price controls 33; privatisation 1, 2, 5, 12, 34, 220–5; privatisation receipts 18, 84; privatised utilities 225–31; public enterprises 11, 106, 151, 157, 219–20; public housing 219, 223; public/private sector industrialists 35; public transport 225; railways 44(n11), 219; regulatory offices 225–6, 227; state assets sold 12; state intervention 30; telecommunications 27–8, 56, 219, 225, 227–31; Telecommunications Acts (1981, 1984) 227, 229; Transport Act (1985) 225; see also British Telecom UNA, Netherlands 250 UNCTAD 222 unemployment and privatisation 40, 127, 129, 132, 133 user charges 219 utilities: see public utilities

Contents

utility: management 50, 52–3, 57–60, 166; monopolistic 51–4; REGULASY-model 49–51; TU-model 50 utility maximising 123 VA-Stahl, Austria 76–7, 78 VA-Tech, Austria 76, 77 value added 10–11, 151–2, 187(n2) Van Bergeijk, P. 19 VEBA, Germany 106, 107, 108 Veljanovski, C. 225 Vermögenspolitik 107 Vernon, R. 35 VIAG, Germany 106, 108–9 Vickers, J. 31, 126, 221, 226, 227, 233, 235 Vishny, R. W. 31 VNO-NCW, Netherlands 255 Vogelsang, I. 230 voice telephony 30, 113, 253 Volkswagen 14, 107, 108–9 wage earner funds 16 wage negotiations 62, 63, 64, 182–3

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wages: cut 40; equilibrium values 65; public transport 225; TU-model 62–3, 66 Walters, K. D. 10 Wassenberg, A. 243 welfare: economic 39–40, 126; losses 234– 5; public ownership 54; regulators 54– 7; state-owned companies 186–7; Sweden 178; and utility 3 welfare maximisation 30, 52, 53–4, 167–8, 173, 186–7 welfare state 15–16, 218, 246 Weyman-Jones, T. 235, 236 Willig, R. D. 30, 51 Willner, J. 19, 173, 174 Wise, P. 37 Wolf, C. 124 Woll, A. 101 Woolf, S. J. 152, 154 working conditions, state industries 30 Wright, V. 40 X-inefficiency 58, 72 Yarrow, G. 31, 126, 221, 227