Exactly 20 years ago this week, 2.4m Britons scrambled to buy shares in the state-owned telephone company, British Telecom (BT), before it was floated on the stock market. At almost £4bn, it was the biggest stock market sale in history.
It gave the world the concept of mass-market privatization. It bristled with marketing innovations. It sparked a revolution in share ownership. It heartened the government to privatise more. And it provided a model from which many other countries, including ex-communist ones, were happy to borrow.
Of course, the revolution started earlier, in 1979, when Margaret Thatcher’s new government inadvertently privatized British Petroleum (BP). Inadvertently, because some of BP’s shares were already in private hands, and when the government dumped a few more, its holding slipped below 50%.
Perplexed Treasury officials noted that if the government did not control a company, it could hardly be kept on the books as an asset; nor could it be subject to all the borrowing and other constraints on nationalized industries. BP had simply floated into the private sector.
But having discovered that 50% is all it takes, Thatcher’s administration cheerfully embarked on other small privatizations. In February 1981, it sold 51.6% of the state planemaker, British Aerospace. By November it was selling Cable & Wireless – a minority at first, but later, when it failed to take up a rights issue, its holding slipped to 45%, and another state enterprise floated away.
When the radio-chemicals company, Amersham International, was sold, there was another innovation. To sweeten the deal with employees, they were offered shares on a buy-one-get-one-free basis. Four out of five of them bought into it. Encouraged by that, the state trucking business, National Freight Corporation (NCC), went to Downing Street with a worker-management proposal. Some 9,000 NFC employees and 1,300 NFC pensioners chipped in an average of £700 (E1,000, $1,300) each to take it private. A shrewd investment: seven years later, that stake would be worth £7,000. Later, when the government sold 51.5% of Associated British Ports, its workers snapped up 12.2% of it.
In 1983-84, some 27 railway hotels – now among the poshest in Britain – went private. So did Jaguar, the carmaker. Sealink ferries went; and the ailing cross-Channel hovercraft service was sold to staff for £1 (they quickly turned things round and sold it on two years later for £4.3m).
But BT, in 1984, was the watershed. It was big. It would be the mother of all privatizations. It would require a £4bn flotation – which few people thought possible in a country with only 3m shareholders. It would need a massive marketing campaign – first to tell people what equities were and then to sell them a share in the company.
Culturally, that was a big shock. As one of the government’s PR advisers told me: “We met up with the London Stock Exchange (LSE) to decide how many copies of the information leaflet – telling people what shareholding was all about – we should print. The LSE said perhaps 5,000. We told them that we were thinking of an initial run of at least a million, and more later. Their faces turned white. They knew things were never going to be the same again.”
A massive television advertising campaign was launched. Ordinary members of the public were encouraged to participate through incentives such as money off their phone bills or bonus shares. And the credit-sale idea was pioneered: buyers needed to find only one-third of the share price up front, the rest payable later. But still, only Thatcher seemed confident. Just two weeks before the sale, a senior director of Kleinwort Benson, the bank chosen to handle it, gazed wistfully out of his 20th-floor boardroom window. “I’m very worried,” he confided to me, “whether this is going to work at all.”
But it did. In fact 2.4m people applied for shares, which were four times oversubscribed. The employees were cut in too, getting 4.6% of the stock. Service improved: after all, the engineer coming round to fix your phone was also a shareholder in the company. And buyers were delighted: the 50p part-paid shares quickly rose to 95p.
That sale of 20 years ago also notched up some other firsts. It introduced limited competition, in the shape of a new company, Mercury. It set up Oftel, charged with extending competition and curbing BT’s abuse of its network monopoly. It introduced the RPI-X formula, whereby BT’s prices would have to fall faster than the retail price index. Originally set at RPI-3%, Oftel soon raised the target to RPI-4.5% and by 1992 to RPI-7.5%.
Lots more followed. British Gas, valued at £5.7bn, and loaded with new debt to counteract its monopoly power. Vickers shipyards, bought by a consortium of staff and local people. Rover, the carmaker, was sold to an already privatised company, British Aerospace. The National Bus Company, was split into small units and sold mostly to management buyouts. The airports followed.
By 1987, even the famous name of Rolls-Royce was up for sale, with another innovation, the clawback. Initially, 60% of the share issue was reserved for institutional investors. But if the general public wanted more, said the government, then the City would get less. They did. The sale was oversubscribed 9.4 times, so the institutions ended up with just 49%. And there was more innovation for the 1989 and 1990 sales of water and electricity utilities – split into regional companies prior to the introduction of full-blown competition.
So by the time the Berlin Wall crumbled in 1989, the ex-communist countries had a wealth of British experience to draw on. In 1991, Czechoslovakia, with 97% of its economy state-run, soon took BT-style mass privatisation to a new level. The government encouraged the public to buy vouchers, giving them a stake in a number of new investment funds that would hold the stock of 1,491 old state industries – the idea being to spread the risk of ordinary people buying into a dud. Some 98.9% of the vouchers were taken up, and by 1998, four-fifths of state enterprises had been privatised – a remarkable turnaround in just seven years.
Bulgaria did much the same, though on a far smaller scale. Poland and Romania tried their own variants that they hoped would create more concentrated holdings in the privatised companies. Russia went for it too, with free privatisation certificates that people could put into new investment funds. But Russia had forgotten the need for public education: many people just sold their vouchers for vodka.
But despite the odd mistake, privatization has swept the world – outside Old Europe, at least. Even there, though, things are changing. A phone call from Windsor stopped Thatcher privatising the Royal Mail and it remains stuck in limbo; but Germany has sold a chunk of its postal service, as did the Netherlands. They might even buy ours, if the opportunity arose. That would be a sad reflection on how Britain’s reforming zeal now lags behind that of others. But Britain can still take heart that, exactly 20 years ago, it started the whole world revolution going.
Dr Eamonn Butler is Director of the Adam Smith Institute. This article was published in The Business newspaper on 28 November 2004.