David Parker Privatization in the European Union Theory and Policy Perspectives Industrial Economic Strategies for Europe 1998

Privatisation in the European Union

Economic pressures and technological change are causing governments acrossEurope to reassess the role of the state in the economy. Privatisation and marketliberalisation have been embraced by some European Union governments as away of shaking up sleepy state monopolies, while providing useful governmentfunding at a time when governments need to reduce budget deficits to meet theMaastricht fiscal criteria for a common currency in Europe.

This volume features contributions by a selection of international experts onprivatisation in the major European economies. The book considers the differentperspectives on privatisation theory and policy in Europe and thereby identifiesdifferent national characteristics in terms of the motivation to privatise, the scaleof privatisation and its consequences. In the opening chapters there is a detailedoverview of the theoretical economic issues involved in privatisation and anassessment of privatisation across the EU. The remaining ten chapters containnational case studies of EU countries which review the history of state ownershipand privatisation in each of these countries and evaluate the extent of privatisation.The role of European Commission directives in deregulating markets andstimulating privatisation is also examined.

Privatisation in the European Union: Theory and Policy Perspectives provides acomprehensive study of privatisation in the EU. It will be of enormous value toacademics, researchers, policy makers and professional practitioners with an interestin 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 governmentsin the UK and overseas. His most recently published works include The Impact ofPrivatisation: Ownership and Corporate Performance in the UK (Routledge, 1997).

Industrial economic strategies for EuropeSeries editors: Patrizio Bianchi, Keith Cowling andRoger Sugden

Europe is currently at a crucial stage in its economic, social and politicaldevelopment. This series addresses the challenges to European economic policy.It will explore the design of industrial economic strategies enabling Europeanindustries and regions to flourish and prosper as we begin the twenty-firstcentury.

Competitiveness, Subsidiarity and Industrial PolicyEdited by Pat Devine, Yannis Katsoulacos and Roger Sugden

Europe’s Economic ChallengeAnalyses of Industrial Strategy and Agenda for the 1990sEdited by Patrizio Bianchi, Keith Cowling and Roger Sugden

The Impact of PrivatisationOwnership and corporate performance in the UKStephen Martin and David Parker

Economics of Structural and Technological ChangeEdited by Gilberto Antonelli and Nicola De Liso

Industrial Policies and Economic IntegrationLearning from European ExperiencesPatrizio Bianchi

Latecomers in the Global EconomyEdited by Michael Storper, Stavros B. Thomadakis and Lena J. Tsipouri

Privatisation in the European UnionTheory and Policy PerspectivesEdited by David Parker

Privatisation in the EuropeanUnion

Theory and Policy Perspectives

Edited by David Parker

London and New York

First published 1998 by Routledge11 New Fetter Lane, London EC4P 4EE

This edition published in the Taylor & Francis e-Library, 2002.

Simultaneously published in the USA and Canadaby Routledge29 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 inany form or by any electronic, mechanical, or other means, now known or hereafterinvented, including photocopying and recording, or in any information storage orretrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication DataA catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication DataA catalog record for this book has been requested ISBN 0-415-15469-3 (Print Edition)ISBN 0-203-05895-X Master e-book ISBNISBN 0-203-20880-3 (Glassbook Format)

Contents

List of figures ixList of tables xList of contributors xiiPreface xiv

1 Introduction 1David Parker

Themes and content 1Privatisation as industrial policy: some unanswered questions 6Note 9References 9

2 Privatisation in the European Union: an overview 10David Parker

Introduction 10Privatisation in the EU: history, trends and rationale 12Privatisation, liberalisation and EU policy 20Privatisation and market liberalisation assessed 30Privatisation, industrial policy and welfare 38Conclusion 42Notes 43References 45

3 Theoretical perspectives on privatisation: some outstanding issues 49Dieter Bös

Introduction 49Privatisation versus regulation (REGULASY-models) 51On changing welfare functions of regulators 54On changing utility functions of managers 57Privatisation and trade unions (TU-models) 60On the changing power of the trade unions 63Conclusion 65Notes 66References 68

vi Contents

4 The privatisation experiment in Austria 70Karl Aiginger

The specific experiment and its background 70The history and structure of public interference 71Some intermediate steps towards reform 72How to privatise firms: selling the majority of five large industrial firms 74How not to privatise a bank 79Lagging deregulation in Austria 81Conclusion 83Notes 85References 86

5 Privatisation in an industrial policy perspective: the case of France 88Jacques de Bandt

Introduction 88The nationalisations of 1982 89The first wave of privatisation (1986–8) 92The second privatisation wave (from 1993 on) 93Some specific aspects and characteristics of privatisations in France 93The industrial policy implications 96Conclusion 98Notes 98References 100

6 Privatisation in Germany: symbolism in the social market economy? 101Josef Esser

Introduction 101Size and structure of the public sector in West Germany 102The politics of privatisation in West Germany 107Privatisation policy in East Germany 115Explanations and conclusion: the corporatist German model – but

for how long? 118Note 120References 120

7 Privatisation in Greece 123

Nicholaos Haritakis and Christos PitelisIntroduction 123Theoretical considerations 123The case of Greece 127Conclusion 134Notes 134References 134

Contents vii

8 The importance of state enterprises in the Irish economy andthe future for privatisation 136Sean Barrett

Introduction 136Government and the economy – the historical background 136The Fitzgerald taxonomy of state enterprises in Ireland 139Disillusionment with state enterprise 141Case studies of privatisation in Ireland 143Conclusion 147References 148

9 Privatisation in Italy: a tale of ‘capture’ 150Massimo Marrelli and Francesca Stroffolini

Introduction 150Public firms in Italy before 1990 151Pressures to change 156The process of privatisation 158The regulatory structure 164A positive model of privatisation in Italy 165Conclusion 169Notes 170References 171

10 Privatisation in Finland, Sweden and Denmark: fashion or necessity? 172Johan Willner

Introduction 172Ownership and social objectives 173Public ownership and privatisation in Scandinavia 174The case for wider objectives 180Competition and behavioural motives for public owernship 181Conclusion 186Notes 187References 189

11 The privatisation of state enterprises in the Spanish economy 191Vicente José Montes Gan and Amadeo Petitbò Juan

Introduction 191The Spanish state enterprise sector 196Origins and development of the state enterprise sector in Spain up to 1995 197The 1995 reorganisation of public sector industrial groups 202The state enterprise sector modernisation programme of 1996 204The privatisation of state enterprises 206Privatisation and company control 208

viii Contents

Competition and privatisation 211Conclusion 213Notes 214References 216

12 Privatisation in the UK: policy and performance 218Paul Cook

Introduction 218Publicly owned enterprises 219UK privatisation 220Regulation and privatised utilities 225The case of telecommunications 227The case of electricity 231Performance under privatisation 236Conclusion 239Notes 239References 240

13 Privatisation and deregulation in the Netherlands 242Willem Hulsink and Hans Schenk

Introduction 242Background to industrial policy in the Netherlands 243Programmes for redefining the Dutch state 245Case 1: electricity regulation 249Case 2: gas regulation 251Case 3: telecommunications regulation 252Conclusion 255Notes 256References 256Index 258

Figures

1.1 Privatisation in economics: developmental stages 72.1 Utility ownership in 1995 212.2 Ownership, competition and performance: the standard

argument 322.3 Context setting powers and enterprise control 413.1 Hierarchical tiers of the institutional settings 513.2 Scale factor and control costs 587.1 The privatisation process in Greece 1307.2 The Greek privatisation model 1319.1 Italy: employment and value added of publicly owned firms in

Europe 1519.2 Italy: state ownership and industrial sectors 1529.3 Italy: the public enterprise sector before 1992 1559.4 Italy: net profits as a % of value added in private and public

enterprises, 1974–91 1569.5 Italy: private and public enterprises – some performance

comparisons, 1991 1569.6 Italy: the public enterprise sector after corporatisation and

privatisation 16110.1 The case of a public monopoly 18310.2 The impact of competition 18510.3 Competition and integration 18611.1 State enterprise reorganisation: organisational model, 1995 20411.2 State enterprise modernisation programme: decision-making

process, 1996 20511.3 Shareholder hard cores in Spain: a few examples in the energy

and telecommunications sectors, 1997 210

Tables

2.1 Numbers employed, value added and gross fixed capitalformation in European public enterprises, 1991 11

2.2 Total privatisation receipts, 1985–95 183.1 Equilibrium values of wages 654.1 Privatisation revenues in EU countries 846.1 Germany: size of the federal industrial assets 1056.2 Germany: share of the industrial federal sector in different

industries 1067.1 Greek state-owned industrial companies: major information 1287.2 The Greek privatisation programme 1287.3 Privatisation programme: early stages 1327.4 Job reductions in privatised and restructured state-owned

holding groups in Greece 1328.1 Irish Sugar/Greencore: operating profits by class of business,

1990 and 1996 1459.1 Italy: selected statistics on public enterprises 1539.2 Costs and tariffs of public utilities in Europe 1579.3 :Italy: privatisation laws and decrees 1609.4 Privatisations in Italy, 1992–5 16210.1 Privatisation and remaining public ownership in Finland 17510.2 Privatisation and remaining public ownership in Sweden 17810.3 Privatisation and remaining public ownership in Denmark 18011.1 Composition of the state enterprise sector in Spain: invested

groups and companies, 1997 19211.2 State enterprises in Spain, 1993–4 19211.3 Non-financial state enterprises in Spain: main economic

variables by business sector, 1994 19311.4 The financial position of Spanish state enterprises by sector, 1994 19411.5 State contributions to public sector companies, 1983–95 19511.6 Historical development of state-owned companies in Spain:

industrial and energy sectors, 1941–96 19812.1 UK: public corporations, 1979 22012.2 Major enterprise sales in the UK 221

Tables xi

12.3 The scale of privatisation in OECD countries, 1979–91 22212.4 UK regulatory watchdogs 22612.5 UK: comparative productivity growth rates for the regional

electricity companies, 1971–93 23512.6 The performance of British Telecom, 1981–5 23712.7 UK: employment in selected privatised enterprises 238

Contributors

Karl Aiginger is Professor of Economics at the Austrian Institute of EconomicResearch, Vienna, Austria.

Jacques de Bandt is Professor of Economics at LATAPSES (CNRS-Université deNice Sophia Antipolis), Nice, France.

Sean Barrett is a Fellow of Trinity College Dublin and Senior Lecturer inEconomics.

Dieter Bös is Professor of Economics in the Department of Economics, Universityof Bonn, Germany.

Paul Cook is Reader in Economics at the Institute of Development Policy andManagement, University of Manchester, UK.

Josef Esser is Professor of Political Science at the Johann Wolfgang Goethe-Universität, Frankfurt am Main, Germany.

Vicente José Montes Gan is an economist at the Técnico Comercial y Economistadel Estado, Spain.

Nicholaos Haritakis is Professor of Economics at the University of Athens.

Willem Hulsink is Senior Lecturer of International Business and StrategicManagement at the Rotterdam School of Management of Erasmus University,Rotterdam, the Netherlands.

Amadeo Petitbò Juan is Professor of Applied Economics at the University ofBarcelona, 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 AstonBusiness School, Aston University, UK.

Christos Pitelis is the Barclays Bank Lecturer in Industrial and Business Strategyat the Judge Institute of Management Studies, University of Cambridge, and Directorof Studies in Economics at Queens’ College, University of Cambridge, UK.

Contributors xiii

Hans Schenk is Professor of Industrial Policy and Corporate Strategy at TilburgUniversity and chairman of GRASP at Erasmus University, Rotterdam, theNetherlands.

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, ÅboAkademi University, Finland.

Preface

In 1996 about 56 per cent of the privatisations in the world, measured in terms offinancial 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’slargest ever sell off and was alone valued at US$13 bn.

Major privatisation programmes have been pursued in the UK, Portugal andFrance in recent years. However, in some EU countries privatisation programmeshave foundered on political opposition. For example, under political pressure theItalian government postponed the sale of Stet, the state-controlled telecoms group;while the programmes in Greece and Ireland have been modest to date. In certaincases privatisations have not involved public flotations of a majority of shares, asis common in the UK, but rather have been designed to favour particularshareholding 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 theEU and not all involve an expectation of economic efficiency gains. Recently theprospect of monetary union in Europe has led governments to seek out privatisationreceipts to reduce the level of government debt. Another argument relates to adesire to develop and expand domestic capital markets. Also important have beendirectives of the European Commission aimed at liberalising markets previouslydominated by state-owned enterprises in Europe, notably in telecommunications,transport, electricity and posts.

This book brings together contributions from academics in universities acrossthe EU. Each author was asked to review privatisation in his country and to accountfor 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 theEU countries could be covered. Nevertheless, nine country chapters and one regionalchapter (covering Scandinavia) are provided, as is an overview chapter reviewingprivatisation across the EU and a theory chapter which explores the theoreticalfoundations of privatisation in economics. An introductory chapter summarisesthe contents of the book. The result is a reasonably comprehensive study ofprivatisation in the EU.

Preface xv

The book is designed to be of interest to policy makers at national governmentand EU levels; to students of privatisation requiring European perspectives; and tolecturers in universities and colleges teaching courses on privatisation, deregulation,industrial policy and European studies at undergraduate and postgraduate levels. Iwould like to thank Vicky Bond and Denise Burgandy for magnificent help inediting the contributions and reducing them to a common format for publicationand Megan and my children for their usual understanding and support during longhours of writing and editing. My final thanks go to Professor Roger Sugden ofBirmingham University who helped plan the book.

David ParkerAston 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 inrecent years privatisation activity has intensified in the other member states of theEU. Interest in privatisation has been stimulated by the UK example, bytechnological change and by the European Single Market programme, which isconcerned with removing non-tariff barriers to trade in the EU. Amongst otherthings, the Single Market programme has led to policies designed to open up statemonopolies to competition, notably in telecommunications, energy, transport, posts,public procurement and financial services. More recently, the trend towardsprivatisation in the EU has been reinforced by the Maastricht Treaty ceilings ongovernment debt and deficits in the runup to European Monetary Union. The saleof state industries offers one means of reducing the level of outstanding debt.

Major industries including public utilities are being lined up for sale or havealready been subject to share flotations in the EU. However, the EU consists of adiverse set of nations with each country’s precise attitude towards state ownershipand privatisation dictated by a complex combination of historic, economic, socialand cultural factors. The transfer of privatisation as policy across Europe involves,therefore, emulation but not exact copying of any one model. Emulation involvessome adaptation in recognition of institutional and structural constraints on policytransfer. In some cases political divisions and trade union pressures reinforce policyinertia.

As a consequence, creation of a horizontal, across industry, ‘EU policy’ onownership is not occurring. Instead, policy is developing on a sectoral or verticalbasis and reflects particular attitudes of member states. France and to a slightlylesser extent Italy have been more reluctant than the UK and Germany to seeprivatisation and associated liberalisation of markets extended into areastraditionally served by monopoly state providers, notably electricity, postal servicesand rail transport. Also, privatisation raises important questions about the directionof economic policy which extend beyond matters of immediate economic efficiencygains (static efficiency gains), to encompass issues to do with longer-term industrialperformance (dynamic efficiency gains) and income distribution or welfare effects.

2 David Parker

Within the EU there are different views about whether privatisation can promoteeconomic prosperity and maintain social cohesion.

The purpose of this book is to provide a comprehensive review of privatisationin the EU member states and to consider different perspectives on privatisationwithin the EU. To this end privatisation experts in a number of the member stateswere asked to write about their country’s experience and to place privatisationwithin a wider historical and economic context. In the cases of the Nordic statesit was decided to provide more of a regional perspective. Authors were encouragedto adopt their own approach to the content of their chapters. As one of the mainaims of the book is to bring together different perspectives on privatisation, itwas important not to attempt to restrict the content by imposing a heavy editorialhand. The result is a series of individual studies which can be read for comparativepurposes or as self-contained discussions of privatisation in particular EU states.The chapters have differences in approach reflecting the different attitudes toprivatisation within countries and the particular views of the authors. Some includea neoclassical perspective, while others are more institutionalist in nature or morewithin the tradition of political economy.

Turning to each chapter in detail, chapters 2 and 3 provide a study ofprivatisation activity across the EU and a theoretical treatment of privatisationrespectively. Both chapters are intended to provide a framework for the latercountry studies. Chapter 2 compares the history, rationale and levels ofprivatisation activity in each member state and considers EU Commission policyon ownership and market liberalisation. What is clear from this comparativeperspective is, first, the extent to which privatisation has come to the fore ineconomic policy making in Europe in the 1980s and 1990s; second, how boththe rationale for privatisation and the precise nature of the policies vary acrossEurope; and, third, how EU Commission policy is evolving and creating pressureson member states to liberalise markets, which in turn is leading to pressures toprivatise long-established state activities. It is clear that the notion prevalent inthe UK that privatisation raises economic efficiency strikes a cord in some memberstates but by no means all. Privatisation within the EU results from other forcesincluding the ‘fashion’ to privatise, evident worldwide, and, more pragmatically,expediency. The latter is most obvious where countries are wrestling to meet thebudgetary criteria for monetary union in Europe.

Chapter 3, by Dieter Bös, looks particularly at agent–principal theory ineconomics and the way it has been used by mainstream, neoclassical economiststo justify wide-scale privatisation. Most of the relevant economics comes fromthe USA and the UK and Bös identifies both strengths and weaknesses in theliterature. In particular, he argues that ‘in my opinion, this neoclassical way ofreasoning misses many facets of the most important changes in enterprises whichare privatised’. He allows for a change in the regulator’s welfare function andfor distributional effects and particularly takes account of the reduction in tradeunion power when firms are privatised. Whereas neoclassical theories onprivatisation assume constant welfare and utility functions, Bös recognises thatprivatisation decisively changes these functions. While not rejecting neoclassical

Introduction 3

explanations of privatisation, he concludes that ‘these explanations should refrainfrom holding things constant whose change is central to the process ofprivatisation’.

In chapter 4 Karl Aiginger discusses privatisation in Austria. The public sectorhas traditionally played an important role in the Austrian economy and by the1980s the country had a peculiarly large share of public ownership of manufacturingindustry. Aiginger catalogues the privatisations since the 1980s and emphasiseshow potential buyers were selected according to whether production capacity andmanagement decision making would remain in Austria. As in the case of a numberof the countries discussed in this book, Austria’s privatisation programme has notinvolved an unconditional acceptance of the omnipotence of competitive capitalmarkets.

Jacques de Bandt’s study of the French experience (chapter 5) stresses the extentto which the policy of privatisation is a reversal of the earlier period of nationalisationafter 1981. In a study critical of the drift to privatisation, he shows that before thefall of the socialist government in 1986, industrial policy was in retreat. In thissense privatisation is a continuation of a move away from earlier state involvementin industrial restructuring and regeneration as part of state economic planning inFrance. State intervention is now on a case by case basis ‘aimed at solving immediateproblems, reinforcing existing structures or defending national interests . . . andnot 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, ofwhich the use of favoured groups of shareholders during privatisation sales, theso-called noyaux durs, is one manifestation. He concludes that privatisation inFrance involves ‘concentrating economic power and providing easy profits to thebenefit of a small group of capitalists’. Bandt’s tone is one of scepticism about therationale 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 thecountry’s ‘social market economy’ model. A model that seems to have beenexceptionally successful for much of the postwar period. Esser concludes that sofar privatisation in Germany (excluding the former East Germany) has affected nomore than a few state-owned concerns and those which are profitable. He alsoconcludes that the new pressures for privatisation and liberalisation may threatenthe 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 policyof privatisation was not, from an economic standpoint, of paramount importancein making sure that Germany remained competitive in world markets’. The Germancase underlines the importance of studying privatisation in the light of each country’sinstitutional and structural constraints.

Privatisation in Greece is discussed in chapter 7 by Nicholaos Haritakis andChristos Pitelis. They firstly review the theories of state failure in economicsprevalent in the 1980s, identifying strengths and weaknesses. Overall, theyargue that neither theory nor practice lend unconditional support to what theycall ‘privatisation mania’. In relation to the experience in Greece, they explainhow privatisation policy has gone through three distinct phases where lessons

4 David Parker

have been learned and policy has evolved. However, as elsewhere, policy isdriven by political considerations and constraints. In November 1993 agovernment favourable to privatisation was forced to resign after losing itsparliamentary majority. Haritakis and Pitelis also identify some of the economiccosts of privatisation in Greece, in terms of depressed economic activity andhigher unemployment. Their study illustrates that higher resource utilisationand higher profits in privatised firms can come at a cost in both economic andsocial terms. Nevertheless, they conclude that a speeding up of privatisation inGreece is essential, especially of the loss-making state enterprises.

The Irish case is reviewed by Sean Barrett in chapter 8. Barrett explainshow Ireland since independence has built on a state interventionist traditioninherited from British administrations in Dublin. The political culture of Irishpolicy making from the 1920s encouraged the championing of state-ownedenterprises, although a philosophy favouring public enterprises did not develop.Support for state enterprise was pragmatic and related to the perceived need todevelop the Irish economy. This view was shared by all of the political partiesin Ireland until the 1980s, when the consensus broke down in the face ofmounting evidence of economic failure in a number of state enterprises. Barrettprovides three case studies of privatisation in Ireland and identifies certainperformance improvements. Yet by 1996 privatisation in Ireland had lost impetusin the face of political opposition.

In their study of privatisation in Italy, in chapter 9, Massimo Marrelli andFrancesca Stroffolini further underline the importance of studying privatisationin relation to the history and politics of the country. As they acknowledge: ‘Tomany foreign observers the Italian political economy model has always beensomething rather mysterious and somewhat incomprehensible.’ They go on todemonstrate that privatisation in Italy with its stop–go nature and contradictionscan only be rationalised and explained once the peculiar characteristics of theItalian political system and institutions are recognised. They reinforce theirstudy be proposing a political economy model which rationalises the choicesbeing made. They build a model in which public ownership of firms allows theruling party to extract private benefits from localisation and employmentpolicies. The welfare outcomes of privatisation depend upon the effectivenessof liberalisation and regulatory processes.

Chapter 10 is a regional study of privatisation in Scandinavia encompassinga comparative analysis of policy in Finland, Sweden and Denmark. JohanWillner explains that in spite of a reputation for welfarism and publicintervention, 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 marketconditions. State ownership was therefore an integral part of industrial policywith the objective of developing the countries’ economies. Willner concludesthat a significant group of companies will remain in public ownership, inparticular in Finland and Sweden. He also demonstrates through an economicmodel, where the state enterprise maximises a weighted sum of its profits and

Introduction 5

wages, that competition is not incompatible with wider objectives. Competitioncan make it easier for a company with wider objectives to break even. Thisflies in the face of the usual argument in Europe that liberalised markets reducethe scope for non-profit objectives. This finding is clearly controversial.

Turning to chapter 11, Vincente J. Montes Gan and Amadeo Petitbò Juanlook at privatisation in Spain. They review the structure of the Spanish statesector until the 1990s and consider the different approaches to privatisationadopted. Their chapter provides a detailed discussion of the 1995 reorganisationof public sector industrial groups and the state enterprise sector modernisationprogramme of 1996. They also explain the methods of privatisation used andemphasise the role of shareholder ‘hard cores’. Hard cores in Spain arecomparable to the noyaux durs in France and are stable shareholder groupschosen to assume control of former state enterprises with the aim of maintainingthem under national ownership. While Spain’s privatisation process has helpedimprove efficiency in the business sector and has reduced the public deficit,different routes have been pursued to achieve these ends. Some former state-owned firms operate freely in competitive markets, but in other cases the statehas attempted to retain a degree of control through specific-rights shares ordefined shareholder hard cores.

Privatisation in the UK is discussed by Paul Cook in chapter 12. The UK’sexperience has provided a model and indeed an inspiration for privatisationprogrammes elswhere. Cook looks at the background to the 1980s’privatisations, the evolution of UK policy and the methods of sale. He alsoconsiders the extent to which the government’s objectives have been met,especially in terms of raising economic efficiency. In addition, he discussesthe role of state regulation of privatised monopolies in the UK. The UK modelof regulatory offices, operating ‘price caps’ to control prices in the privatisednatural monopolies, has been studied closely by many countries planning theirown privatisations of public utilities. Cook explains how the development of aregulatory environment to curb monopoly abuse has been a necessaryaccompaniment to privatisation in the UK. He concludes that in general termsthe UK experience suggests that privatisation can bring about significanteconomic gains, but privatisation needs to be adopted ‘in a selective andpragmatic manner. Experience has indicated that there are a host of constraintsto successful privatisation that need to be recognised and controlled . . . andthat serious consequences for the credibility of the broader economicmanagement of the economy arise if privatisation is mismanaged.’ Thisconclusion could be applied to all of the countries studied in this book.

Finally, in chapter 13 Willem Hulsink and Hans Schenk study privatisationin the Netherlands. The Netherlands is a highly ‘open’ economy, very dependentupon international trade and in which a number of large, transnationalcorporations are located. Hulsink and Schenk explain how and why the countryis moving towards deregulation and privatisation and how this is combinedwith a stronger ‘but still ineffectual’ competition policy. Through case studiesof electricity, gas and telecommunications they demonstrate the relationship

6 David Parker

between ownership and competition and privatisation and EU directives. Theyconclude that in the Netherlands privatisation is pragmatic and opportunisticrather than ideologically driven.

PRIVATISATION AS INDUSTRIAL POLICY: SOMEUNANSWERED QUESTIONS

There can be no doubting the impact privatisation has already had in terms ofindustrial restructuring in Europe. In a number of cases privatisation is providingan opportunity to rejuvenate once sleepy state industries. This will be of long-termbenefit to competitiveness within the EU, but at the same time, cash-strappedgovernments have a certain penchant for ‘selling the family silver’ rather than thealternatives of raising taxes or cutting public spending to reduce public deficits. Itis also disturbing that such a large-scale change of ownership of economic assetsis occurring without serious consideration of its impact on the competitiveness ofmember economies and of the EU as a whole.

Privatisation can take many forms, as it is doing within Europe and with, to beexpected, differing economic effects. Privatisation has become an article of faithin certain political circles, amongst industrialists and large swathes of the media inEurope, but at a time when economists are also inclined to emphasise the roles ofcompetition and state regulation in achieving long-term economic efficiency. Kayand Thompson (1986) have labelled privatisation in the UK ‘a policy in search ofa rationale’. At the EU level an appropriate description might be ‘a confusion ofrationales in search of a common policy’.

Economic policy can be considered to develop through three broad stages (seeFigure 1.1). The first stage is one of early development, where the ideas supportingthe policy are new and under-developed. Generally, supporting theory will belimited, 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 economicpolicy was in its early development stage in the late-1970s to mid-1980s.Developments in agent–principal theory in the mid-1980s provided more substantialfoundations in terms of economic theory. Agent–principal theory suggests thatgenerally shareholders with clearly defined property rights will more successfullymonitor managerial behaviour in private sector enterprises, leading to higher levelsof operating efficiency, than the government officials who monitor managerialbehaviour in state enterprises. There was also from the mid-1980s the beginningof empirical study of privatisation, especially in the UK. The empirical worksuggested that privatisation could lead to productivity increases but that suchimprovements were not guaranteed. This in turn led to theory refinement and theclear separation of competition from ownership as constraints on managerialperformance. Competition as well as ownership was seen as important in promotingefficiency gains. There was also an appreciation of the potential adverse effects onefficiency of inappropriate state regulation of industries after privatisation.

Privatisation in economics is still in the ‘consolidation phase’. To achieve thefinal, ‘maturity stage’ an economic idea needs a well-established theoretical base

Introduction 7

and a substantial body of supporting empirical evidence. So far privatisation lacksboth.1 Moreover, it is important to recognise that privatisation is as much aboutpolitics as economics, sometimes more so as the various chapters in this bookemphasise. The decision to privatise, what to privatise and how to privatise aredriven 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 andtiming of privatisation. Privatisation in the EU is a complex and politically sensitiveprocess which defies any simple classification or summary.

So far there has been a lack of critical perspective at the EU level to make senseof all of the privatisation activity underway. Questions that urgently need to beaddressed include: • Does privatisation have a lasting impact on industrial competitiveness and

precisely how? What is the effect of privatisation on competitiveness within theEU and between the EU and the rest of the world?

• What are the implications of privatisation for continuing state intervention inthe economy, especially in terms of regulatory policies both at the memberstate and EU Commission levels? Is there a need for supra-EU regulatory bodiesor will national-level regulatory offices suffice?

Figure 1.1 Privatisation in economics: developmental stages

8 David Parker

• What are the effects of privatisation on industrial structures in Europe, includingthe 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 cohesionin Europe given the inevitable income redistribution effects that privatisationimplies?

• And, finally, how should privatisation be assessed within the context of economicpower? Does it remove an undesirable concentration of economic power withinthe state, as many privatisation advocates argue, promoting consumer sovereigntyand social wellbeing. Alternatively, does it lead to an undesirable shift ofeconomic power in favour of large-scale capital, perhaps concentrated in large,often transnational, private sector companies? Privatisation is part of a widertrend towards a globalisation of capital and labour markets, but with whatconsequences?

There have been many studies of privatisation at the national level, especially inthe 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 ofprivatisation or its immediate consequences in terms of the companies’ profitabilityor 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 researchagenda lies centrally within the framework of the debate on industrial policy inEurope. On the one hand, for much of the postwar period industrial policy wasassociated with state involvement to direct and shape or at least influence economicactivity with a view to raising national economic performance. The case forindustrial policy draws on the concept of ‘market failure’. The arguments forindustrial policy are based on the notion that market forces cannot be entirelyrelied upon to ensure the desired level of economic growth and prosperity. Throughsome kind of state planning and investment a more desirable outcome is obtainedthan 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 thenotion of the superiority of market forces over state intervention, reinforced byarguments of ‘state failure’ in policy delivery. The result is government policytowards industry which takes the form of minimising direct state involvement inindustry, promoting and defending private property rights and promotingcompetitive private markets. Privatisation is a central part of this reassessment ofindustrial policy and with it the role of the state.

This book attempts to advance research into privatisation in the EU in terms ofboth theory and policy. It does not provide definitive answers to the above questionsbut it does surface the issues and identifies differences and complementarities inindustrial restructuring in Europe. It will hopefully promote further interest at theEU level in privatisation not simply in terms of some short-term expedience tobalance 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 adynamic for obtaining long-term, sustained, economic improvements.

NOTE

1 Boycko, Shleifer and Vishny (1996) seem to suggest that there is a substantial body oftheory and empirical evidence that, in their words, ‘privatisation works’ (p. 318). Theirpaper implies that privatisation in economics has reached the ‘maturity stage’, but theirtheory is partial and unsatisfactory in the light of both alternative theories (see, forexample, Bös, chapter 3, and Willner, chapter 10, below) and experiences of privatisationin 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 CorporatePerformance in the UK, London: Routledge.

2 Privatisation in the European UnionAn overview

David Parker

INTRODUCTION

There is a long history of state ownership of industry in Europe involvingnational and regional public corporations, state holdings in private sectorcompanies, state holding companies and operation through local and centralgovernment departments. A major expansion of state enterprises occurred inthe interwar years and more especially after 1945. For example, in Italy bankruptindustries were salvaged by the state under the pre-war Fascist regime; whileafter 1945 the Labour government in the UK nationalised major industriessuch as coal, the railways and electricity. On the continent industries owned byNazi collaborators were taken into state ownership, such as Renault in Franceand many of Austria’s large enterprises. Later, in the 1970s, economic crisesled to the state takeover of failing industries, such as British Leyland (motorvehicles) in the UK and steelworks in Sweden. In West Germany state-ownedcoal, steel and shipbuilding companies faced severe economic difficulties andattempted to widen their industrial base by investing in companies involved indownstream activities, thus expanding the scope of state control.

Across Europe governments attempted to stimulate industrial developmentthrough investments in new technologies. Hence, new state firms appeared inelectronics, 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 werenationalised and in 1981–2 in France a socialist administration took largenumbers 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 themid-1980s, the state owned 13 of the 20 largest companies and had a controllingstake in many others (Nugent, 1994).

The figures in Table 2.1 show the importance of state enterprises in theeconomies of most of the EU countries by 1991. It is clear from these figuresthat state ownership was significant in all of the economies, but most importantin terms of the share of employment, value added and gross fixed capital

Privatisation in the European Union 11

formation in France, Greece, Italy and Portugal (and this in spite of some majorprivatisations in France between 1986 and 1988). If the data were for 1979,before the UK’s privatisation programme, then the figures for the UK wouldhave been over twice as large.

By the late 1960s a political consensus existed in Western Europe favouringthe existence of a mixed economy. In spite of an essentially liberal economicclimate in Western Europe, there was considerable neutrality on the issue ofstate ownership. Governments of different political leanings were reluctant tointerfere substantially in the ownership of economic assets and in a number ofcountries, such as West Germany and Sweden, there was a decentralisation ofeconomic power which restricted the sale of state assets owned by regionalgovernments (Länder in West Germany) and municipalities (Bös, 1993, p. 100).

This chapter reviews the development of privatisation across the EU andthe role of EU policy. It also considers the different rationales for privatisationacross member states and emphasises that there is no consensus on the likelyefficiency gains from privatisation. The chapter reviews the privatisationliterature and concludes that expectations of improved efficiency may not beborne out. The discussion then turns to industrial policy, where it is pointedout that privatisation and related market liberalisation are industrial policiesonly in a negative sense. Whereas in earlier years in some member states thestate was seen as having an instrumental role in industrial development,privatisation and market liberalisation imply essentially that the state’s roleshould be limited to defining and protecting private property rights.Undoubtedly, privatisation involves a shift in property rights and thereforeeconomic power.

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 àParticipation Publique dans l’Union Européene. Annales du CEEP 1994. Résumé des Etudes Nationales)as summarised in Jacobson and Andréosso–O’Callaghan 1996, p. 283Notes: aTotal GFCF; bpercentage share in non-agricultural turnover

12 David Parker

PRIVATISATION IN THE EU: HISTORY, TRENDS ANDRATIONALE

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, andItaly in the 1950s and 1960s. These sales were not, however, part of a systematicprogramme aimed at slimming down the state sector (with the partial exception ofthe UK in the early 1950s). For example, the main objective in West Germany was adesire to curtail the power of the trade unions coupled with a wish to to spread shareownership more widely so as to create ‘manager-owners’ or ‘popular capitalism’;rationales that have featured in more recent privatisations, notably in the UK. In theevent, it proved difficult to persuade the public to buy shares and hold them for longand interest in the programme declined.

Privatisation began in the UK following the election in 1979 of a Conservativegovernment. The new government was keen to reduce the role of the state in theeconomy following years of poor national economic performance; in 1979nationalised industries accounted for 9 per cent of GDP. The programme begancautiously, however, and was extended to the public utilities, namelytelecommunications (1984), gas (1986), water (1989), electricity (1990–1) and therailways (1995–7), only when it became clear that there would not be decisiveopposition from management, unions or the public and that large privatisationflotations would be supported by investors. By 1997 the total value of UK privatisationsales had risen to around £65bn and the share of nationalised industries in GDP hadfallen to under 2 per cent.

Throughout much of the rest of the EU privatisation activity was on a much smallerscale in the 1980s, as discussed below. The main exception is France where a right ofcentre government between November 1986 and January 1988 privatised 14 largeindustrial, banking and financial trusts (Andreff, 1992, p. 135). For example, the oilcompany Elf Aquitane was privatised in September 1986, Saint Gobain in November1986, Paribas in January 1987 and Alcatel–Alsthom in May 1987. Most of the firmsaffected had been nationalised in the early 1980s, although a few could trace theirstate ownership back to just after the Second World War, such as the bank, SociétéGénérale. This extensive privatisation activity was brought to a halt by the re-electionof a socialist administration in 1988.

The 1990s have seen far more privatisation activity in Europe. This has beenassociated with two principal economic pressures, namely liberalisation of marketsat the EU level and government budgetary difficulties – two motives discussed inmore detail later in this chapter. Also relevant has been the election of governmentssympathetic to privatisation. For example, March 1993 saw the re-election of a rightof centre government in France and a renewal of the privatisation activity halted bythe socialist administration in 1988. The Privatisation Law of 1993 slated 21 enterprisesfor privatisation and since then shares have been sold in a number of French stateenterprises, including Elf Aquitane, the insurance group UAP, Renault, RhonePoulenc, the bank BNP, Usinor Sacilor and the aluminium business Pechiney. So far


France has chosen to concentrate on privatising industrial and commercial firmsoperating in competitive markets rather than monopoly public utilities, although ithas prepared (and repeatedly postponed) a partial sale of France Télécom.1

Turning to the other EU countries, Italy also began its current privatisationprogramme in 1993. By the early 1990s state enterprises were recordingmounting financial losses, notably those controlled by the giant industrial state-holding corporation the IRI (Istituto per la Ricostruzione Industriale). By 1994the IRI’s losses were equivalent to 5 per cent of Italy’s GDP. The IRI was setup in 1932 to bail out failing industries and soon controlled directly or indirectlylarge parts of Italy’s shipbuilding, maritime transport and steel industries. Inmore 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, restructuringand sale of state industries was passed in January 1992, after delay arisingfrom political opposition and disagreement between government and the stateholding companies, such as the IRI, over whom should benefit from theprivatisation revenues. Subsequently, continuing argument and frequent changesof government have slowed down the implementation of the legislation. Thefirst important sale involved 67 per cent of the shares in the bank Credito Italianoin 1993 and this sale was followed by the privatisation of two other large banks,the Istituto Mobiliare Italiano and Banca Commerciale Italiana and the state-owned insurance group INA (Istituto Nazionale della Assiurazioni). The latterinvolved the largest equity offer ever from Italy. By 1996 some 300 statecompanies had been involved in some privatisation and the total privatisationreceipts exceeded 25,000 bn lire.

Portugal is another recent convert to privatisation. Until June 1989 themajority sale of state firms was prohibited under the Portuguese constitutionand it was not until 1990 that a privatisation programme was launched, undera centre-right Social Democrat (PSD) government. Since then the programmehas developed quickly and has become more extensive than anywhere else onthe 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 shareof the economy from around 20 per cent in 1989 to 11 per cent now. As in theUK, and unlike in most other parts of Europe, the Portuguese have extendedprivatisation enthusiastically to the public utilities. In 1995–6 shares in PortugalTelecom were sold in two tranches reducing the state’s holding to 51 per cent.Electricidade de Portugal has undergone major restructuring involving theseparation of electricity generation, transmission and regional distribution onlines similar to those adopted in the UK; although current privatisation plansinvolve the state retaining a majority shareholding. When Portugal recentlyelected a socialist government, the new government immediately announcedthat it not only intended to continue the privatisation programme but toaccelerate it. The current programme includes privatisations affecting banks,steel, shipbuilding, oil, chemicals, mining, cement, gas, electricity, pulp andpaper, tobacco, airport management and motorway construction and operation.

14 David Parker

In Spain privatisation activity has been less frenetic but still significant.State enterprises in Spain were an integral part of industrial policy from theFranco era and were organised around holding companies, similar to those inItaly. State companies were mainly in two organisations, the most importantbeing the INI (Instituto Nacional de Industria). Further failing companies werenationalised post-Franco, between 1976 and 1982.2 By the early 1980s theholding companies accounted for two-thirds of the value added of state industry.

Although at this time there was no systematic denationalisation strategy inSpain, between 1984 and 1986 the government dissolved or sold off over 30smaller state concerns (Garcia Delgado, 1989, p. 496). The first noteworthyprivatisations involved the sale of a minority stake in the Rumesa Group, rescuedfrom bankruptcy by the government in 1983, and the sale of a majority stake inthe loss-making car manufacturer, Seat, to the German company, Volkswagen,in 1986. Since then, with continuing losses in a number of state industries andbudgetary pressures, further sales of state assets have occurred with 1989 and1991 being years of particularly heavy privatisation activity. Sales of shareshave occurred in SKF Espanola (tyre manufacturer), Endesa (the largestelectricity enterprise in Spain), Repsol (formed out of the oil interests of thestate-holding company, INH), Telefónica (telephones), Argentaria (bankinggroup), and holdings in the textile and cellulose industries.

In Finland state-owned enterprises developed as a response to a failure onthe part of private investors to invest in the fledgeling state, threatened by theSoviet Union to its east. After 1945 Finland’s economic policies were influencedby a desire to develop a close trading relationship with the Soviet Union toreduce 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 ofthe industrial labour force. Since 1987 successive governments have beencommitted to a programme that includes a large-scale privatisation of stateindustries. In 1991 the Ministry of Trade and Industry set out arguments andguidelines for privatisation in a report (Valtionyhtiöt markkinataloudessa) butinitially progress was modest. In February 1988 there was a first share issue inthe state airline Finnair and some share sales occurred around the same timeinvolving the paper machinery, mining and steel sectors. The economicdifficulties of the early 1990s halted the programme, however, and indeed acommercial bank was, temporarily, nationalised. Since 1993 the pace ofprivatisation has accelerated again in the face of more buoyant stock marketprices. For example, stakes have been sold in Outokumpu, involved in miningand metals, Rautaruukki, the steel producer, and Kemira Oy, a major chemicalsgroup; although only in the case of Outokumpu has the state holding beenreduced to under 50 per cent. The election of a left of centre government in1995 has created some uncertainty but it appears that the privatisationprogramme will continue.

As mentioned earlier, West Germany privatised a number of state firms inthe late 1950s and the early 1960s, but further privatisation was restricted bythe federal political system and by the political consensus in favour of a mixed


economy. In 1985 the Federal Minister of Finance outlined a generalprivatisation programme affecting 13 firms, but with the government intendingto 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 andshipbuilding industries and state banks, the railways, posts andtelecommunications and research institutes. However, even these limitedprivatisation proposals met with protests from the trade unions and in March1985 the government reduced the number of firms targeted from 13 to 5.

In the following years privatisation activity in Germany remained on a smallscale3 until the absorption of the former communist East Germany meant theintroduction of an extensive privatisation programme for that region. In addition,between 1990 and 1994 in former West Germany nine enterprises were soldentirely and three partially, so almost ending the federal government’sshareholdings in the industrial sector. However, the Länder continue to havemajor shareholdings in public credit institutions, insurance companies, powersupplies, transport, construction and property, and some manufacturing firms.The flotation of Deutsche Telekom in late 1996 was the largest privatisationsale 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 inEurope after the war in terms of economic policy, resulting in fewer stateenterprises than elsewhere in Europe (Parris, Pestieau and Saynor, 1987).Nevertheless, by the 1980s the state participated directly in 41 companies andindirectly in many others, for example through the National Investment Bankand the Industrial Guarantee Fund. The result was, according to one observer,‘a motley collection, each individual holding to be explained by historicalaccident rather than by any grand design or strategy’ (Andeweg, 1994, p. 205).A privatisation programme was officially announced in 1982 but the approachhas been pragmatic. Shares have been sold in state enterprises whenever itseemed to make economic and administrative sense and when it was profitableto do so. Noteworthy sales have involved Royal Dutch Airlines KLM,Koninklijke PTT Nederland, NMB–Postbank Groep (renamed ING Bank), thechemical firm DSM and the state’s holding in the aircraft firm Fokker. Thetotal value of privatisation sales was inflated by the disposal of KoninklijkePTT Nederlands, the country’s largest privatisation, and more generally thescale 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 whichlarge 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 shipbuildingand steel. Indeed, at this time economic pressures on the Swedish economymeant that the non-socialist government, between 1976 and 1982, nationalisedmore companies than at any time under Social Democrat administrations. TheSocial Democrats governed Sweden from 1932 to 1976 and between 1982 and

16 David Parker

1991. In addition to operating the postal services, telecommunications, railwaysand electric power, by the mid-1980s the state sector included steel plants,mines, a bank, food and pharmaceutical companies and timber enterprises. Intotal there were around 70 state-owned joint-stock companies and nearly 1,400local government enterprises. Also, the state had become heavily involved insome leading Swedish corporations such as Volvo and Astra. The setting up ofwage earner funds (Löntagarfonder) in the early 1980s, to invest in shares inprivate sector companies and financed by profit levies, threatened to extendthe socialisation of industry.

The defeat of the Social Democrats in the September 1991 election led to amajor change in policy. In December 1992 a privatisation bill was passed byparliament and early in 1992 a privatisation commission was set up within thegovernment. The result was a plan to sell 34 state firms, including the electricitycompany Vattenfall, Nordbanken, Procordia in biomedicine and food products,Celsius in shipping and ASSI and Doman AB in forestry. In the same year thewage earner funds were dismantled. However, progress in privatising companiesproved slow at first because of a crisis in the Swedish economy and the widerEuropean recession. More recent years have seen some build up of privatisationactivity including sales of shares in Procordia, Nordbanken, Stadshypotek AB,AssiDoman and Celsius. In addition, state organisations such as Vattenfall havebeen turned into joint-stock companies and given commercial objectives (Lane,1994, p. 183). In total, between 1991 and 1994 the government sold shares in20 companies, involving assets worth Skr 24bn. Sixty per cent of the shareswere sold to the general public and employees and the rest to institutionalinvestors. However, the re-election of a Social Democrat government in 1994led to a reassessment of the privatisation programme. The new governmentagreed to go ahead with the privatisation of Nordenbank but not the otherplanned sales, including Vattenfall, whose future remains uncertain.

In the case of Denmark, in the main what state industrial holdings existedhave already been sold and the remaining major state-owned firms are in thepostal, telecommunications, transportation and energy sectors. In the early1990s the government began to change the legal status of public enterprises tolimited liability companies6 and more recently has sold shares in some of thesecompanies. The sale of a 51 per cent holding in the post office’s bankingbusiness, GiroBank, in 1993 was the country’s first large privatisation sale.Other sales have involved the state life assurance company (Statsanstalten forLivgforsikring) and the telecom business Tele Danmark. In 1994 a restructuringof the share capital of Tele Danmark had the effect of reducing the state’sholding from 89 per cent to 51 per cent. The government has also sold 25 percent of its shareholding in Copenhagen airport.

In a number of other EU member states there has been even less privatisationactivity. The economy of Luxembourg is small and the scope for privatisationis limited. In Belgium there exists a long-established tradition of mixed-ownership or public–private joint ventures. As a consequence the Belgiangovernment, particularly through the Societé Nationale d’Investissement, owns


shares in many companies. Policy towards the sale of these shares has beenpragmatic rather than ideological. In large part this results from the federalstructure in Belgium and the existence of two linguistic communities. This inturn results in complex, unstable coalition governments and an emphasis ongoverning by consensus. In 1992 a new coalition government drew up aprogramme to sell state assets motivated by budgetary pressures and agovernment 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 andinsurance company ASLK–CGER in 1994, another was the sale of shares inNIM–SNI, an industrial holding company. The government has also beenlooking for foreign telecom partners to invest in the state telephone company.Nevertheless, the approach to privatisation in Belgium has been cautious andthere have been no mass state-asset sales comparable to those in the UK, Franceand Portugal, for example.

The same is true of Ireland. Here the government has undertaken only modestprivatisations, including sales of shares in state-owned insurance firms and insugar production. State ownership played a key role in economic policy fromthe 1920s and although by the 1980s financial losses in state industries producedgrowing pressures for a transfer of some industrial and commercial assets tothe private sector, this has not developed into a major drive for privatisation.Irish policy remains pragmatic with still some leaning towards continued stateownership. Similarly, privatisation remains at a low level in Greece, in thiscase reflecting political differences over continued state ownership. The electiondefeat of a right-wing government in 1993 led to the scrapping of earlierprivatisation plans, including a 35 per cent stake in OTE, the statetelecommunications company. However, within a year the new socialistgovernment dropped its ideological objections to privatisation and decided tofloat minority stakes in some state-controlled companies and small privatisationsoccurred, such as the sale of Neorian shipyards by the state-owned developmentbank, ETVA, to a consortium of Greek shipowners and other business interests.Nevertheless, political disagreements, union opposition and constraints on thepricing of share issues imposed by the conservative political opposition havecombined to block a number of further privatisations, including the sale of 25per cent of OTE in November 1994.

In the postwar period, Austria had one of the largest state sectors in the EUand the largest on some counts. This dated back to 1946 when industry andcommerce seized from the Nazis were nationalised. In 1987, of the nine largestenterprises in Austria, five were totally state owned, one was under majoritystate ownership, and two others were state controlled through large nationalisedbanks. Only one was privately owned. Following a financial crisis in Voest–Alpine (steel and engineering group) in November 1985, exacerbated by lossesincurred speculating in the oil market, and difficulties in the major state-holdingcompany, ÖIAG, the government announced that it would introduce privatefunding into some of the state-owned companies. Progress occurred with theÖIAG’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, adverseeconomic conditions and a subdued stock market in the early 1990s led to apostponement of further privatisations.

In November 1993 the coalition government parties agreed to renewedprivatisation and in the following months the state holding company, AustrianIndustries, was merged with the ÖIAG, which became responsible for sellingassets. Also, plans were announced to privatise all of Austria’s state industriesby the end of the decade. Nevertheless, so far sales have amounted to onlyaround 1 per cent of GDP. The speed of sale has been slowed by a desire toprotect ‘Austrian interests’; for example, the privatisation of the state bankCreditanstalt dragged on for over five years, as the government tried to puttogether a consortium of predominantly Austrian buyers.

It is clear from the above brief review of privatisation activity in the EUmember states that all have seen some privatisation activity, although theeconomic significance varies considerably reflecting a difference in the degreeof enthusiasm for and opportunity to privatise from country to country. Table2.2 provides estimates of the amounts raised by privatisation in a number ofthe member states between 1985 and 1995 collected from official statisticsand of the value of these sales in relation to GDP in 1996. It is clear thatmeasured in terms of the share of GDP, to reflect economic significance,privatisation has been most important in the UK followed by Portugal. On theother 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 thisvaries across the EU (also see Van Bergeijk and Haffner, 1996). It sometimesappears from a UK perspective that the idea that privatisation will lead toefficiency gains is well accepted across Europe (indeed the world!), but this isnot so. In general, privatisation policies elsewhere in the EU have been more

Table 2.2 Total privatisation receipts, 1985–95 (selected EU countries)

Source: VariousNotes: UK figures are from 1977. Between 1977 and 1979 the Labourgovernment sold shares in the oil company British Petroleum (BP)


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 amain driver of privatisation policy for the Conservative governments of 1979to 1997, for some governments this is not so. For example, in Finland, wherestate enterprises were initially set up to offset a lack of interest by privateinvestors in industrial investment: ‘Efficiency has not been an issue, becausethe state-owned companies’ commercial performance was in general the sameas in private firms’ (Willner, 1994, p. 2).7 The same is to some extent true inthe Netherlands, where the management of state firms have been expected torun them efficiently, as if they were private companies. In (West) Germanypublic enterprises have generally operated commercially with business interestsrepresented 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’sincreasing dissatisfaction with the nationalised industries. In the 1986 electionsboth parties referred to privatisation as a way of increasing their electoralfortunes, but neither had developed a clear idea of what role privatisation wouldrealistically play in future economic strategy’ (Meth-Cohn and Muller, 1994,pp. 175–6). Although in recent years French governments may have arguedthat privatisation promotes economic efficiency, this view is not necessarilywidely 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 determiningits behaviour. The dynamic of the environment plays a fundamentalrole.

(italics in the original; Redor, 1992, p. 163) Instead of the efficiency argument, sometimes more prominent have beenarguments to do with capital market development and government financing.The desire to promote the national capital market has been particularly importantin Spain and Austria. Privatisation flotations have increased the stock marketcapitalisation and provided a means of encouraging investment and internationalactivity by domestic banks. Privatisation has also been a means of attractinginvestors to own shares as against fixed interest securities, traditionally preferredby investors on the continent.

Government financing through asset sales has become more important asthe prospect of monetary union has loomed. Indeed, meeting the Maastrichtcriteria for eligibility to join a single currency has become a very importantconsideration driving privatisations in a number of EU countries.8 Althoughthe European Commission has ruled that privatisation receipts cannot be takeninto account when calculating budget deficits under the Maastricht rules,privatisation receipts can be used to reduce the public debt – another of thetreaty criteria – and a lower debt reduces interest payments made by government

20 David Parker

and therefore, indirectly, the budget deficit. In Spain, Portugal, France andItaly privatisation receipts are seen as a less politically painful way of reducingthe state debt than spending cuts or tax increases. Sale proceeds have also beenused to recapitalise the firms or remaining state firms in the absence of adequatestate financing. In Austria privatisation share issues were not priced low (asoccurred in the UK, especially in the 1980s) because the government wantedto raise the maximum revenue possible for the budget and industry restructuring.Indeed, so close has the link between privatisation and the public financesbecome in member states that commonly governments have announced targetsfor annual sales as part of their budget forecasts. In France and Italy legislationhas been passed to limit the use to which privatisation receipts can be put.Under French legislation of 1986, privatisation proceeds had to go into repayingpublic debt or recapitalising the remaining state enterprises. This was amendedin 1993 since when receipts have gone into the general budget. In Italy a lawof October 1993 required that revenues from privatisation be set aside in aspecial fund to be used for the sole purpose of buying back outstanding publicdebt.9

In summary, across the EU there is no single, common rationale or objectivefor privatisation. Some governments promote privatisation to achieve efficiencygains, while at least as important in others is the potential of privatisation saleseither to expand the capital market or meet the Maastricht criteria for monetaryunion. Some governments have seemingly pursued all of these objectives, eventhough they may not be compatible. For example, to achieve efficiency gainsan industry may benefit from restructuring ahead of sale to promote competition,but by removing the opportunity for monopoly profits sale receipts are reducedand therefore so is the contribution to the state budget. Promoting a domesticcapital market may mean restricting foreign share holdings, but foreign investorsmay help promote a more effective capital market constraint on managerialbehaviour, as discussed later. A further factor impacting on national policieshas been EU directives aimed at liberalising markets, to which the discussionnow 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 ofindustry and accepted the existing mix of state and private sector across Europe.This approach arose from the need to accommodate within the EU countrieswith differing levels of state ownership and from the belief that state monopolieswere necessary in the public utility sectors to ensure a universal service andnetwork economies. In postwar Europe postal services, telecomunications,railways, scheduled air and bus transport, electricity and gas industries andwater and sewerage services were typically provided by central government orlocal municipal or regional bodies; although there were some importantexceptions, such as water supply in France. Figure 2.1 provides information


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 wasstill the norm in 1995. The expectation is, however, that the role of stateindustries will decline in the years ahead and this is reflected in recent EUdirectives.

Throughout the Treaty of Rome runs the principle of free trade. Articles 30to 37 set out the aim of free circulation of goods, while Articles 52 to 66 areconcerned with the freedom to provide services and the freedom ofestablishment. Article 37 states that: ‘Member states shall progressively adjustany State monopolies of a commercial character so as to ensure that when thetransitional period has ended no discrimination regarding the conditions underwhich goods are procured and marketed exists between nationals or Member states.’At the same time, Article 222 confirms neutrality on ownership by stating that thecommitment to a market economy ‘shall in no way prejudice the rules in Memberstates governing the system of property ownership’.

Figure 2.1 Utility ownership in 1995

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

22 David Parker

In other words, competitive markets are favoured but this is not taken toprejudge the form of ownership that should be adopted in member states. EUpolicy intervenes only when government policies are seen to be in conflictwith free and fair trade within the EU. In particular, Article 92 forbids state aidthat distorts competition between member countries, although in practicederogations have been granted under Commission guidelines that allow for theinfluence of other policy objectives, such as regional development, protectionof the environment, industrial policy and R&D. For example, state aid ispermitted for regional development provided that the benefits exceed adverseeffects on the industrial sector as a whole and if rationalisation or innovationare stimulated. At Maastricht in 1991 Article 130 was inserted into the Treatyconfirming that industrial policy measures must comply ‘with a system of openand competitive markets’. In practice, the Commission has fought a rearguardaction against governments determined to support their loss making coal, steeland shipbuilding industries and, more recently, airlines.

Until the 1980s the Commission stressed coordination and network economieswhen discussing the public utilities and to a degree still continues to do so, inpart ‘to reduce tensions between the Member states and the Communityinstitutions’ (Scott, 1995, p. 35).10 The attitudes of member states varyconsiderably on the role of the state in the ownership and control of the utilitieswith 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 ofthe EU influenced by economists pointing to technological change undermining‘natural monopoly’ characteristics. In addition, there is recognition that while itmay still make sense to have monopoly power grids, telephone lines and railnetworks, since it would be uneconomic to duplicate them, this does notnecessarily imply the need for monopoly service providers over the networks.

Significant in changing policy within the EU has been the passage of theSingle European Act in 1986. This aimed to remove the remaining non-tariffbarriers to free trade within the EU by the end of 1992 and had implications forthe public utilities, which were generally protected from competition both interms of outputs and procurement policies. Utilities remain governed by nationallegislation and regulatory rules, but following the Single Market agreement, theEuropean Commission has applied pressure for the markets of the utilities inmember 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 theirpublic utilities transferred to Brussels. In response the European Commissionhas fought shy of proposing a formal EU wide regulation of the utilities. Instead,the Commission has endeavoured to convince member states of the case foropening up their utility markets to competition and of the need to develop theirown, national regulatory systems to promote competition and protect theconsumer. To minimise opposition and to ensure a more speedy liberalisation,the Commission has adopted a ‘vertical’ or sectoral approach to policy making


rather than attempting to force through a ‘horizontal’ or across the board policy.This has meant developing separate market-liberalisation policies for each utilitysector. Each policy has progressed at different speeds reflecting practicalopportunities for liberalisation in the member states and the strength of nationalopposition.

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 devotedto improving the competitive environment in which firms operated’ and that‘privatisation, to the extent that Member states judge it compatible with theirobjectives, could further the progress already made in this direction’ (EuropeanCommission, 1994, p. 11). In a 1995 White Paper the Commission repeatedthe point:

progress is required . . . in the areas of insurance, intellectual andindustrial property, public procurement, new technologies andservices and freedom of movement. Moreover, progress has beenslow in the extension of the single market to telecommunicationsand energy, while the internal market in transport remainsincomplete. Furthermore, additional progress is necessary inreinforcing competition rules, reducing State aid and reducing therole of the public sector. Privatisation, to the extent that Memberstates judge it compatible with their objectives, could further theprogress already made in this direction.

(European Commission, 1995, p.15) The Commission has recognised that the notion of a non-discriminatoryuniversal service, as part of a public service objective for a public utility, mayconflict with liberalisation and privatisation. Can everyone have access to basicservices of a defined quality and at an affordable price in a competitive privatemarket? 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 operatingwithin the EU, each member state has its own definition (CEPS Working Partyon Utilities, 1996).

In summary, as the EU has worked towards removing restraints on traderesulting from regulation, this has had implications for the nature of ownershipin industries previously protected from competition. Deregulation policy impliesa change in the relationship between government and state-owned utilities,most notably in terms of ruling out state subsidies and introducing privatesector competition. In turn, this has created an economic environment whichhas led member states to review the benefits of retaining state ownership. State-owned firms may be handicapped when facing competition from large privatesector companies with ready access to capital markets. At the very least,competition can be expected to worsen the finances of the incumbent state-owned utilities, necessitating large capital injections.

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At the same time, the EU continues to struggle with the consequences of thechanges underway in the utility markets, most notably how to balance efficientlyoperating public utilities, the public’s concern for ‘fairness’ in public servicedelivery and pricing, the propensity of national governments to want to retaincontrol of these industries to some degree, and a properly operating internal,competitive market. This is no easy balance, as is evident in the followingreview of the evolution of EU policy toward transport including airlines, postalservices, electricity supply and telecommunications.

Transport

Transport is one of three sectors specifically mentioned in Article 3 of theTreaty of Rome (external trade and agriculture are the other two) for which theCommunity intended to develop a common policy. However, in the yearsfollowing the signing of the Treaty it proved impossible to achieve consensuson the changes needed in the member states to bring this about. Instead a seriesof ad hoc measures were introduced, relating to issues such as quotas for roadhaulage, axle weights and intra-community trading. In particular, the desire bymember states to continue to plan and control their own transport systemsresulted in consistent opposition to deregulation.

In the 1980s, with the development of transport deregulation at the memberstate level, notably in the UK, and the Single Market initiative, the Commissionbegan to press for extensive liberalisation, particularly of road haulage, therailways and of air routes. Since then the Commission has been successful inremoving restrictions on competition in road haulage. The Commission hasalso suggested that rail links between member states should be opened up tocompetition and that operators should pay for track use (Hitiris, 1994, p. 273).A 1991 EU directive suggested that the railways should separate infrastructurecharges from operating costs for book-keeping purposes, something that hasoccurred in some of the member states, for example the UK, Sweden andFrance11 Separate accounting is a step towards enabling new train operatingcompanies to provide services on the rail network. This stage of liberalisationhas met, however, with fierce resistance from the railway unions, especially inFrance. In addition, governments are suspicious of the impact on railwayfinances and the viability of the current rail network. In 1995 the Commissionproposed opening up rail freight to cross-border competition, but following aFrench rail strike the proposals were scaled back to cover only the busiestfreight routes.12

Turning to air travel, the Court of Justice ruled in 1986 that the EUcompetition rules (Articles 85 and 86) were applicable to air transport. In June1987 the Commission responded by agreeing with the airline industry a packageof liberalisation measures. In return the industry was granted a temporary andconditional block exemption from relevant EU competition law. In December1989 the Community transport ministers agreed an airderegulation packagewhich involved the scrapping of capacity-sharing arrangements and which


created much freer access to European routes. This was followed in 1992 by anew agreement dealing with fares, market access and licensing of air carriers.The aim was to encourage further competition. The freedom to provide cabotageservices (the right of an EU airline from one member state to operate on adomestic route in another state) remained, however, effectively prevented untilApril 1997. Nevertheless, faced by gradual deregulation of air routes in Europeand increased competition from airlines based outside the EU in world markets,national governments have been promoting rationalisation and new investmentin their national carriers (sometimes leading to accusations of unfair subsidies,as in the case of recent state aid to the Spanish national airline, Iberia). TheCommission has attempted to link continued state subsidies to capacityrationalisation programmes. The resulting restriction of state funding has led,in turn, to moves to encourage the participation of private capital in nationalcarriers, for example in KLM and Lufthansa – in the UK the main nationalcarrier, British Airways, was privatised in 1987.

Posts

Worldwide, postal adminstrations are coming under increased pressure tooperate more commercially due to: (1) competition from rapidly expandingcourier 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) bygovernments keen to reduce losses and to shift investment financing to theprivate sector.

Traditionally, the postal service in each EU country was a state monopolyand operated with extensive cross-subsidies. Letter mail tended to cross-subsidise parcel deliveries and mail posted within cities much more expensiveto deliver rural mail. Since competition threatens standard charges for collectionand delivery, there has been considerable difficulty in getting agreement onthe desirable level of competition in postal services among the member states.While Germany, the Netherlands and the Nordic countries, in particular, havefavoured fast liberalisation, at the other extreme Greece, Portugal and Francehave wanted virtually none.

Hampering liberalisation is the differing commercial position of the nationalpost offices. The UK post office, for example, is profitable and has been formany years (Parker, 1994). However, the Italian post office lost £1.7bn in 1993and the French post office lost £130m in 1995 (Financial Times Survey, 14February 1996, p. II). Such losses reflect both uneconomic charging andoperating inefficiencies. Germany’s post office, for example, delivers only afew more letters a year than the UK’s but employs almost twice as manyworkers.

Therefore change is forestalled both by a fear that competition could endthe universal service, leading to a withdrawal of services in rural areas or muchhigher 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). Asa consequence, so far the European Commission has been able to achieve onlylimited support for changes to the postal market. An EU draft directive inDecember 1995 was a careful compromise between the supporters ofliberalisation and those who wanted much slower change. The directive aimedto maintain a universal post service by allowing the national postaladministrations to retain a monopoly over the basic letter service, i.e. thecollection, sorting and delivery of items up to 350 g. This was an importantconcession given that the average letter weighs only 15 g. Also, the post officeswould be able to retain control of the distribution of incoming cross-bordermail and direct mail until the end of the year 2000, if this was ‘necessary forthe financial equilibrium of universal service providers’. These proposals meantthat for the time being 80 per cent of all mail would remain within the controlof the post offices thus limiting the development of competition. Also, underthe proposals liberalisation would come in from the year 2001 only if a furtherCommission review gave the go-ahead.

Alongside these limp proposals some governments have already institutedtheir own and more ambitious liberalisation programmes. In particular, theprofitable Dutch Post Office was floated on the Amsterdam stock exchange in1994 and is beginning to circumvent some of the restrictions imposed bynational postal monopolies. The Dutch have been adept at developing newmarkets and have a strong position in remailing (the bulk shipment of mail toa foreign postal administration). Also, Sweden and Finland have liberalisedtheir markets with the Swedish post office losing its monopoly in 1993. TheGerman post office is expected to float an initial tranche of its shares on thestock market in 1998. Interestingly, while the UK has taken a lead in mostareas of utility privatisation and market liberalisation, in postal service it lagsbehind these countries. In 1994 the UK shelved plans for privatisation and theRoyal Mail’s monopoly on the delivery of letters costing less than £1 to postremains.

Electricity

The liberalisation of EU electricity markets has proved troublesome.13 The 1988White Paper on the Internal Energy Market promoted the case for liberalisation,but differing attitudes of member governments to competition and especiallycross-border suppliers meant deadlock on the actual proposals for cross-bordercompetition. The UK is still exceptional in its degree of market liberalisationwith Italy (in effect) and France still having integrated monopolies and Germanya collection of mixed-owned or publicly owned de facto regional monopolies.14

The Swedish electricity market was recently deregulated, however, to ensurecompetition in generation and supply and Vattenfall, the state company, haslost control of the main transmission network. This is now in a separate agencyand other electricity companies may use it. In Italy, legislation in January 1992authorised private electricity generation but so far this has led to only a small


amount of domestic competition. The state-owned producer, Enel, continuesto dominate the market. The possibility of privatising Enel has been discussedbut 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 anddistributors from other member states. This was favoured by Germany, whichwished to see competition undercut its regional producer cartels, and the UK,with its privatised and liberalised electricity industry. France, however, fearedthe impact of unregulated cross-border supplies on its primary electricity supplier,Electricité de France. The EdF generates 81 per cent of its electricity in highfixed-cost, nuclear stations. While the French government did not object to theEdF losing its monopoly of electricity supply, it did object to it losing controlover transmission and distribution. The company would then be unable to plannuclear power supplies. In particular, importers could exploit temporarily lowfossil fuel prices. Also, the French wished to maintain the same price for electricitysupplies across France and this would be threatened by unregulated cross-bordersupplies. France has proved willing to allow its largest energy using companiesto bargain with foreign producers for cheaper power, but insists that power importsmust pass through a single buyer, i.e. the EdF or an alternative government-controlled body, to control distribution and prices. The Commission agreed acompromise settlement in June 1996 opening up initially around 22% of the EUmarket.

Telecommunications

Telecommunications is one area in which technology (e.g. digital transmissionand fibre optics) is quickly removing the ‘natural monopoly’ argument for havinga single, national supplier. In turn this is leading governments to favourprivatisation of the state utilities. Between 1985 and 1995 telecoms privatisationsin Europe totalled the equivalent of $40.5bn, putting this sector well ahead of oiland gas ($32.7bn), banking and insurance ($32bn) and electricity ($26bn) interms 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 provideda universal service and perhaps contributed profits to the state finances. Each countryhad its own national supplier which meant that the EU telecommunications industryremained highly fragmented along national boundaries. The first country to changethis arrangement substantially was the UK. In 1981 the UK separated posts fromtelecoms and in 1984 privatised the resulting state company, British Telecom (BT).At the same time, a competitor network operator was licensed, MercuryCommunications. In the following years competing cellular telephone systems werealso encouraged and in 1991 the provision of networks was opened up to furthercompetition. 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 EUcountries. New operators have been licensed, posts and telecoms separated(although not in all cases) and support for privatisation has grown.15 In 1995the telecomunications sector accounted for 25 per cent of the total amountraised by European privatisation sales (Sharpe, 1996). By mid-1997 BT in theUK and Telefónica of Spain were wholly privatised, Deutsche Telekom KPN/PTT of the Netherlands, Tele Danmark and Telecom Italia were partiallyprivatised and some privatisation was scheduled for France Télécom, PortugalTelecom and Telia of Sweden. The sale of the first shares in Deutsche Telekomin 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 andDenmark operate highly liberalised markets, but this is less so elsewhere. Also,the Dutch gave priority to the privatisation of KPN/PTT Telecom over the settingup of an independent regulatory structure (Hulsink, 1996, p.7); the first sharesin the business were sold in 1994. By contrast, the French have set up aregulatory structure but have been slow to privatise France Télécom (Burnsand Parker, 1997). In Germany there is continuing uncertainty over theeffectiveness of the regulatory authority that will oversee competition inGermany’s telecoms market and the extent to which competition will develop.In Italy draft legislation exists for establishing a telecommunications regulatorystructure, but progress has been slow.

The form of telecomunications restructuring in member states reflects widernational attitudes to competition and state ownership. Hulsink (1996) contraststhe liberal, free-market views that shaped UK telecommunications policy(privatisation and competition) with the consensus building-negotiatingresponse of the Dutch in relation to affected parties (gaining the acceptance ofthe industry, suppliers and consumers to changes) and the state-led industrialpolicies of the French (protecting the technological capability of the Frenchtelecommunications industry as part of a wider industrial policy based onnurturing ‘national champions’). The postponement of the sale of FranceTélécom was the result of union opposition coupled with fears about the impacton 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 liberalisationof network provision and voice telephony. In this area of utilities policy, long-standing national attitudes are affecting the precise form that liberalisationand privatisation is taking within the EU.

Although the Commission has stopped short of actively promotingprivatisation, reflecting official neutrality on ownership, it has supportedtelecommunications liberalisation since the mid-1980s (the development ofEU policy is detailed in Schneider et al. 1994 and Curwen 1996). In a 1987Green Paper on the telecommunications sector the Commission emphasised:

In general, an open, competitive market for new service providersand terminal manufacturers can make a substantial contribution tothe rapid spread of the new services, under the current conditions


of rapid development of technology and market opportunities . . .Given the complexity and multiplicity of the emergingtelecommunications services, only the market can efficiently linkthe producer with the consumer. Economics knows of no othermeans of fulfilling this purpose and all attempts to replace it bysomething 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 extendingpublic-provider, monopoly powers to the supply of new terminal equipment,such as cordless phones and modems in Germany and first telex terminals andmodems in Italy. In 1988 the European Council of Ministers adopted theCommission Green Paper on Telecommunications issued the previous year.This confirmed the progressive introduction of a common market fortelecommunications services and equipment. The Green Paper was subsequentlyimplemented through directives on: (1) liberalisation of the supply and provisionof terminal and network equipment; (2) liberalisation of services, excludingfor the time being public voice telephony (including fax) and the operation ofthe 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 competitionrules 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 establishedin mobile communications and most EU countries have introduced someliberalisation into their telecoms sector. But liberalisation of the telecomsequipment market, required by EU Directive (88/301/EEC), was completedonly after a delay of three years, due to slow implementation in Belgium,Ireland, Denmark and Germany. Moreover, liberalisation of all non-voiceservices (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 haveexploited a safety net in the 1988 Green Paper to delay change. Under theterms of the safety net, exclusive and special rights for the provision of thenetwork infrastructure by the telecoms administrations and for a restrictednumber of reserved services may continue as ‘essential, at this stage, forsafeguarding public service goals’. In addition, new competitors often complainabout anticompetitive access charges to networks levied by public sectormonopolies and an inadequate number of leased lines available. Cross-subsidiescontinue and cross-border call charges within Europe are still inflated.

In general, telecommunication tariffs are regulated by government or otherauthority (e.g. the Office of Telecommunications [Oftel] in the UK and theAgence de Réglementation des Télécommunications in France).16 Withinmember states local and national calls are typically priced below and

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international calls above supply costs. Resulting cross-subsidies are justifiedin terms of a universal service mission, which is itself sometimes justified interms of exploiting positive network externalities. Under a July 1993 Councilof Ministers resolution full competition in voice telephony is required from 1January 1998 in the countries of the EU with the largest networks; in Belgiumand Luxembourg from the year 2000; and in Ireland, Spain, Portugal and Greeceby 2003. Member states are aware of the pace of change in telecommunications,and this explains the more ready acceptance of the case for liberalisation thanin postal services.

PRIVATISATION AND MARKET LIBERALISATIONASSESSED

The usual argument for privatisation over state ownership in the economicsliterature centres on the comparative economic efficiency of the public andprivate sectors. In that part of the economics literature called public choicetheory, public sector activities are said to be managed less efficiently becausestate officials pursue their own, non-social welfare maximising objectives (e.g.Niskanen, 1971; Mitchell, 1988; Donahue, 1989). Also, state industries areassociated with conflicting and poorly articulated operating goals leading todisruptive political intervention in management, capture by rent-seeking groups(notably trade unions) and financial failure. In general, inefficiency is tracedback to the ideological and political motives for government ownership of firmsand continuing political involvement in their management (Aharoni, 1986;Shapiro and Willig, 1990).

Certainly there are plenty of examples of political intervention leading toloss-making activities in state industries in Europe. However, the exact extentto which these interventions have been social welfare reducing as against profitreducing is less certain. For example, from time to time in the UK and Francestate industries have been used to control prices and to preserve jobs, both ofwhich are incompatible with maximising profit but can be compatible with asocial welfare goal. Employment preservation and good working conditionshave also been objectives in other EU economies, notably Sweden, Austriaand Ireland. In Finland and Italy state firms have made an important contributionto regional policy; while particularly in Sweden, Finland and France stateownership has been associated with industrial policies to rebuild and preserveinternational competitiveness. In Finland state industries were supposed to forgoprofits and supply private firms with cheap supplies (see chapter 10 below).By contrast, in Germany in the 1960s, Social Democrats expected state firmsto compete aggressively with private enterprises to raise the general level ofoperating efficiency in oligopolistic markets.

It is true that the objectives of state enterprises are often multiple, sometimesconflicting, and always changeable as governments come and go. This canmake it difficult for management to develop and implement consistent, long-term business strategies. As an example, over the years Spanish state industries


have been expected to pursue exports, maintain high levels of employment,combat regional inequalities, improve the balance of technological trade, re-industrialise the country, and provide an example of the ‘work ethos’ (GarciaDelgado 1989). Indeed, as long as EU countries are participative democraciesit is difficult to see how state enterprises can have unambiguous, long-termobjectives. Each ministry and each interest group will push its own agenda andchanges in government will inevitably bring changes in goals (Aharoni, 1981).In Italy, ruling parties have used state firms ‘to mediate among major interestgroups, 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 inthe Netherlands, where usually state industries have had a high degree ofindependence from government, political interference has still occurred fromtime to time. This is not necessarily undesirable, however, since if managementare neither accountable to the private capital market nor to government, theycan be expected to pursue their own utility and not necessarily the public interest.

In the privatisation literature, enhanced management accountability in theprivate sector results from a combination of the transfer from public to privatesector funding and the introduction of competitive product markets followingprivatisation (Vickers and Yarrow, 1988; Jensen, 1989; Zeckhauser and Horn,1989). Agent–principal theory features prominently in the critique of stateownership. Ownership and control are associated with agent–principalrelationships arising out of the nature of the property rights (Jensen andMeckling, 1976; also chapter 3 below). The weaknesses of state ownershipresult from the poorer mechanisms by which the principals (public) can controlthe behaviour of their agents (officials) in a world of information asymmetriesand incomplete contracts; a problem compounded by unclear objectives andby the possibility of politicians and government officials pursuing their ownends. If information was perfect and complete contracts were possible thenownership would be irrelevant. Agents would be able to write efficient contractsthat completely constrained agent behaviour so as to meet their goals, underboth private and state ownership equally. In practice, however, information isimperfect and incomplete agent–principal contracts are the norm.17

The usual argument in the privatisation literature is that incentives for agentsto pursue the goals of the principals are superior in private capital marketsthan in the state sector because of the profit motive (Bös, 1991; Boycko, Shleiferand Vishny, 1996). Private ownership more successfully limits managerialdiscretionary behaviour by capitalising expected future profits in the shareprice. Low expected profits lead to a depressed share price and the threat of ahostile takeover bid. Equally, large shareholders have a greater incentive tohold management to account for their behaviour than in the public sector, whereownership of state industries is diffused across the entire population. Largeshareholders have more to lose individually from poor managerial performance.Also, in the private sector it is common for management pay to be profit relatedor 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 servicepay rates.

In general, the agent–principal literature, in combination with publicchoice theory, leads to the conclusion that state ownership is inherentlyinferior to private ownership, especially where there is a competitive capitalmarket. This is supported by reference to the efficiency attributes ofcompetitive product markets. In so far as state provision is associated withmonopoly provision, the expectation is that privatisation, combined withthe opening up of markets to competition (liberalisation), will lead to higheroperating efficiency. Figure 2.2 illustrates the standard argument in theneoclassical economics literature regarding the relationship betweencompetition in the product market, ownership and expected efficiency.Monopoly markets and state ownership are associated with both allocativeand productive inefficiency. Monopoly leads to prices above marginal costsand ineffective state regulation to inflated costs. By contrast, the existence of acompetitive product market and private ownership (with a competitive capitalmarket) is associated with high allocative and productive efficiency. Theintermediate positions of private ownership and monopoly and state ownership

Figure 2.2 Ownership, competition and performance: the standard argument


and competition are associated with some efficiency loss, although presumablyless 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 isimportant to distinguish between allocative and productive efficiency and interms of static and dynamic gains. Allocative efficiency refers to the setting ofprices according to marginal supply costs; productive efficiency to keepingsupply costs as low as possible, which results from firms achieving bothtechnical efficiency (producing on their production frontier and input priceefficency) and input price efficiency (employing inputs efficiently accordingto their relative prices). Static efficiency involves one-off gains in productivityand cost efficiency (a movement to the firm’s production frontier and inputprice efficiency); while dynamic gains are associated with on-goingimprovements in production processes and products (a shifting outwards ofthe firm’s production frontier). The argument in neoclassical economics forprivatisation is predominantly concerned with productive efficiency, particularlyeconomising on inputs and often in a static, cost-reducing sense given currenttechnology. It is possible for a firm to be productively efficient but allocativelyinefficient (although not vice versa) and this is to be expected in monopolymarkets where prices are above marginal supply costs. Dynamic effiency gainsare associated with post- privatisation restructuring, involving investment, R&Dand innovation, the subject matter of industrial policy, but have been relativelyneglected in theoretical discussions. They can also be ignored in practice, asnewly privatised companies attempt to satisfy the demands of their new investorsfor high dividend payments by concentrating simply on short-run costreductions, notably, reducing manning levels and economising on investmentand R&D spending.

In addition, the allocative effects of privatisation have tended to receive lessattention than productive efficiency in the privatisation literature and amongstpolicy makers. Allocative efficiency depends upon the competitive environmentin which the firm operates, rather than ownership, and privatised monopoliesmay be highly inefficient in allocative terms. Therefore where monopoly firmsare privatised, effective regulatory systems need to be introduced to lower pricesto marginal costs, encourage cost efficiency and improve output quality. Ineffect, regulation replaces the direct departmental (hierarchical) control overmanagement that exists under state ownership. Whether the new regulatorysystem will prove superior over the long-term in preventing monopoly abuseand promoting efficiency than direct control of industry by government dependsupon the effectiveness of the regulatory system introduced. In the UK pricecontrols through an RPI-X price cap18 appear to be superior to the previouscost-plus mentality when monopolies were state owned and the new regulatoryoffices have successfully promoted competition. But whether this proves to bethe 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 aboutpublic versus private ownership. There is a body of theoretical and empiricalevidence which suggests that the market for corporate control is likely to be aweak 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 privatesector management cannot stray far from improving efficiency, otherwiseshareholders depose the management or sell their shares, triggering a takeoverbid. Management in the public sector face no such threat. What is left unclearis the optimal share ownership to effect this managerial constraint. For example,when the share capital is divided among many investors, the logical result of aprivatisation policy aimed at increasing the number of small shareholders, ifone shareholder engages in the task of monitoring management behaviour, heor she bears the full cost of the activity but receives only a small fraction of thetotal gain. Dispersed shareholding may, therefore, lead to sub-optimalmonitoring of management behaviour. Also, there is little evidence that it isnecessarily the poorly performing firms, in terms either of earnings, dividendsor 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 versusprivate sector firms (usually measured in terms of productivity or costs ofproduction) have suggested that, while private enterprises are often moreefficient than their state-owned counterparts, state enterprises can be as efficientespecially in markets where there is little or no product competition (for anearly summary of this research see Millward and Parker, 1983, and for a morerecent review, Martin and Parker, 1997, chapter 4). Similarly, studies of theimpact of privatisation on business performance in the UK suggest that it hasnot always resulted in improved productivity (however, this may be because offactors unrelated to privatisation, such as a less favourable trading environment);while the longer-term, dynamic effects remain uncertain (e.g. Bishop andThompson, 1992; Parker and Martin, 1995; Martin and Parker, 1997).

Assessing the impact of privatisation is complicated by the lack of agreementon what constitutes successful performance. Income distribution issues needto be taken into account when appraising privatisation from a social welfareperspective, yet most performance studies do not consider distributional issuesconcentrating instead on enterprise profitability, productivity and costs ofproduction. Also, privatisation studies tend to adopt a partial equilibriummodelling. This is understandable given the great complexity of accountingfor the wider, general equilibrium consequences, but the result may be a failureto capture important economic effects. State industries were set up acrossEurope not simply to maximise their own efficient use of resources, but topursue wider goals, including raising industrial performance in general (forexample in Finland and in France).

Much of the privatisation literature has drawn a sharp distinction betweenmanagement behaviour in the private and public sectors, but some studies have


questioned the extent to which, in practice, the behaviour of state firms differsfrom that in private sector enterprises:

state-owned enterprises do seem to share many characteristics withtheir private counterparts, especially when they serve similarmarkets and employ similar technologies. Moreover, with increasingfrequency, large private enterprises are being exhorted to behave ina ‘socially responsible’ manner and to include representatives oflabour and the general public in their governing structures. A goodcase can be made, therefore, for the view that large privateenterprises are exposed to all the opportunities of privilege, theambiguities of purpose and problems of multiple oversight that arethe lot of state-owned enterprises.

(Vernon, 1981, p. 16) In most countries, but especially France, the social and educational backgroundof senior civil servants and private sector industrialists have been the same orsimilar. Typically, both went to elite grandes écoles, of which the most famousare the National Schools of Administration (Redor, 1992, p. 158). Also,managers have moved between public and private firms much more frequentlythan is the case in the UK, for example. This may help to explain why, on thecontinent, there is sometimes a much lower expectation of efficiency gainswhen enterprises are privatised than has existed in UK policy making circles.

Certainly improvements in economic performance following privatisationare less likely the more difficult it is to make substantial changes in the waythat enterprises are managed and operated. In a number of the EU countriesthere are more constraints on restructuring post-privatisation than have existednotably in the UK and Portugal. For example, in Italy legal constraints on jobcuts in banking and finance, where early privatisations were concentrated, havemeant formidable difficulties in rationalising manning. In the Netherlands,employees made redundant because of privatisation have been offered jobselsewhere in the public sector and workers have retained a right to preferentialcivil service unemployment benefits (Andeweg, 1994, pp. 204–5).

In the Netherlands, France, Italy and Germany the trade unions have stronglyopposed privatisation and have been willing to take industrial action to stopprivatisations that threaten to cause large-scale reorganisation and demanning.For example, a strike by Air France staff in October 1993 led the governmentto disown a restructuring plan drawn up by the airline’s management. Also,employees of utilities in France, such as France Télécom, are fonctionnaireswith civil service privileges and this complicates any privatisation. Thebargaining pre-privatisation between government and unions to facilitate asmooth sale usually involves protecting working conditions and staff gradings.A similar situation exists in Germany, where many railway, telecommunicationsand postal service employees have civil service status.19 When a new state-owned telecommunications company replaced the former state enterprise in

36 David Parker

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 firstyears after privatisation (ibid.). In other words, across Europe privatisationmay not offer the same scope for immediate productive efficiency gains asexisted in the UK; while even in the UK, not all enterprises have raised theireconomic performance following privatisation (Martin and Parker, 1997).

Moreover, while the neoclassical economics literature emphasises the roleof a competitive capital market in raising productive efficiency, in a number ofEuropean privatisations a competitive capital market is not the obvious result.In continental Europe the term ‘equity’ in financial markets implies a right tothe residual income and assets of a company, subject to a much larger andmore arbitrary degree of governmental and stakeholder (eg. workforce)influence than in the UK. Also, the stock markets are less open to the mountingof hostile takeover bids in countries such as Germany than is the case in theUK and USA, from which much of the relevant agent–principal literatureoriginates.20 The form of the privatisation also affects the likely outcome. Inparticular, ‘corporatisation’ is not the same as privatisation. This needs stressingsince a number of countries have transferred state activities from departmentalcontrol to quasi-independent corporations and insisted on describing the policyas ‘privatisation’, even when the state retains majority voting rights. In othercases restrictions have been placed on the rights of private shareholders. Forexample, when the Austrian government sold shares in the engineering firmVA Technologie, no shareholder was permitted to exercise more than 25 percent of voting rights at the company’s annual general meeting. Elsewhere thestate has retained some kind of ‘golden share’ to block unwelcome takeoverbids, including the UK. But if the term privatisation is to be meaningful it isbest 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 tointerfere in the management and the future of the enterprises. Defined in thesestrict terms, privatisation has not been anything like as extensive in the EU asthe figures for share sales imply.

It is also important to appreciate that privatisation has not necessarily entailedacceptance of the case for a more open market in corporate control. In a numberof European countries there are examples of privatisation policies aimed atkeeping out or limiting foreign ownership and favouring ‘reliable’, domesticinvestors. Favoured investors is one way of securing the success of aprivatisation issue without reliance on unrestricted foreign investment. Forexample, in Belgium generally sales have been on the basis of a preselectionof investors, not public offers. In Spain sales of state shareholdings in the 1980sinvolved mainly the sale of minority stakes because the government did notwant to forgo control of the enterprises. The government also feared that thecompanies might fall into the hands of foreign investors. The sale of Seat toVolkswagen was a notable exception to this policy because there was nodomestic motor group available to purchase and rationalise the company.21 Inthe case of Portugal, the government has been accused of rigging privatisation


sales to favour domestic groups that the government had privately consideredfrom the outset to be suitable owners (Wise, 1995).22 The new government inPortugal has stated more firmly than its predecessor that it intends to keepstrategic companies Portuguese.

Although this policy conflicts with the notion of a European-widecompetitive capital market, it reflects a deep-seated fear amongst EUgovernments that privatisation will lead to a loss of national control overimportant industries. The long delay in Austria in the sale of Creditanstalt wasthe result of opposition in Austrian business circles to the country’s secondbiggest bank falling into foreign hands (Hall, 1996, and chapter 4 below). InSweden the government has favoured large and friendly investors and the UKhas placed limits on foreign shareholdings in privatised companies at the timeof flotations. Usually foreign ownership has been restricted to not much morethan 20 per cent of the shares on offer. This is not so important if foreignersthen have access to the stock market to buy further shares after the flotation,but for some privatised companies the UK government has placed continuingrestrictions on foreign holdings.

It is in France and Italy that a traditional hostility to foreign ownership ofindustry has developed into prominent policies to retain national ownership.Some foreign investor participation in recent French privatisations has beenpermitted, but in general policy from the mid-1980s discriminated againstforeign capital.23 An Act of August 1986 prevented the state transferring morethan a 20 per cent stake in privatised firms to foreign investors, though thelimit was removed in 1993. French policy has favoured established, mainlyFrench, core shareholders or noyaux durs. The objective of a noyau dur orfavoured shareholder is to facilitate a smooth privatisation and to limit anypost-privatisation takeover threat. For instance, in the ‘first phase’ ofdenationalisations, 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 BNPand AGF. Since 1993 the core shareholders in France have been widened toinclude some foreigners, notably the Italian company FIAT and the bank CréditSuisse. Similarly, Italy has its own noyau dur policy, for instance the preferredpurchaser of shares in Istituto Mobiliare Italiano were banks owned by thegovernment; while the sale of Credito Italiano was structured around theMilanese merchant bank, Mediobanca.24

One argument for placing shares with favoured investors relates to the sizeof the domestic capital market. The UK has a large and international capitalmarket, but capital markets are much smaller in other EU countries. In countriessuch as Austria, Denmark, Finland, Sweden and Portugal privatisation planshave been slowed by a fear of ‘crowding out’ their capital markets. In thesemarkets there is also only a relatively small volume of institutional investment.To make matters worse for the success of privatisation flotations, domesticinvestors on the continent have generally had a preference for fixed incomeassets (bonds) over equities (shares).

38 David Parker

The lack of large institutional investors at home and less interest in shareholdingby domestic groups increases the likelihood of controlling stakes passing to foreigninvestors. Noyaux durs in France, continued core state holdings, restrictions onlarge holdings and golden shares mean that the threat of foreign ownership can beallayed. There is also competition law at the EU and national levels that mayintervene where takeovers are proposed. In general, therefore, takeovers especiallyforeign takeovers of privatised companies have been rare so far. The UK is a partialexception in this respect, reflecting its traditionally more open and competitivecapital market. By mid-1997, 11 of the 12 privatised regional electricity companies,responsible for electricity distribution and supply, had been taken over, mainly byUS utilities; although the government has occasionally intervened, for example toblock bids involving a privatised electricity generator and a regional electricitycompany. However, to the extent that where performance is disappointing a takeoveris not a credible threat, the capital market constraint on managerial behaviour, amain argument for the superiority of private sector firms in the agent–principalliterature, is radically reduced.

Although some economists (and policy makers) have emphasised thepotential efficiency gains from privatisation, it seems that the relationshipbetween privatisation and efficiency is more complex than often perceived.Where enterprises have been reasonably well run under state ownership andare managed much as before, where they operated in competitive markets orremain state regulated much as before, where the capital market constraint onmanagerial behaviour works imperfectly, then the expectation must be thatthere will be no sharp change in allocative and productive efficiency followingprivatisation.

PRIVATISATION, INDUSTRIAL POLICY AND WELFARE

Industrial policy is concerned with promoting economic development throughsome kind of state action. In the postwar period in Western Europe the statewas generally given a prominent role in economic development, especiallywhen left of centre governments took power. Industrial policy was generallyjustified in terms of ‘market failure’, i.e. that free markets would not guaranteemaximum economic welfare. Market failure occurs particularly where thereare: (1) significant externalities – costs and benefits accruing to others thanthe buyer and seller directly involved in the market exchange; (2) monopoly –so that allocative and productive inefficiencies accrue; (3) increasing returnsto 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 failto invest sufficient amounts in capital equipment, staff training and researchand development. Until the 1980s, state intervention was generally accepted inEurope wherever there was evidence of market failure.

Since the 1980s, however, the change in intellectual thinking brought aboutby the public choice and agent–principal theories in the economics literature,


along with the internationalisation of product and financial markets,technological change, the Maastricht criteria for a single currency, plus thedemonstration effect of privatisations in the UK, have all contributed towardsthe drive for privatisation in member states. Privatisation along with marketliberalisation has substituted for more active state involvement in industrialdevelopment. But it is important to recognise that privatisation is industrialpolicy only in a negative sense;25 that is to say, it exists as confirmation of thesuperiority of market forces. Incontrovertibly, privatisation is leading to anappreciable 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 thefull economic effects precisely is highly problematic and the social welfareeffects even more daunting. A complete cost–benefit analysis of privatisationwould require identification of all gainers and losers, the precise gains andlosses and some form of social weighting of the gains and losses. In practice,empirical studies have generally been limited to the direct effects on theprivatised firms, ignoring wider (‘spillover’) effects and without any explicitweighting of the income transfers. Jones et al. (1990) have set out a morecomprehensive method, which has been applied by Galal et al. (1994). Theapproach considers consumer surplus, prices, costs, profits and transfers togovernment (as a result of ownership or taxes). This takes in wider effects ofprivatisation than most studies but does not extend to being a comprehensivewelfare analysis. The study by Galal et al. was, in any case, restricted to lookingat the immediate rather than longer-term effects of privatisation,26 whereasindustrial policy is concerned with longer-term effects.

The impact of privatisation on economic welfare is uncertain for it turns onthe nature of the privatisation, the existence and form of continued stateregulation and the impact on the various groups in society. The economicliterature on privatisation has been primarily concerned with the impact onconsumers – reflecting the usual neoclassical concern with product marketsand with the widespread belief that privatisation will lower prices and improveproduct quality. It has also been concerned, more indirectly, with the interestsof shareholders because higher profits are viewed as a reward for highereconomic efficiency. By concentrating on the effects on consumers andinvestors, studies of privatisation are apt to see lower wages and other inputcosts as desirable outcomes, as they reduce costs and prices and raise consumersurplus and profit. Higher wages and other input costs are interpreted asevidence of ‘inefficient’ economic rents under state ownership. However, suchdiscussion side-steps the importance of resource redistribution effects onwelfare. In assessing the total welfare effects of privatisation, the impact onlabour and other (non-capital) inputs should not be ignored even though thisgreatly complicates any assessment of privatisation.

What is clear is the potential shift in economic power implied by privatisationand its associated redistribution of income to favoured groups – just in thesame way as nationalisation implied such transfers, although to a different set

40 David Parker

of interests. French privatisation has directly benefited certain financial andbusiness groupings. In Italy privatisation has strengthened the position ofalready powerful groups (e.g. those connected with the Agnelli and De Benedettifamilies) (Wright, 1994, p. 33).27 Some groups in society have been more clearbeneficiaries of privatisation than others; most notable gainers so far have beenbankers and financial advisers (‘the City’) and within the companies somesenior management, in terms of their much higher remuneration. The losershave been the interests now less favoured by government, usually the tradeunions and those vulnerable to unemployment or wage cuts post-privatisation.28

In general, most privatisations in the EU have been driven from the top, atgovernment–industry–banker level, very little has occurred due to action frombelow, in terms of worker–manager initiated ownership restructuring. Thiscontrasts with parts of central and eastern Europe where there have been manymore cases of localised and ‘small-scale’ privatisations.

Privatisation involves a shift in economic power, something underresearchedand often ignored in the neoclassical economics literature. Privatisation suggestsa more favourable view of the role of private (sometimes multinational)investment in promoting social wellbeing and a less favourable view ofemployment, employment rights, wages and trade union collective bargainingthan 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 Europeancompetitiveness.

Nationalisation resulted from a belief that state ownership could counterthe adverse effects on economic welfare of large-scale private enterprise, muchof which today is transnational (Holland, 1975). For example, this was thecase in France as late as the early 1980s. As EU member states have removedbarriers to international capital flows and the movement of goods and servicesacross Europe, state ownership has diminished the economic effects andpermitted some retention of national control over important assets, especiallyin the public utilities. Privatisation is removing this means of state influenceand in this sense substitutes financial freedoms for earlier social welfare andindustrial policy objectives.

Figure 2.3 distinguishes between the state’s power to set the economiccontext within which industries operate and the state’s direct operationalcontrol over enterprises. Context setting refers to the power to define orrestrict the goals of organisations and their processes of service delivery soas to achieve social welfare in oligopolistic markets. Operational control isconcerned with the day-to-day management of the organisations so as tomeet the context-setting goals. In principle, state ownership is associatedwith both strong context-setting powers and operational control. It is thereforerelated to the notion of economic coordination to overcome market failure.

Privatisation implies a loss of operational control, but the impact on thestate’s power to set the context in which the privatised firms operate dependsupon the degree of continuing industrial policy and regulation (including the


strength of competition policy). Where a penetration of international capitalinto industries previously controlled by government leads to a transfer ofeconomic power out of EU countries then a significant decline in bothoperational control and context-setting powers may occur with economic (andsocial) effects that deserve fuller investigation. This is especially so asprivatisation is occurring at a time of other changes in the global economy,resulting in greater capital mobility and reduced state control over factor andproduct markets. A loss of control at the national level implies the need forstronger control and context-setting powers at the EU level, but so far the EUCommission’s powers continue to lag behind the pace of economic change. Inso far as EU countries lack adequate context-setting powers, notably newregulatory systems to replace former hierarchical state management of keyindustries, privatisation involves a potential loss of national influence over thebehaviour of enterprises and markets. At the EU level there is no sense ofurgency to develop regulatory powers to counter any threat from privatemonopoly abuse, especially in the face of takeovers, cross-shareholdings andinter-firm alliances amongst privatised companies.29 What is lacking withinthe EU is a clear response to the potential transfer of economic power impliedby privatisation and for that matter any apparent and obvious concern at thepotential loss of economic power at governmental level.

To date surprisingly little research has been directly undertaken into industrialrestructuring within the EU resulting from privatisation and its implications interms of dynamic effects on economies. It is, therefore, not possible at thisstage to pass judgement on the long-term effects on economic development of

Figure 2.3 Context setting powers and enterprise control

42 David Parker

privatisation and associated market liberalisation. On the one hand, privatisationmay lead to a better use of resources and more investment leading to highereconomic growth. This is the belief of those who advocate privatisation toraise economic welfare. On the other hand, privatisation could lead to anextraction of profit overseas, reduced investment, lower R&D expenditurewithin 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 theEU and the role of EU policy on market liberalisation. Although the EU hastraditionally adopted a neutral stance to state ownership, recent directives onopening up to competition markets previously dominated by state enterprisesis necessitating a review of ownership and regulation across Europe. An addedimportant factor is technological change which is creating the scope forcompetition in markets previously considered to be ‘natural monopolies’, mostnotably in telecommunications.

Interest in privatisation has been reinforced by the economics literature,mainly public choice theory and agent–principal theory, which has providedan academic argument in favour of state assets sales. At the same time, however,more recent research has pointed to restrictions in this literature, which castsome doubt on the suggestion of an automatic link between privatisation andimproved economic welfare. This is supported by recent empirical work,especially in the UK, which concludes that allocative and productive efficiencyimprovements following privatisation are not automatic.

The last part of the chapter has made a few brief observations on privatisationfrom industrial policy and welfare perspectives. Privatisation involves a moveaway from a state interventionist approach to economic development, favouredfrom time to time in the postwar period in member states, towards a kind ofnegative industrial policy, where economic development is left to market forces.By concentrating discussion on consumers and profits, surprisingly littleattention seems to have been paid to the impact of privatisation on industrialrestructuring in Europe and to the implied shift in economic power. Like alleconomic policies, privatisation can be expected to involve losers as well asgainers.

These criticisms should not be viewed as necessarily implying thatprivatisation is foolhardy. There is evidence that privatisation has introduced anew competitive spirit into sleepy state enterprises (e.g. Martin and Parker,1997, ch. 9). It is enabling management to manage freed from irksomeaccountability to government departments. Higher allocative and productiveefficiency, where it occurs, should increase aggregate economic welfare(alongside income redistributions). But arguably such results need to be viewedfrom a much longer term perspective than has been possible so far, particularlyfocusing on the impact of privatisation and market liberalisation on industrial


and market structures within the EU. What are the likely long-termconsequences on the competitiveness of industry and services vis-à-vis otherparts of the world, and more specifically on employment, training, investmentand 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 headquarterswithin national boundaries and have cultivated noyaux durs, is this sustainablein the face of fluid international capital markets? In the absence of relevantresearch (and experience) answers are elusive.

The notion that privatisation is a substitute for more active state industrialpolicy in Europe is essentially an article of political as well as economic faith– just like nationalisation before it. Economists have provided the economicrationale for privatisation, but it is politicians, influenced by interest groups,who continue to plan what, when and how to privatise across Europe. Hence, itis ultimately politics that will shape future privatisations.

NOTES

1 In June 1997 a socialist government was elected in France and the future of theprivatisation programme is now uncertain. A month earlier a centrist Labouradministration took office in the UK and its plans for privatisation are unclear. InNovember 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 Italywere the IRI, ENI and EFIM (now abolished). The holding company structure has alsobeen important in Sweden (e.g. the Statsforetag Convention, renamed Procordia in 1984)and Austria (most importantly the ÖIAG – Osterreichische Industrieholding AG), seechapter 4 below.

3 By December 1990 West Germany had privatised only around DM 10bn of federal stateholdings (Hawkins, 1991).

4 The difficulties of the federal government when privatising Deutsche Telekom illustratethe 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 postalservices (including telecommunications) required a two-thirds majority in the Bundestagand Bundesrat. To get the necessary support for the sale of Deutsche Telekom, thegovernment had to agree to the demands of the main opposition party, the SPD, that ameasure of state control should continue to exist over the company following theintroduction 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 countriesthe municipalities in the Netherlands have developed policies to contract out local servicedelivery and corporatise municipal functions. Space precludes a discussion ofrestructuring and contracting-out of service delivery at the local government level. Inaddition, governments, especially in the UK, have subjected certain central governmentservices to competitive tendering and have established agencies within government torun former departmental functions on a more commercial basis. Competitive tenderingand agency status are also omitted from this overview of privatisation, although theyclearly arise from the same view of the superiority of private competitive markets overstate, 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 sectormanagement practices should apply.

7 Many of Finland’s state industries have been highly competitive in world markets. InFinland state enterprises were intended to play a strategic role in the country’sdevelopment and were therefore encouraged to be ‘world class’. Unlike state industriesin the UK, they were encouraged to adopt an international focus, involving investmentabroad, if this was felt necessary for international competitiveness.

8 The Maastricht criteria for ‘sustainable economic convergence’ and eligibility to jointhe EMU are: (1) an inflation rate in the previous year of 1.5 per cent, at most, above thethree member states with the lowest inflation; (2) long-term nominal interest rates in theprevious year not exceeding by more than 2 per cent the average rate in the three memberstates with the lowest rates; (3) general government net borrowing and nominal grossdebt below 3 per cent and 60 per cent of GDP respectively (known as the fiscalconvergence requirement); and (4) a stable currency within the narrow band of the EMSwithout realignments or ‘severe tensions’ for at least two years.

9 In Portugal revenue generation was a prime objective behind the privatisation programmefrom 1990. Until July 1993 80 per cent of privatisation funds were to be used for statedebt reduction. From July 1993 revenues could also be used to write off the debts ofremaining state industries.

10 The Commission can apply the rules on competition (Articles 85 and 86) to any utilityif its anti-competitive behaviour adversely affects trade between member states.

11 The UK has established a company owning the rail infrastructure, Railtrack, and privatisedtrain-operating companies that provide rail transport under franchises. In Sweden SJ,the state-owned railway business, is still publicly owned but the track management wasseparated from the rolling stock in 1988 and SJ no longer owns the tracks. At the beginningof July 1996 SJ’s monopoly of rail services was removed. France has put infrastructureand the large debts of the rail business, SNCF, into a new state holding company. SNCFwill 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 anumber of countries are dependent on gas imports from Russia, Algeria, Norway andLibya, often under ‘take or pay’ contracts.

14 Germany has nine large, integrated regional monopolies, 40 regional distributors andaround 1,000 local suppliers. Mixed (public and private) ownership dominates. A publiclyowned national monopoly still exists for electricity in France, Italy (in effect) and Portugal.Austria, Finland, Spain and the Netherlands have deintegrated their industries to somedegree (Newbery, 1996, p. 30).

15 For example, in January 1995 the German post office was split into three joint-stockcompanies, Deutsche Post (postal services), Deutsche Postbank (banking) and DeutscheTelekom (telecommunications).

16 To promote competition the Commission requires that telecommunication operators beseparated from the regulatory authority. This is occurring, but slowly.

17 Also, if managers were risk neutral they could simply pay shareholders a fixed rent forthe right to manage the firm and bear all of the residual risks themselves. It is becausemanagers are to some degree risk averse that optimal management contracts involvethem in bearing some, but not all, of the residual risk and, therefore, in having less thancomplete 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 theretail price index less an efficiency factor, X, which reflects the scope for expectedproductivity improvements.

19 The German postal union has secured Deutsche Telekom employees continued status as


civil servants after privatisation. Employees in France Télécom will continue to havecivil service status with accompanying job protection rights until 2002.

20 In other words, the ‘outsider’ model of corporate governance relevant to the UK andUSA with their active stock markets, and on which the notion of the takeover as adiscipline on management behaviour is based, may not be relevant. On the continent an‘insider’ model based on continuing monitoring of company performance by interestedstakeholders, who have a long-term relationship with the firm, is more pertinent. Actionto change management decisions occurs through internal channels, such as participationin supervisory boards and committees. This form of corporate governance leads directlyto the notion of large, favoured investors.

21 In the last few years more foreign investment has been permitted because the Spanishdomestic 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 electriccompany, were floated, 53.6 per cent of the issue was reserved for Spanish nationals.

22 Nevertheless, the objective of restricting foreign ownership of privatised firms to 10 percent unless there are special circumstances favouring a larger foreign investment hasbeen circumvented, for example by foreigners purchasing Portuguese firms that thenapply for shares in privatisation issues. There has been, in particular, a large foreigninterest in investing in the Portuguese banking sector.

23 The European Commission’s position remains somewhat confused. It did intervene whenthe French restricted purchases of shares in Saint Gobain but in other cases seems tohave accepted restrictions on foreign investment.

24 In Italy the Privatisation Law of 30 February 1994 allows for a stable nucleus ofshareholders (nocciolo duro) in privatisation issues. It also includes powers for thegovernment to restrict individual investors and associated parties voting rights to nomore than 5 per cent of a company’s shares. ‘So far Italy’s treasury has sold only twobusinesses completely – INA, an insurer, and IMI, a financial-services group. But neitherwas a true privatisation. In both cases, control passed to “core” shareholder groups ofpublic sector banks’ (Economist, 2 November 1996, p. 102).

25 Negative in the sense of implying less, not more, state involvement in industry.26 This resulted from the short period since privatisation in the countries studied.27 Similar results may be occurring in Sweden where a small number of large private

groupings dominate the economy, notably the Wallenberg group and Volvo.28 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, whichgoverned from 1979 to May 1997. A number of government ministers heavily involvedin privatisation have subsequently obtained highly paid board-level appointments inprivatised companies and City firms.

29 The proliferation of recent strategic alliances amongst world airlines andtelecommunication companies and the prospect of takeovers of privatised companiesraises questions about the extent to which the state should intervene and the adequacy ofexisting regulatory systems in Europe to police competition. The latest case involves theEuropean defence industry where takeovers and alliances are occurring as more of it isprivatised.

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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 CostBenefit 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 ofEconomic Affairs.

Monsen, R. J. and Walters, K. D. (1983,) Nationalized Companies: A Threat to AmericanBusiness, 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 ’, InternationalJournal 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 inEuropean Policy-making: Harmonizing Telecommunications Policy’, Journal ofCommon Market Studies, vol. 32, no. 4, pp. 473–98.

Scott, C. (1995) Competition and Coordination: Their Role in the Future of EuropeanCommunity Utilities Regulation, International Series 3, London: Centre for the studyof 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 SectorReform and Privatization, London: Westview Press.

Sharpe, A. (1996) ‘ Sell-offs in 1996 May Total a Record £36bn ’, Financial Times, 26January, p. 17.

48 David Parker

Van Bergeijk P. and Haffner, R. (1996) Privatization, Deregulation and theMacroeconomy: 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

privatisationSome outstanding issues

Dieter Bös

INTRODUCTION

In the 1980s the opinions of many economists began intensively to deviate fromthe Musgravian view which had long been prevalent in public economics. Theallocation of resources became the field of central interest. Internal subsidisationin public enterprises was increasingly considered undesirable, as was any formof pricing with redistributive features. Furthermore stabilisation by publicenterprises fell into disapproval. Monetary policy of the Friedman type wasrecommended as more appropriate for the achievement of the desired stablegrowth of an economy. Adherents to this view dismissed those distributionaland stabilisational arguments in favour of public enterprises which had longbeen believed in theory and practice. With respect to the allocative justificationof public enterprises, the natural-monopoly paradigm has been destroyed in the1980s. Baumol and others1 stressed the contestability of enterprises which claimedto be natural monopolies, and this led to a careful reconsideration of the internalorganisation of public enterprises. It became clear that typically only parts ofproduction exhibit those cost advantages which prevent them from beingcontestable. Consequently, public utilities may be disintegrated either verticallyor horizontally, with possible privatisation and market entry in those parts whosemarket position is contestable.

My first paper on the theory of privatisation in a Western-type economyappeared in 1986.2 Hence, I would like to use the present paper to ask how farthe theoretical reasoning on the topic has brought us in the ten years from 1986to 1996. In these ten years quite a few neoclassical papers have been publishedwhich compare a publicly and a privately owned utility. Two types of models,which have become paradigmatic, will be presented and critically discussed inthis 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 areboth regulated to avoid the undesired consequences of monopolistic pricing.The regulatory setting is captured by principal–agent approaches where themanagement 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 ina typical neoclassical manner: the information structure, and consequently theincentive structure changes because ownership changes. However, the regulatorand the manager in the two firms to be compared remain the same. It is not a newgeneration of regulators or a new generation of managers whose new attitudesmake the privatised firm more efficient than the public firm. The utility functionsof regulators and of managers are exactly the same in both types of firms; it isonly differences in incentives which imply changes in efficiency. I do not wantto deny that changes in incentives are extremely important when it comes to atransfer of a firm from public to private ownership. However, in my opinion, thisneoclassical way of reasoning misses many facets of the most important changesin enterprises which are privatised.

After presenting the basic features of REGULASY-models, we shall deal withthe 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 betweenthe regulator and the management. Admittedly, this is already a very complicatedmodel. However, its explanatory value is greatly reduced by the fact thatprivatisation also decisively influences the power of the trade unions and,consequently, the position of the employees in the utility. And the trade unionsas an actor are missing in all of the REGULASY-models. There exist some simplermodels, typically full-information multi-stage games, which compare a publiclyand 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 bargainingpower of the trade unions is always assumed identical regardless of the ownershipof the firm. This is a phenomenon which is very similar to that accentuated in mycriticism of the REGULASY-models. Once again, the main actors are assumedidentical when it comes to a comparison between a publicly and a privately ownedutility. And, once again, it is clear from practical evidence that this assumption iscounterfactual. However, as usual in neoclassical economics, we lack a goodtheory to explain in formal terms how the trade unions’ power is reduced in theprivatisation process.

After presenting the basic features of TU-models, we shall deal with the singlemost 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

Theoretical perspectives on privatisation 51

of course lie in these sections. The paper has rather been written to push thepoints which are made in the sections on changing welfare- and utility-functionsand on changes in trade-union bargaining power. Purists might claim thatneoclassical economics has nothing to say on these points. Obviously, I am not apurist.

PRIVATISATION VERSUS REGULATION (REGULASY-MODELS)

In this section we deal with a monopolistic utility which is alternatively ownedby the government or by private shareholders.3 If the government is not willingto accept the exploitation of consumers by profit-maximising prices introducedby the privatised utility, it can either refuse to privatise the utility, or regulatethe privatised firm with respect to prices, quantities, rate of return, etc. However,if regulation is inevitable, why should the government privatise at all? Whyshould a regulated privatised enterprise be preferable to a public enterprise?These questions become particularly challenging if we assume that the economicenvironment is the same for the public and for the privatised firm: the sameagents operate in both institutional settings, demand and production functionsare the same, etc. Figure 3.1 illustrates the hierarchical tiers of the institutionalsettings which are to be compared.

Figure 3.1 Hierarchical tiers of the institutional settingsSource: 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 itis better to have a public firm (left-hand side of the figure) or a regulatedprivatised firm (right-hand side). The framer does not interfere with the firm’sactivities, it neither gives incentives to the public officials who monitor thefirm, nor to the managers who run the firm, nor to the private owners in thecase of privatisation. Its only activity lies in framing; that is in making thedecision whether or not to privatise according to the welfare consequences ofthe two compared cases.

2 Public officials (minister, regulator)

In both cases, the firm is monitored by public officials who serve as ministersresponsible for a public firm or as regulators of a privatised firm. We shallspeak of government if the officials are interested in welfare maximisation; weshall speak of bureaucrats if they want to maximise their personal influence asmeasured 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 canbe doubted that the shareholders of a regulated privatised firm have any actualinfluence on the regulatory system. However, for reasons of commercial law,they cause an information barrier: the regulator cannot directly offer a contractto the manager because this manager is directly responsible to the board of hisfirm which represents the shareholders. An exception would be the case of anowner-manager; however, privatisation of public utilities typically does notlead to situations where owner and manager coincide, because in most cases itis large-scale enterprises which are privatised in Western economies, includingthe EU.

4 The management of the firm

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


more income or to reduce effort. To enhance the performance, therefore, themanager must be offered a contract which gives an incentive to approachallocative and productive efficiency as nearly as possible. Moreover, themanager must be offered compensation for effort which makes the job attractive,i.e. the managerial utility must exceed some reservation level. It is assumedthat this level is identical in the two cases compared: the manager does notattribute a special value to working in a public instead of a private firm or viceversa.

After setting the stage, let us present the comparison between the publicand the private regulated firm. We begin with the case of welfare-maximisinggovernment officials who monitor the public firm (‘minister’) and the privatisedfirm (‘regulator’). As a benchmark case we assume fully informed officials. Inthis case, there is no difference between the case of a public and a regulatedprivatised enterprise. In both cases, the government officials are able to enforcethe first best; welfare-optimal prices p* and welfare-optimal effort e* prevail.Regardless of ownership, the government officials achieve the same welfareoptimum. In the regulated privatised firm the private owners will be left withoutany economic profit. The managers will always be forced down to theirreservation utilities. The government officials will appropriate all rents. In thissetting the framer is always indifferent between the case of a public and aregulated privatised enterprise.

This result changes if there is asymmetric information. It is plausible toassume that the managers have private information in both the public and theprivatised firm. This private information will refer to parameters which influencecosts or demand, and, of course, to the manager’s own effort.5 The governmentofficials in both public and private firms typically will not be fully informedabout these parameters and about the manager’s effort. To get the relevantinformation, they have to ask the manager and give the right incentives for atruthful revelation. To give these incentives is costly. In other words, the managerearns an information rent. Now consider a public enterprise. Let the ministerconsider a positive shadow price of public funds. Therefore, the minister facesa trade-off between the manager’s information rent on the one hand and bothallocative and X-efficiency on the other hand. Hence, the minister willcompromise on efficiency and will accept an effort level epub

< e*. In theprivatised firm, conversely, there is a double information barrier. First, theregulator has to determine an incentive contract with the private owners. Second,the private owners also are imperfectly informed and have to extract privateinformation from the managers by an adequate revelation mechanism.Therefore, both allocative and X-inefficiency are increased as compared withthe public firm: the produced quantity is lower, and so is the managerial effort,epriv < epub

< e*. Accordingly, the welfare-maximising framer will opt for thepublic firm.

This holds unless the model is enriched by further assumptions on particularweaknesses of public enterprises. Laffont–Tirole (1991), for instance, assumethat investments and the benefits from investments are not verifiable. However,

54 Dieter Bös

once investments in public firms are sunk, the government, which has theresidual rights of control over the public firm, can ‘expropriate’ the managersby using the investments for purposes not originally intended. It may, forinstance, tell the public managers to use the returns from their investments toemploy excess labour. Anticipating such government behaviour, the publicmanagers refrain from investing, in contrast to the private regulated firm.6

Even if there are no particular weaknesses of public enterprises, publicownership may be welfare inferior if minister and regulator do not maximisewelfare. Let us, therefore, for the sake of argument assume that both ministerand regulator have the same multiple objective: they want to maximise aweighted average of welfare and output instead of welfare alone. In this multipleobjective the maximisation of output would require prices which are as low aspossible, preferably zero tariffs. The simultaneous consideration of welfare,comprising consumer and producer surplus, requires higher prices, althoughthey still would possibly lead to a deficit for the enterprise. This multipleobjective allows the treatment of various types of ‘bureaucratic’ ministers orregulators depending on the weight which is attached to the output objective.

Apart from the introduction of ‘bureaucrats’, the organisational structureand the informational setting of both the public and privatised firms are thesame as in the preceding paragraphs. Therefore, once again, the regulator ofthe privatised firm faces one more information barrier than the minister who isresponsible for the public enterprise. Due to the consideration of bureaucratsinstead of pure welfare maximisers, however, this additional information barriernow has both negative and positive consequences. Negative is the reduction ofmanagerial effort, as explained in the preceding paragraph. Positive is the tamingof the bureaucrat. The additional information barrier restrains the bureaucraticregulator in the pursuit of the private agenda.7 Hence, the regulator will haveto accept lower output after privatisation. If prior to privatisation the regulator’soutput-maximising attitude had been very strong, this lower output will benearer to the welfare-optimal output than was the case in the public enterprise.The privatisation body, which still is a welfare maximiser, evaluates the negativeand the positive consequences of privatisation and if the positive consequencespredominate, 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 thepublic enterprise and the regulator of the privatised enterprise have the same welfarefunction. The only change in an objective function which matters in REGULASY-models is the move from a welfare-maximising public owner to a profit-maximisingprivate owner, namely the private shareholders. However, privatisation will typicallyinclude a change in the regulator’s welfare function as well, relinquishing thedistributional welfare judgements of the ministry in favour of an allocatively oriented


welfare function. Let us clarify this change in the welfare function by using ageneralised utilitarian concept, that is

W = ΣΛhvh; (1) where vh (p, rh) is the indirect utility function of consumer h = 1, . . ., H,who faces a price vector p and a non- labour income rh. The price vectorincludes the wage rate w. The ministry which regulates the public enterpriseshall be described by

Λh = W/ vh > 0; with 2W/ vh2 < 0. (2)

This implies a decreasing marginal welfare of individuality utility. The abovewelfare weights signal an inequality aversion of the policy maker. Thisinequality aversion refers first to the individual utilities. However, sinceany individual utility is increasing in the individual incomes, rh + wlh, thepolitician’s inequality aversion indirectly also refers to the individualincomes. Given this objective function, the minister as a regulator will advisethe public enterprise to choose prices which reflect his distributionalobjectives9 (if we add the realistic assumption that it is impossible for theminister to choose the individual lump-sum incomes {rh} 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. Theregulated privatised firm should not set prices so as to help the poor, sincethis type of public sector pricing always implies an internal subsidisationunwanted by those policy makers who pursue a privatisation policy. Hence,those policy makers will employ a regulator of the privatised firm whosewelfare function is

W = Σvh; (3) excluding any distributional weighting. How is the REGULASY-paradigminfluenced by this change in the welfare function? Typically we would think ofthe framer as a conservative policy maker not interested in distributional targetsof 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, accordingto the REGULASY-paradigm, the framer will compare a publicly owned and aprivately owned enterprise from the own point of view, that is from the pointof view of a welfare-type (3) function. However, this is a bias in favour ofprivatisation.

Let us conclude this subsection by looking at some problems of regulatorypractice related to the change in the regulator’s welfare function. Price-capregulation of a privatised utility does not necessarily exclude pricing withdistributional objectives and internal subsidisation, respectively. This can be

56 Dieter Bös

shown most clearly with the example of the British RPI - X regulation: theaverage price increase of monopolistically supplied goods of the public utilitymust not exceed the increase of the retail-price index minus an exogenouslyfixed X, which is politically determined, and should be set on the basis ofexpected productivity increases. RPI - X regulation fails to avoid internalsubsidisation 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 toincrease rental charges and local calls, but to reduce prices of particularlong-distance calls.10 However, a regulator who cares for distribution policycould achieve at least part of his intentions under an RPI - X constraintunless competition makes this impossible.

• Moreover, the weights of the retail-price index ‘distort’ the regulated pricesin a systematic way. As shown in Bös (1991: 124–34), the resulting pricestructure favours lower-income earners. It is qualitatively identical with theFeldstein (1972) rule of distributional pricing.11 The reason is that the basketof goods which is used for the calculation of a retail-price index is alwaysfixed 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-of-living indices show that in a developed and growing economy the percentageof consumption dedicated to necessities falls over time. Hence, a basket ofgoods of some earlier period always exaggerates the weightings ofnecessities. Regulation on the basis of a retail-price index, which over-accentuates necessities, implies relatively lower prices for these necessities.Hence, RPI - X regulation implies distributional pricing, although the firmis privatised and maximises profits.

Employment and regional policy

Changes in the regulator’s objective function not only relate to the distributionof personal incomes. It has often been recognised that governments requirepublic enterprises to safeguard employment, to be a shining example when itcomes to the relationship between firm and trade union, or to supply servicesto less developed regions of the country even if this is coupled with a highdeficit. Then the minister who monitors and regulates a public enterprise mustbe described by an objective function which does not only include consumerutility W, but also some measure of employment, of trade-union compliance orof regional outputs. By way of an example, in Pint (1991), the governmentowner of a public enterprise maximises an objective function which is aweighted sum of consumer surplus, producer surplus and wages paid to labour.This makes the public enterprise biased in favour of labour inputs. After


privatisation the firm is subject to a regulatory constraint bK on the rate ofreturn, 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 isnot explicitly modelled. The compliance of trade unions is a motivator in DeFraja (1993b). Here the utility of the relevant trade union enters the objectivefunction of the public-firm regulator. De Fraja’s model will be extensivelyreviewed 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 andinforms the regulator of the production possibilities resulting from the chosencontrol inputs.13 In contrast to the imperfectly informed regulator, themanagement 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 ofcontrol inputs.14 The control inputs are used in the administration of that firmwhich the government is going to privatise. For ease of explanation they arefully separated from production inputs, although some production inputs maybe of similar type to control inputs. For instance, we have administrative labourinputs which cannot be used for productive purposes. We assume decreasingreturns 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 tothe replacement of a bureaucratic staff by a market-oriented management. Bothpublic 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 chosenoutput bundles along a ray sz¯, where s > 0 denotes a scaling factor. In productiontheory s is well known as a Farrell measure of output efficiency.15 However, anychoice of s requires costs of control p

cc corresponding to the technology g(sz¯, y,

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 utilityfunction from that of the public bureaucrats. It is the difference in the personalitytypes which drives changes in control and profitability. Private technocrats, forinstance, may have been educated differently from public bureaucrats whoseindividual judgements are formed by a sort of civil-servant ethos. The privatetechnocrats, possibly Yuppy types, start from different personal attitudes withrespect to economic activities. Let us describe these differences by assumingthat the subjective importance of technical efficiency and of the costs of controldiffers 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 utilityfunctions are assumed to be strictly increasing in outputs and strictly decreasing inthe control inputs.16 Moreover, they are quasi-concave in the scale factor and incontrol costs.

In Figure 3.2a the market-oriented private technocrats concentrate on increasesin s and are willing to accept the higher costs of control. In a public firm, the publicmanagers’ optimisation leads to point A, a full transition to private managementimplies a move to point B. This is a case where X-inefficiency is reduced at theexpense of higher control costs. Note that this follows the Stigler approach of X-inefficiency rather than the Leibenstein approach:17 the firm always produces an‘efficient’ input-output combination, but the efficient combination is shifted if thecontrol costs change. In Figure 3.2b the opposite happens. The public technocratsare insensitive to control costs. They are accustomed to the hierarchical structureof the firm, to red tape and other expensive procedures of internal control. Theprivate technocrats prefer less hierarchy and less expensive control, even if thatimplies a reduction in the scale of outputs. Here control costs are reduced at theexpense of a reduced scale of output.

One interesting question remains to be answered. In Figures 3.2 a and 3.2 b wedistinguish two types of managers. Does privatisation correspond to Figure 3.2a orto Figure 3.2b, i.e., does privatisation imply an increase in the scale of outputwhich is made possible by an increase in control costs (Figure 3.2 a), or doesprivatisation imply a reduction of control costs coupled with a reduction in thescale of output (Figure 3.2 b)? Bös and Peters (1988: 246–7), attained the resultthat only Figure 3.2b describes what happens in the case of privatisation – a moredetailed explanation of the result is presented in note 20 below. If there are nopossible reductions of control costs from selling any shares, the firm remains inpublic ownership. Too little output is not taken as the reason for starting to privatise.

Figure 3.2 Scale factor and control costs


Therefore, ‘inefficient’ public firms may remain public, because the low outputlevel could only be cured by an unwanted increase in control costs.

In REGULASY-models the utility function of the managers is the same, both inthe public and in the privatised firm. Hence, there is only one point on the productionpossibility frontier which matters, regardless of the ownership of the firm. Byrestricting itself to identical managerial utility, REGULASY loses much explanatorypower.

The case of partial privatisation

A total shift from A to B refers to the case of total privatisation, where all publictechnocrats are replaced by private managers. In countries like (West) Germany,however, partial privatisation also plays a major role. Let us therefore deal withthis 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 areowned by private shareholders. We denote this percentage by Θ. For any givenextent of partial privatisation, let λ(Θ) denote the percentage of private managersin the management. In a public firm we have no private managers, so λ(0) = 0. Onthe other hand, 100 percent of public technocrats are replaced if the firm is fullyprivatised and, therefore, λ(100) = 100. For all cases in between, the percentage ofprivate managers is higher, the higher the extent of privatisation. This shall becaptured by assuming an increasing function λ(Θ).

Partial privatisation implies that the two groups of technocrats have tocompromise. Hence, they enter into negotiations. A special case of such negotiationswould be as follows. Define U¯(Θ) and V¯(Θ) as the security levels of the twogroups of managers for any degree of privatisation which is exogenously given tothe management. Consider now a symmetric Nash bargaining solution with acontinuum of agents. We aggregate identical agents, namely the λ(0) percent ofprivate technocrats and the (100 - λ(Θ)) percent of public technocrats. Then thebargaining solution can be written as18

max

c,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* whichresult from the cooperative solution exceed the respective security levels U¯and V¯. The optimal s* (z, y, Θ) determines the output quantities which the firmwill choose when combining outputs, control, and production inputs. Hence,we have s*z¯ = z (7) for any bundle z¯. Moreover, we have the optimal control inputs

60 Dieter Bös

c* = c* (z, y, Θ). (8) An interior optimum of s and c is achieved if economies of scale are not ‘toolarge’ 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 thecase of privatisation. However, partial privatisation stops somewhere betweenpoints A and B, compromising between increases in X-efficiency and increasesin control costs.20

It should be noted that in the limiting cases, Θ = 0 and Θ = 100, theoptimisation problem (6) is also well defined, although there is no bargainingas only one group of representatives decides on c and s. Hence, the followingtext on the change in the technology which results from the changing managerialutility functions holds for both total and partial privatisation. Therefore, it hasbeen made a separate subsection.

Changes in the technology

The control-input functions c(z, y, Θ) are the signals which the managementsends to the regulator and which the regulator forwards to the framer. So thedecisions of both regulator and framer are based on c(z, y, Θ), not on g(·), whichis known only by the management. However, the knowledge of regulator andframer is fully sufficient. Including both g(·) and c(·) in their relevantoptimisation approaches would be superfluous because the technology hasalready been taken into account by the management when choosing c(z, y, Θ). Soany control-input vector c(·) implies technically efficient production. Note thatthe control-input functions describe the adjustment of the management to thedegree of privatisation. Although the functional shape of g(z, y, c) is independentof the extent of privatisation, the control inputs move in the Θ-space and thetechnology is shifted in dependence on the framer’s privatisation activities. (Thesame argument holds for the typical REGULASY-models: although the functionalshape of the production function is independent of privatisation, some argumentof the production function depends on privatisation, for instance managerialeffort e.)

PRIVATISATION AND TRADE UNIONS (TU-MODELS)

The trade unions’ influence will typically be reduced by privatisation. By wayof an example, it has been argued that the privatisation of the Britishelectricity industry, among other things, was aimed at breaking the power ofthe miners’ union because the government correctly anticipated thatprivatised electricity generation companies would increase the use of gas inpower stations and also increase imports of coal, thus reducing the size of theBritish coal industry and, consequently, reducing the importance of theminers’ union. Similarly, the first wave of privatisation in West Germanysome thirty years ago was intended to reduce union power. The strength of


German trade unions, which are adamantly opposed to privatisation and exerta strong influence on political parties, was one of the main reasons why ittook so long before the German government started to privatise publicutilities.21

Some models explicitly introduce trade unions when it comes to acomparison between publicly and privately owned utilities. Let me begin withBös (1989). In this paper the government is perceived as an institution whichwants to draw money from selling its property, and so willingly cooperateswith private shareholders who also are interested in the value of the firm. Theantagonists 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. Theyare, however, willing to agree to at least some firing of employees if theremaining employees get some share of an increased profit and if there is acertain social safety net for the dismissed. Therefore, when deciding onprivatisation, the government enters into negotiations with the trade unionsabout the plan for employees’ shares and financial compensation for thedismissed. In the course of the negotiations the players have to anticipate howthe firm will adjust to the compromise the government and the trade unionshave made. This adjustment is described as a cooperative game between theshareholders and the representatives of the trade unions in the firm.

There are many different results in this paper. It is shown that privateshareholders never get shares free of charge. It is also shown that partialprivatisation never happens in this positive-theory framework. Either the firmremains 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 thegovernment. Two scenarios are particularly characteristic. First, a scenariowhere the trade unions dominate. Here, the trade unions preclude the privateshareholders from any net incomes from dividends and confine thegovernment to that minimum revenue requirement which is necessary to getthe government to privatise. All profit which exceeds the governmentminimum revenue requirement goes to the employees through plannedemployees’ shares or is used to keep inefficient jobs in the firm. Second, thereis a scenario where the conservative interests of the government dominate.Here, the government is not willing to share any part of the profit with theemployees: there are no employees’ shares. However, it is willing to sharepart 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 ofnon-employee shareholders and, in the case of privatisation, in the revenueinterest of the government. Let us first present Grout’s reasoning.22 Hisunexpected result is rooted in the outcome of the wage negotiations. Theowners and the employees share the aggregate revenue of the firm accordingto a Nash bargaining solution. When sharing a given revenue, it does notmatter whether the employees receive money as wage-earners or as dividend-

62 Dieter Bös

recipients. The bargaining only determines a particular sum of money whichthe employees receive. If they have more employee shares, the higherdividends will reduce their wage bill. The sum of wage income plus dividendincome remains constant for any amount of employee shares. In contrast towage incomes, however, dividend incomes require the acquisition of sharesand, therefore, the payment of some issue price. Hence, the employees shouldopt for wage incomes only because they receive the same amount of moneyand have no additional costs. The more employee shares they buy, the higherthe 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 employeeshares 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 determinethe level of investment activity of the firm. In doing so they also consideremployee wages which will be negotiated at a later stage. The non-employeeshareholders are long-run oriented and maximise the value of the firm, i.e.,the discounted sum of future profits. Investment is an increasing function ofthe percentage of employee shares because wages to be paid per unit ofrevenue decrease if employees hold more shares: the employees contribute tocosts proportionate to their share ownership. Therefore, total revenue, whichis negotiated by the firm and the employees at a later stage, increases withemployee shares.

Any employee pondering about his investment in shares anticipatesperfectly the consequences of his purchase. He knows that an increase inemployee shares will increase revenue. On the other hand, the employeeshave to pay a price for their shares, although per unit of revenue they receivea constant income from wages and dividends. Since the two effectscountervail, employees may either gain or lose from their share purchase.Grout neglects the possibility that the increase in revenue can be high enoughto compensate employees sufficiently. A counter-example is given in Bös andNett (1991). This example shows that the positive effect on revenue canoutweigh the negative effect on income net of the issue price to such an extentthat the employees gain from the introduction of employee’s shares.

Let me finally present a TU-model which studies the long-run effects ofprivatisation on wages (De Fraja 1993b). The author first deals with a ‘mixedduopoly’ where a public and a private firm compete with each other. Heanalyses a two-stage game. In the first stage the public and the privateenterprise simultaneously and independently bargain with a trade union todetermine wages. The public firm maximises welfare, the private firmmaximises profits. In each firm the wage level is determined by a Nashbargaining solution where firm and trade union engage in one negotiation,assuming that the negotiation in the other firm will also lead to the respectiveNash bargaining solution. In other words: in the public firm a wage wo isdetermined according to a Nash bargaining solution for given w*1 of the private


firm and vice versa.23 In the second stage the two firms are engaged in non-cooperative Cournot competition in the output market. The outcome of thesecond stage is perfectly anticipated in the first stage. De Fraja’s mainmessage is that ‘when there is oligopolistic interdependence between theprivate and the public firm, the latter is more likely to pay a higher wage thanwhen the firms considered are independent’.

De Fraja further investigates the effects of privatisation by examining thetransition from the original mixed market to a duopoly of two profit-maximising firms. He concludes as follows:

Although there may be exceptions for extreme values of theparameters, the general rule seems to be that while the wage in theprivatised firm may go up or down, the wage in the other firmincreases as a consequence of its rival’s privatisation. This result,read in conjunction with the previous one of higher wage in thepublic firm, would suggest that any observed wage differentialbetween public and private firms operating in the same market isdue more to the depressing effect of the presence of a publicoligopolist on the private firms’ wages, than to any enhancingeffect of public ownership on the workers’ wages. This is indeed anatural way of interpreting the result: the public firm, byexpanding its output level beyond what a Cournot duopolistwould choose, is a very aggressive competitor for the privateproducers, and as such, it reduces the size of the pie upon whichthe 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 unionis 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. Barredvariables denote reservation values. The transfer from public to privateownership is only reflected in changes in the function v which moves fromwelfare to profit. The parameter ß, however, is taken as constant in spite ofprivatisation. It is well known that this is a counterfactual assumption. Let usbriefly reflect how the main results of various TU-models can be expected tochange if the trade-union power is assumed to decline in the course ofprivatisation.

64 Dieter Bös

In the Bös (1989) approach the trade-union dominated scenario becomesless likely if privatisation implies a decline in the power of the trade unions.The conservative interests of the government prevail and it becomes veryprobable that there are no employee shares and that the government shares theprofit 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. Thereason is simple. The revenue is shared according to a Nash-bargainingsolution. The part of the revenue which goes to the employees shrinks if theirtrade union becomes less influential. Hence, privatisation implies that thesum of wages and dividends, as a percentage of revenue, is reduced. Even ifthe absolute amount of revenue increases as a consequence of issuingemployee shares, the employees get a lower percentage of the revenue andthis 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, Iwould like to deal more extensively with this model. In De Fraja’s mixedmarket, in stage one the Nash-bargaining solutions result from

ßlog(u0 - u¯

0) + (1 - ß)log(S - S¯); for w

1 =w*

1, (10)

ßlog(u1 - u¯

1) + (1 - ß)log(π - π¯); for w

0 = w *

0. (11)

The symbols have the usual meaning: S is the surplus which the public firmwants to maximise, π is the profit which the private firm wants to maximise,u

i, i = 0, 1 are the utilities of the respective trade unions.24 Privatisation means

that both firms maximise equation (11), taking the other firm’s wage asconstant. As can clearly be seen, De Fraja leaves ß unchanged in spite ofprivatisation, just as in Bös and Grout. However, there is a change in trade-union power in his model. The public firm’s objective is assumed to be

S = Cs + II + αu

0, (12)

where S stands for surplus, C

s for consumer surplus and ? for the profit of the

public firm. Hence, the trade union influences the public-firm wages in a two-fold way: first because it has bargaining power ß, second because its utility isdirectly included in the firm’s objective function. The value of a isexogenously given. Privatisation implies a move from objective S to objective? and, therefore, includes a loss of trade-union power, although thebargaining power ß remains unchanged.

For the following interpretation it is helpful to reprint some results of DeFraja’s numerical simulations. Table 3.1 presents a comparison of wages inprivate 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, theconventional case of a government objective which comprises consumer and


producer surplus, and a = 0.5, which gives some special weight to the tradeunion’s utility.25

If the trade unions have no bargaining power, then the firms will only pay thecompetitive reference wages, which have been normalised to zero. Thisexplains the first line of the table.26 In the mixed-market cases we can see thecrucial influence of a, the special weight which is given to the trade union’sutility. If a = 0.5, the public firm pays higher wages w

0 > w

1, except for the

extreme values of bargaining power ß = 0, 1. If a = 0, the public firm payshigher wages only if ß is low (!).27 Privatisation implies a move to theprivateduopoly case. This always increases the wage of the privatecompetitor. The wage of the formerly public firm is always increased byprivatisation if a = 0, but may be reduced, if a = 0.5 and ß is low. This showsthat the main effect of privatisation comes from a change in trade-unioninfluence.

CONCLUSION

Neoclassical theories on the privatisation of public enterprises assumeconstant welfare- and utility-functions, whereas privatisation is decisivelychanging these functions. The same reasoning holds for the constant trade-union bargaining power in the relevant models. This, unfortunately, is a majordeficiency of all the relevant theories on the subject.

In this paper we presented two types of papers where the ceteris nonparibus problem (‘not everything remains equal’) is of particular importance.We first dealt with comparisons between a publicly owned and a privatelyowned utility, which in both cases is regulated under asymmetric information(REGULASY-models). We showed that the results of these models decisively

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

Source: De Fraja (1993b: 465)Note: aw0 is the wage in the public firm, w1 in the private firm

66 Dieter Bös

depend on the assumption of a constant welfare function of the regulator andof 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 theassumption that the trade unions’ bargaining power in wage negotiations isassumed typically to remain unchanged in spite of privatisation.

The problems treated in this paper are not easy to handle. It isunderstandable that neoclassical economics has always been hesitant tomodel changes in welfare- and utility-functions and in bargaining power.After all, our practical knowledge of welfare functions and utility functions isnext to nil. Hence, if we do not actually know the functional shape of welfare-and utility-functions, how should we model changes of such a functionalshape? Bargaining power also is something which, for understandablereasons, is treated as exogenous in typical neoclassical models.

However, if changes in welfare- and utility-functions and in the bargainingpower of trade unions are just what matters for privatisation, then one has toeither model these changes or to give up neoclassical modelling of theproblem 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 arequite extreme. Often it would suffice to note changes in the relevant utility-and welfare-functions without explicitly modelling these changes and thesame holds for changes in the trade unions’ bargaining power. Hence, there isstill much scope for neoclassical explanations of privatisation. Nevertheless,these explanations should refrain from holding things constant whose changeis 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 notconsidered in this paper.

4 The non-verifiability of certain variables is particularly important in the theory ofincomplete contracts. For an interesting application of this theory to thecomparison of public and privatised regulated utilities, see Schmidt (1996).

5 See Laffont–Tirole (1993) or Bös (1994: 289–381), for detailed analyses ofvarious cases of informational advantages of managers.

6 It can well be doubted whether this is a realistic setting. In practice, it takes a greatdeal to discourage managements in public enterprises from investing and thediversion of the enterprises’ surpluses into welfare purposes would not stopinvestment. After all, such diversion is an implicit purpose of public enterprise.

7 Shapiro–Willig (1990) present this argument. For purely didactical purposes theyassume that the bureaucrat is perfectly informed about the public firm (noinformation rent to the manager!).


8 The discussion in this section complements discussion in other chapters in thisbook 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 pricecap in a particular service thus removing the scope for re-balancing.

11 Maximising profits, given an RPI - X-constraint, leads to exactly the same pricestructure as minimising the retail-price index, given a revenue-cost constraint. Forthe latter problem, see Bös (1978), who proved the qualitative equivalence ofminimising 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 ofthe utilities of consumers, shareholders and managers/workers. This paper is acomparison of X-inefficiency in public and private firms; however, it does notinclude regulation of the private firm. Hence, it has not been included in theREGULASY-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

1:= U/ (Uz¯) > 0 and U

2:= U/ (p

cc) < 0, and analogously for V.

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 tomaximise welfare W(p

z, p

c, z, y) subject to the firm’s budget constraint p

zz - p

yy -

pcc (z, y, Θ) = ΙΙ(Θ), where ΙΙ(Θ), is the profit resulting from the compromise of

welfare interests of the government owners and profit interests of the privateowners of the firm. Prices p

z, p

y, p

c and quantities z, y are exogenously given when

the privatisation body takes its decision. Maximising the respective Lagrangeanfunction leads to the following Kuhn–Tucker conditions

-pccΘ = IIΘ, for Θ* < 1;

-pccΘ > IIΘ, for Θ* = 1.

Both pc and IIΘ are positive. Therefore, along the path of privatisation, c

T must be

negative: control costs are always reduced. Now consider the two scenarios on thetechnological management we have illustrated in Figure 3.2. Only Figure 3.2bdescribes the technological change in the case of privatisation.

21 Particular difficulties arose in the German railway and PTT-system where manyemployees have civil-servant status which provides job security and generouspension plans (Vogelsang 1988). Accordingly, special provisions for civil servantswere made in the corporatisations of these public utilities.

22 In this brief presentation we skip all effects of taxation which Grout explicitlyincludes in his model.

23 De Fraja (1993b) in a footnote comments: ‘That is, I look for a Nash equilibrium inNash bargaining solutions.’

24 The trade unions want to maximise union rents, that is, the total wage above thecompetitive 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 levelof employment.

68 Dieter Bös

25 The competitive wage level which serves as a basis of reference in the tradeunions’ utility functions is set equal to zero. De Fraja himself also investigates thecase 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 TheTheory 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 ofEconomics/Zeitschrift für Nationalökonomie, Supplement 5), 17–40.

Bös, D. (1989) ‘ Privatization of Public Firms: a Government–Trade Union–PrivateShareholder Cooperative Game ’, in M. Neumann and K. W. Roskamp (eds) PublicFinance and the Performance of Enterprises, Detroit: Wayne State UniversityPress.

Bös, D. (1991) Privatization: A Theoretical Treatment, Oxford: Oxford UniversityPress.

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: aComment ’, 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 ofPublic Economics, 50, 15–30.

De Fraja, G. (1993b) ‘ Unions and Wages in Public and Private Firms: a Game-Theoretic 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 andRegulation, Cambridge, MA: MIT Press.

Pint, E. M. (1991) ‘ Nationalization vs. Regulation of Monopolies: the Effects ofOwnership on Efficiency ’, Journal of Public Economics, 44, 31–64.

Roth, A. E. (1979) Axiomatic Models of Bargaining (Lecture Notes in Economics andMathematical Systems, no. 170.), Berlin: Springer.

Schmidt, K. M. (1996) ‘ The Costs and Benefits of Privatization – an IncompleteContracts Approach, Journal of Law, Economics and Organization, 12, 1–24.

Shapiro, C., and Willig, R. D. (1990) ‘ Economic Rationales for the Scope ofPrivatization ’, in E. N. Suleiman, and J. Waterbury (eds.) The Political Economy ofPublic Sector Reform and Privatisation, Boulder, CO: Westview Press.

Stigler, G. J. (1976) ‘ The Xistence of X-Efficiency ’, American Economic Review, 66,213–16.


Vickers, J. and Yarrow, G. (1988) Privatization: An Economic Analysis, Cambridge,MA: MIT Press.

Vogelsang, I. (1988) ‘ Deregulation and Privatization in Germany ’, Journal of PublicPolicy, 8, 195–212.

4 The privatisation experiment in

Austria

Karl Aiginger

THE SPECIFIC EXPERIMENT AND ITS BACKGROUND1

The term ‘privatisation’ can refer to three broad types of policy: first, assettransfer from the public to the private sector, generally through sale; second,deregulation or liberalisation of statutory monopolies (with or without the saleof assets), with particular emphasis on the removal of entry restrictions; andfinally, franchising or contracting out the provision of marketable goods andservices to private sector firms.2 We could add corporatisation as a fourth methodof privatisation; this is transferring the supply of goods and services from thegovernmental sector to a separate company according to corporate law, whilethe government remains the owner.3 And we can label activities to promoteefficiency and competition within the government as a fifth mode ofprivatisation. The motives for privatisation fall in general into one or more ofthe following categories: financial motives of the seller (gaining revenues orbalancing losses), increase of productive efficiency (reducing average costs),and the pursuit of allocative efficiency (increasing consumer surplus). It iswell known that the first goal can be achieved only in combination with anincrease in the second, because otherwise the selling price would equal forgonefuture dividends.

We can observe in Austria examples of all these policy types and motives.The single largest cohesive experiment ever performed, however, was theprivatisation of the former nationalised industry in the 1990s. Up to the late1970s, publically owned manufacturing firms (‘Verstaatlichte’) together withfirms belonging to nationalised banks accounted for 25 per cent of Austria’smanufacturing sector.4 In the 1990s, the majority of all large industrial firmswas sold in a specific attempt to realise the first type of privatisation (transferof ownership). The motive was primarily financial, namely the attempt to limitthe financial losses, which were remunerated by the public budget. The methodof privatisation had specific, interesting features, which were different fromthe strategies applied in other sectors in Austria and in other countries.

The paper is structured as follows: in the next section we describe the extentand background of public involvement in Austria’s economy. Then we reporton the successful privatisation experiment in the nationalised industry duringthe 1990s. In contrast, we also report on the decade long struggle to privatise a

The privatisation experiment in Austria 71

large bank, which received worldwide attention, and stress the differencesbetween the two strategies. Finally we report on the lag in reforms in Austriaas far as the second type of privatisation (the liberalisation of sectors withnatural monopolies) is concerned.

THE HISTORY AND STRUCTURE OF PUBLICINTERFERENCE

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 bethe positive and progressive impact of the enlightened monarchy in thenineteenth century (‘aufgeklärte Monarchie’), which at this time led to thedevelopment of a rather efficient bureaucracy in Austria. On the other hand,Austria did not produce a large stratum of innovative and dynamic entrepreneursduring the second half of the nineteenth century, but in contrast, experienced alacklustre phase of liberalism. More recent roots the high level of governmentinterference involve the wide-ranging bureaucratic structures of the formerAustro-Hungarian Empire that were concentrated within the small AustrianRepublic following the First World War, and the economy stagnating betweenthe two wars. After 1945, Austria needed and engineered a strong governmentin the form of a stable ‘grand coalition’ uniting the conservative and socialistparties, and – parallel to the two blocs – highly centralised ‘social partners’.Both institutions helped to counterbalance economic backwardness, helped toregain Austrian sovereignty, and protected the property of former German firmsfrom the grip of the Allied Powers, during Austria’s period of limitedsovereignty, from 1945 to 1955.

There are estimates that near the end of the 1970s, 25 per cent of the grossnational product was produced by publicly owned firms.5 The lack of largeprivate companies and a very underdeveloped capital market characterised theother side of the coin. All the major banks were owned by the government,specifically the two largest, the Creditanstalt and the Länderbank.6 These bankshad considerable stakes in big manufacturing and construction firms. Electricity,the post and telecommunications, broadcasting and large parts of thetransportation sector (highways and railways) were owned by central or localgovernments. The share of value added provided by the government bureaucracy(as measured by the payroll of the civil servants) amounted to about 20 percent.

While public ownership in infrastructure had long been a common feature ofEuropean economies, maintaining a large share of public ownership inmanufacturing up to the 1990s was, it seems, peculiar to Austria among Westernmarket economies.7 The larger part of the nationalised sector – specifically firmsdoing business in mining, oil, chemicals, steel, and aluminum – was nationalisedin 1946. Socialists had, to some extent, favored nationalisation for ideologicalreasons. The People’s Party supported nationalisation, in part because no potentialAustrian owners were available, and partly because nationalisation reduced the

72 Karl Aiginger

grip of the Allies on former German firms. German ownership existed in Austriain 1945, since some of the larger firms were founded by the Nazi regime to helpsupply 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 dominatethe national markets, it is well known that there are two alternative methods ofdealing with market failure. Continental Europe, as well as the UK and Australia,usually established public ownership, while the US chose to regulate privatefirms. Instead of choosing between these two options, Austria installed a doublegrip: ownership plus a regulatory process embedded in the bureaucracy of aministry (also allowing the trade union and employers’ organisations to playsupporting roles). This tactic led to a predominance of political over economicgoals. In the first stage, this governance structure implied a rapid rebuilding andexpansion of capacity, which proved extremely important in Austria’s recoveryprocess. Later on, the selection of managers not only according to their ability,but according to their political orientation became the norm. Initially prices werefixed with the goal of sheltering low income consumers from unaffordableexpenses; later on, prices were set with an eye on the next election date.

Many of the well-known inefficiencies of cost-plus regulation becameapparent; investment decisions were made according to regional demands andpolitical lobbying, increasing capacity became a more important goal thaninnovation and service orientation, regulators were to some extent captured bythe monopolies. These judgements are, of course being made with the benefit ofhistorical hindsight. It has to be stressed that this negative assessment evolvedonly after the system had operated successfully for three or four decades. Thefirst twenty years after the war was a period of remarkable recovery in Austria.The efficient infrastructure provided by the national champions, as well as theinexpensive and high-quality products produced by the state-owned basic goodsindustry were two pillars of that process. Equally important were the low pricesfor heating and transportation, which helped Austrians with lower incomes tocatch up with the middle class. But, as the system continued over decades, thepotential increase in the productive efficiency of large firms, and theirSchumpeterian potential for innovation, were more than outweighed byLeibenstein’s ‘x-inefficiency’ and allocative inefficiencies. Rent-seekingmanagers, firms and political parties decreased the incentive to equate resourceswith demands (leading to allocative inefficiencies), while cost-plus regulationinhibited the search for low-cost technologies and innovation and promotedorganisational 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 thelate 1950s. Several firms, located in eastern Austria, had been German-owned, andlater managed by the Russians during the occupation period. In the late 1950s, the


need for restructuring was unavoidable. Some firms were sold to private owners,and some were privatised by a stock offering, specifically targeted at employeesand middle-income investors (‘Volksaktie’). Minority shares in the two largenationalised banks (Creditanstalt and Länderbank) were also offered to the public,although the government retained the voting rights. This experiment is consideredtoday to have been moderately successful. No broad capital market existed in Austriaand there was no popular, widespread attitude favouring investment in stocks. Onlya limited number of small-income investors had the patience to wait for stockprices to rise, so that the lion’s share of the broadly distributed shares was, in ashort period, acquired by large or institutional buyers.

Many examples exist of cases in which reforms were implemented in an attemptto insulate the daily management of agencies or firms from direct bureaucraticgrip, through the formation of quasi independent agencies or independent companiesunder corporate law (corporatisation). In this form of restructuring, the governmentis still the owner, deciding in principle upon the goals, strategies and activities ofthe firm, selecting and monitoring the management. However, decisions regardingdaily operations, financial details, and personnel are made at the level of the firmand operation is according to the rules of the private sector. The minister cannotgive direct orders (Weisungsrecht) and the employees have no lifelong jobguarantee.

Examples of this type of ‘privatisation’ are available at all government levelsand involving a huge diversity of legal and operational constructs. At its verybeginning, the Austrian Central Bank (OeNB) was established as a quasi publicagency with majority ownership by the central government, but free from anydirect state interference in monetary affairs. Here we see that it is even legallypossible to transfer an inherent public responsibility (hoheitsrechtliche Aufgabe)to an independent company. Another early example is the Austrian BroadcastingCompany (ORF), which was transferred to a separate agency in the late 1960s.The Austrian Railways were organised as a separate company in 1993; the postand telecom company in 1996. Several funds for industrial support (ERP, Buerges,FFF) were organised as companies at arm’s length, as was the labour serviceorganisation in 1994. Air traffic control was corporatised in the same year.

The 1980s was associated with a new wave of privatisation, in the sense ofownership transfer. The motives were mixed. Efficiency was among them. ThePeople’s Party joined the government and supported privatisation as a politicalgoal, but the potential of the revenues for reducing the federal budget deficit wasthe driving force. In the majority of cases, ownership changed from one publicagent to another. The largest single action was the transfer of the Hauptmünzamt(the central mint) from direct ownership by the central government to the AustrianCentral Bank (OeNB) in 1989. The second largest was the privatisation of 49 percent of the electrical utilities company, a state-owned monopoly,8 and the sale ofspecific producers of electricity in 1987. The largest portion of the shares wasbought by other public companies or local governments; only some of the shareswere purchased by the broad public. The state travel agency was sold to a privateinvestor in 1990; state-owned residential flats were sold to their tenants; and minority

74 Karl Aiginger

shares in the Austrian Airlines (AUA) were purchased by the public and otherairlines. State ownership shares in the two largest banks were reduced in 1987 and1989. All in all, the volume of ‘privatisation’ in the 1980s may have amounted toASch 30bn, but two-thirds constituted a restructuring from one public owner toanother and therefore was not true privatisation. The main objective was to reducethe federal deficit, a secondary issue was the increasingly fashionable idea thatefficiency and innovation would be promoted by private ownership.9

HOW TO PRIVATISE FIRMS: SELLING THE MAJORITY OFFIVE LARGE INDUSTRIAL FIRMS

The governing structure of the public firms in manufacturing has changed severaltimes over the last four decades.10 Sometimes the firms were directly governedby a ministry, sometimes separate agencies were installed with limited freedomin 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 centof the shares remained in government hands. Different steering methods weretested within the conglomerate of firms; sometimes the holding company wasdesigned as a loose financial holding. Later, it was transformed into a holdingaccording to Austrian business law, which implied that it could implement strategicgoals and extract dividend payments from the individual firms and reshufflethem between industries. At the beginning of the 1970s, all the firms within anindustry were integrated into a branch holding: the big steel companies and thosein the non-ferrous metals industry were merged. A planned oil/chemical mergerwas prevented by the firms and regional lobbies, though the law also called forthis merger (‘Branchenzusammenführung’).

Following the large losses suffered by the firms during the 1980s – centredaround the steel company and its unsuccessful diversification into, for example,mining and oil speculation – a new step towards reform11 changed the rules ofmanagement rather dramatically in 1987. One specific feature was the increasedindependence of the nationalised firms from the government: the choice ofmanagement was de-politicised, a large subsidy (ASch 33bn) was injected tostop losses and facilitate active strategies. The government announced that thiswas the last injection of government money that could be expected; any furtherlosses would have to be covered by privatisation. The leverage of the holdingorganisation over individual subholdings and firms was increased by defininga newly created holding company, Austrian Industries (AI), under Austriancorporate law. The vision was to form a large, professional, Austrian, multi-industry conglomerate, with plans to go public within three to five years.

Positive restructuring took place during the following years. The quality ofdecision-making processes and management was upgraded and the firmsinvested in active internationalisation. Minority stakes in the oil company weresold in 1987 and 1989, but afterwards, privatisation via stock offerings inindividual firms was forbidden by the holding organisation, which eventuallywanted to place its own shares. A bond option as a means of going public was


issued in 1990, offering a preferential swap into stocks in five years time.However, the attempt to restructure the firms failed. One reason was theunfriendly business climate in the steel industry at this time, another was amismanaged internationalisation campaign by the large aluminum company(AMAG). This resulted in a loss of ASch 12bn in 1993. In addition to theseunlucky events, the conglomerate proved to be too large and the interests ofthe firms too different. In this situation the strategic interference and controlpotential of the holding company was, in various cases, simultaneously toostrong and too weak. In the globalising world economy, the time for largediversified conglomerates had passed. Competitors had opted for cost reduction,leanness, flexibility, and flattened hierarchies.

The final stage of Austrian nationalised industry and the privatisationexperience started in 1993. The old holding structure was dissolved.12 A newcapitalisation of ASch 7.5bn was provided and combined with a bindingdemand to sell all the majority stakes. The new holding organisation (ÖIAG)was explicitly stated in the law as being not a holding company according toAustrian corporate law (Konzerngesetz). It could give no orders to itssubsidiaries, except those which were necessary for the promotion of theprivatisation process. For some of the firms, explicit deadlines for privatisationwere set (e.g. 51 per cent of the technology group should be privatised byJune 1994), while for others, the method of privatisation was indicated (thesteel 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 methodof privatisation. Instead, an indicative guide was created which did not haveto be followed if there were strong arguments against it, but otherwise theexpectation was that it would be followed.

The law declared that the goal of privatisation – and therefore the criteriafor choosing between alternative offers and methods – was the amount ofrevenue gained by the seller. But the law added that the selling agency alsohad to ‘to consider that Austrian manufacturing firms and the value added inAustria should be maintained, if economically feasible’. This clause had to berealised and was made operational in the so-called ‘privatisation concepts’,which were to be developed by the new holding organisation and approved bythe owner (the central government). In these ‘concepts’, the detailed timeschedule and method of privatisation, as well as the restructuring intentions,were fixed by the ÖIAG management, and approved by its supervisory boardand finally the new owner. The character of the privatisation concept can beassessed as equivalent to a strategic plan, which is based on targets set downin the law but which makes them more concrete. An ‘Austrian clause’ wasmade operational by establishing a ‘privatisation checklist’. This included anassessment of the long-term business plans of the potential buyers regardinginvestment, employment, research activities and the location of headquarters;the probability that the firms would continue to exist or even be upgraded; therole of the Austrian firms as a centre of competence; and the consequences forAustrian 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 unwantedcompetitor, use the acquired firm as a low-cost supplier, or whether the bidderhad a strategic interest in a quality partner with own core competencies. Thechecklist 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 hadbeen privatised. In each case a different method, speed or process had beenapplied and in all cases the headquarters remained in Austria.

The oil and gas company, OMV, found a strategic partner in IPIC, acompany in Abu Dabi. Today, the holding organisation owns a 35 per centshare of OMV, which is syndicated with IPIC, so as to guarantee the jointstrategic dominance of these two partners. The remaining shares were offeredto the public. The attempt to win other Austrian energy groups as partnersfailed, due a to competitive attitude and personal jealousies. IPIC was chosenbecause it guaranteed a long-term strategic interest, the company wanted tointegrate forward and to diversify geographical interests. Finally, it is notlinked to one of the major multinational oil companies. The potential interestsof the large multinational oil companies did not fit into the privatisationstrategy chosen. There was a fear that the Austrian firm would be acquiredby one of the large multinational oil companies, in order to eliminate anindependent competitor and to downsize it to being a regional network ofgas stations. Further attempts to decrease the shares held of the holdingorganisation are to be expected, but are limited by the necessity to find areliable partner acceptable to the syndicate.

The Austrian Technology group, VA-Tech, is a success story. It started asa collection of several small engineering firms in the energy andenvironmental industry, to which the engineering divisions of the largest steelfirms were added. Now VA-Tech is a large international engineeringconglomerate with subsidiaries all over the world. Specifically, the firm hasa lead in technologies for the reduction of production costs in the steelindustry (KVA technology). Fifty-one per cent of the shares of VA-Tech wereoffered to the public with 20 per cent to be held by VA-Stahl (the largeststeel firm) and 24 per cent remaining with the holding organisation. Out ofthe 51 per cent sold, a slight majority is held by international investors (mostof them are very small shares held by investment and pension funds, a 5 percent share was bought by General Electric), 43 per cent of the shares soldwere bought by Austrian investors. Originally, 27,000 Austrian investorsbought stocks, although more than half of them sold their shares after oneyear (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 longsteel 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 crossownership, so that majority ownership by Austrians is well established. Inaddition, out of the publicly offered stocks, 56.5 per cent were bought byAustrian investors. Since VA-Stahl has traditionally been one of the largest


and best-known Austrian firms, the ownership of this firm is a sensitive issuein the country. During the 1950s, VA-Stahl developed the path-breaking LDsteel technology and today concentrates on high-quality products for the carindustry.

BUAG is a company which produces special steel products, and whichhas leading positions in high-quality tools. It is the result of a merger ofAustrian and Swedish firms and is under Austrian management. Itsinternational qualities, with respect to location, employees and sales, madeits sale to the international public possible and advisable. This was done intwo offerings, in 1995 and 1996. The ÖIAG currently retains a 25 per centstake.

AMAG is Austria’s largest aluminum firm and made heavy losses in 1992stemming from an unsuccessful internationalisation strategy. Too many firms,some of them ailing and some of them at extremely high prices, werepurchased. No middle management existed capable of keeping track of thereorganisation and AMAG’s assets were too small for a firm in a risky andvolatile field. Earlier, a strategic internationalisation programme, orientatedtowards the future, had been delayed by long discussion as to whether thefirm’s outdated primary aluminum capacity should be rebuilt with the helpof a large public subsidy. Political leaders had specifically promised thesubsidy at election time and the management had concentrated on lobbyingfor low energy prices to make primary aluminum production competitive.But competitiveness is a tough problem in a high-income country which lacksthe necessary raw materials and has expensive transportation. The firm finallyhad to be restructured before it could be sold. AMAG was sold in 1996 at anegative 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 Austrianentrepreneurs. No ownership form has been accepted as ideal on ideologicalgrounds. Instead, the privatisation checklist is always used to add non-financial 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 thananticipated. The holding organisation still owns a strategic investment in fourof the five large firms privatised, which is valued by the market at ASch28bn, and the headquarters of the privatised firms remain in Austria. Thesales of the five firms are rising and the stock market evaluation hasoutperformed the general index. Employment has declined in the firms, butnot much faster than in other parts of manufacturing.13

To sum up the results, we can recognise the following specific features ofthe 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

78 Karl Aiginger

only way to stop pouring money into the firms was to subject the firms toprivate ownership and stock market control.

• The former holding company, which initially was a financial holding andthen a holding under corporate law exerting a strategic influence on theindividual firms, was transformed into a privatisation agency with theobjective of relinquishing majority stakes. For that purpose, but only forthat purpose, it could intervene in the firms, with the stick being the necessityto pay back old loans and the carrot being an incentive contract for themanagement with a 50 per cent bonus if privatisation revenues exceededplanned revenues. To a great extent, the firms were restructured beforeprivatisation, which helped considerably to increase the revenues fromprivatisation.

• The maximisation of revenue was the main criterion for choosing the timeand type of privatisation, since only high revenues would allow the payingback of more of the old debt. The time schedule in the privatisation lawwas indicative and could be changed if the holding organisationdemonstrated that postponement for restructuring would increase therevenues.

• A second criterion for choosing among potential buyers was continuingoperation of the privatised firms and the value added created by them inAustria. This criterion nearly equates to a national preference clause. Butthe careful use of words and the nature of the objective allowed the law topass the scrutiny of the EU competition agency. Preferring a buyer whocan plausibly contend that he will continue the production in the samecountry and use the plants as the headquarters for international expansionis not unreasonable. The alternative, by which the plants would be shut downsince they are one of many in an industry faced with overcapacity with theheadquarters of the acquiring firm located in a faraway country which isitself coping with excess capacity, would in any case probably have beenshunned by potential private investors. The privatisation checklist and theprivatisation strategies adopted definitely pre-selected the potential buyers.In the oil industry, it was quite clear that no large multinational firm wouldbe accepted. In the aluminum industry, the offers made by three buyerswere very close as far as revenue alone was concerned. In the case of BUAGand VA-Stahl, large share purchasing by a competitor would probably nothave been accepted.

Privatisation succeeded insofar as all five companies were sold and the strategicownership of all of them remains in Austria. This was achieved in a non-discriminatory fashion, no single question of fairness was raised in Brusselsby a competitor.

The success of this process induced the Austrian government to use theholding organisation, and respectively its management team, in furtherprivatisation plans. The holding organisation was asked to privatise the AustrianSalt Company (Salinen AG) and the Austrian Tobacco Industry. The


management team chairs the Austrian Post and Telekom Holding (PTBG) whichhas 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, theprivatisation of the two largest banks has become a long-lasting nightmare.Specifically, the Austrian government has been planning to give up its majoritystake in the Creditanstalt (CA) ever since 1987. The type of privatisationselected was to find a buyer who would purchase a stock package, which wouldgive strategic control of the bank. The process of selling was directly managedby the Minister of Finance. Offers had to be made to him; he assessed theadequacy of each offer. An agreement between the two parties of the rulingcoalition declared that privatisation was a sensitive issue in which the Ministerof Finance had to consult the Minister of Economics. There was no definiteagreement as to what objectives the sale should follow – for example, whetherthe maximisation of revenues was the overriding goal or whether it was anecessary or warranted condition that the purchaser be of Austrian nationality.At least implicitly, the latter was the case. In addition there was anunderstanding that the CA had always been a bank within the sphere of theconservative party, so that buyers from that party had priority.

Several offers came in over time. A serious offer was made by a large Swissbank, but it was publicly rebuffed by the Austrian People’s Party, and thereforewithdrawn (in 1993). Another offer came from a group representing anagroindustrial bank, which was rejected by the Minister of Finance due to itsimprecision. For a long time, the favourite bidder was a consortium which includeda conservative bank, an Italian and a German group, as well as several Austrianmanufacturing firms. Their offer was accepted with varying degrees of enthusiasmon the right and the left of the government, but the financial offer was rather lowand the decision-making structure within the consortium remained unclear. Finally,a public offer was issued in the London Financial Times. Although it did notmention a preference for Austrian offers, a few days later the head of the Austriangovernment declared that Austrian buyers would have priority. The result was –apart from angry comments in the international press – that the offer made by theAustro-Italian-German consortium remained the sole bid. This was discussed formany months and then the Minister of Finance decided that it was too low. Heissued another, final tender, stating that the size of the offer, its strategic effect onreform in the Austrian financial sector, and unspecified Austrian interests wouldbe the decisive criteria for acceptance. Three offers were received: one made bythe consortium; one by a private Austrian citizen who had sold Austria’s largestretail company some months earlier; and a surprise offer by Bank Austria, theCA’s main competitor. Through a merger some years earlier, Bank Austria hadbecome 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 lastoffer was by far the one offering the largest financial contribution.

Now a political quarrel began between the coalition partners. The socialistparty had for a decade implicitly accepted that the CA should remain withinthe conservative sphere of influence, but this assumption was never expressedexplicitly 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 BankAustria had, itself, received public support to prevent bankruptcy 12 yearsearlier. Furthermore, Bank Austria had asked for exemption from the obligationto meet the compulsory banking standards for its own assets, as recentlyrequired by EU law. It was also claimed that this offer would not result in aprivatisation, since the majority share of Bank Austria belonged (in a ratherindirect way) to the Viennese local government. Experts also questioned thesynergies between the two banks which would be derived from a merger; othersdecried the loss of options for large firms, especially firms wanting to issuestocks, since together the two banks made up 80 to 90 per cent of newly issuedequity in Austria. On the positive side, many observers agreed that the mergerof the two banks would create a large player in the European finance industryand one highly competent in Central and Eastern Europe. Austrian ownershipof CA would result, while the value to the restructuring of Austria’sovercrowded financial sector was considered to be mixed, although judgementswere 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 relativeranking of the bids remained unchanged. Before finally awarding the CA tothe Bank Austria, the coalition partners reached several side agreements, whichto some degree will soften the links between Bank Austria and the Vienneselocal government and which will temporarily shelter the CA from radicalstripping and downsizing. After ten years of irresolution, the story has endedwith a financial success for the Minister of Finance and a strategic triumphfor Bank Austria over an indecisive consortium. The EU Commission agreedthe merger with minor amendments.

What is to be learned from this story? The main conclusion is that theMinister of Finance cannot privatise a firm by himself. His attention to theproblem of privatisation fluctuated over time. When budgetary problems orMaastricht criteria became urgent, the attention towards privatisation altered.In addition, he is a member of a political party and as such is confronted witha 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 toan agency or company, which can make decisions professionally, accordingto the rules stated. The agency should have some temporary leverage over thefirm to be privatised, the minimum being a close cooperation with the firm’ssupervisory board. Several times, the management of the CA actively interferedto attract or thwart offers from potential bidders. It preferred a public placement


because this type of privatisation would have permitted the largest manoeuvringcapacity for the management and, of course, their continuation in office. Finally,the incentives for the privatisation agency should be such that payment directlydepends on the fulfilment of the criteria for privatisation as declared by theowner. All these rules were fulfilled in the privatisation of the nationalisedmanufacturing 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 regulatorypolicy for entry, prices and technical rules (the precise system varies forelectricity, telecommunications, railways, and gas). Pressure to change thesystem has originated from the rules issued by the European Community (seechapter 2), but deregulation or liberalising entry is lagging in all sectors. Onlya few steps were and are being taken to meet the requirements of the newrules and to facilitate the entry of new competitors.

Posts and telecommunications is still in public ownership in a traditionalPTO. The creation of a separate company and the necessity to make cross-subsidisations public through an explicit cost statement for the organisation’sdivisions, ‘yellow post’, buses and telecommunications, were delayed up to1996. The first non-public telephone supplier was permitted in the mobile phonebusiness late in 1996, well after the PTO was allowed to start its own mobilephone line. Five decades of regulation and government-backed policy to prevententry have resulted in high prices for telephone lines, data transmission andthe lack of a service sector and content providers. Specifically, in Austria thevariable costs of telephoning are high, long distance and international callsare expensive, while the fixed charges for installing new capacity are somewhatlower.

The PTO was separated from direct government control in 1996. Plans toprivatise the operating company, starting in 1999, were forced upon theunwilling company on the initiative of the People’s Party in a coalitionagreement. The original plan to nominate retired senior members of the PTOto the supervisory board (and the holding company PTBG) were luckily givenup at the last minute. Retired managers from the old public system would haveeffectively colluded with the new management and its employees to preventthe 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 thegeneral responsibility of providing as much capacity as needed. Electricity is,however, generated by several layers of independent units, some owned byregional governments, some by large cities, while a very small amount isproduced by private generators or by industrial firms. The Verbund owns‘Sondergesellschaften’ which help buffer demand, if other plants are not ableto 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 thereturn on capital, both are known to lead to low cost-efficiency and to over-investment. The electricity firms pay by far the highest per capita wages inAustria, and most clashes with environmentalists originate in unreasonablecapacity enlargements. By law, the large firms must be public (2.Verstaatlichungsgesetz, 1947), although it is expected that this law will soonbe changed. There is no agreed strategy as to how the future of this industrywill look. A unanimous opinion is that the relations between the various layersshould be restructured so that the lowest-cost producer will be the supplier.There is a suggestion that the losses involved in the possible contracting oflarge firms with foreign suppliers should be spread (the so-called ‘cooperativesolution’) among Austrian firms, but this does not comply with EU law. Astrong Austrian company able to compete internationally would be an obviousoption, but it is a very unlikely one. It looks as if privatisation will come verylate and only a few companies will retain positions as important players in theliberalised market.

The privatisation of the railways is not on the agenda in Austria, though thecentral railway was separated from direct government influence in 1994. Itsefficiency and service quality are rated as disappointing by both externalanalysts and business firms. Several steps towards reform have been attemptedand have resulted in marginal changes for the better, but the closest the railwayhas come to privatisation has been an attempt to allow local government toinfluence the closure of regional services. If the local government pays anddeclares its specific interest, it can influence the schedule and extend the serviceof local lines originally planned to be closed. Some minor examples exist inwhich a local line has been privatised.

One feature common to the PTO, electrical utilities and the railways (thesame holds true for the publicly owned banks) is that, historically, the pursuitof ownership interests and regulation has not been separated. The ownershiprights of the PTO and of the state railway are both allocated to the Ministry ofTransportation; formerly, this ministry was also the regulator. The ownershipof the electrical utilities is monitored by the Ministry of Economics, as is theirregulation. The ownership of the banks is monitored by the Ministry of Finance,as is their regulation (Bankaufsicht). This decision was made with respect tosocial planning. If there is a social optimum which can best be achieved by asingle firm (due to economies of scale or other form of ‘market failure’), thefirm 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 destroyedcapacity in 1945 – were not too different: capacity had to be increased asquickly 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


basic services as electricity, railways and the telephone matched WesternEuropean standards as early as the 1960s, which is a great achievement. Buteventually, the negative effects of low competition and innovation outweighedthe advantages. Over time, the interests of managers and society became morecomplex. Managers began to prefer excess capacity (to be on the safe side, orto utilise construction units, or to maximise price) and environmental issuesevolved. The system developed many aspects of ‘regulatory capture theory’;the regulators started defending the firms when they were accused of installingexcess capacity, raising prices and creating environmental problems. Theregulators were appointed to the supervisory boards of the firms, as if therewas no conflict between the objectives of the firms and the tasks of theregulators.

It is currently being discussed whether regulatory tasks should be given toa separate agency. This now appears feasible for the telecommunications sectorwhere privatisation is planned, but not for railways and electricity where noprivatisation programme yet exists.

Contracting out, tendering licences and incentives

Contracting out and the tendering of services and licences are under-developed in Austria. The delegation of tasks performed within the state sectorto agencies or firms under company law has been applied for the railways,telecommunications and broadcasting and in many other cases. It has becomeeven more popular recently because of the commitment to fulfil theMaastricht budgetary criteria, which favours off-budget practices.

It is beyond the scope of this chapter to provide an overview of the successand failures of these initiatives. The general view (as expressed for examplein Gantner, 1996) is that off-budget companies have not been especiallyefficient. Arguably, this follows from an insufficient monitoring process. Inonly rare cases are the objectives of these firms stated precisely and manyof the agencies try to follow certain non-economic goals, including universalservice obligations or additional social and political responsibilities. Thecriteria and extent of these non-economic objectives are not specified andoften the government erroneously believes that the ownership responsibilityends with the separation of bureaucracy and management. The firms becomeagencies without effective principals; safe in the knowledge that they canreturn to the state for financial help.

CONCLUSION

Privatisation has recently become an important topic in Austria. Privatisationrevenues are now large compared to a number of other countries in the EU andcompared 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 andcentrally organised social partners in Austria’s economic sector. Public

84 Karl Aiginger

ownership has been larger than in other Western countries; specifically, up toone-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 1996a majority of all the large firms were sold after restructuring. The experience isconsidered a success since the revenues were high, the headquarters of thefirms remained in Austria and the privatised firms now outperform the stockmarket average. The privatisation was delegated to a former holding company,which was transferred into a privatisation agency with clear incentives toprivatise. The privatisation schedule and mode were flexible; a specificsupplementary criterion demanded that offers where headquarters and valueadded remained in Austria should be preferred, if economically feasible. Thenationality of the owner, however, did not play a direct role.

In contrast to this successful privatisation of manufacturing, the attempt toprivatise one of Austria’s largest banks gained worldwide attention as a neverending story. The difference between privatisation in the manufacturing sectorand 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 verylast stage of the privatisation process, the rules were changed during the processand never made explicit up to a very late stage, and choices were limited bypolitical considerations.

Table 4.1 Privatisation revenues in EU countries

Source: Financial Market Trends, 66, Paris, March 1997Notes: aInformation on trade sales not available; b1993; c1990, 1993; d1991, 1993;e1991–3; f1990, 1992, 1993; g1992, 1993; h1996, 1997; i1995, 1996


Finally, Austria continues to lag in liberalising infrastructure or public utilitymarkets. So far only the telecommunications business is clearly slated forprivatisation.

NOTES

1 The author thanks Wilhemine Goldmann, Gerhard Jersabek, Claudia Schmid andGunther Tichy for discussing an earlier version of this paper, Dagmar Guttmann forcalculations, 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’, wheregovernment continues to provide a service, but makes use of a company structurewhile remaining owner of this company. A third type is ‘contracting out’, here thegovernment guarantees the provision of the service, but uses the means of a contractwith a private firm (see Fuest 1997).

4 The exact shares differed over time and according to whether investment, valueadded, employment or exports were used as indicators for measuring publicownership. Aiginger, 1985, reported that 25 per cent of value added in manufacturingwas produced by publicly owned firms, 14.5 per cent of total value added inmanufacturing was produced in firms with public ownership, as determined by thenationalisation law of 1946, 5.4 per cent was accounted for by firms owned indirectlyvia banks with public majorities. At its climax 125,000 persons were employed inthe first group, and 50,000 in the second.

5 Aiginger (1985, p. 41). The figure was 25 per cent for the total economy, excludingpublic consumption in the numerator, but using GNP in the denominator. If we addpublic consumption the share of public ownership increases to 37 per cent.

6 Later the Länderbank merged with the Zentralsparkasse (a savings bank with strongstakes 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 definitelyhigher 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 inAiginger (1985) report approximately equal shares of about of 11–13 per cent ofemployees for France, the United Kingdom, Italy and Austria. On the other handpublic ownership in all its different forms, including bank subsidiaries, statemonopolies and cooperative associations amounted to 19 per cent according toAustrian statistics.

8 Verbundgesellschaft, 1988. This company has the import and export monopoly, ownsthe largest share of the distribution system and guarantees the overall supply ofelectricity.

9 For a summary of attempts at privatisation between 1987–90, see Siegl (1990). Thefigures cited do not include some specific attempts at privatisation in the nationalisedindustry sector. During this period, a minority share in an oil company was sold tothe public and the ownership of a pharmaceutical firm and an electrical firm wastransferred to foreign investors. But at the same time, the nationalised firms purchasedjust as many firms, in an attempt to restructure and to internationalise, so that weconsider 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 thisincludes 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. Thelargest type is the so called ‘Verstaatlichte Industrie’. This sector is comprised moreor less of those firms which were nationalised in 1946 by law (Verstaatlichungsgesetz1946). The ownership rights were monitored by different ministries and then bydifferent holding or operating companies, called ÖIG, ÖIAG, AI, and finally againÖIAG. 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 bankswas reduced over time, but as of 1997, the largest European brick company andmajor Austrian firms in the vehicle and chemical industries, and specificallyconstruction 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 beenorganised 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, andPriorities’, 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 Reviewof Economic Policy, 9 (1), pp. 95–111.

Boyko, M., Shleifer, A. and Vishny, R. W. (1996) ‘ A Theory of Privatisation ’, EconomicJournal, March (106), pp. 309–19.

Domberger S. and Piggott, J. (1994) ‘Privatisation Policies and Public Enterprise: ASurvey’, 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 derdeutschen 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 ComparativeAnalysis, 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.


Parker, D. (1995) Measuring Efficiency Gains from Privatisation, Research Centre forIndustrial 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.

5 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 recentprivatisation 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 recentprivatisations in France, to analyse the situation it is necessary to look first at theopposite 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 beenfollowing, first from 1986 to 1988, then again since 1993, the general movementtowards total or, in a few cases, partial, privatisation of big state enterprises, inboth the industrial and the service sectors especially banking and insurance. Thesetwo phases correspond to the arrival in the Parliament of a new political majorityand of rightist governments (albeit with a leftist Presidency).1

During the same period dramatic changes have affected industrial policies, asconcerns the attitudes towards industrial policies and the concrete definition andimplementation of industrial policies, and the resources which have been directedto such policies. While industrial policies had been gaining momentum duringthe 1970s and until the beginning of the 1980s, the nationalisations at thebeginning of the 1980s were unable to give a new impetus to this tendency. Theemphasis 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 mountingpressures from Brussels.

At first glance, it may seem that the privatisation processes have been part ofthe trend away, since 1983, from industrial policies and towards the full restorationof market principles and mechanisms. While this is likely to be true – privatisation,liberalisation and deregulation have clearly been convergent trends – we have tolook deeper into those realities, in order to understand how privatisation hasbeen affecting industrial policies. We need to consider not only the instrumentsor the resources allocated to industrial policies, but the industrial strategies andpolicies in general.

Privatisation in an industrial policy perspective: France 89

Of course, privatisation can be analysed from different angles and several aspectsof the process can be highlighted: the procedures which have been followed, theimpact 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 thegovernment of the revenues from the sale of privatised assets, the consequences interms of the management, the strategies and the performances of the firms whosestatus has been changing, and so on. The second phase of privatisation is quiterecent, therefore it is still rather difficult to give any detailed evaluation of theseprivatisations.2

The main emphasis here is on industrial policies: what can be said about themeaning and the role of the recent privatisations from the standpoint of industrialpolicies? Industrial policies can be understood either in the large sense – in thislarge sense, what is at stake is the industrial strategy of the country, to the extent ofcourse 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 inthe 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. Themain reason is that all the firms concerned are particular cases, with their ownspecific history. Even if there are a number of cases, it is difficult to isolate theimpact of privatisations from these specific situations and histories. The same canbe said of the macro-economic context: while nationalisations took place in therecession of the early 1980s, the first phase of privatisation benefited from theboom of the mid-1980s. By contrast, the second phase was strongly affected bythe unforeseen severity of the recession in 1993.

The content of the chapter is as follows. The first part is purely descriptive: theobjective being to present briefly the main facts as concerns the privatisationprocesses in France. The second part aims at characterising some of the main aspectsof those privatisations. Finally the chapter will analyse, so far as it is possible, theinterrelationship 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-incharacteristic 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 tonationalise some of the big private groups. There were several reasons for this. Themost obvious was ideology: the most leftist parts of the left were still strongly in favourof the socialisation of the means of production.3 Other reasons were related to thenecessity to manage collectively the on-going transition crisis following the 1970s oilprice increases and economic recession. This meant both rescuing large sections of theproductive system which were suffering severely from the crisis – several big firms

90 Jacques de Bandt

were in bad shape and needed financial aid and restructuring – and strong action andintervention of the state in order to develop new accumulation processes.4

The political outcome was initially uncertain, but was settled at the end of 1981with a decision of the Constitutional Council, allowing for the effective nationalisationof firms. This became effective at the beginning of 1982. The following firms weresubsequently 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 industrialactivity 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, from11 per cent to 22 per cent (from 6.4 per cent to 18.3 per cent) in terms of employmentand, in terms of investments, from 43.5 per cent to 51.9 per cent (from 12.1 per cent to25.9 per cent). These figures show that, due to these nationalisations, the public sectorincluded around one-quarter of industrial activity as compared with around 10 per centbeforehand.

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 moreemployees, 18.2 per cent of firms with between 500 and 2,000 employees, but only 6.1per cent of firms with less than 500 employees. In 1981 total sales of the industrialpublic 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 theprospects for nationalisation in an industrial strategy.5

2 Immediately a new political battle raged within the left during part of 1982. Thequestion was how should new nationalised firms be managed: within the framework


of a strict plan or by very strict decision criteria6 or with complete autonomy? ThePrime Minister decided abruptly (in July 1982) that the firms should have completemanagement autonomy. But somewhat later, it was decided as a compromise, thatthey would have to negotiate and sign a contrat de plan, i.e. a kind of contractualdefinition of their strategy and major development decisions. The objective was totry to influence the strategies of the nationalised firms in order to make them convergewith national strategies or policies. In practice, the ‘contrat de plan’ remained purelyformal. Contrats de plan were signed between the government and the firms in thepublic sector, but they proved to be without any real influence on the strategies andbehaviours of the firms.

3 At the end of 1982 it was explicitly stated that the enterprises of the publicsector which were the biggest investors would constitute the driving force ofan ambitious industrial policy,7,8 but in practice no real attempt was made touse the public sector in order to define and implement any kind of systematicand ambitious industrial policy.9 There are several reasons for this: the firstwas the political decision to give the nationalised firms complete managementautonomy, which did not seem to leave much room for any industrial policy.10

The second reason was probably a lack of competence within the governmentin the fields of strategic management and organisation. The third reason wasthe fact that time was short. Already in March 1983 (with Mr Fabius first asMinister of Industry – then as Prime Minister11) the movement away fromindustrial policy had set in at government level. While the Ministry of Industryhad been increasing its powers during the first phase of nationalisation (1981–2), immediately after the more traditional balance of power was restored withingovernment to the benefit of the Ministry of Finance. It appeared more andmore difficult for the Ministry of Industry to get the necessary information onthe economic and financial situation of the firms within the public sector. Asa consequence, from 1983 on there was no intervention whatsoever in thestrategies and management of public enterprises. There was a sheer absenceof any willingness to push forward any kind of industrial strategy in France.

4 One specific aspect of nationalisation should be mentioned, which is quiteimportant. The Secretary of State (J. Le Garrec) in charge of the nationalisationprogramme had a double mission: to both extend the public sector anddemocratise it.12 One major objective of the leftist government was to makeprogress towards some kind of economic democracy with more participationin the management of state enterprises, at least for the workers directlyemployed. As a consequence – parallel to ambitious reforms in the fields oflabour organisation and industrial relations (under the name of ‘Lois Auroux’)– two efforts were made. One consisted in nominating representatives of theemployees to the boards of public enterprises. Although the relations of theserepresentatives with management and the trade unions were never totally clear,the system worked quite well, but for a short period only until 1986. Thesecond – in line with the self-management (‘autogestion’) ideology – thestrategies of public enterprises were to be discussed and defined on the basisof systematic participation procedures before being formalised in the contrat

92 Jacques de Bandt

de plan; however, no serious attempts were made in this direction. Theparticipation of employee representatives on the boards was consideredsufficient for the time being. While democratisation was clearly seen as animportant issue by the left, most prominent members of the socialist party didnot 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 ofthe priorities of the Chirac government (notwithstanding the opposition of F.Mitterrand who was still President) was privatisation.13 The new governmentclearly aimed at obtaining additional financial resources in order to reduce thebudget deficit and to restructure French capitalism to the advantage of somewell-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 ElfAquitaine and Crédit local de France – and achieved within two years.

When the left regained power in 1988 the privatisation process came to astop. 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, eitherfor international reasons (at least officially) or when no loss of power was implied.In the meantime, the opposition of the socialists to further privatisations hadclearly declined, not least because of the budgetary pressures the governmentfaced. Indeed, two partial privatisations took place in the petroleum sector. As amatter of fact, many public enterprises were given the freedom, within the overallframework of the ‘ni-ni’ principle, to change substantially their ownershipstructure.


THE SECOND PRIVATISATION WAVE (FROM 1993 ON)

In 1993, still under the presidency of Mitterrand, the right again won theparliamentary elections. The new Prime Minister, E. Balladur, immediately launcheda 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, thoughsome 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 severalindustrial firms (for example, Renault) or services (for example, Crédit Lyonnaisor Air France) which can be further privatised. Of course the firms have to besaleable and it may take time before some state firms reach the point where theyare sufficiently attractive to investors.

It is not clear where the limit to privatisation is in France. The debate on thefuture of the public utilities (‘services publics’) tends to reveal quite divergentopinions on the desirability of privatising the public utilities, notably FranceTélécom, Electricité de France and Gaz de France, though a first sale of shares inFrance Télécom occurred in October 1997.

SOME SPECIFIC ASPECTS AND CHARACTERISTICS OFPRIVATISATIONS IN FRANCE

The procedures

There is not much to discuss about the procedures used in privatisation in Franceat least for those privatised firms which are sold to the public at large. The proceduresused are quite standard.

Due to the fact that the state had complete ownership, there was no marketvaluation of the companies. Auditing firms were therefore asked to value eachfirm, so as to indicate an upper and a lower price limit for the shares.15 Thegovernment then had to decide between those limits, taking account both ofthe situation on the stock exchange and of the necessity to attract as manyindividual investors as possible.16 For the public at large, the share price was

94 Jacques de Bandt

decisive in promoting interest in the sales.17 It should be noted that prioritywas given to the employees, in the sense of reserving quantities of shares forthem to purchase at privileged prices.

What is quite original in the case of the French privatisations, however, isthe 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 limitednetwork or subset of big financial or institutional groups, which were supposedto become a core group of permanent shareholders. The organisation of a coregroup of stable institutional investors (the noyaux durs) has become a centralcomponent 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 thestandpoint of Mr Balladur (Minister of Finance in the Chirac government in1986–8 and Prime Minister in the period 1993–5) – one major objective ofprivatisation was the organisation and control of the financial structures ofFrench capitalism.

The purpose of the government was to organise, in a certain sense, therestructuring and the strengthening of financial powers within the Frenchsystem. The government had decided to promote systematically the organisationof a selection of major participations (at a somewhat higher price) from somebig industrial or financial groups. These groups were not chosen haphazardlyor by pure accident. As a matter of fact the procedure was used not only inorder to create a core group of permanent shareholders, but as an instrumentfor building strong links between two or more of those shareholders. This islikely to have an enormous impact on the financial structure of the Frenchsystem.

The impact has indeed been quite significant already. F. Morin,19 who hassystematically studied the central financial structures (what he calls ‘le coeurfinancier’) of capitalist countries, shows quite convincingly how these financialstructures have been restructured into two major groups or networks ofinterrelated groups. According to the figures assembled by Morin (1994), theFrench capitalist system has already been strongly restructured by theprivatisation 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 significantlyrelated 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 companiesare significantly related to this pole, namely Total (petroleum), Cogema(atomic energy), Aerospatiale (aerospace), Thomson (electronics), Usinor–Sacilor (steel) and Rhône Poulenc (chemicals).


3 The third pole, somewhat smaller, but the pure result of privatisations, isorganised 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 characterisedby systematic cross-shareholdings between the major players, giving them ahigh degree of automatic control of the privatised companies in which theybuy shares. Some big firms have relations with more than one pole. A movementtowards stronger concentration within the poles has been going on and is notyet completed.

The prices of shares of privatised companies

The sale of shares in privatised companies is generally considered by publicopinion as having been handled badly. Most of the shares in the first waveincreased their value substantially, though with some big exceptions (Paribasand Suez, two holdings, and Cie du BTP, a building company). But the sharesof 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 isgenerally 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 exceptionsmentioned, due to particularly good (for the first wave) or bad (for the secondwave) performances of the shares of the privatised firms. Rather, the result is aproduct of disappointing trends in share prices in general on the French stockexchange.21 Many small investors who entered the domain of the stock exchangeby buying shares in privatised firms have been disappointed by what hashappened to their savings and have had little regard for what has been happeningin the stock market as a whole.

Budgetary resources

Part of the resources obtained by privatising enterprises has been used torecapitalise the firms which have remained in the public sector, especially firmswhich 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 sectorhave systematically exceeded capital resources in recent years.22 It must,however, be added here that while the capital needs of the public sector havebeen increasing substantially, this has been to a large extent due to the fact thatpublic firms have entered, since the late 1980s, into a process of shoppingaround for acquisitions outside France. The financing problem has been solvedby the backing of big financial partners to which the state has been linking thepublic firms. Besides this recapitalisation process, the privatisation resources

96 Jacques de Bandt

have been used essentially as additional receipts into the current state budget.In principle, the resources to be obtained from actual and future privatisationsshould help reduce past debts, but this is only true in principle. The governmenthas systematically and progressively been more and more eager to privatisefor current budgetary reasons.

From that standpoint, receipts from privatisations have remained belowexpectations. The 1987 crash on the Stock Exchange stopped the privatisationprocess of one of the largest privatisations (UAP: insurance). The 1992–3recession and the disappointing evolution of the stock market in 1994–5 reducedboth the pace of privatisations and the prices at which privatisations could takeplace.

THE INDUSTRIAL POLICY IMPLICATIONS

It has already been indicated that, while more and more emphasis was being put atthe beginning of the 1980s on industrial policies, aimed both at modernising existingindustrial sectors and at developing new high-tech activities, the trend away fromindustrial policies had clearly set in as early as 1983. It has also been indicatedthat, partly for this reason, the nationalisations of the early 1980s were not translatedinto new industrial policies. It can safely be said that the main result ofnationalisations was to save and restructure most of the firms, which were in a badand in many cases hopeless state at the beginning of the 1980s. Unfortunately, thelarge financial resources thus distributed (the nationalisations took place atunreasonably high prices) did not lead to additional investments elsewhere in theeconomy.

In the middle of the 1980s, before the first privatisation phase, the most severerestructuring problems were seen as practically solved. It was becoming quite clear(because of the evolution of ideas and policies elsewhere in the world and alsobecause of pressure from the European Commission) that the industrial policy erawas definitely over. As indicated, one of the top priorities of the new rightistgovernment from 1986 was privatisation. They were opposed both to the publicsector as such and to the forms of state participation introduced by the formergovernment. They were also opposed to the previous forms of industrial policy.Industrial policies, which fell out of favour, were now increasingly replaced byscientific and technological policies, together with some attempts to promote andsupport small and medium-sized enterprises (SMEs). These two types of policiesprogressively gained momentum, seemingly eliminating the necessity for anyspecific and wide industrial policy.

There seemed to be good reasons for not caring about industrial policies. Themore so that the first privatisation phase took place in a booming economy. Butmore fundamentally, as indicated, the main objective was to help existing financialpowers to consolidate and reinforce their positions, by capturing some of the goodparts of the state assets and assets which, at least in principle, had been dulyrestructured. The approach was mainly predatory, aimed at concentrating economicpower and providing easy profits to the benefit of a small group of capitalists.23


The approach seems, at the same time, very conservative or defensive, as isapparently the case for a major proportion of mergers and acquisitions outsideof the state sector.24 Financial asset management, aimed at consolidatingownership and power, would seem to be in clear contradiction to either strategicmanagement at the micro level or industrial policy at the global level.Rationalising existing assets and structures does not leave much room fordevelopment-oriented strategies. This can of course also be said the other wayaround: 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. Withthe 1992–3 recession, the situation of many public firms worsened and mostfirms 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 ofthe attention and the available resources. The combination of these neweconomic circumstances, along with the obstinate desire of the new government(in 1993) to resume the privatisation process, which had been interrupted in1988 for political reasons, made the second privatisation phase even more thanthe first phase concentrate on two objectives: budgetary objectives and theconcentration of financial power. As concerns the first objective, the governmentmade clear the amount of resources it was expecting from privatisations, whichmeant that privatisations were decided with reference to budgetary objectives.As concerns the second objective, the government, even more clearly than inthe past, indulged in manipulating the financial structures during privatisationthus reinforcing the major financial powers.

There was not, therefore, much room left for consideration of industrialpolicy at the state level. In any case, industrial policy had been abandonedsome time earlier. The government is still interventionist – it can even be saidthat the government has been in the very recent period more interventionistthan in the 1980s – but essentially within a case by case approach aimed atsolving immediate problems, reinforcing existing structures or defendingnational interests. Moreover, the intervention has taken place at the level ofparticular firms and not within the framework of some well thought out nationaldevelopment 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 redefiningindustrial policies in the early 1980s, namely the attempt at democratising thepublic sector, has been progressively abandoned. As indicated, the absence ofany clearly defined industrial policy has not prevented the development ofalternative policies, e.g. of technological policies and, more so, of policiesaimed at promoting and supporting SMEs. But it does not seem possible tofind any link between privatisations and these policies or the way they havebeen developed.

98 Jacques de Bandt

CONCLUSION

The conclusion from all this tends to be that the whole nationalisation/ privatisationprocess in France over a period of 16 years, from 1981 to 1997, can be characterisedas follows: 1 the overall process has helped restructure many (most) big French enterprises

or groups, whose activities, boundaries and organisation have changedsubstantially;

2 enormous assets have been transferred in both directions between the privateand public spheres, to the final benefit of some financial groups in whose handsthe restructured assets are now concentrated;

3 notwithstanding the changes of ownership, the relations between the state andlarge enterprises remained very important before, during and afternationalisations and privatisations; and

4 the financial logic behind asset management has constantly been dominant instate policy in France, at the expense of any clearly defined long-term industrialstrategy 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 privatisationprogramme 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 timewith a rightist President.

2 For example, until very recently, shareholders were losing substantial amounts on theprivatisations of the second phase. This has changed recently, but the experience continuesto affect the third phase of privatisation.

3 By contrast, the most rightists parts of the left considered that either minority holdingswould be sufficient to control these groups or influence their strategies or that the statealready had enough participation in industry.

4 Account must be taken here of the fact that, ignoring the crisis at the beginning of the1970s, most of these big companies had been continuing to invest rather heavily formany years and that, for these very reasons (together, of course, with the impact of theoil crisis), their financial situation had been worsening steadily. As a matter of fact, thiswas not only the case of big companies. Studies made by the Expert Group in SectoralAnalyses of the EEC at the end of the 1970s indicated the lack of a decisive restructuringof French industry as a whole. Policy seemed to hesitate between adjustment and defenceof 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, thePresident took charge of policies aimed at inducing some big firms into new technologicaldevelopments with large-scale state aid.

5 I remember attending a meeting, in December 1981, which was opened by the socialistminister in charge of the nationalisation process, saying: ‘we won the battle ofnationalisation; the question is now: nationalisation, what for?’


6 The communist part of the left was developing at that time sets of decision andperformance 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 1981were EDF (electricity), SNEA (petroleum), PTT (Post), SNCF (railway) and Renault(automobile) – all national enterprises. The idea was that with many more firms in thepublic 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, ambitiousindustrial policy. In the summary report of the working group on the role of the publicsector (chaired by A. Gomez, who has been for many years CEO of Thompson), thisidea of the public sector as a main economic driving force was explicitly stated (‘Ellesont une finalité: constituer le fer de lance d’une grande politique industrielle’, p. 199, inUne politique industrielle pour la France: Actes des journées de travail des 15 et 16Novembre 1982, La Documentation Française). However, Mr. Chevènement left thegovernment in March 1983 before having succeeded in defining the new orientations ofthe industrial policy he intended to design and implement. This was the most decisiveturning 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 hadrepeatedly to ask and thus to lobby to get additional resources. This was no longer thecase.

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’environnementindustriel.’

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 andprocedures.

14 As a result of the 6 per cent sale in June 1996 the participation of the state in Renaultwas reduced below 50 per cent.

15 Incidentally, these auditing procedures have raised problems which have since becomequite 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 theprinciples and rules with the result that it is quite difficult to value many firms.Alternatively, the performances as indicated by the accounts may hide importantweaknesses 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 investorsmaking quick profits. In consequence, many of the small investors who purchase sharessell them rapidly. In order to encourage shareholders to hold on to their shares, theinvestors that keep their shares for at least one year have been given a 1 share premiumfor 10 initially bought. A similar phenomenon of selling for quick gain and incentives tohold 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 ofthe price both inside and outside France. Many individuals have speculated on thepossibility of reselling their shares immediately for profit.

18 The Ministry has been organising what is called a ‘tour de table’ aimed at defining anoyaux 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. Thiswas set up after the nationalisations of the early 1980s in order to monitor the performanceof the public sector.

20 This is, of course, likely to affect adversely the privatisations to come, unless the situationimproves on the stock exchange. The number of shareholders fell from 5.7 million in1994 to 5.3 million in April 1995.

21 The CAC index of the Paris stock exchange increased from an average level of 1200 in1987–8 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 of1,800 from the middle of 1989.

22 Since 1992, the gap has been widened dramatically due to some very substantial deficitsin 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 bysmall numbers of people. This has happened seemingly without provoking strongreactions, but for those of Raymond Barre former Prime Minister in the 1970s, who hasbeen very critical of the financial synergy thus created: ‘L’expérience des privatisationsdepuis 1986, qui avait pour but de liberer les forces economiques de l’emprise d’un Etatimmodeste et arrogant, a fini par se révéler comme un processus par lequel l’Etat, ouplus encore la direction du Tresor, n’a renoncé en rien à ses moyens d’intervention et depression’ (Le Monde, 1 December 1987). Barre prefers to criticise the Treasury insteadof the Minister of Finance in person, but the role of the Minister of Finance and thenetwork 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 therequired 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 DocumentationFrançaise.

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).

6 Privatisation in GermanySymbolism in the social market economy?

Josef Esser

INTRODUCTION1

As in other Western industrial societies of a liberal-capitalist nature, social andeconomic discussions in the Federal Republic of Germany were dominated fromthe mid-1970s by the neo-liberals. However, the latter had to wait until the autumnof 1982 before they could begin to think about implementing their strategies. Itwas a conservative-liberal government, comprising the Christian Democrats of theCDU-CSU (its Bavarian sister party) and the liberals of the FDP, which was thefirst to include in its programme its intention of reducing state influence on theprivate economy and of strengthening market forces. The new government alsoclearly defined its position on the privatisation of public property: it underlined inits 1983 annual economy report its desire to work for a policy that would reducethe activities of the state to those that were appropriate, to transfer as far as possiblepublic services to the private sector and to privatise public goods whenever possiblewithout harming the interests of the state.

In the first 10 years of being in office, however, the conservative-liberalgovernment carried out its promise to reduce the activities of the state only to avery small extent. This created increasing disappointment amongst neoliberaltheorists, who complained that the privatisation and deregulation measures promisedby the government remained insignificant (Woll, 1987). The debate on privatisationwas again reactivated in the 1990s following first, the collapse of communism inEast Germany and the process of reunification which was thereby triggered. Anew policy emerged and this concerned the vast public sector of the eastern part ofthe country. The declared intention was to convert into competitive privateenterprises the 9,000 firms and holdings which were ‘the people’s property’ underthe Germany Democratic Republic (GDR). This new debate on privatisation wasin the beginning also completely dominated by neo-liberal thinking. Emphasiswas placed on the need to bring about a rapid, brutal and effective break with thepast, in line with Schumpeter’s concept of ‘creative destruction’. However, sincethe spring of 1991 this crash programme has been abandoned, and privatisation isno more than one objective amongst many others to improve the situation of non-profitable firms with the help of the state.

102 Josef Esser

Second, new pressures for deregulation and privatisation arose challengingGermany’s politically regulated infrastructure sector (telecommunications,postal services, energy supply, transport). These arose from a complex mixtureof 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 WesternEurope) which have also affected other EU countries. As a result today thissector is in the process of being deregulated, commercialised and partlyprivatised.

This chapter attempts to explain the clear reluctance of the state to pursue aradical privatisation programme in (West) Germany, in spite of the demands ofimportant parts of the mass media and of the neo-liberals since the 1980s. Thechapter also considers the rather conservative, cautious and pragmaticprivatisation course adopted in the 1990s. The chapter begins by giving anoutline of the West German nationalised sector, its significance and its structure.This is followed by an analysis of the privatisation policy of the conservativeliberal government between 1982 and 1996. Then the policy that has beencarried out by the Treuhand (the state body which was given the task ofprivatising the East German economy) is discussed. The last part of the chapterdeals with the causes of the cautious and until now, corporatist mode ofprivatisation in Germany.

SIZE AND STRUCTURE OF THE PUBLIC SECTOR IN WESTGERMANY

The public sector at the local and Lander levels

When describing the public sector in the west part of Germany it is importantto distinguish between property which belonged to the Federation, that whichbelongs to the Länder (regional or state governments) and that of the townsand other local authorities. Naturally, a detailed study of the public sector,which cannot be undertaken here, would be necessary to show the extremevariety of forms across the entire public sector, since the position changesfrom Land to Land and from town to town. However, some points should beobserved.

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 rubbishcollection, slaughterhouses, swimming pools, schools, and local transportsystems are carried out at local level, whereas the Länder look after the energysupply, universities, and credit organisations. The German Federal Bank hasestimated the actual market value of the enterprises belonging to all the publicauthorities in 1990 at around DM 370 billion (Neue Zürcher Zeitung, 30November 1990). In 1988 the nominal shares of the Länder in the capital ofthese enterprises amounted to some DM 12.3 billion, those of the Federation

Privatisation in Germany: Symbolism 103

to about DM 6.5 billion – in other words about half of the value of that belongingto the states (Wirtschaftswoche, 52/53, 23 December 1988: 15).

Without doubt the twelve state banks constituted, both from an economic aswell as a social viewpoint, the most important element in the sector belongingto the subnational authorities. In 1994 the four major Länder banks were theWestdeutsche Landesbank with assets worth DM 379 billion, the BayerischeLandesbank with DM 281 billion, the Südwestdeutsche Landesbank with DM168 billion, and the Hessische Landesbank with DM 153 billion. These bankshave been transformed into universal banks in the meantime and two of them,Westdeutsche Landesbank and Bayerische Landesbank are amongst the tenbiggest banks in Germany (Monopolkommission, 1996: 229). One would findnobody in the Federal Republic and especially in the governments of the Länderor in the councils of the major local authorities who would envisage theprivatisation of such effective credit bodies. Politicians of all politicalpersuasions consider these banks to be vital instruments of structural andregional policies. Indeed, at the moment the principal issue concerns the possiblemerger of these banks so that they may remain competitive in financial marketswhich are increasingly liberalised and internationalised (The Economist, 15October 1994).

When (as in the case of Hesse in 1988) a Christian Democratic Ländergovernment decided to give up its shares in the Land bank they were boughtby 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 theGerman banking sector is in public hands and only a small part of that is in thehands of the Federal government. Over many years the German monopolycommission has demanded the privatisation of these banks and the Federalgovernment has argued in the same vein, but nothing has happened(Monopolkommission, 1996: 37ff., Jahreswirtschaftsbericht derBundesregierung, 1993, and 1995).

The privatisation ambitions of the neo-liberals initially targeted localservices. They have come to very little. No doubt the occasional town hasprivatised a local service such as rubbish collection or street cleaning. Severaltowns have also sold some of their properties to reduce their debt. However, onthe whole, and irrespective of the political persuasion of the local authority,local services have remained firmly in the public domain. Indeed, when theFederal government does decide upon very limited policies of deregulationand privatisation either the policies have no impact at Länder or local level orthe local and Länder authorities buy what the Federal government has decidedto sell.

Consequently, when analysing the policy of privatisation in Germany it isessential to exclude large parts of the considerable public sector belonging tothe towns and to the Länder. At this subcentral level, the public sector isunderpinned by a complex and widespread network of economic, political andsocial interests, and has become a significant means to pursue specific objectives

104 Josef Esser

in the field of infrastructure, transport, training, social and industrial policy.Until now, this system has remained perfectly intact. In other words, at thelocal and Länder level there is a wide consensus on the need to respect thesocial market economy. There is a feeling that public enterprises are needed tocompensate for market failures – in both social and infrastructural terms.Naturally, these enterprises have to be competitive and efficient. But to theextent that they fulfil these conditions and there is no empirical evidence thatprivatisation would improve their social and economic performance, local andLänder interests see no point in calling into question the current ownership.

Nevertheless, there is a debate, which is just beginning in certain towns, onthe virtues of public–private partnership inspired by the British and Americanmodels (Heinz, 1993; Reichard, 1994). The causes of this debate include thehigh costs of reunification, which have partly to be met by the communities inthe West. Another reason is new and fierce competition between local authoritiesacross Europe to entice the investment of transnational corporations. Finally,the economic pressures on government from the rising costs of social benefitsand the costs of modernising local infrastructure have stimulated debate aboutthe proper role of the state and the future of the social market economy inGermany. 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 ofthe central government in Germany, since currently it is only at this level thatprivatisation on an appreciable scale is envisaged. It is worth recalling that thissector dates from the Weimar Republic or the Nazi period. It is embedded inpolitical will, being advocated by both the pre-war right and left, and rooted inthe ambition to industrialise the country rapidly in order to catch up with Britainand the USA (Himmelmann, 1986; Knauss, 1986). After the Second WorldWar there was no nationalisation in West Germany, either of major sectors orof firms in difficulty. As a result, the central government’s public sectorremained smaller than that of many European countries where powerfulworking-class movements were able to impose extensive nationalisationprogrammes. The German working-class movement advocated nationalisationin its early postwar programmes, but it was too weak politically to have thepolicy implemented. On the other hand, there was no one in West Germanywho wished to denationalise the existing public sector. And the West GermanConstitution even protected until 1996, in Article 87, a state monopoly of theFederal railway system, the postal and telecommunications sectors, and inlandnavigable waterways. A two-thirds majority of both houses of the GermanParliament was required to break up the monopoly.

Christian Democrat governments of the 1950s and 1960s, which were farfrom being neo-liberal, utilised the public sector, inherited from Weimar andthe National Socialists, in order to maintain political support for the economicrestructuring of the country; while the Social Democratic-Free Democrats


coalition government of the 1970s mobilised it to back their Keynesian-inspiredmixed economy model. Andrew Shonfield’s ‘organised private marketeconomy’ 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, anationalised sector and state intervention whenever it was deemed necessaryin the national interest (Shonfield, 1965).

During the 1970s the industrial public sector controlled by the centralgovernment grew sharply. The reason was clear. The most important publicsector groups included steel, coal and shipbuilding, all of which because ofinternationalisation faced increasing competition. In these circumstances, statefirms in these industries attempted to widen their industrial base by buyingshares in other industrial branches or in companies which were connected toor suppliers to their own activities. As a result, the number of firms in whichthe Federal government held at least 25 per cent of the shares increased from697 in 1970 to 958 to 1982. At the same time, the capital share of the Federationincreased 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 sectorwhen the Christian Democrats regained office. Compared with the situation inother European countries the figures are rather modest. Within Western Europein 1978, the major public sector enterprises comprised 13.7 per cent of theturnover of the 269 biggest companies. Accounting for only 3.9 per cent oftotal turnover, the West German public sector was one of the smallest and along way behind Austria, which had the biggest public sector with the stateaccounting for 82 per cent of turnover, Italy with 51.8 per cent, France with24.9 per cent and the UK with 12.5 per cent (Czada, 1983: 256; Dunning andPearce, 1981).

Table 6.1 Germany: size of the federal industrial assets

Source: F. Knauss (1986: 227)

106 Josef Esser

Table 6.2 provides data relating to the share of domestic production, byindustrial sector, belonging to the Federal government. The overrepresentationof the public sector in the problem-ridden industries of coal, steel andshipbuilding emerges clearly. The most important direct stakes of the centralstate in 1983 involved the Salzgitter steel group (100 per cent owned),Lufthansa, the national flag carrier (74.3 per cent), the mines of theSaabergwerke (74 per cent), Vereinigte Industrieunternehmen (VIAG), a holdingcompany with interests in electricity, gas and aluminium (86.5 per cent), andIndustrieverwaltungs-GMBH (IVG) which was active in industrial share buying,property deals, transport and oil (100 per cent). The central state also hadimportant minority holdings in powerful German companies such as VEBA,the energy and chemical group (43.8 per cent) and the motor car companyVolkswagen (20 per cent) and held a significant stake in the country’s bankingsystem. Excluding the central bank, in 1982 Federal state assets in bankingwere worth around DM 170 billion, placing these banks just behind the DeutscheBank and Westdeutsche Landesbank (itself a public bank since it belongs tothe Land of Rheinland–Westphalia) in terms of size ranking. The most importantpart of the Federal state’s banking arsenal was the Kreditanstalt fürWiederaufbau (KfW) (Credit Institute for Reconstruction), which specialisedin providing financial aid for industrial development and export guarantee loans.Another, the Deutsche Ausgleichsbank, had a similar central-stateinterventionist rationale: it was initially set up to finance the programmes forintegrating political refugees from the East. This bank, together with the CreditInstitute for Reconstruction, has since become the major instrument formanaging the European Recovery Programme. Mention should also be madeof the Deutsche Siedlungs- und Landesrentenbank (which provides aid to theagricultural sector), the Berliner Industriebank (which financed help for theWest Berlin economy until 1990), the Deutsche Pfandbriefanstalt (later called:Deutsche Pfandbrief- und Hypothekenbank which is involved in localgovernment financing) and the Deutsche Verkehrs- und Kreditbank (whichserves its sole shareholder – the German Federal Railways).

Table 6.2 Germany: share of the industrial federalsector in different industries (% of national production)

Source: F. Knauss (1986: 227)


In the scientific field, too, the central state retains considerable leverage. TheFederal Ministry of Research and Technology controls fourteen research institutions(Max-Planck-Institutes or Fraunhofer Institutes), often together with the states inwhich the Institute is located. These research institutes are charged with ensuringbasic knowledge or technological innovation, often in close collaboration with theprivate sector (Hohn and Schimank, 1990). Finally, we should note the Treuarbeit,which plays an important role in structural and industrial policy by examining thebalance sheets and potential of firms which apply for Federal aid. The Treuarbeitbelongs to the Federal state and five Länder, each of which has an 11 per cent stakein 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 withthe denationalisation of Preussag and the partial denationalisation of VEBA and ofVolkswagen. They are worth mentioning here because the failure to create a ‘popularcapitalism’ through state asset sales played an important part in shaping theperceptions of governments involved in later privatisation programmes. Also, atthe time there was no question of making privatisation an integral part of an extensiveprogramme of economic liberalisation, which might have prejudiced the socialmarket economy. Rather, the programme was designed to widen ownership as partof a policy of giving people a share in the country. The campaign in favour ofpopular capitalism was linked with the socio-political programme of the socialmarket economy: its purpose was to make each citizen a committed manager-owner who was economically autonomous. However, this programme ofredistributing national wealth was not a success. The major reason lay in thereluctance of large sections of the German population to invest their savings inequity: they preferred to put their money into investments with guaranteed returns.This situation has not changed since that time. The average German has littleconfidence in shares: only 14.5 per cent of West German wealth in 1995 was inequity and private savers held only 5 per cent of their money in shares (DeutscheBundesbank, 1997: 29). Until 1992 government support for the creation of wealth(Vermögenspolitik) had the result that 96 per cent of financial investment wasrelated 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 overallprivatisation programme, it was reacting to the increasing pressure, largelyideologically inspired, exerted by neo-liberal circles and professional investors,and by the Free Democrats (FDP) who belonged to the government coalition. Therewas no real economic necessity, but there was a need to underline the break with

108 Josef Esser

the immediate Social Democratic past. It must be emphasised that the pressure fora radical programme was largely symbolic. The industrial sectors that were oflong-term strategic significance in the international marketplace were already inthe 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 fiscaldeliberations were part of the game. The sale of some of the jewels in the nationalindustrial crown was expected to help reduce the national debt.

Although the principle of privatisation was decided in 1983, the Federal Ministerof Finance waited two years before presenting a general programme for itsimplementation. This prolonged period underlines the divisions over privatisationwithin the government coalition and within the interest groups close to the coalitionat the time. Meanwhile, and as a sop to an increasingly impatient Free DemocraticParty, it was decided to privatise partially the apparently problem-free VEBAcompany. In the first place, the Federal government reduced its stake from 48 percent to about 30 per cent, and decided not to take part in the recapitalisation of thecompany, which had the effect of further reducing its stake to 25.6 per cent. Thisstake was later sold to private investors. However, the attempt to privatise througha policy of widespread share ownership was, as in the past, a failure. Over 4 millionshares were sold, but only 52,000 went to new shareholders.

When the Federal Minister of Finance eventually outlined his generalprivatisation programme in 1985, he announced that only thirteen companies werein a fit state to be privatised. All the other public firms were either not viablefinancially, were in deep economic crisis (in particular, the steel, coal mining andshipbuilding enterprises) or had to be kept in the public sector for industrial policyreasons. In the latter category were placed the state-controlled banking sector, theresearch 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 theFederation. In the majority of cases this involved retaining a 51 percent stake. Inothers a 25.1 per cent holding was deemed adequate. What is striking, therefore, isthat the privatisation programme was far from radical. Nevertheless, it triggered awave of protests, even within the government. As a result, the cabinet decided, inMarch 1985, to reduce the list of thirteen to five: VlAG, Volkswagen, Prakla-Seismos, Deutsche Pfandbriefanstalt, Deutsche Siedlungs- und Landesrentenbank(OECD, 1989). In the other cases it was agreed to explore the matter further or topostpone 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 ownedthe companies, did not follow the central government’s example: Lower Saxonyretained 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 hada holding, a 15 per cent stake in VlAG (Wirtschaftswoche, 23 December 1988: 18)In 1994, however, the Bavarian government in cooperation with Bayernwerk andVIAG changed its industrial policy strategy – an event which the monopoly


commission has called ‘Scheinprivatisierung’ (apparent privatisation)(Monopolkommission, 1996: 38). A new conglomerate, ‘VIAG’, in which thegovernment, the earlier Bayernwerk and the ‘government-friendly banks’(Bayerische Vereinsbank and Bayerische Hypotheken- und Wechselbank) havestakes was to be built up as a new competitive ‘global player’ in the sectors ofenergy utilities, chemical, transport and telecommunications. This corporation with100,000 employees and a turnover about DM 40 billion is now the second biggestfirm in Bavaria, behind Siemens, and the sixth largest in Germany. It also has beenshaped as a counterweight against Nordrhein Westphalias energy utilities RWEand Veba (Neue Zürcher Zeitung, 1 December 1993 and 12 March 1994).

Once the steel crisis had abated, Salzgitter was also privatised, but the Federalgovernment remained the owner of Saarbergwerke (coal) because of the economictroubles facing this enterprise and the Bavarian government increased its stake inMaxhütte, a steelmaker, just before it was to be declared bankrupt. IVG andDeutsche Pfandbrief- und Hypothekenbank were privatised in the meantime, too.The central government also reduced its stake in Verkehrs-Kredit Bank (to 75.1per cent) and in Deutsche Siedlungs- und Landesrentenbank (to 55 per cent) . Thepart privatisation of the DSL was greeted with considerable opposition. The crucialrole played by this bank in the state financing of agriculture compelled the Ministerof Agriculture to intervene in the privatisation debate. The compromise whichfinally resulted involved the DSL remaining a public law institution withadministrative functions (Handelsblatt, 9 June 1988: 9).

The planned full privatisation of Lufthansa also did not happen. In the 1980s itfailed because of several disputes, notably between Bavaria and the Federalgovernment. The initial plan was to reduce the central government’s stake from79.9 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 nationalrole of the airline by introducing foreign capital into the company. The state had toremain the dominant owner. The CSU also raised the vexed question of nationaldefence, since Lufthansa was obliged in the case of armed conflict to place itsaircraft at the disposal of the armed forces. Behind this appeal to national interestthere lay the real reason for Bavarian opposition, and it was rooted in the industrialpolicy of the state. It is in Bavaria that German aircraft and aerospace industriesare concentrated with Messer-Schmidt-Bölkow-Blohm (MBB), now integrated intoDeutsche Aerospace, a subsidiary of Daimler-Benz. The German parts of theEuropean 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 underminingof the close links which had been established between Lufthansa, MBB and Airbusthrough the judicious use of state procurement policies.

In the controversies within the government coalition the Free Democratslost ground to the CSU. In spite of repeated accusations of advocating statecapitalism, the latter maintained its opposition to the privatisation of the nationalflag carrier. After lengthy debates in cabinet, the CSU won the day; it wasdecided to retain the Federal stake in Lufthansa. Nevertheless, Bavaria was

110 Josef Esser

unable to prevent the ‘passive privatisation’ of the company, since it was agreedthat it could raise new capital on the private financial markets, thus effectivelyreducing the public stake to 52 per cent. Bavaria reacted by increasing its ownshareholding. When Daimler–Benz took control of MBB, with the massivebacking of the Bonn government which was keen to strengthen the Germanaerospace industry, the Länder of Bavaria, Hamburg and Bremen refused tosell their stakes in the company, thus becoming minority shareholders inDeutsche Aerospace, the subsidiary of Daimler-Benz. Today Bavaria isgradually abandoning its opposition to privatisation of Lufthansa.

On the whole, it must be concluded that the 1985 privatisation programmewas only partially implemented – even though the Free Democratic Party, akey coalition partner of the CDU, denounced the timidity of the 1985programme. Privatisation reduced the number of firms in which the Federalgovernment held at least 25 per cent of the shares, from 958 in 1982 to 400 in1995, which generated about DM 12.5 billion in revenues for the government(Jahreswirtschaftsbericht, 1995: 24). The only point on which the coalitionappeared to be united was the need to sell certain parts of the ‘family silver’ inorder to raise money for the state budget. Nevertheless, the supporters ofprivatisation were content with the measures taken. They were, it was argued,symbolic in character, and suggested that a Germany which appeared stuck inthe mire of corporatism had finally decided to smash some of the taboossurrounding denationalisation. Eventually, they envisaged a more radical neo-liberal economic policy emerging.

Deregulation, commercialisation and partial privatisation of theinfrastructure sector

Germany’s social market economy has always featured two major sectors. One, asmentioned earlier, comprises private key industries that compete fiercely ininternational markets in areas such as mechanical engineering, car industry, factoryconstruction, chemicals and electronics. The other has always been a politicallyregulated one in which the principles and requirements governing competition inthe marketplace have taken a back seat to the aims of social and structural policies(Esser, 1995). Such areas included transportation, postal services andtelecommunications, public utilities, public banks and saving institutions, whichmake up an important part of the infrastructure of the social market economy.

Beginning in the 1980s, but winning ground not before the 1990s, there werediscussions going on within West Germany which suggested that infrastructureprovision should be deregulated, reorganised, commercialised and in part privatised.This resulted from a complex mixture of technological, economic and politicalfactors embracing new information technologies, globalisation and the SingleEuropean Market initiative. The first and most instructive example of the corporatist,gradual and social-consensual manner in which the restructuring has beenimplemented involves telecommunications (more details can be found in Esser,1995, and Esser, Lüthje and Noppe, 1997).


In the 1980s vast changes in the telecommunications sector at international andEuropean level forced West Germany and many other countries to call into questionthe status of telecommunications as a natural monopoly owned by the state. Germanneo-liberals demanded outright privatisation, as in Britain and Japan. However, inthe 1980s the Bonn government was successful in refusing to follow the neo-liberal path in spite of considerable pressure from the Free Democrats. At the sametime, Bonn recognised the key importance of the role played by the Federal postoffice system (Deutsche Bundespost) in creating the new telecommunicationstechnical infrastructure (notably the Integrated Service Digital Network or ISDN),as well as the increasing importance of telecommunications for Germancompetitiveness. It therefore accepted that new organisational structures wererequired to enable quicker and more flexible reactions to technical, economic andpolitical change. Hence a governmental advisory commission was set up in 1985for the purpose of examining the problem. It included, in addition to scientists andlegal and business experts, senior representatives of the professional associationsconcerned, delegates from all parties represented in the Bundestag, representativesfrom the Länder, and a representative of the postal union, DeutschePostgewerkschaft (DPG).

Following wide-ranging discussions lasting two-and-a-half years, thecommission reached a broad compromise on the future of telecommunications, acompromise that provided the basis for the Act of 1 July 1989 on the structure ofpostal services, whereby Germany telecommunications were reorganised(Postreform I). What was remarkable about the changes proposed was that, inspite of obvious conflicts of interest between manufacturers of transmissionequipment, information and communication technology industries, and betweenusers, constructors and installation engineers, the commission achieved acompromise. This was ‘broadly capitalist’ in character, yet resulted less inprivatisation than in ‘mild deregulation’. The administrative function wasdistinguished from the strictly business functions and transferred to a reorganisedMinistry for Postal Services and Telecommunications, which was then the centralregulatory authority in this sphere. Federal postal services (Deutsche Bundespost)were subdivided into three relatively autonomous state-owned enterprisesresponsible respectively for postal services, financial services (Postbank) linked tothe post office, and telecommunications (Deutsche Telekom), each having at itshead a newly created managerial body. Cross-subsidisation from profitablebusinesses to loss-making ones was sanctioned for only a limited transitional period.Telekom retained as well its monopoly, the strategic function of effectiveimplementation of ISDN as the standard for a unified telecommunicationstechnology. 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 wereto form the core of the latter. Private firms would compete with Deutsche Telekomin these areas; an arrangement which also took into account the interests of theLänder, 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 ofthe Länder was vital in any restructuring of post and telecommunications.

Although Deutsche Telekom was not privatised, its functioning was now moresubject to market mechanisms. So as to be able to finance the considerable cost ofsetting up ISDN on its own, it had to perform in the same way as a service concernin the private sector. Both management orientation and work practices had to beadapted to marketing objectives and methods; rationalisation was essential, entailingjob losses and new working conditions, with a view to achieving both higher qualityand greater efficiency. The agreement of the post office workers union was wononly after fierce resistance; for a long time it opposed the compromise plan putforward, but, being in a weak position, was eventually obliged to accept it as thelesser of evils.

Even so, the future of Deutsche Telekom was not finally settled. Debate continuedafter 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 offurther budgetary revenue to help finance the integration of the eastern territories.But second, and more importantly, there was increasing pressure initiated by theEuropean Commission to liberalise the European telecommunication market totally,as well as by Deutsche Telekom itself, which welcomed its opportunity to competeinternationally. Its management considered that its present status as a publiccorporation denied it the right to do this. It was argued that because of challengesposed by a completely altered and increasingly competitive world market, Telekomhad to position itself as a global, high-tech service provider in a key technologyarea, and that strategic alliances with foreign partners were necessary to extend itscurrent activities to the global stage. If Telekom were no longer subject to publicservice law, in matters of wages, employment status and working conditions, itcould better achieve the flexibility needed to compete (Ricke, 1994).

This discussion was occurring in a familiar setting and resulted in the 1996Postreform II. The opposition SPD party had to be involved in order to achieve atwo-thirds parliamentary majority, which was necessary to remove the Bundespost’sconstitutional status as government property. The states had to become involved,since otherwise they could exercise a veto in the Bundesrat. Finally, the postalunions and the postal service officials also had to agree to the changes, since boththe SPD and CDU/CSU would not have been able to stand up to any resistancefrom the postal employees. All this happened in summer 1996 after more than twoyears of fierce bargaining between federal and state governments, the oppositionparty SPD, and the postal union.

The new law turned Deutsche Telekom, the postal savings bank and the postalservice into three different joint-stock companies which were intended to be partlyprivatised over the next few years. Additionally, the postal service and Telekomwere to lose their monopolies in sending letters and transmitting phone calls. Thepostal service, due to be partially privatised in 1999 or 2000, is limited in its exclusivelicence to letters weighing under 100 grams and costing less than DM 5.50 to postand only until the end of 2002. Whether after that date full competition will happenor not is difficult to say at present, for the plan faces stiff resistance in the upper


house of parliament. It is opposed by the majority of the federal states and thepostal trade union because of fears of job cuts, higher postal costs and a deterioratinguniversal service.

The selling of Postbank, the postal savings bank, is scheduled for 1997 forabout DM 3 billion. A planned stake by the postal service in Postbank has nowbeen limited to 17.5 per cent to prevent a blocking minority shareholding (25.1 percent) (Neue Zürcher Zeitung, 1 and 2 March 1997). This result came after a fiercedebate within the CDU–FDP coalition government, in which the liberal FDP feareda resurrection of the old state monopoly under a new roof.

Deutsche Telekom loses its monopoly in transmitting phone calls on 31December 1997. This date coincides with the European Union voice telephonyliberalisation. The first step of partial privatisation of the enterprise was undertakenin November 1996, when about 25 per cent of the shares were sold to privateowners. The next step is scheduled for 1998. There were three conflicting issuesbetween government, opposition, states and trade union which had to be solvedbefore this agreement could be reached: (1) the future of the universal serviceprinciple; (2) the structure of the new regulatory authority ; and (3) the right ofmunicipalities to charge for the carriage of telecoms services across their gas andelectricity networks (‘Wegerecht’). The opposition SPD and the postal union hadattempted to ensure that each telecom licence issued after 1998 should be tailoredto cover both urban and rural areas and to deliver every customer the same technicalISDN-standard telephone at the same price. Government and industry rejectedthis and licences will be available to any operator who meets certain technicalstandards within the area covered by the operator. This will have the result that theGerman social market telephone infrastructure, which until now has been politicallycontrolled and regulated by the state providing coverage of the whole country atunified prices which are affordable to all, will be displaced over time by a systemof divergent access conditions and opportunities of participation dictated by themarket. The concept of basic provision telecommunication infrastructure for allwill only apply to technically primitive minimum facilities. ‘An extension of thediversity 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 natureof the future regulatory authority. This will be established in 1998 as a new agencywithin the Ministry of Economy after the abolition of the Ministry of Posts andTelecommunications. Under the Postreform I from 1989, Deutsche Telekom wassupervised by a ‘Regulierungsrat’ made up of officials from the Federal governmentand in which especially the states tried to ensure that the private companies couldnot neglect infrastructure investments in less-populated areas. The states hadproposed an authority including Länder representatives but the governmentsuggested that it would be prepared only to allow the states some say in appointmentof a staff which it insisted must be ‘professional’ and not ‘political’. Both sidesagreed on a compromise whereby an 18-strong advisory council made up ofBundestag and Bundesrat members would be consulted about appointments to theregulatory authority.

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Although there is consensus about ‘asymmetrical regulation’, which means thatonly dominant market players have to fulfil minimum universal service obligationsbefore receiving a licence, details about management, organisation, staff and thespecific power of the proposed new regulatory authority are still not finalised. Thebig proposed new competitors of Deutsche Telekom in the liberalised market after1998 (VEBA/RWE, VIAG/British Telecom, Mannesmann/German railway andAT&T) have attacked the government for failing to decide the vital details ofliberalisation like fees for interconnecting telephone networks.

Pressure has been placed on SPD deputies by the municipalities, traditionalSPD constituents, which want to ensure that they can charge for the carriage oftelecom services across their networks. But the Federal government has insistedthat it will not permit this and though the state chamber, ‘Bundesrat’, first voted toapprove this claim of the local authorities, it eventually accepted the government’sposition. This dispute is not settled, however, because the municipalities havedecided to take their fight to the supreme court.

In a similar manner, cautious, pragmatic and social-consensual change is beingadvocated for the German railways (Deutsche Bundesbahn). This publicly ownedactivity has been corporatised with the intention that it should be decentralised,liberalised and privatised in the longer run (Lehmkuhl and Herr, 1994). Agovernment commission, in which all important social and political actors wererepresented, made a proposition for a reform draft and the first step towards itsrealisation was the so-called ‘privatisation of the organisation’(Organisationsprivatisierung) in 1994. Under the reform, the German Bundesbahnand German Reichsbahn (the railway organisation of the earlier GDR) werecombined in the Deutsche Bahn AG, a joint-stock company. Under this government-owned holding company, three independently operated enterprises for passengertransport, goods transport, and the rail infrastructure were formed. This is not trueprivatisation and under current plans rail infrastructure is to stay in public ownershipwith the state remaining responsible for building, maintenance and marketing ofthe railway track. In 1996 regional rail traffic started to be managed under theauthority of the 16 states after the Federal government agreed to subsidise this newLänder task. Civil service status was revoked for new employees and consequentlywages 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. Theintention is to help the airline compete better in the market and to enable it to buildup 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 andsecond, accepted the further reduction of the public stake from 52 per cent to 36per 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 stilltotalled 40.65 per cent (Bundesminister der Finanzen, 1995). In January 1997 theGerman government announced that it would sell its remaining stake in Lufthansa,while approving legislation intended to keep the carrier in German hands. Thedraft legislation called for the airline’s traditional bearer shares to be converted


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 implementedafter consultation with representatives of the personnel. The central business sectors– freight, technology and airline transport – were established as independent profitcentres; while activities such as sales, cost accounting and product managementcontinued to be centralised within the Lufthansa holding company. The status ofthe workers as civil servants is being gradually ended, starting with the introductionof flexibility contracts and acceptance by the trade unions of step by stepemployment reductions.

A deregulation commission, established in 1989 by the Federal government,made recommendations for deregulation and privatisation in the field of energysupply. However, nothing of major significance has happened so far with thetraditional local or regional coalitions of interests and clientele structures remainingintact. 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 thatthe current restructuring processes are being undertaken while retaining publiclyowned firms (Esser, 1995).

PRIVATISATION POLICY IN EAST GERMANY

The degree to which the process of privatising concerns in East Germany that wereformerly the ‘property of the people’ may affect the overall policy of privatisationin the new united Germany remains to be examined. The Treuhand was set up inMarch 1990 by the GDR, while still autonomous. Its task was to convert the 9,000nationalised firms and holding companies, representing at the same time someseven million workers, into business companies and require them to be run inaccordance with the norms of a market economy. The West German governmentthen used its pressure to make changes in the Treuhand’s management, placing itsown managers of proven capacity in key administrative posts, in what was termedthe ‘largest industrial holding company in the world’ (Mrs Breuel, chair of theTreuhand).

After reunification the Treuhand became a legally constituted entity under thelegal and technical supervision of the Federal Ministry of Finance. The ninemembers of its Board and the 24 members of its management enjoyed a considerabledegree of autonomy in defining which of the 9,000 firms under their jurisdictionshould 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, andwhat should become of the sale proceeds. Examination of these problems wasdivided among five specialised sectors for the various industries and 15 subgroupsregionally based, their task being to ‘municipalise’ immovable assets and privatisesmall firms operating in a fairly local context. After reunification, the West Germantrade 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, constantpressure on their part led to them being granted minimal participation.

In conformity with the market ideology destined to prevail in the new unitedGermany, the Treuhand began by announcing that its priority was to privatise‘competitive’ firms in East Germany and liquidate the remainder. Moreover, ittook the view that wider structural and social policy considerations were notwithin its competence. Given the policy of closures, the Treuhand rapidly madeitself extremely unpopular not only with the East German population but withthe elected local and Länder representatives in the ex-GDR. Massdemonstrations, organised by the unions, vehemently demanded that priorityshould be given to industrial rehabilitation before privatisation or liquidationwas considered. The feeling was strongly expressed that the prime objectiveshould be to preserve the basic industrial core and thus prevent the eastern partof 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 Federalgovernment to force the Treuhand to alter its priorities. Indeed, within the ranksof the CDU protests grew more vociferous, even to the point of threatening theparty’s unity. In an agreement of March 1991, called ‘Grundsätze derZusammenarbeit von Bund, neuen Ländern und Treuhandanstalt für denAufschwung Ost’ (principles of cooperation between federation, new statesand Treuhand agency for upturn in the East) efforts were made to improve thecoordination between federation, states, trade unions and the Federal agencyfor labour market policy. Additionally, ‘Treuhand cabinet offices’ (Treuhand-Wirtschaftskabinette) were established in every one of the new Länder andwere to be informed by the Treuhand about every planned measure ofprivatisation affecting their region. Consequently, from that spring onwardsthe Treuhand gave greater consideration to the rehabilitation of non-profitableconcerns and set about finding ways to consolidate key areas of industry, suchas steel, chemicals, shipbuilding and engineering, even when private investorsand purchasers were not forthcoming. Furthermore and generally speaking,when a decision about a firm’s future was taken, greater attention was given toits combined repercussions on the industrial sector concerned, on the regionand on the labour market.

Management in every single firm passing through the hands of the Treuhandwas expected to act as an entrepreneur in the task of restoration of profitability.The trade unions where successful in fighting for social plans, job creationclubs (Beschäftigungsgesellschaften) and measures of retraining whenredundancies happened. In the autumn of 1992 the Treuhand and 500 firmsagreed to specific bilateral plans supporting investment. Five ‘managementsocieties’ were created in which the Treuhand cooperated with experiencedmanagers to bring together and rehabilitate small or medium-sized state firmsfor later privatisation. Finally, the new states created agencies which had thetask of identifying strategically important enterprises for restoring incooperation with the Treuhand agency (Hickel and Priewe, 1994: 60).


The result was that the regional authorities in East Germany succeeded inacquiring more muscle; while the Treuhand alone retained the power to pronounceon a firm’s future, with the option of closure. Expert ‘economic cabinets’ werenow set up in the five new Länder, which the Treuhand was obliged to inform inadvance of measures that were being considered affecting firms in their region.This requirement of prior notice resulted in a kind of corporatist system ofnegotiation, whereby the unions and municipal authorities concerned were broughtin to discussions with the Treuhand and regional governments. In this way, theregional and union representatives on the Treuhand’s management board foundthemselves in a considerably stronger position to put the case for account to betaken of local economic and social problems.

East German privatisation has been successful so far in introducing West Germanstandards and procedures to the East. But the German taxpayer has had to pay thebill for the assistance measures, including payment for unemployment relief and araft of work creation and retraining measures. By the end of 1996 net transfersfrom West to East since 1991 added up to over DM 900 billion, running at about 5per cent of West German GDP (Sachverständigenrat, 1995; Deutsche Bundesbank,1997).

At the end of 1994 the Treuhand agency was abolished. It was successful inprivatising about 15,000 firms or parts of firms with total of debts about DM 256billion and an income of DM 67 billion. About 3,000 privatisations were‘management-buyouts’; while only 860 firms were placed in the hands of foreignowners (Bundesregierung, 1995: 125). Eighty-five per cent of the East Germanindustrial assets are now in the ownership of West Germans, which is bestcharacterised as a large-scale ownership transfer from the East to the West ofGermany (Arbeitsgruppe, 1996: 161). A new agency, the ‘Bundesanstalt fürvereinigungsbedingte Sonderaufgaben’ (BvS) supervised by the Ministry of Financenow manages the privatisation of those firms which were not privatised under theTruehand.

It is too soon to say yet whether this new policy of rehabilitation and privatisationis likely to be a fruitful one. All that can be said is that the East German economywould 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 industrialsubsidies of DM 54.26 billion in the same period (Arbeitsgruppe, 1996: 168). Itshould be added that initial projects for radical privatisation were abandoned earlyon. In the face of the threat of the eastern regions being deindustrialised wholesale,there was (nearly) general appreciation that market forces alone were incapable ofcarrying through the economic and social integration of the former GDR with theFederal Republic. Now, and for a long time to come, the need for intervention andsupport on the part of the government is accepted, the only matter to be settled ishow extensive such intervention should be. Is the answer an overall and systematicindustrial 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 aresympathetic)? Or would the joint involvement of the Länder and private and publiclyowned 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 anyevent and which ever way the debate goes, it is now accepted that after the wave ofneo-liberal euphoria opinion is moving back in the direction of the West German‘social market economy’ model.

EXPLANATIONS AND CONCLUSION: THE CORPORATISTGERMAN MODEL – BUT FOR HOW LONG?

To understand precisely why the privatisation process in Germany has been sohesitant since the 1980s in (West) Germany, and despite the large-scale privatisationunderway in the East, it has to be appreciated that public ownership of industrialcorporations was relatively insignificant, and that the sectors of industry whichwere crucial in the drive for exports – mechanical engineering, construction ofindustrial equipment, car manufacture, chemical and electrical industries, to nameonly the most important ones – were already privately owned. Consequently, ahighly sophisticated and effective financial sector based on private capital was inplace, whose interests closely interlocked with those of West German industry.Unlike the situation that applied in a number of other European countries, a policyof privatisation was not, from an economic standpoint, of paramount importancein making sure that Germany remained competitive in world markets.

Then again – a factor closely linked to that just mentioned and one plain toobserve – there was no significant political or social force in Germany to advocatea massive privatisation programme. Privatisation was not strongly championed byprofessional business associations, trade unions, or either of the two main politicalparties. On the contrary, generally speaking there was an effective consensus amongFederal and state governments, local authorities, political parties, unions andbusiness associations that public assets should not be privatised so long as theywere considered essential for industrial and regional policy. This was true of themajor research institutes, telecommunications, federally owned banks such asKreditanstalt für Wiederaufbau, air transport (Lufthansa), or again, at regional andlocal level, energy distribution and a certain number of business concerns. In all ofthese sectors, the consensus existed that Federal government intervention, in eithermonopolistic or majority shareholding form, was perfectly right and proper. It wasalso true, however, that in general the view was that these concerns should be runin line with market criteria, as regards profitability, competitiveness and so on.Accordingly, the debate on privatisation from the 1980s, at all levels, has in themain been taken up with the issue of whether and to what degree the state enterpriseshave continued to satisfy the demands of an enterprise economy.

Politically speaking, the only discordant voice has been that of the FreeDemocrats, which has been forced by growing interparty rivalry to take a moreaggressive stance on behalf of the interests of its relatively wealthy clientele, whowant more investment alternatives. The CDU certainly needed to take account ofits neo-liberal partner in government; at the same time it could not afford to disregardsections among its own electorate who clamoured for the wider possibilities ofshare flotation. Here can be found the most important reason for the somewhat


symbolic character of German policy in respect of privatisation. While this categoryof 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 massof the electorate did not see privatisation and deregulation as self-evident politicalobjectives. In the wake of the unhappy experience of the sale of “Volksaktien”,popular shareholding capitalism no longer held vote-winning properties for themajor parties. People have continued to prefer to put their savings into low-riskstock or into property. Whether this attitude is changing now, as many politicians,business and media people are hoping after the successful selling of DeutscheTelekom shares in November 1996, it is too soon to say.

A third important factor to explain the reserve evident in privatisation policy inGermany is attributable to the country’s political system and institutions. Devolutionof power at regional and local levels has resulted in extreme fragmentation ofpolitical decision making. Hence the need for a coordinating role at the Federallevel in order for government to function properly (Lehmbruch, 1976), and a wholerange of institutional and technical ‘political interlocking’ devices (Scharpf et al.,1976; Ellwein and Hesse, 1987). Hardly surprisingly, municipalities and Länderhave not had the slightest intention of parting with public ownership given theadvantages that accrue to them in areas of local and regional policy. Their preferencewould be for what the Free Democrats disdainfully term ‘state capitalism’: havingat their disposal the wherewithal to conduct an appropriate policy in terms ofresearch, technology and industrial development, meanwhile retaining the optionto subsidise research and innovation among smaller firms. Consequently, localand regional authorities stand in the way of Federal privatisation plans and,moreover, were able to exercise their veto on issues such as railway ortelecommunications privatisation in the 1980s.

For all these reasons, privatisation has so far affected no more than a few state-owned concerns and those which have proved to be profitable. The debate over theprinciple of privatisation, and when, and how, has involved not merely the interestsof a small number of shareholders eager to enlarge their portfolios, but fiscalconsiderations, the urge to bring a measure of reform into the distribution of nationalassets, as well as the concerns of industrial policy. In other words, the key factorsin the coalition government’s privatisation policy have sprung from a combinationof symbolism (‘we are privatisers too’) and fiscal considerations.

It can be argued that privatisation in East Germany did not really change thiswell-established pattern. After a short illusory boom of neo-liberalism, privatisationhappened there in a way consistent with the West German corporatist, social marketeconomy model. That privatisation was a political issue at all was a result of theuntil then unknown problems involved in solving the breakdown of the East Germaneconomy and turning it into a social market economy, like that in the west of thecountry. 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 well-established institutions of the West German model should be transferred to theEast (Lehmbruch, 1990; Seibel, 1994; Esser, 1995). Whether these institutionswill 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 ofGermany will be changed dramatically. Especially as the result will be the absenceof a modern, self-sustained and competitive economy in the East, which alone canform the basis for the functioning of an effective social market economy throughoutthe newly unified Germany.

A new drive for privatisation has arisen in the politically regulated infrastructuresector in recent years. Here new challenges which may be encapsulated in phraseslike ‘third technological revolution’, ‘triadisation of production’ and‘Europeanisation’ have forced the economic and political actors to break up long-established public monopolies. Public monopolies shaped to fulfil the duties ofproducing a community of interest based on the provision of universal public goods.Although the government has attempted to manage these new pressures forprivatisation and deregulation in a traditional, pragmatic and corporatist manner,the unintended consequences of destroying universal services (for instance intelecommunications) or ‘public goods’ for this social-consensus oriented societyare difficult to estimate.

Until now economic measures in the German ‘social market economy’ modelhave continued to stand out in terms of the economic success and social stabilitythey have achieved. Efficiency and stability are, in fact, two sides of the same coin,one standing for continuing economic modernisation – which meets with generalacceptance because it succeeds and which succeeds because it meets with generalacceptance! The fact that an equation containing so many imponderables has sofar regularly met with solutions would seem to be a vindication of the political andorganisational resources of the social market economy. In the absence of any realurgency in the past, why then abandon this tried and tested approach to economicpolicy in pursuance of a policy of privatisation and deregulation, whoseconsequences are unforeseeable? If Germany resolves to embark on a wide-rangingand systematic policy of privatisation and liberalisation, which includes all thepublic assets at local and state level, it would be promoted by the urge to proceedwith a radical restructuring of capitalism. That may happen – but forecasting itseconomic and social consequences is another story.

NOTE

1 This article is a revised and updated version of J. Esser, ‘Germany: Symbolic Privatizationin a Social Market Economy’, in V. Wright (ed.) (1994) Privatization in Western Europe,London: Pinter.

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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.

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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 deskooperativen Federalismus in der Bundesrepublik, Kronberg: Athaeneum.

Seibel, W. (1994) ‘ Strategische Fehler oder erfolgreiches Scheitern? Zur Entwicklungslogikder 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 aprivatisation programme since 1991, which has gained the support of bothmajor 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 ofprivatisation in Greece in the period 1991 to 1997. Following this introduction,the next section reviews the relative efficiency of alternative ownershipstructures (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 manycountries in the 1980s. This was part of a reconsideration of the nature androle of the state sector in market economies, which seems to have been resolvedin 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 Europeled to an attempt to create markets there and to privatise whole economies. Itis interesting to examine why this has happened, in particular the theoreticalreasons offered for or against privatisation.

The state is widely acknowledged to be one of the most importantinstitutional devices for resource allocation and the division of labour, alongwith the market (price mechanism), and the firm. In centrally plannedeconomies, 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 ofGDP are high, in some cases as high as 60 per cent (Mueller, 1989). Manytheories have tried to explain the growth of the public sector in marketeconomies. They originate from a number of different ideological perspectives.In brief, neoclassical theories tend to consider such growth as a result ofincreasing demand for state services by sovereign consumers, while publicchoice theorists regard it as a result of state officials, politicians andbureaucrats’ utility-maximising policies, which tend to favour enhanced state

124 Nicholaos Haritakis and Christos Pitelis

activity. In the Marxist tradition, the growth of the state sector was linked tothe laws of motion of capitalism – increasing concentration and centralisationof capital and declining profit rates – which generate simultaneous demandsby 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 overtime, many economists in the 1980s focused their attention on why states couldfail to allocate resources efficiently and, more particularly, on the relativeefficiency properties of market versus non-market resource allocation.Particularly well known here are the views of the Chicago School, in particularFriedman (1962) and Stigler (1988). In a number of papers, Friedman hasemphasised the possibility of states becoming captive to special interests ofpowerful organised groups, notably rich business people and trades unions.Stigler, among others, on the other hand, has pointed to often unintentionalinefficiencies involved in cases of state intervention. Examples areredistributional programmes by the state which dissipate more resources (forexample, in administrative costs) then they redistribute. For these reasons –and the tendency generated by utility-maximising bureaucrats and politicianstowards excessive growth – rising and redundant costs tend to lead togovernment failure. Wolf (1979) has a classification of such failures in termsof derived externalities (the Stigler argument): rising and redundant costsbecause of officials’ ‘more is better’ attitude, and distributional inequities, infavour of powerful pressure groups (as in Friedman).

On a more general theoretical level, the case for private ownership andmarket allocation has been based on three well-known theories. First that ofthe neoclassical property rights school, which suggests that the communalownership (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 widelydispersed in every society and efficient acquisition, utilisation and creation of(new) knowledge can be achieved best through price signals provided bymarkets. Third, Alchian and Demsetz’s (1972) residual claimant’s theory whichsuggests, much in line with the property rights school, that private capitalistownership of firms is predicated on the need for a residual claimant of income-generating assets, in the absence of which, members of a coalition, for examplea firm, will tend to free ride thus leading to an inefficient utilisation ofresources.

There is now a huge literature on the merits and limitations of these theories;see for example Eggertson (1990) for an extensive coverage. Some significantweaknesses have been exposed in each defence of private ownership and marketallocation. Concerning the ‘tragedy of the commons’, it has been observedthat, historically, communal ownership often had efficiencyenhancing effects.Hayek’s critique of pure planning loses much of its force when one considerschoices of degree in ‘mixed economies’, which is virtually always the case, at

Privatisation in Greece 125

least in market economies. Lastly, the residual claimant theory downplays thepotential incentive-enhancing attributes of cooperatives and, moreover,becomes weaker when applied to modern joint-stock companies run byprofessional management.2

Well-known mainstream arguments relating to the problem of governmentfailure are also Bacon and Eltis’s (1976) claim that services, including stateservices, tend to be unproductive; and Martin Feldstein’s (1974) view that pay-as-you-go social security schemes tend to reduce aggregate capitalaccumulation. The alleged reason for this is the view that rational individualsconsider their contributions to such schemes as their savings, and they thusreduce their personal savings accordingly to remain at their optimalconsumption-savings plans. Given, however, that the schemes are pay-as-you-go (that is, contributions are used by the government to finance currentbenefits), no actual fund is available, so that individuals’ reduction of personalsavings represents an equivalent reduction of aggregate saving, equated byFeldstein to capital accumulation.

Some of the above reasoning is reminiscent of (and is supported by) certainMarxist criticism of the role of the state; for example, the views that the stateis captive to capitalists’ interests (Miliband, 1969), and that some state servicesinvolve unproductive (that is, no surplus value-generating) labour (Gouph,1979). This is often linked to the falling tendency of the rate of profits, andthe tendency for government spending under advanced capitalism to exceedgovernment receipts. Reasons are related to demands by both capital and labouron state funds and resistance on both sides to taxation, which are particularlyintensified under conditions of monopoly capitalism.

The near universality of the attack on the state, from both ends of the politicalspectrum, as reflected above, is informative of the general theoretical aimunderlying the drive to privatise (for one of the few attempts to defend thepublic sector, see Heald, 1983). Concerning specifically the relative efficiencyproperties of private sector versus public sector enterprises, the focus ofattention has been, in the main, on issues of managerial incentives, competitiveforces and differing objectives. It is claimed that public sector enterprisesachieve inferior performance in terms of profits or of the efficient use ofresources. While private sector managers are subject to various constraintsleading them to profit-maximising policies, this need not be the case with publicsector managers. Such constraints arise from the market for corporate control(that is, the possibility of takeover of inefficiently managed firms by ones whichare run more efficiently), the market for managers (that bad managers will bepenalised in their quest for jobs) and the product market, including the ideathat consumers will choose products of efficiently run firms for their betterprice 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: theconcentration of shares in the hands of financial institutions; the emergence


of the M-form organisation which tends to ensure that divisions operate asprofit centres; the possibility of contestable markets, that is, markets wherecompetitive forces operate through potential entry by new competitors, as aresult of free entry and costless exit conditions. It is assumed that public sectorenterprises are not subject to such forces, at least, not to the same degree,which implies the possibility that managerial incentives for efficient use ofresources and profit maximisation may be less pressing in public sector firms.

Many of the above factors are linked to the concept of competition andcompetitive forces. Here again the claim is that public sector enterprises maybe more insulated from such forces, being thus less likely to pursue efficiencyand profit maximisation. The latter will also be true if public sector enterprisessimply do not aim at such policies, for example because they are used asredistribution vehicles by the government; and/or for non-economic reasons,such as the need for electoral support; and/or because they aim at correctingmarket failures, such as the high prices of private sector monopolies. All thesefactors tend to establish the economic-theoretical rationale for the efficiencyof 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 efficiencyof the private sector. One limitation arises from the possibility that the variousconstraints on private sector firms’ managers are not as strong as they are oftensuggested to be. For example, large size may protect inefficient firms fromthe threat of takeover; it may be difficult to tell when a manager has performedwell, given the often long-term nature of managerial decisions; and boundedlyrational consumers may often fail to tell differences in the quality of similarlypriced products. Concerning competition, a private sector monopoly is asinsulated from it as a public sector monopoly, ceteris paribus (assuming nodifference in the forces of potential competition). Furthermore, the absence ofcompetition is not per se a reason for privatisation: it could well be a reasonfor opening up the public sector to such forces, for example, throughcompetitive tendering and franchising (Yarrow, 1986). Such considerations haveled many commentators to the conclusion that the issue is not so much that ofthe change in ownership structures as the nature of competitive forces and ofstate 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 policiesis that the very reason for public sector enterprises has often been market, notgovernment, failure (Rees, 1986). It is worth reminding ourselves of the issueshere. In mainstream economic theory, the first fundamental theorem of welfareeconomics shows that markets can allocate resources efficiently without stateintervention, provided that market failures do not exist. Such failures, however,are widely observed; famous instances of market failure being the existenceof 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,


among others, that efficient government itself is a public good, has led to theidea of pervasive market failure (Dasgupta, 1986), which is viewed as the veryraison d’être of state intervention (Stiglitz, 1986). The very reason why publicsector enterprises are run by the state is that they have been seen as naturalmonopolies (firms in which the minimum efficient size is equal to the size ofthe market as a result of economies of scale, leading to declining costs). Ifprivate, it is assumed that these firms would introduce structural market failurein terms of monopoly pricing. The undertaking of the activities of such naturalmonopolies (often known as public utilities) by the state could solve theproblem through, for example, the introduction of marginal cost-pricingpolicies. Although such policies need not necessarily re-establish a first bestPareto-optimal solution (given imperfections elsewhere in the economy), theycould, at the very least, point to the limited value of any claims that publicutilities do not maximise profits, given that this was not their objective to startwith.

To summarise, theory and evidence seem to be less clear-cut on the issueof the relative efficiency properties of different ownership structures than wouldappear to be the case on the basis of the privatisation mania of the 1980s. Thisis not to say that ownership does not matter, but rather that the issue of marketversus non-market allocation is far more complex than often allowed by theproponents of privatisation. This conclusion need not be true if the very reasonfor public enterprise was misplaced to start with. As was seen in the previoussubsection, neoclassical, Chicago and Hayekian perspectives would point tothis conclusion. However, the immense literature on the issues of contestablemarkets, differential efficiency and differential innovation is at best indecisive(see Pitelis, 1991, for a survey). Furthermore, and importantly, the transaction-cost theory is predicated on the existence of firms as solutions to transactionalmarket failures; therefore it strongly questions the alleged efficiency of themarket. All these again would appear to question the simple view of the efficientprivate sector versus the inefficient public sector. Theory and evidence, onceagain, are indecisive on the issue of the relative efficiency properties of differentownership structures.3

THE CASE OF GREECE

The salient characteristics for understanding the reasons and the performanceof 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 processwould exacerbate unemployment and, at the extreme, that the new liberalgovernment would be swept away (political cost argument).


3 For many practical reasons, such as valuation difficulties, meaninglessaccounting statements and unclear sales and costs accounts reported, theimpression was formed that buying those state companies was a dubiousinvestment.

4 In this muddled situation, the presence of a largely state-owned bankingsystem and the suspicion that buyers were benefiting from low sales pricesat the expense of the state, produced an inflexible response and, in particular,a complete lack of financial liquidity to support the programme.

Source: Denationalization Secretariat, Ministry of Industry 1991Note: aDr. = DrachmaKey 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); GreekTelephone Authority (OTE)

Table 7.1 Greek state-owned industrial companies: major information, March 1991

Table 7.2 The Greek privatisation programme, March 1991

Source: ICAPNotes: aCompanies in the energy sector are not included; bexcept the Greek TelephoneAuthority and the mobile telephone sector


included in the privatisation programme. The bulk of industrial assets and a goodpart of industrial property required either a drastic liquidation or (for very few ofthem) privatisation through a sale auction. The last was implemented under thecondition that the company would be able to compete and survive after theprivatisation. Starting from 1993, the government passed on to buyers a newresponsibility. It required them to put forward a business plan which would keepeach company in its current line of business and make firm proposals foremployment and investment targets. Very often those targets were used as evaluationcriteria 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 measureswere aimed at the formation of a group of necessary conditions required in orderto initiate the main programme. Following a trial and error procedure, thegovernment tried to understand the required core legislative transformations for afull implementation of the programme.

During phase two (1992–3) the experience gained in the previous phase waspresented through a complete legislative framework (Law 2000/91). The new lawexpressed experience gained from international practice and incorporated particularcharacteristics of both the Greek and the European Union legal environment.

In this framework one can observe an important difference vis-à-vis theregulations approved for the same purpose in other countries. Law 2000/91described the companies to be included in the privatisation programme withoutlisting them explicitly. This was in contrast to other countries involved in the sameprocedure before, for instance, the German legislation passed on June 17/1990and it could be an important reason for the delays observed afterwards in theprogramme.

As part of law 2000/91, authority passed to the Denationalisation Secretariatand the Central Triministerial Committee and the law demanded the privatisationand reorganisation of nationally owned and controlled property in general. At thislevel it was, at least from a legislative point of view, feasible to extend theprivatisation procedures either to the ex-private and currently public companiesnationalised during the first Pasok (socialist) government (1982–4), public utilitiesand state-owned monopolies and non-viable companies mainly acting as collateralof state-owned financial institutions.

The basic goals expressly set by the law (beyond the political-ideologicalprinciples 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 operationshad already been substantially reduced, privatisation procedures were announcedprimarily for profitable and high asset value public entities and utilities. The target


was to accumulate new funds and to achieve a drastic reduction of aggregateoutstanding public debt. The organisations affected were, for example, theTelecommunications Organisations of Greece (OTE), the National TouristOrganisation (EOT), casinos, oil refineries, airports and mobile telephony.

Phase diagrams, Figures 7.1 and 7.2, display the administrative steps requiredin order to fully complete the procedures as well as the legal network establishedby the new legislation. It is evident that the creation of an effective privatisationprocedure in a country with an established legal environment is complicated and

Figure 7.1 The privatisation process in Greece

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rigid. Furthermore, socialising the debt of an organisation, according to an EUcompetition policy ruling, demands additional administrative procedures and avery complicated authorisation process.

A credible privatisation programme, implemented by a government with aminimal electoral majority in the parliament, as it was in Greece at that time, islikely to result in short-term problems. It is likely that there will be political pressuresand interest group lobbying for mid-course changes, and there may even be pressuresto reverse the programme. In the Greek case, even though the government hadtaken significant actions to provide a clear signal that a change in policy favouringprivatisation had occurred, it failed to build a good track record on its commitmentand in the end was pushed to resignation, in November 1993, after losing itsparliamentary majority by one vote. Table 7.3 summarises the actions taken by thecompanies which were initially included in the privatisation programme duringthe period 1990–1993. It is clear that few outright sales occurred, although many

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

Source: Denationalisation Secretariat, Ministry of Industry

Source: Denationalisation Secretariat, Minsitry of IndustryNotes: aThe Bank of Central Greece is not included; bIncluding LARKO and PYRKAL (twoindustrial companies owned by the state); cHellenic aircraft industry; dHellenic urbantransportation and mobile telephony are excluded

Table 7.3 Privatisation programme: early stages, to March 1991


firms were evaluated for possible privatisation. Preparations for privatisation inGreece seem to have had a depressing effect on economic activity. The data onunemployment in Table 7.4 shows that a large number of job losses resulted fromprivatisation 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. In1996 and 1997 the government launched two flotations of the Greek TelephoneAuthority (OTE). In total, in both issues the government sold close to 20 percent of the 24 million shares in the company.

• In industry: between 1989 and 1994 seventeen companies were privatised withproceeds amounting to Dr 137.3 billion. The sale of Aget Heracles Cement toCalsestruzzi and the flotation of the Hellenic Sugar Industry on the AthensStock Exchange were the two major ones.

Looking at the positive potential aspects of the privatisation programme in overalleconomic 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 centaverage value for the period 1982–1989, to a 77.5 per cent average value for theperiod 1990–1992 (Institute of Economic and Industrial Research, 1993); and

2 the improvement measured in average industrial profitability, which rose sharplybetween 1990 and 1993 (European Economy, 1996).

The general remarks which can be made on the privatisation programme in Greeceare not dissimilar to those made for programmes in other countries. On the positiveside: • the analysis of the problems of some state banks (mainly the Agricultural Bank

of Greece and Hellenic Bank for Industrial Development) and the supportprovided for their portfolios to overcome bankruptcy status; and

• the establishment of a control mechanism for the management of the aggregatepublic 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 qualityof the actions taken; and


• the failure to create a ‘critical mass’ of successfully privatised companies inorder 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 priorigeneralisations. For the case of Greece, there is little doubt that speeding up theprocess 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 corruptpublic sector in Greece. It is, however, important that privatisation takes placealongside reorganisation, restructuring and improvement in efficiency in theremaining 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 theindustries privatised; (3) reducing the public sector borrowing requirement; (4) easingproblems of public sector pay determination by weakening the public sector unions; (5)widening share ownership; (6) encouraging employee share ownership; and (7) gainingpolitical advantage.

REFERENCES

Alchian, A. and Demsetz, H. (1972) ‘ Production, Information Costs and EconomicOrganization ’, 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 ofEconomic Policy, vol. 2, no. 2, pp. 25–36.

Eggertson, T. (1990) Economic Behaviour and Institutions, Cambridge: Cambridge UniversityPress.

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.


Kay, J., Mayer, C. and Thompson, D. (1986) Privatisation and Regulation: The UKExperience, Oxford: Clarendon Press.

Kay, J. A. and Silberston, Z. A. (1984) ‘ The New Industrial Policy – Privatization andCompetition ’, 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 percent of total public sector employment of 273,100. By September 1995 employmentin commercial state companies had declined to 56,200. This was 20 per cent oftotal 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 statecommercial enterprise. Other categories of state employment are local and regionalauthorities (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 comprising139,000 in agriculture 342,000 in industry and 751,000 in services. Between 1990and 1995, while employment rose from 1,134,000, employment in state enterprisedeclined from 5.8 per cent of the total to 4.6 per cent. The reductions in statecommercial 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 interventionin Ireland over two centuries. There follows analyses of the enterprises in the 1960sand of disillusionment with them in the 1980s. Three case studies of privatisationare examined and the outlook for future privatisations is reviewed.

GOVERNMENT AND THE ECONOMY: THE HISTORICALBACKGROUND

The Republic of Ireland, then known as the Irish Free State, gained independencefrom Britain in 1922. There had previously been a brief period of legislativeindependence from 1782 to the Act of Union in 1800.

The period of legislative independence saw interventionist policies and relativeprosperity. Daly states the ‘the belief that the Act of Union brought industrial declineand that Home Rule would mean prosperity was an important dimension in Irishnationalism. Its greatest exponent was the founder of Sinn Fein – Arthur Griffith’(Daly, 1981: 79). According to Daly, Griffith misinterpreted the German economist

State enterprises in the Irish economy 137

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 byKennedy, Gibbon and McHugh (1988: 4). In 1841 Ireland’s population was overthree times that of Scotland and more than half that of England and Wales; by1921 Ireland contained 10 per cent fewer people than Scotland and one-ninth ofthe population of England and Wales. Thus ‘the apparent coincidence betweenindustrial decline and loss of an Irish parliament encouraged an exaggerated beliefin the power of politics to determine economic well-being, an interpretation givengreater credence because the interventionist policies of the late eighteenth centurycoincide with a period of prosperity’ (Daly 1992: 4).

After the Act of Union in 1800 Irish politicians developed the skills of lobbyingat Westminister for government intervention in the Irish economy. Robert Peel,Chief Secretary for Ireland (1812–18) stated that ‘everybody in Ireland instead ofsetting about improvement as people elsewhere do, pester government about boardsand public aid. Why cannot people in Ireland fish without a board (for fishing) iffishing be so profitable’ (McDowell, 1952; Meenan, 1970; Hitchins and Birnie,1994). An interesting echo of that period has been the success of Irish politiciansin recent decades in lobbying for EU assistance.

The political wish of Irish leaders for more government intervention in theeconomy drew a response from British political leaders which was known as ‘KillingHome Rule with Kindness’. The separatist movement in Ireland would be grantedits requests for more state boards to intervene in the economy in the hope thatseparatism would thus be weakened. Guiomard (1995: 207) notes that ‘by 1914,there were forty government departments in Ireland. Although eleven were Irishbranches of British Departments, twenty-nine had no British equivalents.’

Later research has emphasised factors other than the loss of legislativeindependence when explaining Ireland’s poor economic performance in thenineteenth century. According to Cullen, Ireland’s ‘proximity to the leader of theindustrial revolution and the dramatic reduction in transport costs in the nineteenthcentury in conjunction left its small-scale and domestic industries vulnerable in amore fiercely competitive age’ (Cullen, 1968: 124). This is echoed by Daly, whoargues that it is no longer possible to explain Irish industrial failure as a directconsequence of the Act of Union. Falling transport costs did more to remove theeffective protection of Irish firms and the pace of technological change in thenineteenth 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 Britishadministrations before independence was a powerful influence in Ireland up to thelate 1980s. Ireland maintained its monetary union with Britain until 1979 when itjoined the European Monetary System. The absence of the exchange rate as apolicy instrument increased the emphasis on direct state intervention in the economy.

The interventionist political culture in Ireland was therefore well establishedfor over a hundred years when independence was obtained in 1922. A civil warbetween proponents and opponents of the treaty with Britain and uncertainty about

138 Sean Barrett

the division of border areas between the new state and Northern Ireland divertedattention from economic policy.

Tariffs were first imposed in 1924: ‘By 1929 the government claimed that 60per cent of non-agricultural imports were subject to tariffs creating an extra 15,000jobs’ (Daly, 1992: 41). Tariff protection created an interventionist public sectorwhich sought to influence the ownership and location of industry. There was arent-seeking relationship between those seeking protection and the political andadministrative systems (Kingston, 1995: 260–1). The first state enterprises wereestablished in 1927. These were the Agricultural Credit Corporation, to providecredit for that sector, the Electricity Supply Board, and the Dairy Disposal Companyto acquire bankrupt creameries and rationalise the sector.

The natural opponents of state intervention, the major exporting sectors firmssuch as the Ford, Guinness and Jacob companies, located branches in Britain inresponse to the increase in protectionism. Irish agricultural exports peaked in 1929,at a forty-year high in volume terms. The depression caused governments to turnaway from free trade. In Ireland that movement was accelerated by the election ofFianna Fail in 1932 – the new government espoused national self-sufficiency.Disagreement with Britain over land annuities, used to buy out agricultural landlordsin the latter half of the nineteenth century, led to a tariff dispute known as the‘economic war’. The pace of intervention quickened. State companies wereestablished in the areas of industrial credit, sugar manufacture, chemicals, shipping,insurance, steel and fertilisers. There was also an element of ‘New Deal’ policy inorder 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 Irishdependence on the state, and on politicians, for economic benefits.This reliance had evolved during the nineteenth century under Britishrule and although Cumann na nGaedhal appears to have attempted tobreak it Fianna Fail policies brought a considerable extension.

(Daly, 1992: 178) The first Irish government from 1922 to 1932 was somewhat at variance with theinterventionist tradition of Irish politics. The 1932 change of power saw interventionat the core of economic policy.

In the war years Ireland was neutral and a command economy operated. The1950s was a decade of stagnation when Ireland did not participate in Europe’spostwar recovery. In the 1960s the country looked at its prospects as an exportingeconomy for the first time in four decades. Free trade with Britain was negotiatedin 1965 and Ireland joined the European Community in 1973.

Support for public enterprises was shared by all political parties throughout theperiod from the mid-1920s until the mid-1980s when the consensus broke down.The establishment of new enterprises was typically welcomed by opposition partiesin parliament. When governments changed, the policies towards public enterprisedid not. However, a philosophy favouring public enterprises did not develop. Indeed


it became a political badge of honour not to express a philosophy of public enterprisebut to cite ‘pragmatism’ as the guiding principle of policy. The growth of publicenterprises in Ireland ‘owed little to socialist theory. After the eclipse of the leftwing of the labour movement during the latter part of the First World War, therewere few socialists in Ireland, no socialist movement worth the name and nodeveloping 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 treatmentof Irish public enterprise.

THE FITZGERALD TAXONOMY OF STATE ENTERPRISES INIRELAND

Dr Fitzgerald, a future Taoiseach (Prime Minister), noted that state-sponsored bodies‘had not hitherto received the attention which they merit by virtue of theirimportance in the life of the country’ (ibid.: 3). He attributed this dearth to ‘theirrelative novelty as an instrument of government’. Fitzgerald noted the high shareof total gross fixed investment carried out by state companies, 30 per cent of thetotal in 1960 and that ‘earnings per head in this sector appear to be about 40 percent above the national average for employees’ (ibid.: 2).

In his analysis of state trading enterprises Fitzgerald offered two main motivesfor 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 toinaugurate or to operate on a sufficiently extensive scale’ (ibid.: 15).

Fitzgerald included the state transport company CIE and Irish Steel, in the firstcategory and in the latter, the state companies in peat, air transport, shipping, andcapital for industrial development.

The Fitzgerald analysis was reassessed subsequently. For example, the statetransport company was nationalised in 1950. However, the state had preventedcompetition since 1932 and 1933 so that no private sector alternative to the bankrupt,protected company was available. Despite the massive subsidisation of the statetransport company, the unsubsidised private sector currently has a larger bus fleetand the independent road freight sector is many times larger than the state-ownedfleet.

The bankruptcy argument for state intervention was gradually reassessed in the1980s. 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 necessaryto secure the benefits of competition. The indispensability of state enterprise in the

140 Sean Barrett

peat, air transport, shipping, electricity and food sectors was also questioned bothas 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 sugarcompany was established. (Foy, 1976: 33). Manning and McDowell (1985: 1)note that Ireland had an electricity industry for over forty years before theestablishment of the Electricity Supply Board by the state in 1927. Thegovernment chose the state scheme on the Shannon in preference to a privatesector proposal to install hydro stations on the Liffey. In the early 1920s therewere 160 electricity undertakings in the Irish state of which 140 were privateand the balance run by local authorities (ibid.: 15). These operations werecompulsorily acquired and typically shut down; for example, in 1930–1 twenty-four generating stations were closed down (ibid.: 77).

In the category which Fitzgerald thought necessary to initiate economicdevelopment, private enterprise has grown significantly: for instance, in theshipping sector, after one state company went bankrupt and the second was soldwith a substantial debt written off. In air transport, however, Aer Lingus becameinsolvent during 1992 but was rescued by a government capital injection of £175m.

The shortage of capital for industrial development is referred to by Irelandwhen lobbying in Brussels for EU assistance, but Ireland is, in fact, a substantialexporter of capital. A shortage of projects to absorb the available savings in theeconomy has become a factor in the debate on privatisation.

In addition to Fitzgerald’s categories of reasons for the establishment of statecompanies two other factors are important, lack of opportunity and a strongeconomic nationalism. Lee states that ‘not until the state sponsored bodies beganto develop did some openings arise for managers who had lacked the foresightto be born into the right families’ (Lee, 1989: 393). Economic nationalism is acommon theme in the establishment of state enterprises, from 1928, when thecreameries were nationalised, through to the nationalisation of the B and I shippingline in 1965. In 1928, in the parliamentary debate on the Creamery Act, concernwas expressed that control of some 112 creameries would pass into the hands ofLovell 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 takingsteps to promote the extension of native insurance by prohibiting the entry ofany 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 stateenterprise would provide security in future wars which would have similareconomic effects as those in the 1939–45 conflict. The purchase of Irish Steelwas presented to parliament as ‘a valuable insurance against our being deprivedof essential supplies from foreign sources at any future time of internationaldifficulties’ (PDDE, vol. 184: 290).

After four decades of protectionism these sentiments were undiminished. TheMinister stated in 1965 that ‘a greater measure of Irish participation in the cross


channel trade has for a long time been an important objective of governmentpolicy’ (PDDE, vol. 214: 952). The measure received a warm welcome from theopposition. ‘It is a good thing that the B and I Line is now in Irish hands . . . thereare 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 on30 May 1996. As part of the sale, the Irish government provided some £20m inrespect 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 andhad accumulated losses to June 1995 of £145m. Employment fell from over1,000 in the 1970s to 561 in the 1990s and there is a target of 300 underprivatisation. Ispat International invested £5m in working capital in 1996 andwill invest £20m over the following six years. In the Senate on 20 March 1996the Minister for Enterprise and Employment stated that, ‘the experience over theyears has demonstrated that the State was far from the ideal partner for IrishSteel’ (PDSE, vol. 146: 1548).

DISILLUSIONMENT WITH STATE ENTERPRISE

The state companies became identified with high costs and overmanning. Thecompanies achieved ‘regulatory capture’ over the government departmentscharged with their supervision. They received regular subsidies from theExchequer and sought regular supplies of free capital. The protection which thestate companies enjoyed created economic rent which was absorbed by acombination of overmanning and remuneration in excess of the levels in sectorswhich did not have protection from competition.

The National Prices Commission (1972: 45) found that bus and train fares inthe public sector were substantially above those charged by the small independentoperators. Data produced by the European Conference of Ministers of Transportshowed that the average productivity of railway workers in the EuropeanCommission was 44 per cent greater than in Ireland. In air transport, Aer Linguswas shown in ICAO data to have a labour productivity in 1984 of only 53 percent of the European average for seventeen national and major airlines (Barrett,1987: 65). Average remuneration in Aer Lingus was four times the GNP perhead compared to an average of 2.56 for European Airlines. A Civil AviationAuthority 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-thirdsgreater than the average increase of 43.7 per cent. The route was then operatedby a cartel of two state airlines, Aer Lingus and British Airways. Deregulation ofthe Ireland–Britain air routes in 1986 resulted in real fare reductions of up to 70per cent and a doubling of passenger numbers on the Dublin–London route inthree years (CAA, 1987; Barrett, 1993).

The restraints on commercial road haulage, designed to benefit the state railand 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 thederegulation of road freight in 1988 the hired haulage share of the marketincreased to 63 per cent by 1993.

The electricity company ESB in 1962, partly under pressure from an earlierTaoisearch (Prime Minister), was influenced by the compelling national needto maximise employment. This ‘inevitably led in turn to a general emphasis onjob creation and job retention which gradually became an integral feature ofindustrial organisation and trade union expectations in Ireland’ (Lee, 1989:400).

The Report of the Inquiries into Electricity Prices (1984) was chaired byE.G. Jakobsen, managing director of ELSAM Denmark. It found that of a staffof 13,200 in 1982–3 ‘reductions of the order of 3,000 or more do not seemimpossible, if accompanied by appropriate organisational and operationalchanges’ (Jakobsen, 1984: 253). The manning levels in the Irish electricityindustry were double those in Scotland, three times those in Denmark and sixtimes those in Vermont (ibid.: 83).

The ESB declined to provide payroll data to the Jakobsen Inquiry ‘claimingthat the extraction of such detailed analysis would be an enormous task andwould present major difficulties’ and that ‘it would take six months to providethe 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 ESBManagement on the grounds that simple comparisons were misleading and thecorrect information was available to those who bothered to ask’ (ibid.).

A general belief in the inefficiency of state enterprise was reinforced by theexperiences of the national telephone company, Telecom Eireann. In 1979 theDargan Report found that the company was overmanned by a factor of threecompared to Britain, four compared to the US and almost eight compared toSwitzerland. The company undertook a large investment programme in the1980s and also increased its labour force. In 1992 the Culliton Report onIndustrial Policy found that ‘Telecom revenue in Ireland – at 2.7 per cent ofGDP – was by far the highest of any EC country with most other memberstates having revenue in the range of 1.3 to 1.8 per cent of GDP’. Thegovernment 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 billioninvestment by the state. The large loss on the sale reflected overmanning, lowreturns on investment and price uncompetitiveness as deregulation of thetelecoms sector approached. Lee notes that in the early 1980s the Labour Party’sproposal for a National Development Corporation failed to arouse enthusiasm:

the public had so lost confidence in the capacity of any stateorganisation to serve any purpose except its own self-interest thatthe proposal generated more scepticism than enthusiasm. A seriesof poor returns on several enterprises and the apparent casualnesswith which public sector trade unions resorted to the tactic ofinflicting suffering on the public, the same public they claimed to


serve in their more esoteric flights of rhetorical fancy, in order tointimidate government into concessions, left public opinionincreasingly dubious about the likely results of direct stateintervention.

(Lee, 1989: 536)

Notwithstanding disillusionment with public enterprise, the major politicalparties did not adopt policies of privatisation. The major parties, Fianna Failand Fine Gael, grew out of the Sinn Fein independence movement which had apolicy of economic intervention, including state enterprise. The Labour Partyespoused public enterprise on ideological grounds. These parties typicallyenjoyed the support of about 90 per cent of the electorate. The first politicalparty in parliament to advocate privatisation was the Progressive Democratsfounded in 1985 (McDowell, 1987: 27).

In a political system based on clientelism and the spoils of office thepatronage of appointments to state bodies was an important barrier to theevolution of political support for privatisation. Keogh cites a 1992 estimatethat there were some 2,200 appointments to state boards compared to 1,500locally elected representatives (Keogh, 1994: 331). The system of politicalpatronage thus established was identified by Lee with the Fianna Fail partyand Mr de Valera: ‘He encouraged the gradual growth of an insidious, if initiallydiscreet spoils system in the army, the police, the judiciary and the statesponsored bodies’ (Lee, 1989: 322).

CASE STUDIES OF PRIVATISATION IN IRELAND

Three major privatisations occurred in Ireland in 1991–2. These were the IrishSugar Company, renamed Greencore, the Irish Life Assurance Company andthe British and Irish Steam Packet Company. The rationale for state interventionin each sector, the movement to privatisation and the record since privatisationis 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 Irishnationalist movement, Sinn Fein, from 1908. In 1926 the state promoted aprivate sector sugar factory in Carlow with an annual subsidy of £400,000. In1933, the Irish Sugar Company was established by parliament. The statecompany was empowered to acquire the private factory and to construct threefurther factories. The objects of the state sugar enterprise included ‘a nationalwish to be independent of foreign supplies of basic needs’ (Foy, 1976: 23),and a wish to develop alternative products for farmers. Food exports to Britainfell during the 1930s as a consequence of the ‘economic war’ concerning landannuities. Import substitution was judged desirable even though sugar beetwas not competitive with imported cane sugar.

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By the 1980s the business was in some difficulty. Losses were £30.5m in1980 and peaked at £50.7m in 1982. Between 1980 and 1990 over 1,800 jobswere shed, representing a halving of the size of the workforce, and thegovernment provided capital grants of £59m in 1983, 1984 and 1987. Sometwenty-three subsidiaries were either closed or sold, including two of the foursugar 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 andwas offered for sale on 18 April at a market capitalisation of £192.5m. Thepurpose of the privatisation was to ensure that ‘the development of Irish Sugarwill no longer be constrained by the fact that it has a single ordinary shareholderwhich, for policy reasons, may not be in a position to provide funding in thefuture’ (Greencore, 1991: 7). The government sold 55 per cent of the companyin 1991 and the remaining shares in February 1992 (15 per cent) and April1993 (30 per cent) (Reeves, 1996: 7). Staff members were given 109 shareseach and staff and sugar beet growers were given preference in the purchase ofshares. Significant senior management and board changes at Greencore followedprivatisation. Reeves (ibid.: 20) found that:

besides the Chairman, all three other executive directors and thegroup secretary were appointed after privatisation. Furthermorethere were five changes of non-executive directors in 1991 and thesize of the board was reduced from twelve in 1990 to ten. This isexplained by the removal of the trade union representative andworker directors. Between 1991–94 there were three further changesof director.

Turnover increased from £271.4m in 1990 to a projected £474m in 1996 andthe pre-tax profits increased over the same period from £21m in 1990 to aprojected £53.9m. By 11 June 1996 the company’s market capitalisation hadrisen to £588.8m. The report on the company by Davy Research in June 1996states that: ‘a hallmark of the company is its progressive improvement in marginthrough cost efficiencies. Another is its very strong free cash flow generationwhich, over the short term, will build strong net cash balances.’

The operating profits by class of business before privatisation and by 1996are shown in Table 8.1. It is evident that in all areas operating profit has risensharply.

The Irish Life Assurance Company

In the late 1920s approximately 80 per cent of insurance was under Britishcontrol; the majority of Irish firms were insolvent and the industry investedthe 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


a position in which they can command the utmost confidence of the insuringpeople and to secure that, in due course, the greater part, if not all of theAssurance business arising from the Saorstat will be placed with suchcompanies’ (PDDE: 1710). The Insurance (Amendment) Act, 1938, confirmedand gave statutory effect to an agreement between certain life assurancecompanies to transfer their life assurance business and their industrial assuranceto a single company. Three Irish companies faced insolvency, while five BritishCompanies and one other Irish one had signalled their intention to withdrawfrom the market (Irish Life, 1991a: 10).

In 1939 a rescue plan came into effect whereby the government undertook tomake good any deficiency. The Industrial and Life Assurance AmalgamationCompany took over the business of the nine others. The shareholding structurewas Irish Companies – 10 per cent, British Companies – 72 per cent and Ministerfor Finance – 18 per cent. In 1947 the Minister for Finance purchased the Britishshareholdings and in 1959 the name was changed to the Irish Life AssuranceCompany. Problems mounted, however, in the late 1980s when the companyexperienced a sharp fall in its share of the national life and pension sales, from42.7 per cent in 1987 to 28.8 per cent in 1989, with a partial recovery to 30.3 percent in 1990. In addition its building society failed to generate significant volumesof business (Davy, 1991: 15).

The Irish Life Assurance Company was offered for sale on 12 July 1991. TheMinister for Finance held 90.25 per cent of the ordinary share capital and offeredfor sale some 46 per cent. In addition a further 10 per cent of the shares weresold 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 hasdecided to reduce his shareholdings in order to realise part of his investmentand to facilitate the future development of the Group. The directors believethat the listing of Irish Life’s ordinary shares on the Stock Exchange willincrease 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 beforeprivatisation. Premium income rose from £602m in 1990 to £767m in 1995 bywhich time the embedded value was £664m. The embedded value of a lifeassurance company is defined as the sum of its adjusted net worth and thevalue of its in-force business. In 1995 the board of Irish Life had thirteen

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

146 Sean Barrett

members of whom five were appointed after privatisation. Of the five membersof 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 duringthe 1939–45 war. Between its establishment in 1941 and its liquidation in 1984Irish Shipping received some £129.5m in 1985 prices. The company had fifteenyears of profit to 1982 but lost £14m in 1982–3. The company was liquidated in1984 and by then had assets of £23m and liabilities of £117m. It was estimatedthat 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 forCommunications told the parliament that ‘charter agreements were entered intoon behalf of Irish Shipping without the knowledge or consent of the then Ministerfor Transport or the Minister for Finance and have led to the destruction of whatwas, up to then, a viable and successful State enterprise’.

The only section of Irish Shipping which has survived is Irish Ferries. Thiscompany was 75 per cent owned by Irish Shipping and in 1987 a number ofinstitutional investors acquired the company. Profits in 1987–8 were £869,000 ona turnover of £34.1m and in 1988–9 the profits were £1.5m on a turnover of £35.6m. In 1992 Irish Ferries took over a second state shipping company, the Britishand Irish Line.

The British and Irish Steam Packet Company was founded in 1836 in Dublin. Itoperated passenger and freight ships between Dublin and London and Liverpool.In 1919 it acquired the older City of Dublin Steam Packet Company, founded in1823, and the combined line was in turn acquired by Coast Lines Limited. ‘Eachof the companies in this group, most of which were themselves the results ofamalgamations preserved its identity and continued for the most part to trade infamiliar waters. Coast Lines Limited, the controlling or parent company, ownedand operated ships in its own right. By the mid 1950s the combine made up one ofthe world’s largest fleets of coastal steamers’ (Smyth, 1984: 119).

The Irish government acquired the B and I Line in 1965. ‘The decision by thegovernment to acquire the company stemmed from a concern that its ownersappeared to be willing to tolerate the running down of some of the cross/channelservices operated and were not prepared to consider the replacement of obsoletetonnage. The government were also anxious to obtain a significant Irish influencein 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 ofnine 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 capitaldeficiency of £26.5m. Between 1985 and 1989 the turnover of the company declinedby 45 per cent in real terms. The number of passengers declined by 20 per cent andthe volume of freight by 17 per cent. The staff numbers fell by a half to 897.


The B and I Line was sold to the Irish Continental Group in 1992. The saleprice was £6m and debts of £27m were written off. The fleet then comprised twoships with a combined GRT of 10,248. No director of the B and I company wasretained 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 enlargedIrish Continental Group in 1995 were £11.0m.

CONCLUSION

The political culture of state enterprise is firmly rooted in Irish public life. It isbased on an interpretation of a period of legislative independence from 1782 to theAct of Union in 1800. Revisionist historians have subsequently disputed theprosperity allegedly generated by legislative independence and attribution to theAct of Union of responsibility for economic decline, emigration and famine innineteenth century Ireland.

Economic interventionism was increased by independence for the Irish FreeState in 1922, the recession in 1929 and an economic war with Britain in the1930s. Public enterprise became identified with low productivity and high wagecosts in the 1980s, but until the foundation of the Progressive Democrats in 1985privatisation was not on the political agenda.

State companies in shipping, sugar manufacture and insurance were privatisedin the early 1990s and their profits increased steadily in each case. The state steelcompany was sold in 1996, as was 20 per cent of the state telephone company. Thestate companies enjoyed protection by their parent government departments. Forexample, the Department of Transport was frequently described as ‘a downtownoffice of Aer Lingus’. Under EU competition policy, government departments havehad to adopt an arm’s length relationship with state companies. In areas such assteel, transport and telecommunications, EU competition policy has broughtliberalisations which have allowed governments to become market regulators ratherthan providers of legislative protection and free finance to state enterprises.

In late 1996 privatisation in Ireland had lost its impetus. It had been successfullychallenged by the trade union movement, which is dominated by the public sectorunions due to differential unionisation rates in the public and private sectors. Itwas also opposed by the Labour Party, which had been in government longer thanother members of coalition governments throughout the 1990s. The EIU GlobalPrivatisation Manual (1994: 34) indicates some forty-seven countries withprivatisations in the pipeline – Ireland is not included.

In the event of political change to favour privatisation the most likely candidatesare the airline Aer Lingus, the airports body Aer Rianta and the state banksAgricultural Credit Corporation and Industrial Credit Corporation. The heavy losseson rail services make the state transport company, CIE, an unattractive purchasefor the private sector. In the case of monopolies, such as the electricity companyESB, Ireland lacks the necessary legal powers of regulation to ensure that theenterprises operate efficiently in either the public or private sectors. Public ownershipis seen as a second-best solution.

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From 1982 to 1997 the dominant party of government in Ireland was the LabourParty. It held office in three coalition governments, two with Fine Gael and onewith Fianna Fail. It used its bargaining power within these coalitions to vetoprivatisation. In the 1997 election a minority government of Fianna Fail and theProgressive 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.


McDowell, M., (1987) Privatisation and Liberalisation: A Survey of Some Issues in EconomicPolicy, University College, Dublin: Centre for Economic Research, Policy Paper no. 28.

McDowell, R. B. (1952) Public Opinion and Government Policy in Ireland, London: Faberand Faber.

Manning, M. and McDowell, M. (1985) Electricity Supply in Ireland: The History of theESB, 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 ItalyA tale of ‘capture’

Massimo Marrelli and Francesca Stroffolini

INTRODUCTION1

Privatisation in Italy is one of those economic phenomena which surprise fortheir suddenness and for the strength of the swing which took place from a viewwhich favoured a widespread public intervention in the economy, in the form ofstate ownership, as an effective instrument of industrial policy, to one in whichthe market and private property are seen as the panacea to all inefficiencies andeconomic failures.2 All the parties in the political arena, from left to right, withthe 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 alwaysbeen something rather mysterious and somewhat incomprehensible, and this lastphenomenon does nothing but confirm them in their opinion of the unforeseeablenature of the Italian model. In this chapter we hope to show that many of thechoices in the matter of public intervention versus privatisation can be quiteeasily rationalised and explained, once one takes into account the politicaleconomy nature and the ‘peculiar’ characteristics of the Italian political systemand institutions. In order to do this, we will first and very briefly, describe therole of state ownership in Italy, we will discuss this role and analyse possibleeconomic pressures to change it. Second, we will consider the extent to whichprivatisation is being pursued in Italy, which model of corporate governance isbeing sought and which regulatory structure is being prepared. We will, then,propose some simple political economy model which rationalises the choiceswhich have been made, and, finally, we will discuss some of the lessons to belearnt.

In the economic literature a few papers have already addressed the issue ofItalian privatisation: in particular, very comprehensive and illuminating ones havebeen written by Goldstein and Nicoletti (1996, 1997), whose work we frequentlyrefer to. Our contribution, we hope, is in the final part of our paper where wepropose a simplified political-economy model which is intended to shed somelight on the peculiarity of the Italian model.

In examining industrial policy choices in Italy, one has to bear in mind theparticular nature of the Italian political system where no clear distinction existsbetween the ‘legislative’ and the ‘executive’ branch; indeed, most of the laws

Massimo Marrelli and Francesca Stroffolini 151

passed in Parliament are government initiatives but their implementation lieswith a very high number of bodies’ so that the ‘executive’ responsibility is muchdiluted. This explains why so many Acts of Parliament in Italy never getimplemented 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 contingenciestend to be explicitly regulated and no residual power of decision tends to begranted through a system of rights to decide in unforeseen occurrences. It is easyto 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 pureproportional system of representation which, in a fragmented society, gives riseto unstable coalition governments.

It is not surprising, therefore, that the process of privatisation, in Italy, hasbeen (and still is, to some extent) a very long and controversial one, full of stopsand go, often contradictory, and, sometimes, with results opposite to the onessought 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 wholeeconomy, furthermore their extent, both in terms of sectoral diversification andin terms of employment and value added creation is one of the largest within theOECD countries. In 1988, all utilities were public, both at the central and at thelocal authorities level (with very few exceptions), and publicly owned firms(Partecipazioni Statali) were responsible for 16 per cent of non-agriculturalemployment 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 10per cent, respectively.

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

152 Privatisation in Italy: a tale of ‘capture’

Moreover, with the exception of the ‘Distribution’ sector, the share ofemployment of Partecipazioni Statali (PS from now) in total employment wasconsistently 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 depositsand gave 90 per cent of total loans, the second insurance company in Italy waspublic and 12 of the first 20 firms in terms of sales volume and more than one-third of the first 50 were publicly owned; it is interesting to notice that publicsector owned enterprises were present in almost all sectors (see Table 9.1)

The situation depicted in the above paragraphs derives, obviously, from along historical process4. This dates back to 1880 with direct public interventionin the sphere of industry occurring in the early 1930s, when IRI (Istituto per laRicostruzione Industrial, a public company created in 1933) was still regardedas a temporary body with the main function of reorganising its holdings incertain 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 notsurprising to find its assets scattered over ten sectors, but with a predominatinginfluence only in fields where private enterprise was unwilling to risk losses.Efforts were made to render IRI holdings more homogeneous: financial holdingscompanies were created to coordinate and finance investments in various sectors(STET, Finmare, Finsider), however, the way in which IRI had obtained itsassets determined the new method of exercising state control; for while IRIitself was a mixed public–private law corporation, wholly owned by the state,but with financial and legal autonomy, the firms it acquired remained jointstock companies operating under private law. The IRI kept a controlling interestbut private investors also could hold shares.

‘The change from a predominant doctrine of laissez-faire to one of deliberateState intervention . . . had emerged in practice out of the traditional policy ofsalvaging private industries that had got into difficulties’ (Posner and Woolf,1967: 30), but, after the Second World War, another conscious policy was theaim of imposing some form of control for the benefit of the society,especially in a country like Italy where industry had displayed such strongmonopolistic tendencies. This required greater control of IRI’s activities by

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


Parliament and coordination of all institutions financed by state budget undera single technical committee responsible to Parliament. The solution was thecreation of the Ministry of State share holdings (Ministero delle PartecipazioniStatali). The ministry was to take control of all state shareholdings (in IRI andENI, a public corporation which had been created in 1953 to coordinate theactivities of the existing state-controlled joint stock companies, like AGIP, inthe field of oil and natural gas) and certain patrimonial possessions (spas, mines,cinema), but was to have no power over the Aziende Autonome5 (railways, postalservices, monopolies, etc.) or over state insurances, which were to remain undertheir 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 juridicaland organisational forms were involved: Enti di gestione (private lawcorporations with their stock wholly owned by the state), Enti Pubblici (publiclaw organisations, which are controlled by one or more ministries, but havemanagerial autonomy and their own capital stock, usually government funds)and Aziende autonome (see note 5). The Enti di gestione (IRI, ENI, EFIM)

Table 9.1 Italy: selected statistics on public enterprises

Source: Goldstein and Nicoletti (1996)


controlled conglomerates and subholdings, which, in turn, exercised controlover productive firms, and were under the political control of the Government,of the Ministero per le Partecipazioni Statali, and of different permanentinterministerial committee like CIPI (Interministerial committee for industrialpolicy) and CIPE (Interministerial committee for economic policy). In the Boardof 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 reducedthe autonomy of holdings, subholdings, and firms, the first two having to havetheir strategic plans approved by government and Parliament.

Furthermore, the balance sheets of the Enti di gestione and of the EntiPubblici were to be submitted to and approved by the Corte dei Conti (asomewhat judicial institution, which has jurisdiction in the field of publicaccounting and management). In Figure 9.3 we give a rough idea of the situationbefore 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 caneasily imagine how the cost of autonomy reduction for the public enterprisesmay 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 animportant instrument of industrial and economic policy Their role in the Italianpostwar growth process has definitely been important (Posner and Woolf, 1967);they were attributed economic and social goals, such as the industrialisation ofthe Mezzogiorno (the economic underdeveloped South of Italy), technologicalinnovation, employment creation or defence and the public control of strategicsectors. The main idea was also to pursue, through direct productive activity ofthe state, social welfare ends, instead of leaving them exclusively to a socialwelfare 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 newindustrial plant and 40 per cent of total investment by the public enterprises inthe Mezzogiorno), recognised that firms were going to face extra costs (oneriimpropri) and therefore needed direct financing from the state. Stateendowments (Fondi di dotazione) were seen as a means of covering the extracosts imposed on the firms for pursuing objectives that were not firms’ typicalgoals. However, the organisation of the structure of control (described above),the endemic instability of the Italian governments, the institutional constraintsof the Italian legal system, and the degree of asymmetric information betweenpoliticians and firms made it very difficult to analyse the social costs andbenefits.

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PRESSURES TO CHANGE

Economic results

In the light of the considerations of the last paragraph, it is not surprising that publicenterprises 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 publicenterprises over the period 1974–91.

As Goldstein and Nicoletti show, much of the difference in the economic resultsbetween private and public enterprises can be explained by the higher leverageratio (debt/equity) of public firms, which gave rise to higher financial costs,especially in periods with high inflation rate and high real interest rates (notablyfrom 1975 to 1982). However, even if one excludes financial costs, one finds thatprivate firms perform generally (with the only exception of 1990) better than publicones. This comparison becomes particularly significant when one compares firmsoperating 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, 1974-91Source: Goldstein and Nicoletti (1996)

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


average labour productivity6 and the share of profits in value added (see Figure9.5).

Also, public services production in Italy often seems to be less efficient thanelsewhere 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, Franceand UK, average costs are definitely higher, and for the postal services where thedeficit as a percentage of revenue is larger (except for Spain). Furthermore, thequality of service tends to be lower in Italy than elsewhere; for example, more than10 per cent of trains arrive late and the time taken for mail delivery is longer.

As Goldstein and Nicoletti notice, since proprietary structure, technology andmarket structure (with a possible exception of the UK) are very similar in all of theEU countries, the differences in performance are probably due to the regulatorystructure. Notwithstanding substantial state transfers (from 1982 to 1986 theyamounted to 5,300 billion lire a year, i.e. 0.7 per cent of GDP) public enterprisescontinued to make very high losses. For instance, EFIM’s financial debt in 1991reached 8,000 billion lire (0.5 per cent of GDP) and in 1992 the IRI’s net debt wasequal 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 liquidatedor recapitalised; indeed the Italian Corporation Law requires either a bail-out inthe 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’sassets decreases under 200 million lire. Furthermore the value of outstanding bondscannot exceed that of assets and finally, if all the shares are owned by a singleshareholder, the shareholder faces unlimited liability.

Public debt and the financial crisis of the state.

Although not directly correlated with it, another indirect pressure to privatisecame in the early 1990s from the financial crisis of the state. Public debt as apercentage of GDP increased from 34.2 per cent in 1970 to 108.6 per cent in1992, even though, at the same time, fiscal revenue (inclusive of social security

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

Table 9.2 Costs and tariffs of public utilities in Europe


contributions) increased from 26 per cent of GDP (1970) to 42.4 per cent ofGDP (1992). If one remembers that, for example, in the period 1982 to l986transfers from the state to public enterprises amounted to an average of 5,300billion lire a year (0.7 per cent of GDP), it is easy to understand why, even if notever explicitly mentioned in official documents, the financial crisis of the stateconstituted a strong external pressure to privatise. Privatisation would have helpedboth to reduce public expenditure and to increase (at least partially) publicrevenue.

THE PROCESS OF PRIVATISATION

Legal procedures and strategy

The organisation and the legal structure of control of Italian public enterprisesrequired a profound change in the legislation for an effective process ofprivatisation;7 the direction and the type of changes required, obviously, dependedon the strategic decisions of the government. In particular, one has to bear inmind that selling public properties, on the part of the state, required differentprocedures 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 amunicipality (Azienda Speciale) or by a Ente Pubblico. Moreover, if, among theobjectives of a privatisation plan the government includes the promotion of someform of ‘people’s capitalism’, there would be a need to transform publicenterprises 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 StateShare Holdings, constitutes the first organic official document to tackle theproblem of privatisation. This plan proposed the immediate sale in the market ofa few big and profitable firms, financial institutions and public utilities, committedthe government to interrupt the flow of fondi di dotazione to IRI and ENI anddrastically reduced the possibility of conceding special credits. It also imposedan upper limit to the leverage of the Enti di gestione and their subholdings, in thehope of tightening their budget constraint and of increasing efficiency incentivesfor the managers of public firms. In the next four years, the state was supposedto sell other less profitable firms, those operating in economic sectors whichwere 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 theinternational market;


3 to increase the share of corporate stock owned by families, thereby promotingsome sort of ‘people’s capitalism’;

4 to favour foreign demand for investment in the Italian stock exchange; and5 to reduce public debt (with less emphasis). In order to pursue these goals a wide set of different sale techniques wereallowed: both ‘private sale’ and ‘private placing’ were possible, so were an ‘offerfor 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. Inconclusion, both public companies, corporations with a solid control by fewshareholders, and partial privatisation were sought.

The achievement of these objectives required a profound change in the legalsystem and so a number of new laws, government decrees and directives wasprepared in the period from 1990 to 1995. This process is still under way. Adetailed list of all the Acts of Parliament (more than 30) which have been approvedand were made necessary by the complicated structure of the Italian legal systemcan be found in Goldstein and Nicoletti (1996). Table 9.3 simply lists the mainones.

Two facts are worth emphasising: on the one hand, the legal proceduresnecessary to achieve an effective privatisation have been extremely cumbersomeand complex; on the other, the problem of regulation has been tackled relativelylate. It is important to notice, though, that the powers attributed to the regulatoryauthorities are very wide in scope. They have the power to propose to thegovernment the criteria for attributing, renewing, revising and repealing thefranchise. They also have the power to set the tariffs, which have to be based ona ‘price cap’ system, the power to control the quality of the services, and powersin respect of the ‘universal service’ principle. Moreover, they have the power toreport to the antitrust authorities behaviour of the franchisees which constituteviolations of the competition law.

As a consequence of this long revision process, the organisational structureof 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 partialprivatisation and partly due to the attempt to simplify the procedures ofprivatisation. Also evident is the drastic reduction in the number of judiciallyautonomous activities run under public law. The fact that the operation andmanagement of these companies now fell under the rules of the civil law made itpossible to sanction future changes in the state of public enterprises by governmentdecision rather than by legislative action.

Even if the results of this attempt to simplify procedures were not exactly asdrastic as those expected by the government,8 the government obtained a muchmore rational and easy to manage organisation of state enterprises. Also, theprocess of corporatisation produced an even stronger effect, which can be saidto constitute the ‘point of no return’ on the road to privatisation.


Table 9.3 Italy: privatisation laws and decrees

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As already mentioned, the Italian Corporation Law requires either a recapitalisationor an adjudication of bankruptcy every time: (1) losses amount to more than onethird of assets; and (2) the value of the corporation’s assets decreases under 200million lire. In addition, the value of outstanding bonds cannot exceed that ofassets and finally, if all the shares are owned by a single shareholder, the personfaces 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


European Commission sees recapitalisation of firms by the state as a violationof the European Competition Law. The combination of these two factors leavesthe Italian government with no other way out but to strengthen incentives (inthe 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 legalframework and to the divergence among political parties, privatisation properlystarted in late 1993. The identification of the companies to be sold took placeearlier, in 1992.9 By the end of 1995 over 25,000 billion lire (more than 1.5 percent of 1993 GDP) were raised by the sale of shares of 11 IRI companies, 8ENI 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 sequencingand to the intense restructuring process which took place before selling. Onthe first issue, it is worth noticing that banks were among the first public assetsto be privatised; this decision was rightly justified on the basis of the argumentthat, 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 innon-financial enterprises, the privatisation process could have been nullifiedby the state-owned banks acquiring shares of state-owned enterprises.

On the other hand, the restructuring of the whole organisation of stateownership, described above, was accompanied by a profound process of changein management, replacement of capital goods and labour-shedding togetherwith a consolidation of balance sheets. This produced significant effects onthe 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. 1,288billion in 1994.

Proprietary structure and corporate governance

Amongst the aims of the 1992 privatisation plan, as already said, were both anincrease in the number of big private groups in the economy and an increase inthe share of corporate stock owned by families, to promote some sort of people’scapitalism.

The wide variety of sale techniques originally allowed in the plan is to beexplained by these different objectives of corporate governance; indeed, thechoice of the sale technique has an obvious impact on the desired structure ofproperty rights in the privatised firms. In Italy, the aims of privatisation, withregard to the transformation of governance, were particularly ambitious. Theneed to favour the surge of public companies that are subject to the disciplineof the market for corporate control was explicitly stated and sought for in allthe official documents of the period. On the other hand, the partisans of thenoyaux durs (preference given to a select group of shareholders) emphasised


the need for a stricter monitoring of managers, which small shareholders arenot able to exert.

The final decision was taken favouring public sales, even if in the case ofSTET and ENEL the government is still considering the creation of a hard coreof stable shareholders. However, the success of public offers for sale and thediffusion of shareholdings did not give rise to the creation of public companiesor to a revitalising of the market for corporate control. The main reason can befound in the fact that the Italian corporate sector is characterised by a smallcore 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 controlof the privatised firms, the government introduced limits to the amount of shareswhich could be owned by a single investor. The 3 per cent ceiling, establishedby the Board of Directors of Banca Commerciale and Credito Italiano, were inpractice nullified by Mediobanca, which, exploiting its monopoly in relationalbanking, moulded coalitions in the two banks. With less than 20 per cent of theshares, and allegedly acting independently, Mediobanca appointed all of thedirectors to the boards. Paradoxically, the limits established to single shareholderownership can now reduce the risks of takeover for the controlling groups andthus reduce the incentive power of the market for corporate control.

More complex problems face the government in the privatisation of publicutilities. With regards to corporate governance, in this sector a viable optionfrom the theoretical point of view, is partial privatisation with the retention ofa golden share on the part of the government. This is seen as a form of internalregulation. However, the Italian governments have committed themselves tothe sale of major public utilities such as telecoms and electricity supply, and,in response to EU directives and Italian Antitrust Authority rulings, toliberalisation of the market.10 The form of privatisation and the ownershipstructure is still a matter of debate.

THE REGULATORY STRUCTURE

As already mentioned the problem of regulatory structure was tackled relativelylate in the Italian privatisation debate. However, Law no. 481 of 1995 establishedthe guidelines for setting up the establishment of the regulatory authorities forEnergy and Gas and for Telecommunications: their powers were defined, thetariffs setting formulas were chosen and the mechanisms for allocation ofconcessions were designed. After that law, the political debate often centredon the opportunity to establish other Authorities: an example is the RegulatoryAuthority for Radio and TV Broadcasting. However, so far, little has beendone, especially in relation to coordination of the powers of the differentAuthorities with those of the Antitrust Authority, of the powers of the Antitrustand those of the Bank of Italy relative to violation of the competition law onthe part of the banks, and, especially, on the issue of reducing the risks ofregulatory capture.11


The two sectors which have, at the moment, a planned regulatory framework,electricity and fixed-link telephony, are public monopolies. The new regulatoryplans envisage for electricity private ownership, a competitive market structurefor generation and a public monopoly for transmission, while the distributionbranch will be partially competitive.12 The price of the electricity will be subjectto discretionary regulation and quality regulation and the promotion ofcompetition will also be among the duties of the Regulatory Authority; finallythe arbitration process will be a judicial one. Similar provisions are consideredfor telephony; both the local calls and long-distance calls markets are to becomecompetitive, and for both of them the regulatory mechanism is to be based onprice caps.

Much, of course, remains to be defined or explained; although the reasonswhy the price mechanisms were adopted and which activities are regulated bylaw owe much to the British model. Probably the regulatory structure alsoreflects the need to adopt a high-powered incentive scheme. The efficiencygains 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 topromote.

A POSITIVE MODEL OF PRIVATISATION IN ITALY

In this section we will try to offer an economic interpretation of the phenomenonof privatisation in Italy. The discussion will focus mainly on the mechanismwhich produced widespread inefficiencies in public enterprises and on thereasons why the privatisation process took place. In doing this there is nopretence of being thorough and exhaustive (real-world processes show morecomplexities than a model can take care of), but we do believe that a large partof the phenomenon described in the pages above can be explained by a politicaleconomy model of regulation like the one we propose.13

Our starting point derives from statements like: ‘Italian state firms are toldto build production facilities in the South, the bedrock of support of the rulingChristian Democrats’ (Martinelli, 1981). Therefore, we build a model in whichpublic ownership of firms allows the ruling party (the majority) to extract privatebenefits from localisation and/or employment policies by, for example,localising plants in its constituencies (or by requiring overemployment) evenif 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 orby hiring more people than necessary, the majority can obtain a private benefitof k at the cost of reducing productive efficiency (raising production costs) ofγ; then it is plausible to assume private benefits to be a function k(γ) with apositive 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 firmwhose cost function is:


C = ßγ - e γ > 1 (1) where ß {ß, ß¯} is an efficiency parameter which reflects the technology of thefirm (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 asthe cost-reducing effort of the firm. We assume that a γ > 1 can be imposed (at acost) to the firm by the majority to appropriate private benefits. The differentefficiency parameters of the firm give rise to different cost increases for the sameγ: In other words, we assume that the more efficient firm can absorb this exogenouscost variable better than the inefficient one.

Effort is costly, so if the manager exerts effort level e, the monetary cost of theproject is reduced correspondingly, but the manager incurs a disutility level whichin monetary terms is equal to ψ(e). We assume positive first, second and thirdderivatives; 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) isthe proportion of type 1 (type 2) in the economy. The regulator observes realisedcost, C, and gives a transfer t to the firm: a contract between the regulator and thefirm can be based on these jointly observed variables. In particular, the regulatoroffers a contract to the firm, specifying a transfer-cost pair for each type: namely{t, C} for type ß and {t¯, C¯} for type ß¯.

The utility (or rent) of type ß firm, when it selects the contract specified for itstype is:

U = t - C - ψ(ßγ - C) for the efficient type U¯ = t¯ - C¯ - ψ(ß¯γ - C¯) 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 totaxpayers. Furthermore, let t1 (resp. t2) be the fraction of transfer to the firm leviedon 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 + (1 - α)S

2 + k(γ) - (l+λ) [vt + (l - v)t¯] + vU + (l - v)U¯

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


The benevolent regulator selects the contract which maximises the expectedsocial welfare function under the following constraints. Individual rationalityconstraints 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 firmare:

U = t - C - ψ(ßγ - C) = t¯ - C¯ - ψ(ßγ - C¯) U¯ = t¯ - C¯ - ψ(ß¯γ - C¯) = t - C - ψ(ß¯γ - C) (7)

which guarantee that the contract designed for the efficient (respectivelyinefficient) 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 writtenas:

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 objectivefunction is concave.

The function φ determines the rent of the efficient type firm (relative to theinefficient type’s effort) by measuring the economy in disutility of effortassociated with a better technology. Given that there is a continuum of consumers,incentive compatibility (for consumers) leads to uniform pricing of the projectso that t

1 = t

2; then, the regulator’s problem is to maximise the expected social

welfare function with respect to e, e¯, U, U¯, γ under the constraints specifiedabove.

Consider, first the derivative with respect to ?:

k’(γ) - (1 + λ) (vß + (1 - v)ß¯) - λνψ″(e¯ - ∆ßγ) (9)

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


a) ψ′(e) = 1 ⇔ e = e*

c) U¯ = 0 ⇔ t¯ = ß¯ - e¯ + ψ(e¯)

d) U = U¯ + φ(e¯) ⇔ t = ß - e* + ψ(e*) + φ(e¯)

e) V

1 = 0; V

2 = 0 (10)

This means do the project if:

Equations (10a) and (10b) show that, while the effort of the efficient type is sociallyoptimal (e*), since it is determined by equating at the margin disutility and benefitwhich arise from the reduction in production cost, that of the inefficient type islower than the socially optimal one. This is due to the fact that the rent of theefficient type (see equation 10d) depends positively on the effort of the inefficientone; as it is socially costly, because of the excess burden of taxation, a rent–efficiencytrade-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 (seeequation 10c).

Consider now what happens when there is first an election in which two candidatescommit to govern in favour of type 1 and type 2 respectively; each consumer votesfor the candidate representing his type so that, if a > 1/2, the candidate of type 1 winsthe 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:

V1 = aS

1 + k(γ) - (1 + λ)a[vt + (1 - v)t¯] (11)

which will be maximised under the participation and incentive compatibilityconstraints stated above. Incentive compatibility for consumers prevents taxdiscrimination and therefore saturation of type 2 individual rationality constraints.Moreover, since rent to the firm is costly, the majority (type 1 voters) will want tominimise it and, therefore, transfers will be:

t¯ = ß¯γ - e¯ + ψ(e¯) t = ßγ -e + ψ(e) + φ(e) (12)


By substituting equation (12) into the objective function and maximising withrespect to the relevant variables we get:

a) k’(γ) - (1 + λ)a(vß + (1 - v)ß¯) - (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 thisis not viable from a social welfare point of view, is λ > 1; so, for a very distortivetax systems, the ruling party might inflate production costs to appropriate privatebenefits even if this causes a social welfare loss. However, increasing ? alsoincreases the rent to be granted to the firm (see equation 8b) and, since this iscostly, the regulator (government) reduces the effort of the more inefficienttype in order to reduce the rent (see equation 13c above). This kind ofmechanism, therefore, induces a low-powered incentive scheme more similarto a cost-plus contract than to a price cap.

Notice also that the slimmer the majority (the closer a to 1/2) the higher theγ for a given λ (see equation 13a); so this model predicts that the slimmer themajority the lower the effort of the firm (and therefore the higher the cost): atestable implication. In Italy, the proportional nature of the politicalrepresentation (and therefore the degree of cohesion of the coalition in power)makes things a bit more complicated; however, in the period 1975–83, whenthe losses of public enterprises were at their highest, majorities were alwaysslimmer than in previous and successive periods.

Finally, a simple comparative statics exercise shows that the equilibrium γdecreases if the shadow cost of public funds increases. This in turn can be seenas one of the causes of privatisation. When public debt and marginal tax rateswere not excessively high, it was convenient for the ruling parties to appropriateprivate benefits by inflating costs of the firms. But the ensuing soft budgetconstraint contributed to raise taxation and therefore the shadow cost of publicfunds (λ); and this, in the long run, did not make it convenient any more for thegovernments to appropriate private benefits: one way out was privatisation. Ofcourse, we do not claim that our stylised model exactly explains all the complexphenomena behind the role of public enterprises in Italy up to the process ofprivatisation; 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 termsof preparing the institutional framework in which privatisation is taking place.Much, however, remains to be done in the field of liberalisation: the regulatorystructure has been announced but not yet implemented and the promotion ofcompetition has only just started. The outcome, in welfare terms, of this process


will strongly depend on the effectiveness of the liberalisation and the regulatoryprocesses.

Finally, very little has been done to prevent ‘regulatory capture’, and this, giventhe 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 Goldsteinand Nicoletti (1996).

2 Until very recently state-owned enterprises in Italy were seen as a very effective instrumentof 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 importit into other countries: one might think, for example, of the Industrial ReorganisationCorporation 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 aredrawn from Goldstein and Nicoletti (1996).

4 A detailed account of the history and role of public enterprises in Italy can be found inPosner 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 financialneeds are covered entirely by the state, but they possess a slighter greater degree ofautonomy than government departments. They have a separate director general and boardof directors and publish independent balance sheets Although authority over the variousAziende Autonome is vested in different ministries (Industry, Finances, Transport, etc.)they are regarded as a single group because of their analogous legal structure. A slightlydifferent version of Aziende Autonome are the ones owned by municipalities and localgovernments (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, aqualified majority, see chapter 6.

8 The Corte dei Conti, which, in the intention of the government was not supposed toexercise control after the corporatisation, appealed to the Constitutional Court and retainedsome control. This is limited to administrative and legitimacy issues.

9 This list included two banks, Banca Commerciale Italiana and Credito Italiano (4th and6th largest), both owned by IRI; the second largest insurance company in Italy, INA, aspecial credit bank, IMI; the industrial activities of SME, IRI’s food and distributionsubholding; IRI’s communication subholding, STET, the whole of the electricity publicproduction and distribution, ENEL; and, finally AGIP, ENI’s subholding for oil productionand distribution.

10 In 1994 a second licence was awarded (to Omnitel) in the market for mobile telephoneservices; 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 operatorswere reorganised into a single new holding.

11 Regulatory capture occurs when the regulator ceases to serve the interests of consumersand 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 lightof the political economy literature is Laffont’s (1996); for a complete version of ourmodel see Marrelli and Stroffolini (1997). Other models which see the inefficiency of


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 theincompleteness of contracts which govern the relationship between managers andpoliticians so that the residual right of control rather than asymmetric information becomesthe initial determinant of resource allocation. Also, both models do not allow one toexplain why privatisation ever takes place.

14 Notice that this restrictive assumption is made to simplify the exposition, but the generalresults do not depend on it. Indeed, even if maximisation of welfare would entail somecost increase the inefficiency of the political system would imply a distortion from theoptimal level and, therefore, a welfare loss; for a more detailed exposition see Marrelliand Stroffolini (1997).

REFERENCES

Aghion, P. and Bolton, P. (1994) ‘Government Domestic Debt and the Risk of Default: APolitical–Economic Model of the Strategic Role of Debt’, ch. 11 in R. Dornbush andDraghi, M. (eds) Public Debt Management – Theory and History, Cambridge: CambridgeUniversity 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 controllonelle Imprese Italiane Medio-Grandi, Bologna: Il Mulino.

Boycko, M., Shleifer, A. and Vishny, R.W. (1996) ‘ A Theory of Privatisation ’, The EconomicJournal, 106 (March), pp. 309–19.

Fausto, D. (1982) ‘ The Finance of Italian Public Enterprises ’, Annals of Public andCooperative Economy, 53 (March), pp. 3–23.

Goldstein, A. and Nicoletti, G. (1996) ‘ Le Privatisazioni in Italia, 1992–1995: motivi, metodie 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 IndustrialOrganization, 14, pp. 1–27.

Marrelli, M. and Stroffolini, F. (1997) ‘ Some Political Economy of Regulation and OptimalDecision Rules ’, mimeo, DTSEP, University of Naples.

Martinelli, A. (1981) ‘ The Italian Experience: An Historical Perspective ’, in R. Vernon andY. Aharoni (eds) State-owned Enterprise in the Western Economies, London: CroomHelm.

Persson, T. and Tabellini, G. (1996) ‘ Federal Fiscal Constitutions: Risk Sharing and MoralHazard ’, Econometrica, 64, pp. 623–46.

Posner, M.V. and Woolf, S. J. (1967) Italian Public Enterprise, London: Gerald Duckworthand Co.

Shleifer, A. and Vishny, R.W. (1994) ‘ Politicians and Firms ’, Quarterly Journal ofEconomics, 109, pp. 995–1025.

10 Privatisation in Finland, Sweden and

DenmarkFashion or necessity?

Johan Willner1

INTRODUCTION

Despite a reputation for welfarism and a tradition of public intervention, theNordic EU-countries Finland, Denmark and Sweden have been affected by thesame policy shifts as elsewhere. This chapter provides a case study of theirexperiences of public ownership and privatisation and a critical assessment ofthe major motives for their present policy. In particular, we focus on thechallenge to public ownership in small countries that is caused by Europeaneconomic integration. This is often seen as restricting scope for wider objectivesthan profit maximisation, but it turns out that there is one sense in which theopposite is true.

Among Nordic EU-countries, Finland ranked first, Sweden second andDenmark third – and below most other EU-countries – in terms ofpreprivatisation shares of public ownership. The nationalised sector in Britainwas usually described as large, but Britain’s share was between Finland’s andSweden’s in relative size.2 Unlike in Britain, mainstream parties have not beendivided on ownership. Sweden and Denmark have traditionally been SocialDemocrat strong-holds, but Nordic Social Democrats never pursuednationalisation when in power. Communists were strong in Finland and theyeven participated in some governments, but were kept at arm’s length fromindustrial policy.

As in most other European countries, public ownership has been widespreadin infrastructure industries like transport, water and telecommunications, butalso in banking (Postipankki in Finland, Nordbanken in Sweden and GiroBankin Denmark). The airline Scandinavian Airlines System (SAS) is jointly ownedby the Danish, the Swedish and the Norwegian states; Finland has its ownstate-owned carrier Finnair. In Finland and Sweden there has been publicownership in manufacturing as well; commercial initiatives alone could notensure rapid industrialisation in such large and sparsely populated countries.

In what follows, the term public enterprise will denote all types of publicundertakings, conforming to Parris et al. (1987, pp. 7 and 22). A state enterpriseis operated by and financially integrated with a government department, likeschools, universities and sometimes postal services or railways. A state-

Finland, Sweden and Denmark 173

sponsored enterprise is more autonomous but subject to some authority, likethe nationalised industries in the UK or public enterprises in Ireland. Publicutilities like postal services, telecommunications and railways (‘public businessactivities’) have been organised in this way in Scandinavia. A state-ownedcompany (SOC) has the same legal status as a private company despite dominantpublic sector shareholdings. Such public enterprises have been transformedinto companies, with or without an ambition to privatise.

The term privatisation is sometimes used when objectives becomecommercial without a change of ownership, as is often the case in Scandinavia.Consequences may be similar, but objectives can be more easily reversed. Inwhat follows, privatisation therefore denotes a change which both reducesshareholdings and removes state control. For example, a reduction from 51 percent to 49 per cent is included in the definition, but not from 100 per cent to 51per 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, publicownership is also believed to be inefficient because of soft budget restrictionsand 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 betrue. Moreover, if markets fail, the benefits associated with public ownershipmight overshadow higher costs.

Public ownership in market economies often exist because of structuralreasons. For example, the state might initiate or maintain a commercial activityin 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 publicownership are behavioural if the authorities want the conduct of a company tobe inconsistent with private ownership. Cases in point are natural monopoliesand mixed oligopolies.4

There might exist behavioural reasons when larger staffing means higherquality, as in child- or health-care, or when the frequency of a transport serviceaffects user mobility.5 Cost cuts may mean lower wages and/or harder work andthus partly a redistribution of income rather than higher efficiency. Moreover,some sluggishness in laying off workers or raising prices might be desirable incases where private companies tend to over-react leading to economic recession.In practice, SOCs do not always maximise welfare, but the opportunities to changepolicy are lost if an activity is privatised.

Public intervention through ownership is often seen as a top-down mechanismonly. However, non-profit maximising organisations can be given autonomy whenneeded, or they can be required to act according to the views of those concerned.In contrast, commercial activities are top-down if corporations become toopowerful, for example when it is profitable for them to neglect local needs.6

174 Johan Willner

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 toconsumers and workers in the objective function causes the public firm to makelosses in bargaining models (see Haskel and Szymanski, 1992).7 Some authorsconclude that wider objectives cannot survive increased competition withoutviolating EU regulations on subsidies (Bös, 1993). Futile or even harmful attemptsto benefit voters or workers should therefore be blocked through privatisation.However, this analysis seems out of place, at least when applied to Scandinaviawhere SOCs are not in general loss-making.8 For example, the bargaining situationwould change if the subsidies that were present in Haskel and Szymanski’s modelsno longer existed. Moreover, it is not self-evident that the pay-off is the same aswhen choosing output. Central bargaining, as in Scandinavia, would presumablyreduce or eliminate wage differences. All companies in an industry could even bemembers of the same federation, as often is the case in Finland. Even if thesequalifications are ignored it might not be true that wider objectives make a companymore 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 afterindependence, to ensure domestic ownership in the forest industry (Veitsiluotoand Enso-Gutzeit) and basic metal industries (Outokumpu and later Rautaruukki).9

Rikkihappo, later part of Kemira, which supplied fertilisers, and the electricitygenerating company Imatran Voima were created for similar reasons in the 1930s.Some factories were established to supply the armed forces. Enterprises were thenorganised as companies in order to ensure access to capital markets, unlike thenationalised industries in Britain and Ireland.

After the war, a number of companies were established partly because of paymentof damages to the Soviet Union and the need for reconstruction. Cases in point areValmet, which made aeroplanes, ships and tractors and which is now a world leaderin paper and board machines; Typpi, which produces fertilisers and later becamepart of Kemira; and Neste, which refines and distributes oil products. Later casesare 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. Privatisationemerged on the agenda in the late 1980s when Social Democrats were stilldominant in the government. This resulted in the Ministry of Trade and Industry(MTI) blueprint, Visio yksityistämisestä Suomessa 1990-luvulla (1991). Thesubsequent right-wing coalition wanted to privatise, but was prevented from doingso until 1994 because of the economic crisis. Its policy is now being continueddespite a swing to the left in the 1995 elections.11

According to MTI policy statements, each company should be treated


individually and some are to remain in public ownership. Unlike in Britain, nocompany is to be sold unless the state can get a satisfactory price, for examplefrom international investors. The government has promised to use privatisationproceeds to encourage R&D in small and medium-sized firms. The extent ofprivatisation of companies owned by the state in January 1994 and the remainingpublic 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) wereprivatised in 1994–96. The state actually became the largest shareholder (30.4per cent) in a previously completely private manufacturer of mineral productsand 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 andNeste and to less than 50 per cent in Rautaruukki.

Finnish government reports are less explicit on the motives for privatisationthan in Sweden and Denmark. However, competition is not an obvious motive,because the 1991 blueprint recommends privatisation as a way to achievemergers.13 It also emphasises the importance of proceeds from sales and warnsagainst public sector dominance of industries.14 Efficiency is an objective, butthe 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 andKeskometalli Oy were nationalised in 1995 and merged with Rautaruukki Oy; bThe aircraftmanufacturer Valmet Lentokoneteollisuus is still in public ownership

176 Johan Willner

conditions, in particular integration and international competition (Kääriäinen,1994).15

Competition and commercialism might transform public services moreprofoundly, because manufacturing companies cannot become more commercialand there is no intervention to force them to compete more rigorously. Forexample, bus routes are increasingly tendered and some want to see themprivatised. Two large operators in the capital region are already owned byLinjebuss (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 officesclosed. Telecommunications, traditionally provided by the state or local publicor cooperative companies, have been deregulated. Calls have become cheaper,but this might result from technical change, cream-skimming and reduced cross-subsidisation. Some experts think that there is no alternative to this privatisation(Kivinen, 1996). What is clear is that, although Finland became a leader inderegulation rather than a follower, the consequences of the experiment aredisputed.

Sweden – ideological change

As in Finland, early state-owned manufacturers in Sweden were established inthe paper and pulp industry (ASSI) and in mining (LKAB) in order to exploitnatural resources under domestic ownership.16 However, the scale of theinvestments needed called for public activity, in more recent times as in thecase of Asea Atom. Companies have also been established in order to ensurethe supply of certain products such as X-ray films (Cea) and pharmaceuticals(Apoteksbolaget).

Ownership has partly been organised through holding companies likeStatsföretag, later Procordia, in order to reduce government involvement inoperational decisions. Procordia’s subsidiaries were engaged in, for example,pharmaceuticals (Kabi Vitrium), railway rolling stock (Kalmer Verkstäder) andhotels and restaurants (SARA), but focused later on pharmaceuticals under thename Pharmacia & Upjohn.17

Ideological differences in Sweden were minor in the 1970s and 1980s. Forexample, the shipyards were nationalised in 1976–82 when non-socialists heldpower. Between 1982 and 1991, when the Social Democrats ruled, Procordiasold a number of companies like Kockums Industrier and Kalmar Verkstäderin 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 andradio were deregulated. But a decisive shift took place under Carl Bildt’s right-wing government of 1991–4, which authorised the privatisation of 35companies. As in Finland, efficiency was not a direct issue, rather privatisationwas seen as promoting a ‘competitive ownership structure’


(‘Privatiseringsrapporten’, 1994). The government proposals wanted a cleardivision between politics and business. The government argued that publicownership distorts competition (Regeringens proposition 1991/92: 69).

In contrast with the position in Finland, markets were required to becompetitive after privatisation. The government also wanted to broaden shareownership, to strengthen the market for venture capital, to release funds forinfrastructure 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 thepublisher Timbro, which issued neo-liberal or Thatcherite pamphlets.18 Itmanaged to get influential support, in particular from the right-wing partyModeraterna.

Given the lower level of public ownership in Sweden than in Finland, thegovernment’s intentions were more radical. However, many enterprises had tobe reorganised before divestiture and this delayed the privatisation process. In1994, before the elections, 20 companies had been completely or partiallyprivatised. Share prices were set closer to the subsequent market valuationthan in Britain, and it seems that the overall process has been more cost efficientthan in Britain or France (‘Privatiseringsrapporten’, 1994).19

Table 10.2 describes the extent of the privatisation of companies withdominant state ownership and the remaining public ownership in December1996. It does not include privatisations before 1991 and/or companies whereminority holdings were sold, such as in the case of the cement manufacturerCementa, the steel company SSAB Svensk Stål, and the oil company OKPetroleum, or a number of regional investment companies.

The Social Democrats won the elections in 1994, and no general authorisationwas given to sell the reminder of the 35 companies chosen by the previousgovernment. State ownership of Apoteksbolaget, which handles the distributionof pharmaceuticals, was even increased to 100 per cent. On the other hand,Nordbanken was partially privatised in 1996 and the vaccine producer SBLVaccin may in the future get some private shareholders or even be privatisedwithout any parliamentary decision.

Privatisation is no longer an end in itself, however, and the emphasis is nowon an active rather than institutional ownership. A reduction to a 34 per centstate shareholding can be made without parliamentary permission (furtherreductions would eliminate the possibility of blocking a change in corporateobjectives). But at the same time, state ownership can be increased, though notextended to completely private companies, without a parliamentary decision.Reduced state ownership may be part of a restructuring in favour of othercompanies and net revenues are used for paying off government debts (Regeringensproposition 1995/96: 141).

Active state ownership is described as a way to improve efficiency, inparticular when there is joint ownership. There are no signs in the proposal ofnon-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

care, telecommunications and transport may therefore be of a greatersignificance than privatisation per se. According to right-wing thinking, thepresence of a few commercial SOCs may not after all be the main problem ifsociety is characterised by excessive welfare provision and hostile attitudestowards business.20

The railways (Statens Järnvägar) are still organised as a state-ownedenterprise, but telecommunications were reorganised as a company (Telia) in1993. At the same time, the number of municipal bus companies has beenreduced 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 Swebuswhich was owned by Statens Järnvägar until being sold to Stagecoach of Britainin 1996. Both companies now operate in Finland as well.

Fölster et al. (1993) have evaluated 38 cases of privatisation by localauthorities in Sweden. They found 8 cases of reduced efficiency, 4 bankruptciesand 6 cases of higher costs to the local authority. On average, costs had beenreduced, although they expected them to increase in the longer run. While notdisputing the merits of privatisation, the authors argued that a failure to benefitfrom international experience of privatisation and to identify cases where publicoperation is actually cheaper might provoke resistance to further sell offs.21

Table 10.2 Privatisation and remaining public ownership in Sweden

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


Both policy and evaluation of privatisation can be criticised for being obsessedby costs, when some studies of particular industries suggest that lost benefitsmay dominate. For example, according to Alexandersson et al. (1996),competitive tendering in public transport has lowered costs, but tariffs haveincreased. Moreover, as non-overlapping services have been cut, waiting timeshave risen. Studies from Sweden, Finland and Britain suggest that longer waitingtimes deter car owners from using public transport and that cuts in the networkand 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-sponsoredenterprise.22 The largest SOC (Statsejede aktieselskab) is Tele Danmark(telecommunication); it is followed by SAS Danmark, Dansk Olie og Naturgasor DONG (oil and natural gas) and Copenhagen airport (KøbenhavnsLufthavne). Moreover, the state operates ferries (DSB Rederi with subsidiaries)and builds fixed links from Sealand to Jutland and Sweden (Sund og BæltHolding). Ownership outside infrastructure industries has included EKR (creditinsurance), Statens Konfektion (garments), shares in the steel industry (DetDanske Stålvalsværk) and a few other manufacturing companies, such asJunckers Industrier.

Like Finland and Sweden, Denmark is at present governed by SocialDemocrats, which replaced a non-socialist coalition. In Denmark’s case, theshift took place in 1993. However, it seems that industrial policy is affectedmore by a long-run change in attitudes than by short-term shifts in politicalpower. Also, there has been practically no state ownership in manufacturing,therefore the scope for privatisation is smaller in Denmark than in Finland andSweden. Nevertheless, 11 state enterprises have been transformed to companiesand more privatisation is now taking place than under the previous government.

Privatisation in Denmark is handled by the Ministry of Finance. Its motivesdo not appear to be ideological and efficiency, as such, is not an issue. At thesame time, separating companies from political intervention and public sectorpolicy on staffing and salaries is seen as desirable. The most important motivefor privatisation or conversion is a perceived need to ‘strengthen the commercialaspects’ of a company’s activities (The Danish Policy of Privatisation, 1996).The authorities expect increasing international competition because of EU-initiativesand changes in domestic markets. New technology and the need to assure strategiccooperation are also mentioned. Proceeds from privatisation sales also seem to bean important motivating factor.

A number of activities that have been privatised in other countries remain inpublic ownership and only three major companies have been privatised in the propersense of more than 50 per cent of the shares being sold. Two are from the financialsector, while the third is the computer centre (Datacentralen), where 75 per cent of

180 Johan Willner

the shares were sold to an American company because of a desire to achievetechnical cooperation. In addition, Tele Danmark and Copenhagen airport havebeen partially privatised and the railway company (DSB) is concentrating on itscore activities – up to 25 per cent of its shipping and bus divisions may be sold in1997. Table 10.3 shows the extent of privatisation until 1996 of companies ownedby the state in 1992. Unlike in Sweden and Finland, the state does not pursueprivatisation and deregulation of the service sector. Nevertheless, some municipalbus companies, such as in Esbjerg, have been sold, or services have been contractedout, as in the Copenhagen region.23

THE CASE FOR WIDER OBJECTIVES

The main motives for public ownership in manufacturing in the Nordic countriesseem to have been structural. Given the ambition to industrialise, some companieshave been located according to needs that the private sector would not have takencare of, such as Svenska Etablerings (financial assistance to new market entrants),Rautaruukki and Kemijoki. Moreover, there were in the 1970s attempts to save anumber of companies through nationalisation, but most of these have now closed.GiroBank in Denmark and some SOCs in Sweden were supposed to reduce marketconcentration (via structure rather than conduct), but now there is a tendency torely on the EU rather than public sector initiatives to promote competition.

Because of the structural motives for public ownership, profitability, at least inthe long run, has been the dominant objective. Earlier restrictions concerning lay-offs and redundancies have now been removed;24 for example, companies in Sweden

Table 10.3 Privatisation and remaining public ownership in Denmark

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


are no longer allowed to take more responsibility for employment than a privatefirm. In Finland and Denmark they belong to the private employers’ associationand managers in Sweden are recruited from the private sector rather than the civilservice. Not surprisingly, state-owned firms have generally been commerciallysuccessful, which explains why efficiency has not been an issue in the same wayas in Britain.25 However, SOCs have occasionally promoted business activities ingeneral rather than their own profitability, for example when providing cheaprailway freights or energy as in Finland. In Sweden, state ownership was used tosupport R&D or increase information about particular production methods, as inthe cases of Svenska Utvecklings, Datasaab or the pharmaceutical industry.

One important reason for privatisation in Scandinavia was the notion that stateownership had a mission to promote economic development. Also, successfulcompanies have been a source of government revenue, though governments nowexpect profitability to be reduced because of increasing competition. Therefore,they prefer divestiture while prices are still high.26 Behavioural motives for stateownership have often been paternalist as in lotteries and football pools. Moreover,Finland and Sweden still have monopolies in wines and spirits; the aim of usinghigh 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 isstrengthening in anticipation of future liberalisation.

Governments address market failure in some cases, as in telecommunicationsin Denmark which are regulated. However, many services are required to beprofitable, 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 andcompetition are often followed by mergers. This suggests that there might be aneven stronger case than before for wider objectives, even if some old motives forpublic ownership may no longer be valid. Arguably, the authorities lack vision orthey blame the EU for making wider objectives impossible, thus forcing even publicsector core activities to become commercial.

COMPETITION AND BEHAVIOURAL MOTIVES FOR PUBLICOWNERSHIP

Wage bargaining and profitability: the case of a public monopoly

Increasing competition and/or market size and rules against subsidies have, inparticular in Denmark and Finland, been important reasons for privatisation. Widerobjectives are seen as no longer viable, though no research has been undertaken onhow new entrants and/or increasing market size affect the conditions for breakingeven. To address this issue, we construct a model in which a state-owned companymaximises a weighted sum of its profits and wage sum. This can be interpreted asa compromise between promoting profits and other components of the socialsurplus. Alternatively, the procedure can be seen as a result of pressure from unions

182 Johan Willner

and/or consumers. Otherwise, the model is conventional. For example, cases wherecompetition might not be desirable because of network externalities or othercoordination problems are ruled out, and the public firm has the same pay-off inthe 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 positiveweight 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 wagerate is known; consequently, we first determine output as a function of the wagerate.

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. Theunion maximises its utility U = x(w)(w - w¯), where w¯ denotes the outside option.Assuming equal bargaining strengths means that the procedure works as whenmaximising 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 commercialmonopoly (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 makeprofits or break even. However, it is more convenient to characterise the conditionsfrom the inverse relationship between p and w¯/a:


(6)

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 inareas I and II, but the company makes losses in II. The same is true in III, wherethere is overprovision as well.

Can wider objectives survive competition?

Suppose now that the public firm faces competition, but to begin with, only in thesame market as before. We then get a mixed oligopoly where firms with differentobjectives 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 itsown profits and its contribution to the wage sum in the industry: W = (a - x)x

1 - w

1x

1 + pw

1x

1. (7)

There are n - 1 identical profit-maximising competitors. The typical profit functionis: π

i = (a - x)x

i - w

ix

i; i = 2, 3,. . . I, I n (8)

Figure 10.1 The case of a public monopoly

184 Johan Willner

It will be convenient to introduce the notation v = (w1, w

2,. . . I, I w

n). Output in firm

1 and firm i are then represented by the following functions of v:

(9)

(10)

Bargaining works as if maximising

B1 = 3 logx

1(v) + log(w

1 - w¯) (11)

Bi = 3 logx

i(v) + log(w

i - w¯) (12)

After differentiation, use symmetry to set w

i = wj = w for all i, j ? 1:

(13)

(14)

Insert to get p - w1 and rearrange to get the following condition for the public firm

not to make losses:

(15)

Using (15) to infer the shape of the boundary p(w¯/a) shows that the largest permissiblevalue 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 isincreasing 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 ifp is too large:

(17)

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


Figure 10.2 shows how the regions I–III from Figure 10.1 change as we movefrom monopoly towards increasing competition. In fact, the region where firm 1does 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 ifp > 0.549. Thus, if for example p = 0.530, a loss-making public monopoly wouldbecome profitable by having a competitor.

It might be easier to understand this result by considering a change in the oppositedirection. To get a monopoly is like introducing central bargaining, which yields ahigher wage rate because of worker unity. If the monopolist is commercial, thehigher price normally compensates for this. However, if the firm has widerobjectives, the wage rate may increase by more than the price.

However, economic integration means an increase in the market as well. Supposethat there is a country A with public monopoly and a large area B with n - 1 privatefirms. Demand is xA = a - p and xB = b - p respectively. When A joins B, inversedemand 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 followingcondition 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 scopefor wider objectives increases further.

Figure 10.3 illustrates the case where B is three times as large as A, whichmeans that (a + b)/2a = 2 and n = 3. Area I is the initial permissible region, areaII the increase for the case when we get three firms in the initial market, and III

Figure 10.2 The impact of competition

186 Johan Willner

the additional increase caused by the increase in market size. Note that there areboth price and wage rate increases for any monopolist whose market grows inthis sense, but the price effect dominates. This explains why the combined effectof competition and a larger market size is to make it even more easy to breakeven 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 createdor saved companies that would otherwise not have existed but have not interferedwith the market mechanism once an activity has been initiated. There are a fewexceptions, usually related to paternalism or an ambition to promote profitabilityin general rather than a particular company.

A significant group of companies will remain in public ownership, in particularin Finland and Sweden, in spite of the privatisation programme underway. Somecompanies have been privatised partly because of the view that theirdevelopmental mission is completed; while natural monopolies are not likely tobe privatised. Also, public ownership may remain desirable in situations wherecommercial operation would cause economic distortions. As the analysis of mixedoligopolies shows, the presence of public ownership in such a market does notnecessarily exclude private competitors. On the other hand, competition maycreate more problems than it solves even if several firms can make profits.

The presence of a completely commercial state-owned company does notnecessarily increase welfare, but privatisation would prevent any attempt to changeits behaviour towards welfare maximisation. At the same time, governments seem

Figure 10.3 Competition and integration


to lack a vision about wider objectives, or they think that only commercialcompanies can survive in the EU. However, as follows from the model,competition may even make it easier for a company with wider objectives tobreak even.

NOTES

1 A preliminary version of the chapter was presented at the HCM-workshop in SophiaAntipolis, 14–15 February 1997, arranged by EUNIP. I am grateful for comments byparticipants and by colleagues at Åbo Akademi University. In addition, a number ofgovernment officials have helped me with details and supplied me with policystatements, 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 andinterpretations.

2 In terms of percentage shares of domestic value added, public enterprises wereresponsible for 22 per cent in Finland, 10–11 per cent in Britain and 6 per cent inSweden. The figure for Sweden does not include ownership through the so-calledwage earners funds, because their share ownership in each company was limited.Figures for Denmark are not available. However, too much emphasis should not begiven to particular numbers because of the definitional problems involved.

3 There is no perfect way to distinguish between private and public control. The statewould in many countries need 67 per cent of the votes to implement a change ofcorporate objectives and 34 per cent to block an attempted change, like abolishing apublic service commitment. A company can be controlled through minority ownershipif there is dispersion of shareholding, but any amount of private capital might makeother 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 andnon-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 sameweight.

8 For example, the SOC can break even in De Fraja (1993b), who assumes diminishingreturns in an otherwise similar model. Welfare maximising would then actually causewages to be lower than under profit maximisation, but would depress the wages of theprivate firm in a mixed market. This leads to a wage premium in the public firm. Alsosee 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 whichwas to make TV tubes.

11 The government now includes right-wingers and former Communists, in addition toSocial Democrats, Greens and a non-socialist party targeting the Swedish speakingpopulation.

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 foroligopolistic welfare losses in Finland and privatisation has reduced competition in

188 Johan Willner

a couple of cases. For example, a catering company and a coach and bus manufacturerwere sold to their largest private competitors.

14 Some decision makers might also want to signal that Finland, having the formerSoviet Union as its neighbour, is now uncontaminated by communist principles.

15 Seppo Kääriäinen was Minister for Trade and Industry 1991–5 during the period ofright-wing rule.

16 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.

17 The car manufacturer Volvo was another shareholder, with 27.5 per cent of the sharesin 1996.

18 It has been estimated that SAF spent the equivalent of about £7–12m on propagandadirected at ordinary citizens and on lobbying political parties (Hansson and Lodenius,1989).

19 Employees and the general public were offered 5–10 per cent lower prices thaninstitutional investors. Share prices for the former increased by on average 10.9 percent the day after privatisation, and by 5.8 per cent for the latter group. This can becompared to an average of 18.02 per cent in Britain. The approach was even morepragmatic in Finland, where the intention was to sell gradually and to get as high aprice as possible.

20 For example, Anders Johnson at the SAF criticises the Social Democrat privatisationpolicy for being excessively focused on business companies rather than public goodsor welfare services (Johnson, 1994). In his view, selling companies is a device tomake voters prefer secure property rights to cheap public services rather than beingan end in itself.

21 In municipalities dominated by Social Democrats, 61 per cent of the privatisationswere successful, 21 per cent unsuccessful and 18 per cent were disasters. If the non-socialists dominated, the corresponding numbers were 42 per cent, 32 per cent and26 per cent.

22 The facts about Denmark are based on the report Erfaringer med StatsligeAktieselskaber 1993), the government bulletin The Danish Policy on Privatisation,26 November 1996 and comments from the Ministry of Finance on a first draft ofthis chapter.

23 The frequency of the bus services in Greater Copenhagen seems to have increased,in contrast to experience in Sweden and Britain.

24 Some recent evidence suggest that SOCs in Finland do not maximise welfare(Stenbacka and Tombak, 1997).

25 Some comparisons of public and private profitability are available in Finland. Beforethe crisis in the 1990s, profitability was roughly similar in each sector (Valitionyhtiötmarkkinataloudessa, 1989). This was true in 1994 as well, as is evident from a year-book of listed companies (Julkiset noteeratut yhtiöt, 1996). Net profits as a percentageof 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 forthe 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).

26 If expectations are rational, current share prices would reflect the anticipated effectsof more intense competition. Privatisation would then cause no net gain and mighteven 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 waitingfor dividends to fall, but in such a world the case for relying on market forces isweaker.

27 Finland’s monopoly has now developed into Alko-Yhtiöt, with prominent (andcompletely commercial) subsidiaries in hotels and restaurants (Arctia).


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

REFERENCES

Alexandersson, G., Hulten, S., Fölster, S. (1996) ‘How Efficient is Competitive Tenderingin 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 ofEconomic 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 NewChallenge in International Business, Greenwich, CT, and London: Research inInternational 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, 457–69De 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: IndustriensUtredningsinstitut.

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-jaTeollisuusministeriö.

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 Ownershipon 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 andObjectives: 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 CompetitionLarge?, European Journal of Political Economy, vol. 8, 477–91.

11 The privatisation of state enterprises

in the Spanish economy

Vicente José Montes Gan andAmadeo Petitbò Juan

INTRODUCTION

In recent years, successive announcements of imminent privatisation campaignshave provoked a new debate – insufficient and poorly developed despite the issuesat stake – on the role of the state-owned company. Two main conclusions havearisen from this process. First, that although from a theoretical standpointentrepreneurial efficiency is independent of the ownership status of the productiveunit, empirical evidence all too frequently shows up the deficiencies of publicsector business management. Second, even assuming privately owned companieshave more incentives to perform efficiently than state enterprises, it is stillundoubtedly the case that privatisation is not the definitive solution to allmanagement deficiencies. This is because, on the one hand, a company’s futuredepends on its long-term ability to stay competitive and, on the other, the supposedlybeneficial effects of privatisation may be curtailed if the markets privatisedcompanies operate in are not truly competitive. The solution, therefore, is toliberalise before privatising.

Spanish state enterprises operating in goods and services markets are the productof fifty years of state intervention in the economy. According to estimates by theEuropean Centre of Enterprises with Public Participation (ECEP), the state-runsector in Spain is small in relative terms (see CEEP, 1994). In 1991, at the time ofthe last ECEP comparative study, Spanish public sector companies accounted for8 per cent of the value added generated within the Spanish economy, 6 per cent ofnon-agricultural employees and 13 per cent of gross fixed capital formation, ascompared with the 11 per cent, 9 per cent and 16 per cent averages respectivelyrecorded in the European Union. Again, according to ECEP calculations thesethree indicators together give the Spanish state enterprise sector a weight in theoverall economy of 9 per cent, that is 3.5 percentage points less than in 1985 and3 percentage points below the EU average. Table 11.1 details the composition ofthe state enterprise sector in Spain; while Tables 11.2 and 11.3 provide data relatingto 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 andcompanies, 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, 1994a

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


private sector counterparts, as well as a high cost to the national budget. Labourcost evolution and earnings performance have often been used to justify thisnegative appraisal of public sector entrepreneurship. As regards the former, labourcosts per employee in Spanish public sector firms as a whole were 20 per centhigher than in the private sector in 1994.1 This gap is excessively wide in anenvironment of intensifying competition and, if not substantially reduced, willjeopardise the future of Spain’s public enterprises. Table 11.4 lists the main profit-making and loss-making sectors.

Turning to public sector earnings performance and capital stock, theinformation furnished by the Bank of Spain is particularly revealing: 100 pesetasinvested in the Spanish state sector in 1982 was worth 124.9 pesetas2 a full twelveyears later. The scant revaluation of these companies is undoubtedly largely dueto the negative impact of a group of long-term loss-making enterprises. Indeed,state contributions to public sector companies over 1983–95 totalled more thaneighty billion dollars (see Table 11.5). Meanwhile, losses accumulated since theoutset of the 1980s sum to over $20bn at constant 1994 rates. These figures donot include the subsidies granted to companies running programme-contracts orin respect of one-off projects, nor the opportunity cost of the capital invested. In1993 alone, the state-owned companies, taken as a whole, recorded losses aftertaxes to the tune of £4.79bn dollars,3 equivalent to 1 per cent of Spain’s GDP. By1994, 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 throwsup quite different conclusions about the efficiency of Spain’s public sectorcompanies and, as a corollary, of the supposed efficiency gains to be securedthrough privatisation. In fact many state-owned firms are currently generatinghealthy profits (see Table 11.4) and many privatisation candidates have only asmall proportion of their capital under public ownership.4 For this reason, indefining 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 yHacienda

privatisation state enterprises in Spain 195

think of the future consequences for the Spanish economy based on the likelystrategies of the purchasing companies or corporate groups, the extent ofcompetition in each market, the long-term competitive standing of the firms inquestion, and so on. A more detailed study of these aspects often shows that, indealing with state-run enterprises, aggregate analyses fail to take into accountthe specific situation of each company. This is the reasoning behind the case-by-case approach to privatisation now being taken in Spain.

Finally, it is worth underlining one particular feature, this is the effect that theprogressive decentralisation of public activity in Spain may have on the make-up of state enterprises. The following paragraphs relate exclusively to companiesrun by central government. Nevertheless, the current evidence is that theincreasing transfer of powers to sub-central authorities is spurring the dispersionof public sector companies in just the opposite direction from the privatisationprocess embarked on by the government.5

The aim of this chapter is to set out the recent evolution of Spain’s publicsector companies and to identify the main characteristics of the privatisationprocess now gathering force. To this end, we first look at the structure of theSpanish state-run sector from its inception to the restructuring programmes of1995 and 1996. Second, we define the different approaches being taken toprivatisation, their aims, methodologies and instrumentation. Finally, we studythe necessary integration of privatisation strategies and policies to introduce orboost competition.

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

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


THE SPANISH STATE ENTERPRISE SECTOR

The composition of the Spanish state-run sector has undergone quite radicalchanges in recent years. We now have four big public sector conglomeratescomprising companies engaged in a wide range of activities. These are: theAgencia Industrial del Estado (AIE), the Sociedad Estatal de ParticipacionesIndustriales (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 predefinedtheoretical framework of reference. Looking exclusively at the specificcharacteristics of each component of these holding companies, we can divideSpain’s state enterprise sector into five groups.

These groups are, first, public sector companies competing with privateenterprise and which are neither instruments of social nor regional protection.These include, for example, financial and insurance firms like Argentaria andMusini, construction companies like Auxini or industrial concerns like Ence,Grupo Potasas, Inespal6 or Babcock Wilcox. Current policy here is to sell offcompanies’ non-priority business divisions or to initiate progressiveprivatisation.

Second, state companies formerly enjoying monopoly status in sectors likeenergy, telecommunications or air transport.7 The deregulation under way insuch sectors necessitates their adaptation to the competitive conditions laiddown in the new regulatory framework. This affects companies like Repsol,Iberia, Empresa Nacional de Electricidad (Endesa), Compañiá Telefónica deEspaña (Telefónica) or Retevisión, where competitive strategies were alreadyin place prior to privatisation. We can also include enterprises like Aeropuertosespañoles y navegación aérea (Aena), Tabacalera, Red Nacional de FerrocarrilesEspañoles (Renfe) or Correos y Telégrafos, these last two are already the subjectof debate regarding, respectively, the privatisation of postal services,8 and theintroduction of competition9, and privatisation of commercial railway transportoperations on certain tracks or in certain segments of this market, such ascommuter 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 spaceand aeronautics construction firm Casa. Such companies fulfil an importantrole in the generation of new technologies, in providing skilled employmentand in terms of value added. In the past, efforts have been made to use theleadership status of such firms in determined market segments to create a filter-down effect on other industrial firms. The filter-down effect is to occur throughlarge-scale projects developed jointly with private enterprise or participationin international industrial and technological programmes. The current view,however, prefers their privatisation with the involvement of partners equippedto maintain and develop their technological projects.10 A good example is theentry of new investors in the electronics group Indra.11

Fourth, we have manufacturers of military equipment where public


ownership was traditionally grounded on reasons of strategic production fornational defence. In this sector too international economic reality has imposeditself in the form of a search for new, diversified activities, productivespecialisation and industrial cooperation. This was precisely the project whichwas attempted, though without success, at Empresa Nacional Santa Bárbara,now in technical bankruptcy, and at Astilleros Publicos Bazán. In both casesthe original objectives, of, for example, ensuring sufficient military productionhave 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 likeshipbuilding, steel and coalmining, characterised since the 1970s by a processof ongoing structural adaptation to changing international competitiveconditions. Examples here include CSI Corporación Siderúrgica, AstillerosEspañoles, Astilleros y Talleres del Noroeste (Astano) and Hulleras del Norte(Hunosa), all of them present in problem sectors Europe-wide. They are alsosubject to EU directives and affected by international agreements under theauspices of the OECD and GATT. Their viability depends on the successfulapplication of restructuring plans emanating from Community institutions asthe only route to business survival and the conservation of jobs. Nevertheless,looking to the medium and long term, these companies are also being targetedfor rationalisation and privatisation.

ORIGINS AND DEVELOPMENT OF THE STATEENTERPRISE SECTOR IN SPAIN UP TO 1995

From a historical perspective, we can date the first state intervention in theproduction of goods and services in Spain from the creation of the FábricasReales (royal workshops) during the period of enlightened despotism12 in theearly part of the nineteenth century. However, the present structure of stateenterprise was laid down in two crucial decades of the twentieth century, the1920s and the 1940s. During the six-year dictatorship of the 1920s, the centralgovernment, inspired by the doctrine of regenerationism, created a core ofpublic sector companies with differing objectives. Foremost among these werethe Compañía Arrendataria del Monopolio de Petróleos (Campsa) and theCompañía Telefónica Nacional de España, founded to manage, respectively,the oil monopoly in the Iberian peninsula and the telecommunications monopolyin Spain. This was also the time of the creation of flagship companies in thefinancial, tourist and mining sectors, such as Banco Exterior de España, theParadores de Turismo and the extraction company Hunosa, incorporated tokeep up production in the coalfields of the northwest.

The second period followed on from the 1936–9 Civil War. This was thebeginning of the era of economic development known as autarky – abarracksbased economy – structured around the planning by targets of economicgrowth, the substitution of imports, and a protectionist approach to domestic

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941–

96


production.The aftermath of the conflict, which hit hard at basic infrastructuresand geographical areas with a more developed industrial base, was used tojustify state intervention in the reconstruction process. One essential instrumentof this policy was to be the state-owned company. This, therefore, was theperiod in which the structure of the state enterprise sector was laid down, whichsurvived, with various modifications, until 1995 (see Table 11.6 for asummary).

The 1940s saw the birth of companies like Renfe, to this day running themonopoly of standard-gauge railway transport. It also saw the birth of theInstitute Nacional de Industria (INI), the state holding company which was toact as an umbrella for a wide range of industrial and energy firms, with theobjective to boost the country’s economic development at a stage when autarkywas the fundamental economic reference point.13 In an economic system whichhad turned its back on the essential elements and mechanisms of a marketeconomy, the government sought to use INI as an instrument to establish anindustrial platform with galvanising effects on remaining sectors.

The INI companies formed fifteen divisions: steel, aluminium, coal,shipbuilding, defence, capital goods, fertilisers, food, electronics andinformation 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 creationof the Institute Nacional de Hidrocarburos (INH),14 after the spin-off from INIof companies engaged in the hydrocarbons sector.15 These companies operatedin the areas of exploration, production, refining, distribution and retailing ofpetroleum products and natural gas.16 Nonetheless, the legal status of INI wasleft unchanged until 1988, when the hitherto autonomous authority became astate enterprise with its own legal status and decision-making powers, governedby private law, but under the Ministry of Industry and Energy.

The 1988 reform also redefined the Institute’s aims. Henceforth INI’s rolewould be to boost, coordinate and control and, where necessary, carry out thebusiness activities undertaken under state ownership, acting in accordance withthe principles of profitability and efficiency in the allocation of resources andwithout 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 theseobjectives. In 1992 a new corporate design was drawn up with the aim ofputting resources behind firms able to compete in normal market conditions. Tothis end a new subholding company came into being, Téneo, to group togetherINI’s participations in these companies (see Grupo Téneo, 1992–4). INI,meantime, retained its function as a state-owned company with stakes in thesteel, shipbuilding, defence and mining sectors, as well as in Téneo. The firstgroup comprised companies in sectors undergoing reconversion or in defence.Many of them, subject to specific regulations emanating from the EuropeanUnion, required financial support from the state. The Téneo holding company,meantime, grouped together economically viable concerns and receivedtransfers neither from the National Budget nor from the INI. Furthermore,


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 thisproved insufficient, through the disposal of assets. Téneo was thus regarded as along-term project irrespective of its eventual ownership, public, private ormixed, as considered appropriate.

Until 1995 Téneo centred its efforts on the rationalisation of its diversifiedstructure and in opening up the capital of its member companies to newinvestors. The result was the forging of a number of strategic alliances,enhanced access to financial resources, and greater submission to marketdiscipline. Téneo was also to be self-supporting, thereby eliminating financialrisk. The 1995 reform, discussed below, later changed these strategies and theTéneo group was wound up in the following year.

Likewise the INH state holding company saw changes in the years 1992 and1993 after the introduction of new regulations governing the Spanish oilindustry. Specifically, the passing of new framework legislation (Ley deOrdenación del Sector Petrolero) in December 1992 brought the Spanish oilmonopoly to an end. This meant the disappearance of Campsa which, after thespin-off of its commercial assets became the Compañía Logistica deHidrocarburos (CLH). Around the same time, the Council of Ministers, in itsmeeting of 26 February 1993, authorised the INH to start the sell-off of Repsolshares. The INH was subsequently reorganised through a complex process ofmergers, whose end result was the consolidation of the Repsol company and theformation of a powerful corporate group in the gas sector, structured around themonopoly firm Gas Natural.17

Both INI and INH and the subholding companies Repsol and Téneounderwent major modifications in 1995 and 1996.18 A large number of publicsector companies, however, have remained outside the control of the InstitutosNacionales, in some cases because of their status as service providers with littlerelation to the industrial sector; in others, because they are subject to specificregulatory frameworks or have business objectives beyond the remit of INI orINH. The majority are state-run firms operating in the financial, transport,telecommunications and commercial distribution sectors, among others (seeTable 11.1 above). One such is the business conglomerate run by the DirecciónGeneral del Patrimonio del Estado (DGPE) of the Ministry of Economy andFinance (see Grupo Patrimonio, 1991–5). The DGPE is the body whichadministers the state’s holdings in a range of companies engaged in industrial,agricultural and service activities. Among their number we find some of thebiggest public sector enterprises in Spain, like the Corporación Bancaria deEspaña (Argentaria), Telefónica or Tabacalera. The DGPE’s function in thebusiness management context is to maintain the economic-financialequilibrium of component holdings and to act as a chain of transmission for thedirectives issued by a range of government authorities.

A historical milestone in the DGPE’s development was its assumption of theadministration of the private corporate group Ruíz Mateos, SA (Rumasa)following its 1983 expropriation19 and subsequent financial restructuring and


re-privatisation.20 Also, as is explained later, in 1996 a new company, SEPP, wasincorporated to head the DGPE conglomerate. SEPP is now active in 11productive sectors through 21 companies in a far more diversified format thanthe other two public sector conglomerates. Nevertheless, it is important torecognise its specific weight in the financial sector, in the telecommunicationsmonopolies and in the tobacco industry.

Finally, there is a heterogeneous group of companies which depends directlyon Ministerial Departments. From the management standpoint, a salient featureis 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 alimited company, while the majority are what are known as entes públicos.These last companies engage primarily in service sector activities, such aspassenger transport – Renfe, Ferrocarriles de Via Estrecha (Feve) and EmpresaNacional de Transporte par Carretera (Enatcar), transport-related services –Gestor de la Infraestructura Ferroviaria (Gif), Aeropuertos Españoles yNavegación Aérea (Aena), Puertos del Estado and Empresa Nacional deAutopistas (Ena); commercial distribution – Mercados en Origen (Merco) andMercados Centrales de Abastecimiento, SA (Mercasa); or information andcommunication services – Radio Televisión Española (Rtve), Red TécnicaEspañola de Televisión (Retevisión) and Explotación de Satelites (Hispasat).

In short, for historical reasons the structure of the Spanish state-run sector ischaracterised by its heterogeneity with the origin of public ownership in eachcase largely determining the present situation and composition of companiesand groups. In some cases this took the form of a fiscal monopoly (Tabacalera,Campsa), or a natural monopoly (Red Eléctrica, Renfe, Telefónica). In othersthe 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 lossesof companies in strategic sectors (Hunosa).

The reorganisation of the Spanish state enterprise sector undertaken inrecent years has a double aim: first, the rationalisation of sectors and a moreefficient working of the economy and, second, the release of resources for thereduction of the public deficit. We should not forget, however, that public sectorindustrial and services groups are the biggest ‘national’ corporations existing inSpain. These conglomerates are able to operate at an international level, wieldconsiderable bargaining power and can successfully do business in areas whichdemand a minimum critical mass, all qualities which have traditionally beenlacking in the Spanish business sector. It is no surprise, therefore, that in justtwo years, two different governments21 have evinced their concern about thesector, developing modernisation and privatisation programmes, hedged in by aseries of control mechanisms, as well as measures to protect the ‘nationality’ ofcompanies’ capital stock.

As we will see in the following discussion, the main difference between thetwo approaches is the intensity of the privatisation process. While the Socialist


government had a real but less explicit will to privatise, the government ofPartido Popular has, for the first time, drawn up an open, step-by-stepprivatisation programme.

THE 1995 REORGANISATION OF PUBLIC SECTORINDUSTRIAL GROUPS

In 1995 the government of the day carried out a restructuring22 of the state-runconglomerates operating in the industrial and energy sectors (see Ministerio deIndustria y Energia, 1995a).23 Although this was a medium-to long-term plan(see Ministerio de Industria y Energia, 1995 b), which was never implementedin full, being subject to revision the following year by the new administration, itis interesting to take a look at its main measures, and the objectives and groundsbehind them.

The chief consequence of the 1995 reform was the disappearance of theInstitutes Nacionales which had represented the public interest in both sectors forover half a century. The INI and INH were replaced by two new holding companiesin which the state’s participations were regrouped according to the criterion ofprofitability. First of all, the state’s holdings in Téneo and Repsol were transferredto a new public sector company, SEPI, to be governed by private law. This newcompany, which grouped together all of the state’s profit-making concerns, wasassigned 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 asguarantor. Together with the outstanding amount, approximately 700bn pesetas,SEPI took on the remaining rights and obligations of INI (company loans, paymentundertakings in respect of disinvestments, return of withholding taxes, etc.) with theexception of the guarantees extended to companies formerly part of AIE, whichwere substituted by Treasury guarantees. The intention was that SEPI should befinancially strong enough to manage the debt, including meeting the correspondingservicing charges until the debt repayment.

Under the terms of this arrangement, SEPI would have access throughout1996 and 1997 to two main sources of financing. First, Repsol’s annualdividend and the tax revenues arising from the fiscal consolidation. Thesewould give a slight profit and allow annual debt reduction in the region of 40billion pesetas. Second, access to the dividends of Téneo, producing a farhealthier cash position because of the dwindling to near-zero of contributions tocomponent companies.24 SEPI then had to cut its debt by a further 300 billionpesetas over 1989–99 out of income in respect of Repsol dividends and taxrevenues and a hefty contribution from Téneo. The latter would transfer its cashsurplus to SEPI through a share capital reduction and at the same time start updividend payments. As of the year 2000, SEPI would, according to officialcalculations, be receiving dividends from Téneo and Repsol in excess of thefinancial costs of the outstanding debt, allowing its prompt cancellation.Subsequently, Téneo would resume contributions to member companies.


The model was completed with the creation of AIE to group together thestate’s participations in those loss-making companies eligible for state aid onthe grounds of an ongoing reconversion process. Unlike the SEPI case, AIEcomponent companies would have access to Budget transfers for the funding oftheir operations, while remaining subject to programme-contracts. Programme-contracts are a contract between the state and a given public sector company,which lays down the contributions which the former will make to cover thelatter’s borrowing requirements. According to government estimates, statesupport 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 benefitsof fiscal consolidation.

In short, the creation of SEPI and AIE in 1995 had a dual purpose; first, torelease the Treasury from any obligation in respect of the debt accumulated byINI and, second, to tighten up the management of state corporate groups. Themeasures taken, as such, combined budgetary and management considerations;the adaptation to EU rules on state aid; and the legal disassociation of publicsector companies from the National Budget. Subsequently, the financingarrangements set out were reinforced by the partial privatisation of certaincompanies and application of the proceeds to accelerated debt reduction.

Among the direct advantages of this operation on the budgetary side we cancite: a saving of 153 billion pesetas over the 1996–8 period, additional taxrevenues of an estimated 38 billion over the years 1999–2000, and the releaseof the Treasury from the need to pay off of the 700 billion debt accumulated bythe INI. Also, this assessment takes no account of the savings arising from thestate’s self-imposed restriction on transfers to its companies. Among the AlEcompanies alone, it is envisaged that the improved financial control deliveredby the programme-contract format will allow the transfer payments committedin 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 thepotential for refloating will be transferred to SEPI (see Figure 11.1) andthereafter privatised, if the Board of Directors deems this feasible. Meanwhile,companies which continue to invoke losses will, say the government, be closedforthwith, except where mitigating social or regional factors exist.

Finally, in relation to SEPI’s flagship companies, Téneo and Repsol, twooptions have been debated involving, first, their function as agents ofgovernment industrial policy and, second, their conduct as financialentities, as holders of the state’s interests (controlling or otherwise) indifferent companies.25 On the one hand, the size of the Téneo conglomerateafforded it important advantages in the financial arena and in certain otherrespects (e.g. purchasing and joint tenders), which only a group on thisscale could aspire to. On the other hand, capital markets were expressingdoubts about the efficiency of the big holding companies by valuing them atless 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,


Téneo had a central role for the government as a financial holding company.It controlled the stakes in companies belonging to or transferred to SEPIwhich were targeted for conservation, acting as a financial investor – studyingand analysing dividend policies, rights issues, etc. Likewise, within SEPI,Téneo and Repsol were to act in representation of the state at the annualshareholders’ meetings of investee companies. However, with the election ofthe new Partido Popular government in 1996, Spanish public sector policyunderwent a change and with it the strategies set out above for the subholdingcompany Téneo.

THE STATE ENTERPRISE SECTOR MODERNISATIONPROGRAMME OF 1996

On 28 June 1996, the Council of Ministers approved a new State EnterpriseSector Modernisation Programme (see Ferreras, 1997). With this programme,the Partido Popular government sought to speed up the modernisation of thepublic sector and the liberalisation of the economy, while fostering greaterefficiency and competitiveness and furthering the job creation process. Toachieve these aims a series of instruments were brought into play, notably theprivatisation of state-run companies, the reduction of subsidies to state firmsand 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 offavouring the entry of Spanish investors; while it has also stated that privatisationproceeds shall on no account be put to meeting the current expenditure of

Figure 11.1 State enterprise reorganisation: organisational model, 1995


central government. Instead, they are to be earmarked, in full, for the reductionof public debt or the financing of investments.

Within this framework, the government’s first move was to change thestructure of state corporate groups from the top. First, Téneo, the SEPI holdingcompany, disappeared and its assets were transferred directly to SEPI.27 Second,a new Sociedad Estatal de Participaciones Patrimoniales (SEPP) wasincorporated under the DGPE. The management of the privatisation processthus passed to AIE, SEPI and SEPP (see Figure 11.2), in conjunction with agroup of expert advisors with the name of Consejo Consultivo dePrivatizaciones.28 SEPI and SEPP, meantime, took on the administration of thesell-off.

The privatisation calendar has been designed with a view to each company’ssituation in its respective market. Taking this as its basis, the government hasdefined three groups of companies, though the lines drawn are somewhat hazy.The first group includes companies regarded as consolidated in their respectivemarkets and thus immediate privatisation candidates (Argentaria, Repsol, GasNatural, Telefónica de España, Auxini, Musini, Grupo Potasas, Grupo Inespal,Tabacalera, Transmediterránea and Enagas). The second is made up of twoelectric utilities (Endesa and Red Eléctrica de España) to be subjected to adegree of competition before privatisation goes ahead. And finally, the thirdgroup comprises companies reliant on the state budget whose sale will not takeplace during the present legislature (Iberia, Casa, Babcock Wilcox), although theymay 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 HaciendaNote: aWithout prejudice to any subsequent review by the Audit Office


also includes those companies which need further restructuring to guarantee theirviability before any future privatisation will occur (Hunosa, Astilleros, SantaBárbara, Bazán and CSI).

If we analyse this classification we can conclude that groups are not definedsolely on the grounds of the degree of competition or deregulation reigning inthe markets in which they operate, but much more in terms of their profitability.Indeed, the groups mentioned unite companies with very differentcharacteristics. Some belong to sectors in which, despite some recentliberalisation moves, major deregulation is still required. Others operate inlargely deregulated markets; and finally we find companies engaging in sectorswhere liberalisation is advancing full sail, though it is not yet concluded. Inwhatever case, even companies in the third and fourth groups could be affectedby some degree of privatisation in the short or medium term, by bringing innew investors with small stakes,29 or selling off certain divisions which can bespun-off from the main company and more easily disposed of as separateconcerns.

Meanwhile, INI’s historical debt, brought down by 158 billion pesetas in1996, will be reduced by a further 250 billion in 1997, for a year-end balanceof 173 billion pesetas, and paid off in full in 1999. Financial support to AIE, toease its disassociation from the national budget, will take the form of a 230billion loan to be granted in 1997. Finally, SEPI’s contribution to public deficitreduction will materialise in the form of a 100 billion contribution towards therestructuring of the mining sector, in addition to corresponding dividendpayments to the state (see Ferreras, 1997). Lastly, as regards the supervision ofthe privatisation process, the controlling bodies are the Intervencion Generalde la Administración del Estado (State Comptroller’s Office), the Tribunal deCuentas (Audit Office), the Congreso de los Diputados (Parliament) and theadvisory Consejo Consultivo de Privatizaciones.

THE PRIVATISATION OF STATE ENTERPRISES

The privatisations carried out in recent years have responded to a variety ofobjectives, among them: the financing of a spiralling public deficit, theachievement of strategic alliances of a technological or commercial nature, orthe obtaining of results which, while technically and economically viable, arepolitically complex.

In general, privatisation has sought to correct three primary defects of thestate-run enterprise: first, the scant sensitivity to varying returns on capital;second, the asymmetrical behaviour of social partners as regards the negotiationof work conditions; and, lastly, submission to a dual legal framework, privateand administrative, which impairs management agility and efficiency. Indefining the privatisation process, varying options have come to the fore. Insome cases privatised companies have been allowed to operate freely in theirrespective markets, while in others the state has reserved to itself a degree ofcontrol. This second course, normally justified in terms of the defence of


national interests and, in particular, social or strategic criteria, has been exercisedusing a variety of instruments, like shares with special rights or the formationof a hard core of shareholders. Perhaps a lack of faith in the market mechanismas 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, threeprincipal 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 notstock-market listed. It is a particularly popular instrument when the only realdifference 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 ofconditions, as stipulated in the bidding specifications – a ‘prior admission’auction. The tender system comes into play as an alternative to the auctionwhen other valuation criteria apart from price intervene, for example, aguarantee of continuity of business. In the negotiated sale, the aim is to reducethe number of direct adjudications. When this mechanism has been used in thepast, the government has set out a series of bidding specifications, includingprice and other conditions, and submitted the same to a number of differentinvestors. This has the advantage of stimulating competition among the latterand avoiding direct adjudication by the Council of Ministers.

The choice of one or other system depends on the type of company inquestion and the government’s objectives in each case. When the aim has beento obtain the highest possible returns, the tender offer or public auction havebeen the chosen routes. However, in the privatisation of an activity or serviceof public interest, when the government wishes to ensure its continuity andquality, the procedures followed are generally those which do not centreexclusively on bidding price, i.e. the competitive tender or negotiated sale. Inthe 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 percentageof its stake to dispose of. In some cases, where companies’ survival dependedon technologies or distribution networks which the state was unable to provideor where companies were simply unviable in public hands, the solution hasbeen to sell off 100 per cent of the shares. Examples of this were the sale tomultinational firms of Seat, Ateinsa and Secoinsa. In the case of other, partial,sales, the aims were to consolidate an enterprise through the search for atechnological or commercial partner, or, directly, the obtaining of funds toreduce 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 whileconserving a significant equity holding, without prejudicing the right of the


general public to subscribe to shares in the remaining capital. This methodachieves both a reduction of the public deficit and political benefits from thedistribution of property ownership, in what has become known as ‘popularcapitalism’. Other formats aimed at boosting productivity through worker andmanagement participation in company capital have barely been applied.30

Deciding between the methods requires clearer criteria than those set out inthe modernisation programme, as well as close consideration of the exact phaseof privatisation the companies affected are in, especially since many had alreadyembarked 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 privatisationprocesses is known as the specific-rights share.31 It is used where the governmentperceives the need to establish a procedure of prior authorisation before theadoption of certain company agreements which may impact on businesscontinuity after privatisation. The scope of this legal provision extends tocompanies in which the state directly or indirectly held more than 25 per centof the share capital on the date of its enactment, provided such percentageconstitutes a controlling interest. The law, likewise, covers subsidiaries underthe control of the companies affected. However, in order for the specific-rightsor ‘golden’ share method to come into play, certain conditions relating to thepublic interest must be present. In other words, the companies in question mustengage in essential activities or provide public services, be subject to anadministrative regime of control or represent exceptions to the application ofEU competition rules. The state, as shareholder, can only apply theadministrative authorisation procedure when its stake in the privatised concernfalls to below a determined threshold level. Specifically, disposal of theaforementioned stake must represent a reduction of 10 per cent or more of thecompany’s share capital, provided that prior to or as a result of the operationthe state holding is less than 50 per cent. This instrument may also be usedwhenever the state’s interest in share capital is brought down, directly orindirectly, to less than 15 per cent.

The acts and agreements subject to authorisation are those affecting thecontinuity of business operations and the composition of share capital: voluntaryliquidation, merger or split-up of the company; disposal or encumbrance ofassets; equity stakes necessary for the fulfilment of the corporate purpose, andthe modification of corporate purpose. Also subject to authorisation are alloperations involving acquisition of shares or other securities where these affectat least 10 per cent of the share capital. The legal formula for the authorisationis set out in Royal Decree. The provisions are not permanent but rather are setfor a fixed period of time on a case-by-case basis. In order to avoid anydisruption of corporate activity the law additionally stipulates a speedy


procedure for dispute resolution of one month. As regards sanctions, anyagreement within the scope of the law not in receipt of the correspondingauthorisation will be deemed null and void. To avoid disruption of corporateactivity, however, the acquisition of equity stakes beyond the established limitsshall be permitted, although the rights associated to unauthorised holdings maynot be exercised.

The policy of hard cores in Spain

Shareholder hard cores can be defined as stable shareholder groups whichassume control of state-run companies in the process of privatisation with theaim of maintaining them under national ownership and safe from speculativemovements. In theory, the participating companies share the same interestsand are headed by management teams with a similar outlook. This is not a newidea, nor one which has been applied exclusively in the case of state-runcompanies; indeed, private firms often use the same mechanism to avoid hostiletakeovers.

The candidates for the hard core are chosen from among Spain’s biggestcompanies so as to be of sufficient scale to defend successfully the interests ofthe core group. In Spain, the only companies with these characteristics are thebanks and savings banks, the electric utilities, some construction firms andother state-run concerns. To create the core, these companies, directly orindirectly, acquire stakes in the share capital of the privatised firms or developstrategic alliances with them. Thus, the creation of such cores brings into beinga complex web of crossover shareholdings in the hands of a small number ofprivate and public sector corporate groups. These thereby gain a significantpower base in key sectors of the Spanish economy.

The best-known shareholder cores are those which have arisen in energyand telecommunications; in both cases markets with an imperfect structure ofcompetition and in which state-run companies have traditionally enjoyedmonopoly concessions. With the start of liberalisation in these sectors, thesecompanies have been partially privatised with the aim of guaranteeing theircompetitive position, in what amounts to being a ‘controlled’ privatisation. Inthe energy sector the most important cores are those formed around Endesa,Repsol and Gas Natural. The electric utility Endesa has four participants in itshard core: three financial institutions, the state-run banking corporationArgentaria with 3 per cent of share capital, Banco Central Hispano (BCH) andBanco Santander (BS)32 with 2.1 per cent and 2.78 per cent respectively andthe German electricity company RWE with 0.5 per cent. Meantime, BancoBilbao 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 centand 5.3 per cent respectively. Repsol in turn constitutes the hard core of GasNatural together with La Caixa (figures are as at 1 December 1996).33

Telecommunications is a sector in rapid expansion subject to a liberalisationprogramme coordinated at EU level. The state-run firm Telefónica will thus


shortly have to compete in a market which has hitherto been its exclusivedomain. Competition has already been introduced in certain segments, such ascellular 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 start-up of a second operator in the remainder of the telecoms market and the otheron the full liberalisation of the sector scheduled for December 1998, Telefónicahas stepped up its privatisation process, creating a hard core with BBV, LaCaixa and Argentaria. Telefónica has also recently forged a strategic alliancewith the construction and services conglomerate Fomento de Construccionesy Contratas (FCC). Thus, Telefónica has created a stable shareholder body andconsolidated its presence in the face of competition from a future secondoperator, which in all probability will be structured around the Airtel consortiumand Optel (whose shareholders include Redesa, Endesa and Unión Fenosa), asubsidiary of the state enterprise Retevisión (see Figure 11.3).34

These are not the only sectors affected. Other business areas in which state-owned companies play a pre-eminent role may also see similar reshuffles. Thismay be the case for companies like Tabacalera, Iberia, Casa, ParadoresNacionales or the Indra group. One consequence of this policy of alliances andcrossover shareholdings has been the concentration of business ownership inthe hands of two major entrepreneurial groups, headed by two private sectorbanks with strong industrial traditions, BCH and BBV, and the state-ownedbanking corporation, Argentaria.35 Recently, however, two more financialcompanies have joined the fray – La Caixa and BS – who together with BBVand BCH respectively make up the two main financial nuclei participating in theprivatisation process.

Figure 11.3 Shareholder hard cores in Spain: a few examples in the energy andtelecommunications sectors, 1997a

Notes: a Based on data as at 1 January 1997;b the second operator in the Spanish telephone market willnot be a state enterprise, but will nevertheless in all probability be structured around the state-ownedRetevisión with the public sector companies Endesa and Redesa and the Airtel consortium headed byBS, BCH and Endesa directly or indirectly participating as shareholders


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 UniónFenosa, the oil company Cepsa, the Airtel consortium, Antena 3 television andCableuropa. The BBV and La Caixa group, meantime, includes Repsol, Gas Naturaland Telefónica among its allies, as well as the electric utilities Iberdrola (partner toBBV in the IBV industrial corporation) and Hidroeléctrica de Cantábrico. Finally,Argentaria has important interests in Telefónica and Endesa, and through themboth with BCH and BBV. As is evident, the complex network of interrelatedownership 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 theextent that hard cores make big corporations impervious to the discipline of thecapital market, they tend to erode efficiency. Indeed management teams, alooffrom the spur of capital market competition, may be less careful in formulatingtheir policies, creating a situation where workers, and shareholders, try to grab asmuch as they can from the proceeds of the productive process. This kind ofinefficient behaviour is exacerbated by the fact that, in many cases, these arecompanies which enjoy, or have continued access to, monopolistic advantages insectors where phased privatisation has gone hand in hand with the liberalisationprocess. Undoubtedly, the persistent inefficiency present in many sectors willhamper, though it should not stop, the farreaching changes companies must makein 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 divertresources away from much-needed measures to ensure the long-termcompetitiveness of the companies and groups affected. Second, inefficientperformance and the erosion of profitability in these companies may alienate non-core shareholders. We should not forget, moreover, that capital markets are notperfect resource allocators and that participants tend to focus solely on those returnsfrom business performance attributable to the holders of ownership rights. For thisreason investments which require the mobilisation of large amounts of cash andwhich generate important external benefits may be undervalued by the market, tothe 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 stateentrepreneurial action should not be confused with regulation or the exploitationof national monopolies; second, that the criteria by which state-run companiesoperate, while they continue, should be the same as those governing the privatesector, and, finally, these criteria can be summed up as efficient companymanagement in pursuit of the highest possible returns. One instrument to achievethese ends and reduce inefficiency is privatisation. The transfer of assets from stateto private ownership, be they companies or public services, is a legal act withmajor economic implications. If it is not accompanied by the review and


modification of market regulation in line with the changed situation, privatisationmay fail to deliver the efficiency gains pursued.

The Spanish Privatisation Plan, as previously indicated, takes as a generalprinciple the need to introduce competition into the markets where companies duefor privatisation operate. For the moment, however, the privatising urge seemsmuch stronger than the liberalising urge. We should remember that if privatisationis not preceded by the opening up of markets to competition, the normal difficultiesinvolved in this last process are greatly exacerbated, as is evident from some specificcases.

First of all the fuel distribution sector is an example of the transition from alegal monopoly to a regulated market system, in the course of which the formerstate-run company, holding a monopoly concession, has been progressivelyprivatised. The impact of liberalisation on sectoral efficiency and competitivenesshas not, however, been wholly satisfactory. Despite the entry of new competitorsand the partial privatisation of Repsol, the market has been slow to evince theeffects of competition. Although direct sales of gas oil now show important discountsto the official maximum price, price competition in the traditional service stationnetwork has been largely cosmetic. Nevertheless, the entry of some shoppingcomplexes and hypermarkets at the retail end of the market, in the face of majorbarriers 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 onefactor influencing business competitiveness and market efficiency.

Second, in the case of the gas sector and the privatisation of Gas Natural, themain problem from a competition standpoint is the regulation of access todistribution networks. The liberalisation measures of 1996 refer to natural gasinfrastructures (gas pipeline network and regasification services) with someambiguity and imprecision. Before the full privatisation of Gas Natural, what isneeded is to press on with sector reorganisation and carry out simulation exercisesto identify the possible results of different scenarios. The National Gas PipelineNetwork, regasification plants and warehousing facilities should without any doubtbe taken as essential services to which all operators may have access on paymentof the corresponding fees. Moreover, the privatisation of Repsol and Gas Naturalcould too easily boost the monopoly power of certain corporate groups or thedegree of concentration in the sectors and markets in which their componentcompanies operate. It is no accident that both firms, controlled by the sameentrepreneurs, market alternative products.

Third, the privatisation of Endesa is a fine example of a pre-privatisation strategyin an oligopolistic market like electricity. In October 1996 Endesa launched atakeover bid for the companies Sevillana de Electricidad and Fecsa. This operation,whose object was to strengthen Endesa’s market position in the run-up toprivatisation, led to a significant increase in the degree of concentration in theSpanish electricity market.

Fourth, regarding the privation of Aldeasa,37 the government’s intention asannounced 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


the operation goes ahead under these terms, we will have a rerun of the presentsituation in which the regulatory body, which grants operational concessionsfor determined services, has an interest in the concessionaire firm. In this way,not only will duty-free shops remain aloof from competition, but the possiblefavoured status accorded to Aldeasa will persist.

Fifth, press articles on Tabacalera talk of the privatisation of 52.3 per centof the company’s share capital. They make no reference, however, to the removalof its monopoly on tobacco manufacturing or on the import and wholesaledistribution of manufactured tobacco from outside the EU, nor again itsmonopoly on the wholesale distribution of official paper and postage stamps.These are all monopolies currently administered and run by Tabacalera andwhich would thereby pass into the hands of the eventual private sector purchaser.

All these examples point to the fact that privatisation could have two opposingoutcomes: either the strengthening of competition or the strengthening ofdominant positions acquired in the past. For this reason, the criteria to befollowed in adjudicating state-owned assets should not rest exclusively on theprinciple of maximising income, but on an analysis of what will be the finalmake-up of the companies and corporate groups privatisation gives rise to, andwhether this process can contribute to improving competition by permittingthe entry of new players. The idea is to defend competition, not competitors.

While in the past we saw how loss-making private enterprises passed intostate hands, we now have a reverse situation in which profitable or potentiallyprofitable public sector firms return to the private sector. But economicefficiency demands the progressive elimination of company monopolistic power,the more so as the evidence is that private sector monopolies do even greaterdamage than state-run ones, where administrative and political control is tighter.When certain activities imply a monopoly structure or dominant positionwithout possible recourse to competition, these should be regulated accordinglyin order to ensure efficiency benefits. In other words, after privatisation themarket is responsible for allocating resources and maximising efficiency. Thestate controls the correct functioning of the market, the elimination of flawsand, finally, the achievement of a balance between the twin aims of equity andeconomic efficiency.

CONCLUSION

Spain’s privatisation process has responded to a number of objectives, foremostamong them achieving improved efficiency in the business sector and areduction of the public deficit. Different routes have been used to achieve theseends. In some cases, privatised companies have been allowed to operate freelyin the market; in other cases the state has retained a degree of control throughinstruments like specific-rights shares or has defined shareholder hard cores.The government’s Privatisation Plan represents the first explicit programme ofprivatisation drawn up in Spain and takes as its natural limit the transfer of allstate-owned companies into private hands.


A country is competitive when its companies are competitive and there is nodoubt that privatisation can make a vital contribution to this end. Thereafter, it willbe the market which determines the most efficient allocation of resources, providedprivatisation is preceded by the liberalisation of the sectors in question. If this isnot achieved then privatisation may fail to meet the efficiency objectives pursued.From a competition standpoint, it is taken as read that the most perverse effectsarise when the privatisation process leads to or reinforces a monopoly situation, orstrengthens the dominant position of the acquiring companies.

The Privatisation Plan recently approved in Spain rests on a ‘deregulation beforeprivatisation’ model. The direction is the right one, but the chosen route is by nomeans free of problems, which will need to be overcome with conviction andstrength of purpose. This will be the only way to combat the pressures of thevested interests in Spain which are seeking to consolidate their positions in themarkets and companies concerned.

NOTES

1 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.

2 This is a particularly significant result as it assumes the ongoing reinvestment of state-owned company earnings.

3 ‘El Sector Público Empresarial en España. informe provisional de 1994’, IntervenciónGeneral de la Administración del Estado (State Comptroller’s Office), Ministry ofEconomy and Finance.

4 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 advisoryConsejo Consultivo de Privatizaciones on its full disposal), Telefónica, 20 per cent andArgentaria, 25 per cent.

5 According to the Census of Regional and Local Public Enterprise Entities (see Ministeriode Economia y Hacienda. 1996), in 1996 there were 1,087 such institutions belongingto Spain’s Autonomous Regions and Local Authorities. Of this total, 352 were publicenterprises and entities adscribed to the Autonomous Regions and a further 674 werecorporations run by Local Authorities.

6 The rationale for these companies remaining in state hands has been that Inespal isSpain’s only producer of aluminium and that Ence and Grupo Potasas have shares intheir respective markets of 66 and 84 per cent.

7 As the Industry and Energy Minister recently stated (see Piqué, 1997), ‘while a fewyears back the formation of state-owned companies could find some justification in theexistence of natural monopolies . . . nowadays it is clear . . . that technological advancesand the broadening of markets have done away with many natural monopolies (andthose which survive do not necessarily have to be state-owned to work properly)’.

8 As regards postal services. the telecommunications ministries of EU member statespassed a directive in December 1996 allowing the distribution of inter-city mail of over350 grams, but incoming and outgoing cross-border mail is to remain as a public monopolyservice until 1 January 2003 (see the discussion in chapter 2). In Spain’s case, thisdirective allows Correos y Telégrafos to continue exploiting the market segment underits control as a full monopoly until the above-mentioned deadline.

9 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


Ferroviaria (GIF), whose incorporation marks the first step to the separation of trainoperations from rail infrastructure. In any case, the recent transfer to Renfe of GIF’smanagement does not seem the most sensible course from a competition standpoint.

10 There is currently speculation that Telefónica may take control of Grupo Indra. As regardsCasa, one of the takeover candidates might be Corporación lBV, already present in theaeronautics sector though Gamesa.

11 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 multinationalThomson with 24.9 per cent, the banking institution BBV and the electronics groupPerez Nievas each with 3.5 per cent, and the remainder in the hands of small shareholders(see Grupo Indra, 1995).

12 We can also find interesting antecedents in the Imperial period, including the ‘Casa deContratación’, created to channel trade with the Américas.

13 The law of 25 September 1941 which founded the INI sets out this Institute’s purposeas, ‘to promote and finance, in the service of the nation, the creation and resurgence ofour industries, in particular those whose chief object is the undertaking of the practicesimposed by the demands of the country’s defence or which seek to further our economicautarky, offering a safe and attractive investment for Spanish savings’.

14 Royal Decree Law 8/1981 of 24 April.15 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 andnatural gas sectors (see Repsol, 1987–94).

16 Also involved were the state’s shareholdings in a number of oil companies outside theINI group.

17 Repsol’s earnings and turnover place it among Europe’s top-ranked companies in thehydrocarbons sector. Since its incorporation in 1987, its profits have advanced at anaverage annual rate of 10 per cent. The company centres its activities in the energysector and has directed its strategies towards cost containment, the reinforcement of itsposition in the domestic market and the intensification of its international expansionprogramme. Foremost among recent developments is the progressive entry into thecompany’s share capital of small and large-scale investors, taking the state’s holdingdown to 10 per cent by 1996.

18 See below.19 Royal Decree 2/1983 of 23 February.20 The Rumasa expropriation (involving 700 companies) was the first ‘forced’

nationalisation undertaken by the newly elected Socialist Government.21 The Government of the Partido Socialista Obrero Español in 1995 and that of Partido

Popular in 1996.22 Royal Decree Law 5/1995 of 16 June on the creation of certain public corporations.23 Also affected were companies present in other economic sectors, notably transport.24 As explained below, Téneo was wound up in 1996.25 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: ‘strengtheningof capabilities in commercial, technological and industrial R&D, the take-up of newopportunity niches, the fostering of corporate groups with a strong market presence,like Téneo and Repsol, and the culmination of re-structuring or disinvestment processesin the specific sectors which so require’.

26 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 thestate and which operate in a market context is unstoppable and, as such, has its naturallimit in the transfer of all state-owned companies into private hands . . .’

27 By this time Téneo grouped together such major companies as Endesa, Red Eléctrica,Iberia, Aviaco, Casa, Indra, Inespal and Ence.


28 The advisory Consejo Consultivo de Privatizaciones recently issued a favourable opinionon 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 fromfriendly society to limited company), El Cano, Grupo Potasas and Grupo Inespal.

29 Examples here would be the possible development of an international strategic alliancefor Iberia or the search for a technological–commercial partner for the aeronautics firmCasa.

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 employeeshave been sold shares at a discount to their asking price, Telefónica, for example, offereda reduction of 8 per cent, while Argentaria granted low-interest loans of 4 per cent toemployees 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 long-term stability of the core.

33 Repsol’s main shareholder is the Spanish state which controls 10 per cent of sharecapital through SEPI.

34 The shareholder body of the likely second operator is still open to new entrants, possiblyincluding a European or North American telecoms group.

35 This represents a major switch in the strategy of Spanish banks, which had shown littleinterest in participating in the capital of Spanish firms after the bad experience of themixed bank phenomenon of the mid-1970s.

36 Each of these conglomerates includes state-owned companies. A good example is therelationship between Telefónica and Endesa. In 1995, Endesa purchased an 8 per centstake held by the private electric utility Fecsa in Telefónica’s competitor Airtel, andreached agreement with BCH to join the core group of shareholders behind the secondSpanish telephone operator.

37 Aldeasa holds the concession from Aena for the running of duty-free shops in Spanishairports 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 nofinancieras en 1994, Madrid: Servicio de Publicaciones del Banco de España.

Cartelier, L. (1994) ‘ L’Expérience française de privatization 1986–1988: Bilan etenseignements ’, Problemes Economiques, vol. 2, p. 362.

Centre Européen des Entreprises a’ Participation Publique, (1994) Les Entreprises àparticipation 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 RelacionesCorporativas del INI.

Grupo INI (1992–3) Informe Anual, Madrid: Dirección de Comunicación y RelacionesCorporativas de Indra.

Grupo Patrimonio (1991–5) Memoria, Madrid Centro de Publicaciones y Documentacióndel 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 yHacienda.


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 Ministeriode Economía y Hacienda.

Ministerio de Industria y Energía (1995a) Real Decreto de Creación de DeterminadasEntidades de Derecho Público. Memoria justificativa, Madrid: Centro de Publicacionesy Documentación del Ministerio de Economía y Hacienda.

Ministerio de Industria y Energía (1995b) Papel de la Empresa Pública, Libro Blanco de laIndustria, 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 quenecesita la economía española, Madrid: Circulo de Economía.

Repsol S. A. (1987–94) Informe Anual, Madrid: Centro de Publicaciones y Documentacióndel Ministerio de Economía y Hacienda.

12 Privatisation in the UKPolicy and performance

Paul Cook

INTRODUCTION

Prior to 1979, the United Kingdom possessed one of the largest public enterprisesectors in Europe. In the years after, the Conservative government undertookan 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 bypublicly 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’seconomic policy when it was elected in 1979. Nevertheless, the signs of changewere evident as the economic and political motives which underlay the originalnationalisation programme were much weaker by the late 1970s. Public opinionin the 1970s also seemed less convinced of the merits of public ownership, asrevealed in a MORI opinion poll at the time which indicated that a growingnumber of people believed that private enterprises were more efficient thannationalised industries (Heald, 1988).

In defining the issue of privatisation in the UK a useful distinction can bemade between the public market sector, i.e. the public or state-ownedenterprises, and the public non-market sector, commonly referred to as thewelfare state. Generally the distinction relates to institutions, reflecting pastpolitical choices about financing, and the characteristics of the goods andservices supplied. However, even goods and services in the public non-marketsector, such as health-care, are increasingly being marketed and consideredfor privatisation.

Clearly, in the UK context, there has been considerable support (or littleresistance) to privatisation in the public market sector dominated by aperception, at least, that public enterprises are inherently less efficient thantheir counterparts in the private sector. In contrast, a significant proportion ofthe public non-market sector commands popular support from the generalpublic. This is particularly the case with the National Health Service.

The privatisation programme which began in 1979 evolved through severalphases. In the first phase of privatisation, which occurred between 1979 and

Privatisation in the UK: Policy/performance 219

1983, the government sold public sector assets and public enterprises that weresmall and largely operated in competitive markets (Bishop and Kay, 1989). Inthis phase the sale of publicly owned property was more significant than the saleof shares. In the period over one million publicly owned houses, fetching £15billion, were sold under the ‘right to buy’ scheme.

The second phase of the privatisation programme concerned the extension ofdenationalisation into the public utility sector. This consisted of a mixture ofattempts to liberalise monopoly markets and denationalise the large public sectormonopolies. It began with the sale of British Telecom, and continues today withthe privatisation of the railway industry. This phase is distinguished from thefirst because separate regulatory offices have been established for each of themajor privatised utilities.

The third phase overlapped the second but represented a new direction for theprivatisation programme. It gained momentum when a significant number ofpublicly owned companies had already been sold and those remaining wereproving to be difficult to sell or were unlikely to generate large sums of revenue.Faced with this situation the Conservative government switched attention to newareas for privatisation which principally involved contracting out, the impositionof user charges, and the introduction of consumer-driven initiatives to simulatemarket controls on state-owned bodies (Curwen, 1995). It also involved to amuch 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 publicownership. This trend was sharply reversed in the 1980s. Although it was theLabour government which created most of the larger public enterprises between1945–51, successive governments of either political complexion continued tonationalise, including the steel, automotive, aeroengine, shipbuilding and aircraftindustries.

The importance of the nationalised industries in the UK in 1979 is shown inTable 12.1. This table shows only production from public corporations andexcludes the goods and services provided by other UK public sector organisationssuch as local authorities and the National Health Service (NHS). It indicates thatpublic enterprises have been relatively more capital-intensive than other sectorsof 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 corporationsprior to 1979 was weak. Rates of return for public corporations had been

220 Paul Cook

substantially below their private sector counterparts. Detailed analyses of pricingbehaviour of individual nationalised industries had indicated that efficiencyobjectives had not been met and this had been attributed to a combination ofoverinvestment and internal inefficiencies. With respect to the measurement ofinternal efficiency, comparative approaches had been adopted: comparing publiccorporation performance to other UK industries and to firms abroad. Efficiencyaudits had also been conducted by bodies such as the Monopolies and MergersCommission. In general, results had revealed a disappointing performance for UKpublic corporations. Performance assessment had, however, been complicated bymethodological difficulties of choosing appropriate indicators of performance,finding appropriate benchmarks against which to compare performance, and inassessing the importance of market structure as a determining factor forperformance.

The disappointing performance and the perception of failure among publicenterprises in the 1970s can, in part, be explained by the lack of clear objectivesgiven to public enterprise management by government. It was not clear to whatextent managers should reduce costs, promote regional development, maintainemployment 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 notcompatible with running enterprises that required heavy investment programmes(Heald, 1988). As a result, discussion of privatisation in the UK began in the 1970swith policy analysis by the Conservative opposition (Bishop and Kay, 1989).Nevertheless, the rationale for the privatisation programme appears to have beeninvented after the process began (Veljanovski, 1987).

Four motives were identified by Heald and Steel in 1982 before the governmenthad fully articulated the programme’s rationale. These included increasingefficiency, enhancing freedom of choice and promoting people’s capitalism through

Table 12.1 UK: public corporations, 1979

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


wider share-ownership, relieving budgetary pressure, and weakening trade unions.Vickers and Yarrow (1988) have added a few more. These include encouragingemployee share-ownership, reducing government involvement in enterprisedecision-making, easing public pay determination, and gaining political advantage.Most have been reiterated at some stage or other in official sources even if theyhave been expressed differently. A recent Treasury publication lists efficiency, widershare-ownership and obtaining the best value for each industry or service sold asthe most important objectives (HM Treasury, 1995).

Extent of privatisation

Table 12.2 provides a list of the major enterprises sold by the government. In somecases shares were sold in tranches. For example, in the case of British Petroleumthe first sale of shares was in 1977 when the government’s holding was reducedfrom 68.3 per cent to 51 per cent (HM Treasury, 1990). The magnitude of sales canbe 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

in terms of GDP. The table emphasises the sheer scale of UK privatisation in the1980s 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 importanthave been share flotation, direct sale, management buy-outs and forms ofcontracting-out. Principally, two methods of share flotation have been used inthe UK and sometimes combinations of both approaches have been undertaken.Public share offerings have been typically used to sell profitable, large-scalepublic enterprises. Often the share offer is used as a means to raise additionalcapital, as well as transferring ownership of the enterprise (UNCTAD, 1995).It can also aid the objective of promoting transparency and widespread share-ownership through the allocation of a proportion of shares to small investors.

First, under an offer for sale the share price is established by the financialadvisors acting on behalf of the government (HM Treasury, 1995). Second,using a sale by tender the actual selling price is not determined until all theinvestors have made their bids. Potential investors indicate how many sharesthey will be willing to buy at different prices. The strike or actual price is thenestablished on the basis of the highest level that allows for all the shares onoffer to be sold. Obviously, this method reduces the risk that the sale price willbe too high, resulting in unsold shares, It also goes some way to ensuring thatit is not too low, preventing the government from losing potential revenue.

The government has generally favoured the offer for sale method because itis easier for investors to understand and encourages smaller investors to a greaterextent than other approaches (Parker, 1995). In practice, the offers have often

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)


resulted in large-scale oversubscriptions which indicate that the share priceshad been fixed too low (HM Treasury, 1990, reports details on the number ofshare applications and the number of successful applications). Further, a largenumber of investors who obtained none or few shares have been disappointed,while those gaining shares have taken advantage of their initial undervaluationand made spectacular capital gains by quickly selling them once trading on theopen stock market has begun. Premiums on the first day’s trading for a numberof leading enterprises sold by share flotation have been in the order of over 80per 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 agroup of institutional buyers, known as a trade sale) has occurred on a smallerscale than share flotations. The sale of Rover Cars to British Aerospace is anexample of this type of sale. In December 1994, British Coal was privatised inan £850 million trade sale.

Finally, management buy-outs have also been significant in the sale ofcentral-government-owned and municipal bus companies. It was also the basisused for the sale of the UK’s single largest freight company, the National FreightCorporation, in 1982 (Parker, 1995).

Privatisation in local government

Privatisation defined as the transfer of ownership of assets from the public tothe private sector has not, with the exception of housing, been significant inlocal government. But there has been considerable emphasis on the introductionof competition in the provision of services, and upon a reduction of regulationby local authorities.

Sale of assets

The ‘right to buy’ initiative, gave public sector tenants the right to purchasetheir rented homes from the local authority owner, at a discounted value.Introduced under the Housing Act 1980 and extended by further legislation in1985, 1986 and 1988, this initiative has promoted the purchase of four millionhomes between 1979 and 1995, raising the national level of home ownershipfrom 50 to 80 per cent. In the same period, public housing stock has declinedfrom 30 per cent of total households to less than 20 per cent. Though theinitiative has generated, nationally, approximately £28 billions, the 1980 Actstipulated that local authorities could not use these funds to support other partsof the local authority budget, or on new house building, regardless of need.

Compulsory competitive tendering

Compulsory competitive tendering (CCT) was introduced through the LocalGovernment Planning and Land Act (1980), which required local authorities

224 Paul Cook

to put out to competitive tender a specified range of services (construction,building maintenance, and road works) normally provided by their ownworkforces. The Local Government Act (1988) extended this competitiveprocess to a range of so-called ‘blue collar’ services, including refusecollection, street cleansing, schools and welfare catering, and vehicle repairand maintenance; in December 1989, sports and leisure management wasadded 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 hasreduced the costs of providing local services (pointing to research evidencethat the 1988 Act has produced overall annual savings of 6 per cent of costs);and has improved the efficiency of direct service provision by exposingpublic workforces to competition, producing productivity gains of up to 25per cent. There has been a relatively low success rate of private sectorbidders. Research showed that of 1,609 contracts awarded by 1991, only 412had been won by the private sector, i.e. approximately 75 per cent of contractsremained ‘in house’ (Shaw, Fenwick and Forman, 1994). In leisure services,86 per cent of all contracts have remained in house. Meanwhile, it is generallyaccepted that the 1992 Act has so far been largely ineffective in promotingcompetition in white-collar services; though the private sector won 40 percent of legal services contracts, it won only 10 per cent of housingmanagement contracts, and generally could not compete on price withinternal providers.

CCT remained a disputed area of policy during the Conservativeadministrations. It encompassed a conflict between a determined centralgovernment prepared to compel often resistant local authorities to introducecompetition into their services provision. It exposed a divide between localauthority managers who saw the legislation as an opportunity, and localtrades unions who saw it as a threat. It tended to reflect party politicaldivisions; most Conservative authorities (and the Conservative centraladministration) promoted the system, while most Labour authorities opposedit. But the leadership of the Labour Party have now endorsed the principle ofcompetitive tendering, so that it is likely to continue as a major feature oflocal provision under the new Labour government.

Deregulation

Deregulation in local government has involved both the deregulation ofspecific services to permit competition in those services; and more generally,efforts to relax regulatory regimes in order to reduce restrictions on privatesector businesses.

The clearest example of service deregulation is in public transport, withthe deregulation of bus services. Up to this point, 90 per cent of bus serviceswere provided by local authorities; the cost of subsidy had risen from £10m


in 1972 to £530m 1982; at the same time, usage had declined. To halt thisspiral of falling usage and rising subsidy, the 1985 Transport Act sought tointroduce competition through restructuring the industry and encouragingnew entrants. Local-authority-owned companies could still compete withprivate operators, but as ‘arm’s length’ trading organisations, preferablyprivatised. Eighty per cent of all routes are now classified as commercial, andso ineligible for subsidy; subsidised routes are subject to a competitivetendering process. The 1985 Act effectively ended the direct role of localauthorities in public transport provision, except in London.

Again, the outcome of this initiative is disputed. Local authority spendinghas been reduced from £550m in 1985 to £280m in 1994–5, and there weresignificant numbers of new entrants into the sector. On the other hand, thewages of bus drivers have declined by 20 per cent, and critics argue thatcompetition 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 otherWestern European economy. In chronological order, telecommunications, gassupply, water and sewerage services, electricity supply and the railways havebeen subject to privatisation.

British Telecom, privatised in 1984, became the model for the regulationof all the public utilities. The ‘BT model’ can be described in terms of threeprincipal characteristics. First, there have been no major independentinvestigations into the future structure of each of the privatised utilities.Royal Commissions were not used for this purpose. In part this was avoidedso as not to alienate top management in public enterprises who might haveresisted privatisation. Such extensive investigations would also have added tothe implementation timetable.

The second characteristic has been the establishment of separateregulatory offices with responsibilities for policing and monitoring thelicences that are granted to guide the operation of the privatised enterprises.The initial regulatory office for the telecommunications sector (OFTEL, theOffice of Telecommunications) was initially based on the model of the Officeof Fair Trading. It has been described as a non-participatory model, with noneof the public hearings associated with US regulation (Heald, 1988).

Third, each regulator uses a price-control formula. The regulatory systemfor the major public utilities between 1945 and 1983 was based on cost-pluspricing principles. In 1984 the UK introduced price cap regulation in the formof ‘RPI - X’ (retail price index with an exogenous estimate, the X factor, toreflect potential productivity growth). Under this form of regulation pricescan 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 toachieve.

The catalyst for the development of RPI - X regulation in the case ofutilities was the Littlechild Report (1983) on the regulation of BT’sprofitability after privatisation. Littlechild argued (p. 6) that ‘the primarypurpose of regulation is to protect the consumer’ and that competitive entry,where feasible, was to be preferred to regulation. The price cap formula wasselected after a review of alternative schemes, including no explicit regulation(Armstrong, Cowan and Vickers, 1994). The other major contender forregulation, namely, rate of return control, was rejected because, more so thanprice cap regulation, it was thought to reduce incentives for efficiency andinnovation. A price cap could also be more easily targeted on particular services.

Table 12.4 UK regulatory watchdogs

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


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. Onerecent addition is the Office of the Rail Regulator, which has responsibility alongwith the Office of Passenger Rail Franchising for regulating an industry that iscurrently 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 andlater a state monopoly under the Post Office (except for services in Kingston-upon-Hull which retained its municipal operator). The Post Office was agovernment department until the late 1960s, when it became a state corporation.From 1960 to 1980 there had been agreement on the need to commercialise thePost Office. First it was separated from the civil service, and then separate postaland 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 apparatusmanufacturing 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 farback 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 interestobjectives rather than profit maximisation (Vickers and Yarrow, 1988). Licenceswere given to private companies and municipal authorities but little real competitionemerged. In 1913 telecommunications became a state monopoly. The monopolyof telecommunications suppliers remained intact, in terms of running the network,approving, supplying, installing and maintaining equipment until the 1981 BritishTelecommunications Act paved the way for the introduction of competition.

Sectoral reform process

A change of policy in 1980 liberalised the telecommunications sector by openingit up to competition. This policy shift derived in part from complaints from BT’scustomers about restrictive practices, but was also driven to a large extent by theideological conviction of the new Conservative Thatcher government of theinefficiency of nationalised monopoly industry. Liberalisation of the apparatusmarket had been considered by the previous Labour government but had beendropped due to union opposition.

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A duopoly policy was born in 1981 on the acceptance of a proposal by Cableand Wireless with British Petroleum and Barclays to lay the digital transmissionnetwork that became the basis of the Mercury project (BP and Barclays laterwithdrew from the project). Since then, Cable and Wireless has played a centralrole in policy on voice telephony. In addition to Mercury’s licence to competewith BT, Racal was selected to develop a rival mobile network. Competition wasalso sought in cable TV, with hopes of an interactive and telecom capability, butthis was not initially realised. The decision to privatise BT accelerated theliberalisation policy in order to strengthen competitors against potential abuseby BT of its monopoly position.

The decision to privatise was announced in July 1982, on the basis of theneed to modernise the network while controlling government spending. Fifty-one per cent of BT’s share were sold in a public stock issue in 1984, then afurther 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 syndicateof merchant banks (HM Treasury, 1996). Since 1984 the government had notexercised the voting rights of its remaining shares, but even after 1993 it stillretains a ‘golden share’ that entitles it to appoint two directors, and to blockchanges to the Articles of Association that limit any shareholder to a maximum15 per cent holding.

Post-reform period

BT’s licence area covers all of the UK except for 200 sq. km of Kingston-upon-Hull, which for historical reasons is covered by Kingston Communications(Hull) plc, owned by the local council. Each company is required to providevoice telephony services everywhere in their area, subject to price control.

Regulators have had to find niches for competitors to counter BT’s advantageof an advance knowledge of the territory in a newly competitive market. Theinitial restriction to a duopoly in fixed-link services allowed Mercury to developits challenge to BT with a government assurance that no new competition wouldbe allowed until 1990 at the earliest. With the responsibility of continuing thegovernment’s liberalisation experiment, Mercury focused on digital servicefor business customers. High fixed charges were offset by an average discountof 20 per cent on BT’s call rates.

A 1990 review of the duopoly policy concluded that more action was neededto speed up the pace of competition. This led to an opening up fully of thedomestic market while restraining competition in international services,maintaining BT price controls and revising interconnection terms to BT’snetwork to level the playing field for new competitors. In 1996 the internationalcalls market was liberalised too.

The domestic market was opened up with licences provided at the discretionof the regulator and the Department of Trade and Industry. The government’sgreater reluctance to liberalise the international market, where charges werewell above costs, is explained by its desire to offer further protection to Mercury


during the transition to full domestic competition. Licences stipulated obligatoryinterconnection, subject to payments to the fixed-link provider negotiated bythe parties involved and arbitrated by the regulator. Interconnection terms werecritical to Mercury’s entry into public network operation. Terms were agreedin June 1984 just prior to the privatisation of BT, but later Mercury sought andobtained better terms from OFTEL. Licences of new service providers alsocontain service obligations, but more limited than those of BT.

Competition has now been opened up in all areas and there is no significantstate ownership. BT and Mercury compete on national and internationalservices, and new providers are developing plans to enter the market or havealready entered (e.g. Ionica). The initial failure to achieve competition fromcable companies was the result of the deliberate fragmentation of the marketthrough the duopoly policy, now corrected by a concentration of cable interestsin hands of US telephone companies. Cable TV companies now provide localtelephone services in most towns in competition with BT, and four mobilephone operators are also well established at the national level. BT still retainsa 90 per cent share of the total UK telecommunications market (though a muchsmaller percentage of the business and international call markets). Mercury(from 1997 called Cable and Wireless) has established itself as second nationalnetwork, although more slowly than initially hoped.

Post-reform regulatory regime

The Telecommunications Act of 1984 now governs the sector, with the aim ofpromoting competition and preventing BT from abusing its market power. TheAct created the post of the Director General of Telecommunications and hisoffice OFTEL, staffed by civil servants (HM Treasury, 1996). It also definedthe licensing system and the regulatory roles and duties of the Director Generaland the Secretary of State for Trade and Industry.

The Director General is mandated to advise the Secretary of State on thegranting of licences, to enforce respect of the licence system, to modifyconditions of licences and to investigate consumer complaints. The Competitionand Service (Utilities) Act 1992 later amended the Telecom Act 1984 by grantingOFTEL the power to also set service standards and seek compensation forfailure to meet them, and to approve operators’ complaints handling proceduresand resolve certain disputes. OFTEL has not set quality-of-service targets, butencourages BT to do so and to publish quality-of-service information. BT andMercury now publish regular reports on their services which are monitored byOFTEL, and OFTEL commissioned an independent survey of cellular networksservices 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 oflicence-required and non-required BT services, to ensure that BT does notdiscriminate unduly or drive out competition by price-cutting and to ensurethat 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 doesnot apply to other providers. Maintaining price controls on BT is consideredparticularly important because its market share is so high. An RPI - X formulaof price control regulates a basket of BT prices, weighted according to theircontribution to BT revenues. Although the method allows some flexibility toBT in setting individual elements of tariffs, a separate limit is maintained forthe residential rental charge. This regime is intended to both substitute forcompetition and stimulate new competitors to the sector.

The first cap of RPI - 3 per cent, from 1984 to 1989, covered line rentalsand local and national call charges (Spiller and Vogelsang, 1994). In 1989 thecap was tightened to RPI - 4.5 per cent until 1991, when international chargeswere included and the cap was adjusted to RPI - 6.25 per cent. A new cap ofRPI - 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 canincrease by more than the RPI.1 In addition to the main price cap there hasbeen, since 1990, a cap of RPI - 0 on private circuit prices, RPI+2 ondomestic line rentals and RPI+5 on business multi-line rentals. The 1993price 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 overtime. In the case of the telecommunications sector, regulation has movedfrom a ‘light rein’ after the initial privatisation legislation to a tighter regimein recent years with greater attention paid to tackling the uncompetitivestructural arrangements inherited on privatisation (Nwankwo and Richardson,1996).

Post-reform performance

Following the first heavily oversubscribed share issue of 1984, BT sharesappreciated immediately in the stock market and performed well afterwards,except for the third tranche of shares issued in 1993 where the yield has beenmore modest.2 Whether privatisation itself caused a significant improvementin BT’s performance remains unclear. The clearest gains were the absence ofTreasury interference in the modernisation programme and avoidance ofmajor 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 havebeen achieved with respect to levels of service, prices, profitability andproductivity but that these must be treated with some caution. Althoughoverall telecommunications prices have fallen by around 11 per cent in realterms since privatisation, the average conceals wide variations in the prices ofparticular services, for example residential connection charges (which are notprice capped) have risen by an annual average of 7.2 per cent.


A large-scale survey of service levels was conducted by OFTEL in 1987. Thereport was critical of certain aspects of British Telecommunication services, inparticular the condition of public telephones. British Telecommunications respondedby setting a target of maintaining 90 per cent of its public telephones in operation byMarch 1988. Service was improved to around 95 per cent operational in 1992. Whilerates of return on net assets for British Telecommunications have risen since theearly 1980s, rising from an average pre-privatisation level of 18.3 per cent to 20.7per cent in the post-privatisation period, employment, research and developmentexpenditure and overall investment have not. Employment initially rose a little afterprivatisation but since 1990 has dropped by 37 per cent and a further 100,000employees are scheduled for redundancy by 1998 (Parker, 1994). The consequencehas been sharply improved labour productivity but more disappointing results fortotal factor productivity compared with performance in the years immediatelypreceding privatisation.

An effect of the price cap is that prices have fallen although businesses havebenefited more than residential customers. Mercury’s focus on business needsreoriented BT the same way, encouraging it to modernise first those areas exposed toMercury competition and causing long-distance charges to fall and rental and localcharges to rise.

There have been claims that ‘light rein’ regulation reflects some kind of regulatorycapture by industry interests. This proposition has been difficult to test since post-privatisation regulation has not been uniform. One recent approach to test whetherthe regulatory process has been captured has been to compare the stock market returnsfor the regulated companies over a specific period with the returns for a comparablesample of businesses not subject to regulation. Abnormally high returns couldconceivably indicate that capture has occurred if they are statistically associatedwith changes in regulation, commonly referred to as ‘regulatory events’.

Dnes and Seaton found, looking at regulatory events that might have impacted onperformance, that BT’s average daily returns were not significantly higher than themarket index, thus ruling out capture of the regulatory system (Dnes and Seaton,1995).3 Dnes concludes that regulation has checked monopoly power and that theimpact of the regulator’s decisions has been heterogeneous – with some decisionsfavouring 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 looselyregulated. A high-tension grid was created in 1926 with the establishment ofthe Central Electricity Board. The electricity industry was nationalised in1947 in response to the problems of rationalising municipally and privatelyowned 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 tomerge and coordinate their activities and came into conflict withmunicipalities who could acquire maturing franchises. The industry waseventually nationalised since public ownership at a national level appeared tobe a preferred option to a complex and disjointed system of public ownershipat the municipal level.

Pre-reform regulatory regime

Under public ownership in England and Wales the Central ElectricityGenerating Board operated all generation and transmission as a verticallyintegrated statutory monopoly, with twelve Area Boards acting as regionaldistribution monopolies. The organisation acted as a classic example of acost-of-service regulated public utility, with high capital costs, heavydependence on locally mined coal and nuclear power, disappointingproductivity and a low rate of return on assets (Newbery and Green, 1996).This state of affairs reflected the political games that were being played inattempting to balance a range of vested interests – the coal miners, domesticvoting consumers, industrial consumers, the power industry, and theDepartment of Energy and the Treasury (Newbery and Pollitt, 1996).

Unfortunately, nationalisation did not provide the industry with a clearenough direction making it easy for numerous interest groups to influence theoutcomes. In particular, the coal industry’s interests were linked to electricitysupply. In the 1960s, the domestic coal industry supplied about 80 per cent ofthe fuel for generation and this figure remained significantly high even in thelate 1980s prior to privatisation (Newbery, 1994). Domestic coal wasprotected against imported coal and highly subsidised throughout the 1970sand 1980s.

The Department of Energy and the Treasury had regulatory oversight ofthe industry. They employed few measures other than establishing financiallimits for the sector. Information gathered to monitor the performance of theindustry was of a poor quality.

Pre-reform performance

Under public ownership electricity prices were held down from time to timeas an anti-inflationary measure, and investment was constrained to control thePublic Sector Borrowing Requirement (PSBR). The effect of these policies onthe electricity supply industry was damaging. Reduced electricity prices andhigh input costs kept average real rates of return under public ownershipbelow 2.5 per cent. Rates of return for UK industrial companies were, onaverage, much higher.


Sectoral reform process

The proposals for privatisation of the electricity supply industry werepublished in 1988 and envisaged a break up of the vertically integrated stateelectricity industry in England and Wales.4 The British government proposedthat electricity generation be split between two companies: nucleargeneration and 60 per cent of the conventional power stations forming a largecompany, referred to as ‘Big G’ and, the remaining conventional stations in‘Little G’. However, the government was unable to sell nuclear stationsdespite 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. TheCEGB was divided into three generators – National Power, PowerGen andNuclear Electricity – and the National Grid Company, a monopoly controllingthe high-tension transmission grid. Nuclear Electricity had all the nuclearpower stations. National Power and PowerGen settled with the division ofconventional power stations along the lines of the initial ‘Big G–Little G’proposal. The 12 Area Boards became Regional Electricity Companiesresponsible for electricity supply and distribution in their areas and at firstjointly owned the National Grid.

Privatisation began in 1990 with sale to the public of the RegionalElectricity Companies. In 1991 the public were offered 60 per cent ofNational Power and PowerGen. The remaining shares were sold to the publicin 1995. The Regional Electricity companies floated the National GridCompany as an independent concern in late 1995. Nuclear Electric wasamalgamated with Scottish Nuclear and restructured to form British Energyand Magnox Electric. The former was privatised in 1996 while the oldmagnox stations with negative net value remain in the public sector.

A mechanism for coordinating the activities of generation, transmissionand distribution was required following their separation during restructuring.To assist this, a wholesale pool, a kind of spot market for bulk purchases, wasestablished and operated by the National Grid Company. Generators are paida pool purchase price for electricity that they supply and users of electricitypay a pool selling price. This includes the Regional Electricity Companies,large users and retail suppliers. The pool operator ranks the generating unitsby 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 poolcharges are principally unregulated. The price cap applies to the averagecharge 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 consumerscould negotiate contract terms. This level has since been reduced to 100kWhand free competition even in the lower-use domestic market is planned for1998 making the electricity supply market fully liberalised in the UK (similarliberalisation is occurring in gas supply).

Regulation is carried out by a Director General heading the Office ofElectricity Regulation (OFFER). A clear objective of the regulator is toencourage efficiency through price control rather than profit control andthrough promotion of competition. The regulator sets the X factor, which inprinciple is fixed for five years to provide some regulatory certainty.5 Thispermits companies to improve efficiency beyond the level implied by the Xfactor and correspondingly build up profits over the five years. Thisrepresents an incentive form of regulation. Shareholders receive profits madefrom further efficiency gains achieved by management once the X factor hasbeen established. When the X factor is reset in the following period, theregulator can tighten the price cap and thereby pass the gains to consumers inthe future.

The price control initially set for transmission and supply was X = 0 percent and for distribution between 0 per cent and 2.5 per cent. Between 1993and 1995 new price controls were set. They consisted of a one-off realdecrease in prices of between 11–17 per cent in distribution in 1995 and aprice cap of RPI - 3 per cent for transmission and RPI - 2 per cent for supplyand distribution (Burns, 1995). In 1996/97 the RECs were required to reducedistribution charges by a further 10 to 13 per cent and the X factor was raisedto -3 per cent.

Post-reform performance

Two factors affect the assessment of the performance of the electricity supplyindustry in England and Wales. First, it is unlikely that a clear picture willemerge from the performance data that is available simply becauseprivatisation was recent and the full effects will not have worked themselvesthrough yet. Second, many of the changes in performance are likely to beattributed to the restructuring process which began before privatisation andnot solely to privatisation alone.

Privatisation alone was not expected to yield significant improvements inthe electricity industry. It was expected that restructuring would increase thescope for competition and surrogate forms of competition. Any anticipatedadverse effects arising from the duopoly in non-nuclear power generationwere expected to be mitigated by an appropriately operating electricity pool,where under normal competitive market circumstances, bids would reflectmarginal costs. However, the industrial structure initially selected forgeneration at privatisation was unlikely to produce these conditions and,therefore, was inherently inefficient. It has been calculated that the duopolyequilibrium price was about 80 per cent higher than the level implied by


marginal cost bidding (Green and Newbery, 1992). A review by OFFER in1991 found that the generators were able to influence pool prices whichconstituted anti-competitive behaviour on their part. This resulted in largeprofits but substantial welfare losses. More generators would bring theequilibrium price closer to marginal cost and it has been argued that persistentexcess 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 inthe post-restructured period. First, the cost of coal in generation representedabout 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 largesavings for generators. Second, fuel costs to electricity generators havechanged because of a change in the fuel input mix. Coal-fired capacity hasbeen reduced while that of gas has been increased. Natural gas-basedgeneration of electricity using CCGT (combined cycle gas turbine)technology has risen from 0 per cent in 1988 to over 13 per cent being sold inpooling arrangements.

Third, the closing of less productive power stations and the change tonewer gas-fired plants with more efficient operation and the reduction inlabour force that accompanied these changes have led to substantial increasesin labour productivity.

Overall the efficiency record of enterprises after privatisation andunder regulation appears to be mixed. Table 12.5 shows comparativeproductivity growth rates for the Regional Electricity Companies. Whileaverage 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 percent for the period 1991–93, but with a range from -3.9 per cent to a highof 11.7 per cent.

The actual price controls contributed to the build up of profits. Thereturn on capital in the electricity distribution sector was higher than thatachieved by other privatised utilities. Indeed overall rates of return haveimproved over their pre-privatisation levels. In the case of generation this ispossibly due to the lack of competition, while in the case of distribution it isprobably partly due to a lax or overgenerous regulatory environment (Buttonand Weyman-Jones, 1994; Burns, 1995; Newbery and Pollitt, 1996).

In the aftermath of privatisation increasing attention is also being focusedon the effects on consumers. In December 1992 a MORI survey commissionedby OFFER found that 87 per cent of respondents believed that customer carehad not changed since privatisation (Ernst, 1994). Customer complaints toOFFER increased by 19 per cent between 1991 and 1992. In many respects theexpectation of a more stringent approach to handling customers, particularlyin relation to consumer debt, as a result of the move to a more explicitcommercial regime following privatisation, has not materialised. There hasbeen a downward trend in the number of disconnections as a means to dealwith consumer payment difficulties and defaults. This experience has been incontrast to that in the gas and water industries (Ernst, 1994). In part this is dueto the improved powers given to the regulator over codes of practice forcompanies (Graham, 1992).

PERFORMANCE UNDER PRIVATISATION

Despite the widespread adoption of privatisation measures in recent years, thebody of knowledge on the impact of privatisation is rather limited (Cook andKirkpatrick, 1994 and 1995).6 To some extent this reflects a failure on the partof policy makers to specify clearly the objectives of privatisation prior toimplementation that could be used to assess performance. But it also reflectsthe paucity of performance indicators which can be applied systematicallyacross enterprises and sectors to allow a comparative analysis of performanceto be undertaken.

The evaluation of the effects of privatisation encounters variousmethodological constraints which are common to all forms of impactassessment. The basic question is simple enough: is the economy better orworse off as a result of privatisation? But a comprehensive answer to thisquestion requires answers to a number of subsidiary questions: what variablesshould be used to assess performance? What changes occurred as a result ofprivatisation? What changes are important? Each of these subsidiary questionsraises serious methodological difficulties.7

Clearly, the choice of impact indicators is important. A range of macro andmicro performance indicators have commonly been used to assess the impactof privatisation. Macro indicators have included fiscal impacts, capital market


development and effects on employment; while micro indicators refer toenterprise level technical efficiency and profitability. Most of these, includingprofitability, technical efficiency, pricing, quality, revenue and employmenthave 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 ofenterprises in the UK after privatisation. Deciding whether or not increasedprofitability is accompanied by increases in efficiency as a product of ownershipchange is decidedly more difficult to decipher, however, because increasedprofitability may have arisen as a result of market power, technical change orother causes. For example, there is little doubt that profitability in BritishTelecommunications increased around the time of privatisation, as shown inTable 12.6. What is less clear is what has happened to technical efficiency andthe level of service. The former is complicated because it is difficult to separatethe effects of technological change in the industry from those attributable toprivatisation.

While it can be claimed that real prices have fallen, quality improved andproductivity increased in the telecommunications industry, the same storycannot be told for the gas industry, where total factor productivity (TFP) growthfor gas declined from 4.4 per cent per year between 1983–89 to 0.4 per centbetween 1990–94 (Bishop and Green, 1995).8 The same sort of picture emergesin relation to productivity in the electricity industry after privatisation (Burns,1995).

The picture is equally mixed with respect to the enterprises that wereprivatised into more competitive markets (Martin and Parker, 1997). A studyby Hutchinson (1991), examined the efficiency of such privatised enterprisesand suggested that privately owned enterprises generally outperformedcomparable government-owned firms. The study concludes, however, that theevidence is not clear cut when it comes to evaluating the performance of stateenterprises after they are privatised. The comparative study revealed thatalthough British Airways and National Freight outperformed their privatelyowned rivals after privatisation, the results for the aerospace and auto-manufacturing 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 isdefined as the purchase of tangible fixed assets

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ownership change on performance. Labour productivity growth and profitabilityin the aerospace sector did not significantly change as ownership was switched.Further, labour productivity appears to have eroded when compared to areference group of enterprises, even though it rose in absolute terms afterprivatisation. The study further highlights the difficulty of finding the cause ofenhanced performance after privatisation, which may be due to changes inownership, but could also reflect changes in market structure and in the macro-economic environment.

The employment consequences of privatisation need to be viewed against abackground of substantial change within the public enterprise sector. Between1979 and 1989, there was a 27 per cent fall in the total labour force in the eightmajor 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 publicsector companies transferred to private ownership, indeed employment actuallyincreased in many enterprises up to 1988. It is difficult, however, to interpret trendsin employment in privatised enterprises. While employment in some industries,such as the electricity industry have declined (employment in National Power fallingfrom 15,713 in 1990/91 to 6,955 in 1993/94, Nuclear Electric from 13,924 to10,728 and Powergen from 8,840 to 4,782 over the same period), some other sectorshave 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 Fordin 1989 and for which no accounts have been published since 1992


is shown in Table 12.7. In all cases bar one the figures compare employment in thefirst year of privatisation with levels by 1994 or 1995.

The conclusion reached in the research by Parker (1995) is that ‘privatisationcan improve performance but performance improvement is much more aboutchanging the internal workings of companies, including their business culturesthan 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 incentivefor performance improvement, than subsequent measures to liberalise the marketand changes in the regulatory regime, as evidenced by the experience of BritishTelecommunications 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 hasindicated that there is a host of constraints to successful privatisation that need tobe recognised and controlled; that a variety of forms and types of privatisation arerequired; and that serious consequences for the credibility of the broader economicmanagement of the economy arise if privatisation is mismanaged. The UKexperience has shown that privatisation alone cannot be relied upon to ensure thatthere are significant gains to the economy over and above those achieved understate ownership. The development of a regulatory environment to curb monopolyabuse and ensure that a wide variety of interests, consumer, industry andgovernment, are taken into consideration, has been a necessary accompaniment toprivatisation.

The UK’s experience with post-privatisation regulation has not been withoutfaults. The process of simultaneously attempting to limit monopoly power andencourage competition has proved difficult. On balance, the scrutiny of performanceby the regulatory agencies and the adoption of the price-capping formulae areproving that monopoly public enterprises, once privatised, do not necessarilybecome abusive private monopolies. As a result, improvements in economicperformance and levels of service can be achieved, but not without the vigilanceand 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 andwith a more restricted coverage (40–45 per cent of BT’s network services). This reflectsgrowing competition in some parts of BT’s businesses and hence the reduced need forregulation.

2 Recent estimates by the CRI in London show an average annual real return to investorsup to 31 January 1997 of 14 per cent for the shares sold in 1984, 10 per cent for thosesold 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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suppliers, both of which were floated in the stock market. In Northern Ireland privatisationinvolved some vertical separation, as in England and Wales, to promote competition.

5 However, the regulator can intervene outside these periods and has done so. In 1995 theDirector General of Electricity Supply reopened the distribution price cap review settlementof the previous year after evidence appeared suggesting that the cap had been set toogenerously.

6 For an attempt to fill the void, see Martin and Parker (1997) who provide a detailed studyof the impact of privatisation on the performance of eleven UK companies.

7 For a further discussion of the difficulties facing an economic assessment of privatisation,see chapter 2.

8 Martin and Parker (1997:101) present a similar picture of disappointing TFP growthalongside a much better labour productivity performance, especially in recent years.

REFERENCES

Armstrong, M., Cowan, S. and Vickers, J. (1994) Regulatory Reform: Economic Analysis andBritish 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 ’, CRIDiscussion Paper no. 10, London: Centre for the study of Regulated Industries, CharteredInstitute of Public Finance and Accountancy.

Burns, P. (1995) ‘Evaluating Privatisation in the UK Utility Industries’, paper presented to theBritish Council/Rolls-Royce plc seminar on privatisation, London, 22 November.

Burns, P. and Weyman-Jones, T. (1994) ‘ The Performance of the Electricity DistributionBusiness in England and Wales, 1971–1993 ’, CRI Discussion Paper no. 8, London: Centrefor 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 ofMethodologies and Evidence’, report prepared for the Privatisation Unit, Geneva: UNCTAD,November.

Cook, P. and Kirkpatrick, C. (1995) Privatisation Policy and Performance: InternationalPerspectives, London: Prentice Hall.

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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 GDPof approximately ECU 325 billion (1996 data). The Netherlands’ economy isheavily dependent on international trade, especially with its European Union(EU) partners Germany, Belgium, the UK and France. The high levels of exportsand imports (about 60 per cent of GDP) illustrate both its openness and itssensitivity to foreign political and economic developments. The Dutch economyis strongly internationalised and concentrated, having an important presenceof ‘incoming’ and ‘outgoing’ multinational firms. Both its mercantile traditionand the small size of its home market have stimulated Dutch companies toenter foreign markets and have encouraged the development of big (Anglo-)Dutch multinational companies, such as Royal Dutch Shell, Unilever, Reed-Elsevier, Philips, DSM, and AKZO-Nobel, that dominate production,employment, R&D expenditures, and the Amsterdam Stock Exchange (Schenket al., 1997). Most notable, perhaps, is that Dutch firms have been very activeas acquirers of foreign, especially British and American firms. The Netherlandshas consistently ranked amongst the three or four largest foreign investors inthe US since the early 1980s. During the early 1990s, approximately 20 percent of investment by Dutch firms was done abroad. Foreign-based firms thatpresently have a strong foothold in the Dutch market have been attracted bythe country’s ideal geographical location for distributive activities, its efficientmain ports Rotterdam (sea) and Amsterdam (air), its highly educated and strike-averse workforce, its favourable corporate tax conditions and the internationalorientation of its firms as well as its population. The activity profile of theeconomy is centred around a small set of key sectors: transportation andlogistics, agri-business, chemical and refining industries, information-relatedservices (printing, publishing, banking and insurance) and electronics.

Thus, the Dutch economy has some definitive characteristics which are notsimilarly present in other countries. These characteristics will be related belowto the Netherlands’ industrial policy. It will be seen that privatisation, thoughbeing a familiar headline in the Dutch press, has not been very substantial –simply because the incidence of state-owned enterprises has been relatively

The Netherlands: privatisation/deregulation 243

small. The paper will therefore focus on the changing interventionist regime inthe utilities sectors in which corporatised and privatised operators and newentrants are now active. We will start by introducing the industrial policybackground to recent programmes and their political-economic foundations.After a discussion of the institutional transition in three selected sectors, namelyelectricity, gas, and telecommunications, we will address whether the Dutchexperiences so far fit within the apparent EU-wide shift from governmentintervention to administrative regulation and whether there is a unique Dutchway of restructuring the industries mentioned and of reforming utilitylegislation.

BACKGROUND TO INDUSTRIAL POLICY IN THENETHERLANDS

Being a small and open economy, the Netherlands would seem to lack thepolitical and economic clout to control major industrial developments. Indeed,Dutch industrial policies are presently characterised by a virtual absence ofambitious projects, including projects in high-technology areas. Also, firms,including small and medium-sized enterprises, have simply been encouragedto join collaborative R&D programmes at the pan-European level like ESPRITand EUREKA. However, the existence of large multinationals has definitelyleft its mark upon industrial policies. For the industrial policy authorities haveconsistently supported the ongoing activities of the Netherlands’ largest firmswith substantial financial donations. In the 1970s and early 1980s, large-scalefinancial support mainly benefited ailing and/or smoke-stack firms. Well-knownin this respect was the one billion plus DG (Dutch guilders) support of theshipbuilding conglomerate RSV (approx. 750 million ECUs at 1997 rates).Similarly to the support that was given to large manufacturers elsewhere, mostnotably in the UK, these forms of support normally did not require thereplacement of top management and the development of innovative strategiesso that the results have predictably been miserable. RSV, for example, wentbankrupt in 1983 (for an extensive analysis, see Wassenberg, 1983). Althoughthe rhetoric has changed since then (financial support is now – under theinfluence of Porter (1990) – couched in terms of the stimulation of networksand clusters), the largest enterprises have continued to enjoy sizeable financialsupport during the 1980s as well as the 1990s (see e.g. General Auditor’s Officeof the Netherlands, 1996), most recently by means of so-called ‘technolease’schemes (see below).

Given the dominant position of the large internationally operating firmswithin the Netherlands, the country has had to rely – and still does – onexportoriented and free-trade strategies, supported by collaboration betweennational producers and compensation schemes among the ruling political andsocio-economic coalitions at home. These economic conditions have fostereda business culture which is characterised by concerted action on the part of themajor interest associations and extensive negotiation in the formulation of socio-

244 Willem Hulsink and Hans Schenk

economic policies, together with the active promotion of exports and tradeliberalisation abroad. As a natural complement to this ‘power sharing’ tradition,the Netherlands has had but a very weak and leniently enforced competitionpolicy. A form of merger control has been absent until very recently – seebelow – despite the fact that Dutch firms are among the most active in the areaof mergers and acquisitions. On the contrary, and similar to other Westerngovernments, the Dutch government has frequently, and with the consent ofthe unions, encouraged even large firms to undertake mergers, mostly withnegative effects on the performance of the firms in question. Thus, the financialsupport of RSV was conditional upon the formation of this conglomerate bymeans of a merger of several formerly independent large-scale shipbuildingfirms. More recently, the now bankrupt aircraft manufacturer Fokker was forcedinto a takeover by Germany’s Daimler-Benz, and when this turned out to be adisaster a few years later, merger of the firm into another huge conglomerate,Korea’s Samsung, was tried unsuccessfully. The search for a takeover candidatetook almost a year. In the meantime, the firm’s management was kept in placeand the firm was supported by both subsidies and equity.

One of the innovations that has come forward as a result of the cosyrelationships between government, big business, labour and the financialcommunity has been the above-mentioned technolease scheme which wasapplied 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 usedfor tangible assets, a firm sells (part of) its as yet undepreciated know-how toanother firm, usually a bank, from which it is then leased back. The bank enjoysconsiderable tax benefits as the purchasing costs can be deducted from profits,while the firm immediately receives a substantial cash flow. Evidently, thescheme is most attractive if the firm’s profits are not sufficient to allow fulldepreciation while the buying firm’s profits are sufficent. The indirect statesubsidy amounts to an opportunity loss as a result of lower and/or postponedtax collections. The gross cash flows for the two firms mentioned aloneamounted to at least one billion ECU, but perhaps to as much as 1.7 billionECU, whereas the attendant risks were largely covered by complex vice-versapayments and put-option clauses. Meanwhile, the scheme has become thesubject of controversy between lower-echelon fiscal authorities and even theEuropean Commission, on the one hand, and those responsible for industrialpolicy on the other. The strong dependence of the Netherlands as well as itsmost influential firms on the world economy has also fostered a pro-Europeanattitude and a major interest in the further integration of national markets intoa free trade regime. Dutch foreign policy explicitly supports the broader goalof international cooperation through the creation of a web of internationalaffiliations. The Dutch have always been strong advocates of Europeanintegration, being one of the six founding members of the EC and playing arelatively important role in the establishment of the common market and themove towards closer economic, monetary and political union. The Netherlands


has developed a strong commercial interest in the European Union withapproximately three-quarters of its exports and imports being exchanged withits EU partners. The economic gains from European integration have been high:agriculture, transportation and financial services and communications clearlyhave benefited from EU policies. Now that the EU has been gripped by pro-market ideology, and has started to emulate the Anglo-Saxon approach towardsadministrative regulation, it is therefore quite natural that the Netherlands isalso moving towards a system in which deregulation and privatisation arecombined with stronger (but still quite ineffectual) competition policies (seebelow).

The share of public enterprise, made up of state enterprises and stateparticipations, has traditionally been small in comparison with countries suchas France and Italy where central governments owned substantial stakes inindustrial and commercial enterprises and banks. An economic reason for thiscan be found in the openness and small size of the Dutch economy, whichmakes it difficult to use public enterprise as an instrument to accomplish nationaleconomic objectives such as innovation and growth. An additional politicalexplanation refers to the moderate attitude of the Social-Democrats, one of thefour main parties, towards nationalisation. Immediately after the Second WorldWar, and inspired by the works of the first Nobel prize-winning economist J.Tinbergen, they dropped nationalisation in favour of indicative planning andfunctional decentralisation. Apart from some minority state shares in the steelindustry going back to the economic recovery following the Second WorldWar (Hoogovens), and the chemicals/mining industry which can be traced tothe days of coal mining (DSM), as well as miscellaneous participations in ailingfirms (like, until very recently, Fokker Aircraft and DAF Trucks), publicenterprise in the Netherlands has largely been restricted to the traditional publicutilities (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 ofpublic enterprises has been low. The main exception was the PTT (and to acertain extent NS Dutch Rail), where the government actively intervened indecisions on tariff setting, wages, labour conditions, and investments.

PROGRAMMES FOR REDEFINING THE DUTCH STATE

Public policy making in the Netherlands throughout the 1980s has demonstratedan increasingly pervasive conviction that state intervention in the nationaleconomy had been overambitious and that a retreat of the state in favour ofmarket forces was necessary. In 1981/82 the Lubbers I Cabinet implementedthe Major Operations programme to facilitate a structural reform of the publicadministration and a retreat of the state. The Major Operations programmeconsisted of the following sub-programmes: a reconsideration of publicexpenditures, a reorganisation and decentralisation of the governmentadministration, deregulation, ‘de-bureaucratisation’ (cuts in civil service salaries


and/or staff) and privatisation. The centre-right Lubbers I Cabinet (1981–5)introduced the Reconsideration Programme to reduce the high level of publicexpenditure and restructure the public sector and the welfare state. In thisprogramme deregulation was perceived as one of the remedies for extensiveand ineffective legislation, in that it would further market liberalisation andcompetition. The privatisation programme had no explicit ideologicalmotivation. Unlike in the UK, the notions of mass public shareholdings, popularcapitalism and free-market doctrines were not regarded as important elements.Denationalisation was considered just another pragmatic instrument toeconomise on the state budget and to strengthen the market sector. Officially,the objectives were to reorganise the public bureaucracy and improve efficiencywithin government, to reduce public expenditure and the budget deficit and tostimulate entrepreneurship and market-responsiveness to economicrevitalisation.

The budgetary motive to trim the public sector was prevalent in theprivatisation programme, and the Treasury was the driving force in itsimplementation. The final results were somewhat disappointing. First, althoughcharacterised by a large public sector, the Dutch economy had only a smallnumber of state enterprises that could be privatised. The explanation for thisparadoxical phenomenon can be found in the availability of a large non-profitsector, in which private associations, performing public tasks in health-care,education, social welfare and social security, are subsidised by the state. Leavingaside the hiving off of some smaller state-owned services and the sale of minorshareholdings by the state (notably KLM, DSM, Hoogovens, ING/NMBPostbank, Volvo Car and Fokker Aircraft), only two large companies wereprivatised between 1981 and 1994, namely KPN/PTT (the biggest corporateemployer in the country with about 100,000 employees) and the Postbank (aformer PTT subsidiary with about 10,000 staff). Second, the Dutch governmentshowed a clear preference for reorganising the public sector by retaining thecore competencies of policy making and by privatising in a gradual way.

Privatisation met with little political opposition and legal-constitutionalproblems were only minor. The government’s pragmatic approach to theprivatisation proposals prevented political opposition: the Christian-Democrats,the Liberal-Conservatives and the centre-left D66 were cautiously in favourand the main opposition party of the 1980s, the Social-Democratic PvdA, inprinciple was not against the proposals. The privatisation programme wasopposed by the civil service unions. They saw privatisation as an excuse forrestructuring an inefficient and ineffective civil service and feared a loss ofjobs, income and pension rights. The public sector unions (with a unionisationrate of about 50 per cent) argued that alternatives like decentralisation andindustrial democracy were more appropriate for making the civil service andpublic management more flexible. When their rank and file did not whole-heartedly support these views, the public sector unions became more moderateand cooperative. If particular labour conditions, such as job security, wagesand social security (such as the breach in pension schemes) were safeguarded,


the civil servants themselves were not necessarily against privatisation.Furthermore, the two major labour union federations FNV (with a socialistpast) and CNV (with a Christian heritage) did not support their civil serviceunions very strongly. Privatisation did not have an influence on their totalunionisation rate. It only implied a (possible) transfer of members from publicsector to private sector unions. The employers’ associations regarded the saleof government shares and the contracting out of public services as belongingto an overall market-oriented economic policy aimed at stimulating the businessspirit and encouraging market forces.

The centre-left Lubbers III Cabinet, which came into office in 1989, wentahead with the difficult tasks of trimming the welfare state and establishing asmaller 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 innovativeprogrammes that challenged laborious consensus-seeking and disturbed thestatus quo. To remedy that, measures were put forward to improve theefficiency and effectiveness of the government administration: a separationbetween policy formulation and implementation by the creation of semi-independent administrative agencies to deal with executive and regulatorytasks, territorial decentralisation and policy reduction in some fields. Theinstallation of the ‘purple’ Kok Cabinet in the summer of 1994, consisting ofLiberal-Conservatives, Liberal-Democrats and Social-Democrats, so far hasnot led to any big changes in public policy. Emphasis is still on balancingpublic expenditures to reduce social security costs and promote publicinvestments and increasing participation levels in the labour market by theimplementation of deregulatory measures. One of the main action lines setout by the Kok Cabinet has been the introduction and further elaboration ofthe so-called ‘Competition, Deregulation and Quality of Legislation’ project.This project is aimed at reinvigorating the market, reconsidering existingrules as regards their effect on the dynamics of the economy and examiningthe 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 ofincreasing European integration on domestic socio-economic policies. Therapid implementation of the Single Market Programme by 1993, and theconcomitant irreversible shift of decision-making powers towards theEuropean level, took most Dutch ministries and key industries by surprise.The EC had simply been regarded as a large market outlet, rather than aninstitution in its own right with substantial powers to constrain the politicaland economic manoeuvrability of its member states. Since 1990, Dutch publicand private policy makers have been more aware of the significance of thedraft phase of negotiations and the need to anticipate the final phase ofdecision making. In the Netherlands, the harmonisation of national policiesto form one common policy and the enactment of guidelines, regulations anddirectives in order to establish the Common Market were widely regarded as


major consequences of European integration. The fact that the Internal Marketprogramme also instigated a process of international deregulation and policycompetition between the national institutional frameworks, however, wasunderestimated. The emphasis in the Dutch political debate has been too muchon the process towards European policy convergence, overlooking the factthat not only European businesses, but also governments are competing againsteach other for capital, labour and technology. In such a market environmentthe member states could optimise their comparative advantages byencouraging entrepreneurship, improving the quality of the industrial andeducational infrastructure, and strengthening other competitive factorconditions. In 1993, in order to make the Dutch business environment moreattractive to domestic and foreign investors, the Ministry of Economic Affairssupported a reshuffle of the government’s budget (reducing the public deficitand collective burden, and increasing infrastructural investments), promotionof labour market flexibility and overall deregulation, and a revision ofcompetition policy.

The 1956 Competition Act (WEM), at the time of writing still partlyapplicable, has left more room for explicit and implicit collusion between firmsand market dominance than the anti-trust legislation of the European Union.Unlike EU law, Dutch competition policy does not prohibit anticompetitivepractices, but sets out to limit abuse of economic dominance and collusion inthe marketplace. Furthermore, legislation on the ex ante scrutiny and controlof mergers and acquisitions was absent. The only existing regulation requiredmerger candidates to inform their employees’ council and/or the pertinent tradeunions. Competition legislation in the Netherlands has been based on a case-by-case judicial review and the enforcement by law of privately conductedcartel-agreements. Thus, by the early 1990s, when hundreds of cartels wereofficially registered at the Ministry of Economic Affairs, and probably manyhundreds more existed ‘illegally’, the Netherlands was close to what somewould call a paradise for cartels (e.g. De Jong, 1990). Although this may seemexaggerated, since many of these cartels applied to unimportant product orservices markets and others merely concerned matters which from a welfarepoint of view would be seen as rather insubstantial, it cannot be denied thatcompetition in sheltered industries, in particular, was rather muted (e.g. in bothwholesale and retail distribution, hotel and catering, car retailing, businessservices and banking, construction).

The 1956 Competition Act provides that only the Ministry of EconomicAffairs is competent to apply the competition rules. In particular cases andpolicy domains, however (e.g. telecommunications, water, broadcasting), theMinistry may act in consultation with other departments. In practice antitrustpolicy has often been subject to the more cooperation-oriented objectives ofindustrial and regional policy. The reason for this clear preference for businessself-regulation over competition policy can be found in the negotiationcharacteristics of the Dutch economy, with its strong international economicdependence requiring collaboration at home between business, state and labour.


However, government authorities as well as politicians generally shared a wide-ranging admiration for captains of industry too. The international success ofthe Netherlands’ largest firms was generally taken as evidence of talent thatwas superior to government capabilities. Indeed, many industrial policy advisorycommittees were chaired by (former) executives from the major multinationalfirms and were mainly composed of industrialists, while, for example, industrialorganisation economists and policy experts were largely excluded.

Until recently, there was no political desire to review domestic competitionpolicy 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 EuropeanCommission on the ‘cartel-friendliness’ of their economy, the Dutch publicand private authorities suddenly realised that a complete revision of theCompetition Act was needed to align it with the prohibitive EC rulings. From1992 onwards a series of anti-trust measures, referring to prohibitions onhorizontal price agreements, market-sharing agreements and transparent publicprocurement, were effectively implemented. In May 1996 a Bill for a newCompetition Act was put forward in parliament; it was passed in early 1997.The material provisions of this new Competition Act have brought Dutchcompetition law into line with Articles 85 and 86 of the Rome Treaty.Furthermore the Bill introduces a full-fledged framework of merger controlprovisions, 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 forallocative effects – a test which itself is already extremely difficult to do properly– whereas productive and dynamic effects of merger are likely to be muchmore incisive (Schenk, 1998).

Compliance with the new competition rules will be enforced by a newlyestablished anti-trust authority, which will act independently, but still will beanswerable to the Minister of Economic Affairs. The Competition Act, whichalso gives the courts competence in appeals against decisions taken on thebasis 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 Dutchelectricity industry was regulated on the basis of a series of semi-publicagreements between the Ministry of Economic Affairs and the joint organisationof electricity producers, SEP, as well as on the basis of an Act dating from1948, the greater part of which was never enforced. There was little centralisedcontrol or direction of the industry. The 1989 Electricity Act was meant tocodify the existing legislation as well as to confer statutory status on the semi-public arrangements. It was primarily concerned with production activities andtransmission. It introduced a limited degree of competition into the sector, inpart by allowing large industrial users to import for their own uses and in part


by encouraging decentralised electricity generation. It also rationalised planningin the sector and conferred certain powers on the Minister of Economic Affairs,for example, to approve tariffs and to issue licences for new generation capacityabove 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 reviewprocess has resulted in a complete overhaul of the present system, partly inorder to restructure the industry and to bring the Dutch legislation more closelyin line with the regulatory framework now required by the recently adoptedEU Directive on the internal market for electricity. Between 1989 and 1995the industry has radically restructured itself. The production companies, whichare in turn owned by the distribution companies and by local government,merged with one another so that only four have remained in operation. Thedistribution companies have also merged with one another so that only some30 of the original 80 are now in business. Of these, some seven companieshave 90 per cent of the market. The government first drafted a regulationgoverning distribution in 1990, but this was only adopted in January 1997.This legislation will liberalise electricity distribution and will require energycompanies to operate any ancillary activities, e.g. in the telecommunicationsor water sectors, separately.

A new Electricity law is to be adopted by the end of 1997: in accordancewith Dutch tradition there will be extensive consultation with the sector on thecontent. In the meantime the government has issued a third White Paper onEnergy Policy, in which it has outlined its plans for further electricity and gasmarket liberalisation. This was followed by a set of guidelines in an officialpolicy document (called Stroomlijnen) published on 6 July 1996 and a detailedletter dated 8 November from the Minister of Economic Affairs to Parliament,setting out the results of his consultations on the future structure and regulationof the industry.

Four production companies jointly produce some 75 per cent of the electricityconsumed in the Netherlands. Two (UNA and EZH) are owned by the localauthorities, while EPON and EPZ are owned jointly by the distributioncompanies and the local authorities. The distribution companies are in turnowned by the local authorities. Although in theory the latter are perfectly freeto privatise or otherwise transfer their shares in the distribution companies,this has not yet happened on any large scale. The third White Paper on EnergyPolicy did not take any firm stand on privatisation, considering this to be amatter for local government. However, the Minister’s letter of 8 November1996 contains a veiled threat that a privatised electricity company might notreceive a licence to supply franchised customers.

The production companies coordinate their activities through their jointlyowned subsidiary, SEP. SEP is responsible for economic and technical dispatchas well as transmission. It also draws up the statutory Electricity Plans andcoordinates fuel purchases for generation. In accordance with the 1989 Act,the production companies have a duty to supply electricity to the distribution


companies at the lowest possible cost. Electricity is sold to SEP, which thenpools it and sells it back to the production companies at a single price. Thelatter 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 choicebut cannot import electricity. SEP has a statutory right to import electricity forpublic supply. Only large users – i.e. with an annual consumption greater than10 million kWh – can import for their own use and they must obtain access tothe SEP grid to do so.

Distribution companies may, however, cooperate with large consumers inbuilding Combined Heat and Power (CHP) plants and this has been theunexpected success of the 1989 Act: decentralised electricity generation nowaccounts for between 25–30 per cent of total capacity in the Netherlands.

The 1989 Act, and particularly SEP’s import monopoly, has been attackedunder EU law, although the various proceedings have not yet been concluded.The Minister has recommended a complete restructuring of the industry. Thefour production companies should merge into a single national productioncompany in a (probably hopeless) search for economies of scale. Fullcompetition is to be phased in in three stages: first for large consumers; secondfor medium-sized consumers as of 2002; and for the remainder in 2007. Thegrid is to be transferred to a separate company. Access for all suppliers toeligible customers is to be free and is to be supervised by an independentauthority, which will, in the first instance, be a separate department within theMinistry of Economic Affairs. The planning functions of the Ministry will bereplaced by periodic energy notices. The Minister will remain empowered toimpose a maximum tariff for the various categories of captive customers. It isexpected 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 amajor source of energy both as a primary fuel and for the generation ofelectricity. The Dutch state has traditionally been closely involved in theindustry. Exploration and production permits are granted by the state, and astate participation in development and production of between 40 and 50 percent, through Energie Beheer Nederland (EBN), is guaranteed. The state alsodirectly holds 10 per cent of the shares in Gasunie – the national gas merchantcompany – and a further 40 per cent indirectly through EBN. The remaining50 per cent is held equally by Shell and Esso. By virtue of this shareholdingand a private law agreement between the state and Gasunie, the Minister ofEconomic Affairs can exert considerable influence over the sector – in particularover distribution and exports. Unlike the electricity sector, there is nocomprehensive legislation on gas.

The third White Paper on Energy also aims to introduce more competitionin the gas market, although both this document and the later guidelines, asreferred to in the official Stroomlijnen document, emphasise the substantial


differences between the two markets. Security of supply in the gas sector willcontinue to play a key role especially if, as is expected, the Netherlands becomesmore dependent upon imports. Further, although the European Commissionhas issued a draft directive on liberalisation of the Community gas market,little progress towards its adoption has occurred. Liberalisation at the nationallevel will therefore proceed at a more cautious speed. Gas suppliers will beentitled to non-discriminatory access to Gasunie’s transportation network andcustomers will gradually become free to choose their own supplier. The Act onDistribution of Energy will also liberalise gas distribution. However, Gasuniewill 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 willbring the Netherlands into the lead group of European nations as regards theopenness of its market to new entrants. At the same time, there are obviousconcerns about the consequences of liberalisation for security of supply andfor environmental protection, as well as for the future of the Dutch energyindustry itself. It remains to be seen whether, in fact, the Ministry of EconomicAffairs will regulate with as light a hand as sketched out in the 1995 WhitePaper.

CASE 3: TELECOMMUNICATIONS REGULATION

The Netherlands is preparing its telecommunications sector for full competition.In its implementation of liberalisation measures, the Dutch government closelyfollows the European directives, which seek to create an open and competitivetelecommunications market by 1998 at both member state and European levels(see chapter 2). The final steps, yet to be taken, are to permit (limited) entryfor new players in the key voice telephony market (accounting for approximately80 per cent of KPN/PTT Telecom’s revenues) and to promote and safeguardcompetition through an appropriate regulatory framework.2 In July 1997 theexclusive rights of KPN/PTT Telecom to provide voice services were withdrawnand replaced by a licensing regime in which new national and regional serviceproviders compete with KPN/PTT Telecom. Also, in 1997 an independenttelecommunications authority will be established that will be responsible forsupervision (e.g. licence compliance), conflict resolution (e.g. competitionissues and interconnection disputes), quality of service and consumer protection.The post-1998 open market and regulatory framework will be governed througha new revised Telecommunications Bill, which is due to be completed andpassed in Parliament before the end of 1997. This future revisedTelecommunications Act will replace the 1989 Telecommunications Act andthe 1996 Interim Act. The latter is an amendment to allow a managed andstaged transition from monopoly to competition.

The Dutch telecommunications regime, based on the 1989 Act (and to someextent on the 1996 legislative amendments), relied upon a core PTT ‘monopoly’


of infrastructure provision and the supply of the basic telephone, telex anddata services. For that purpose, KPN was granted an exclusive concession forthe construction and operation of the public network and the provision of keyservices. KPN, however, was obliged to ensure that its infrastructure wouldallow an efficient provision of leased lines and would provide the basic serviceson a non-discriminatory basis. In addition to the liberalisation of the marketsfor telecommunications services and terminal equipment, already enacted in1989, the scope of KPN’s exclusive concession was gradually reduced to the‘core’ of providing voice telephony services. Between 1989 and 1996 the Dutchgovernment liberalised the following markets: satellite communications (1991),data bearer services (1993), mobile communications (1994) and the fixedinfrastructure (1996). Voice telephony was eventually opened to competitionin July 1997, just before the EU’s 1998 liberalisation deadline. In the sameyear, 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 legislationthat would succeed the 1989 Act, based on the establishment of an infrastructureduopoly between PTT Telecom and a second franchisee. This would haveincluded all of the alternative network operators in the country (e.g. energy,railways and cable companies). In order to be awarded the second franchise tocompete at the different levels of the network with PTT, far-reachingcollaboration and consolidation was required in an Enertel/Telecom-2 jointventure. The Enertel/Telecom-2 collaboration fell apart because some of itsdemands could not be met by the Dutch government (e.g. terms of its licenceand terms of regulation), but also because of internal disagreement in the jointventure. While NS Dutch Rail and the energy utilities without cable networkspreferred the strategy of constructing and operating trunk networks, the cablenetwork operators and the utilities with a stake in cable networks gave priorityto the promotion of local/regional services.

In July 1996, with the adoption of the Interim Act, the fixed infrastructurewas liberalised, permitting alternative networks to have a competitive edgeover new service providers before full competition would develop (from July1997). Furthermore, the Interim Act introduced ‘permits’, based on registeringnetwork/services, and ‘licences’ based on licensing of network/services withspecial rights and obligations. Besides treating a permit holder and a licenseedifferently, the new licensing regime makes a distinction between a licencewithout territorial restrictions and one with territorial restrictions. When granteda licence after a competitive tender, the infrastructure licensee will be entitledto 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 NetworkProvision obligations). The permit holder will be allowed to provide servicesafter simple registration with no special rights and obligations. After acompetitive tender, national infrastructure licences have been granted to Telfort(BT and NS Dutch Rail) and Enertel (an association of regional utilitycompanies); these two groups are now competing with the concession holder


KPN/PTT Telecom in the market for network provision. Existing alternativeinfrastructure providers (e.g. cable network operators) are given preferentialtreatment in the allocation of regional licences. The licensing instrument hasbeen used by the Minister to curtail dominance in the domestictelecommunications market. She refused to grant a licence to an integratedKPN 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 thegovernment by hiving off the company from the state apparatus and separatingthe carrier’s operational and administrative activities. KPN was given corporateautonomy and became a joint-stock company. This process of ‘corporatisation’was followed by privatisation through a public flotation. In 1994, the sale ofthe first tranche of 30 per cent of KPN shares raised almost seven billionguilders, and a year later the second tranche of 25 per cent generated six billionguilders. Given the stipulation in the present legislation that the governmentwill retain at least a third of KPN shares until 2004 and that the governmentcurrently holds a 45 per cent minority stake, flotation of a third tranche ofKPN shares can be expected in the future. Government influence in KPN’scorporate evolution is ensured through a golden share construction, implyingthat 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 operationaland regulatory functions. The administrative tasks of the PTT, like frequencyallocation, normalisation, sectoral supervision and drafting legislation, remainedwithin the Post and Telecommunications Directorate of the Ministry of Transportand Public Works. In 1995, the Supervision Networks & Services Unit (TND)was established next to the Policy Unit and the Operational Affairs Unit of theMinistry. It will eventually be spun off from the government administrationand set up as an independent regulator. A new unit, separate from the policyand shareholdings functions in the Ministry, was required by the implementationof the EU directives on open network provision (ONP) to ensure effectiveregulation and supervision through objective and transparent conditions (e.g.for dispute settlement). Supervision of fair competition is the joint responsibilityof the Ministry of Transport and Public Works on the basis of the 1989Telecommunications Act (KPN’s exclusive rights and duties: open networkprovision, prevention of cross-subsidies) and the Ministry of Economic Affairson the basis of the general competition rules (for any other matters). In thepost-1998 setting, safeguarding fair competition will be shared between thefuture Independent Telecommunications Authority and the future semi-autonomous Anti-trust Authority (see above). A precise division of labourbetween the two institutions still needs to be elaborated.

TND was set up to monitor compliance by KPN and other companies withthe 1989 Telecommunications Act, and to prepare the domestic market for fullcompetition by the 1998 EU deadline. Initially, the Minister made it clear thatsuch an independent regulatory authority would not be established before 1998,


when all service monopolies would have been abolished. The reason for thepostponement was the legal–administrative obstacles over the definition ofministerial responsibility and the authority’s legal basis and remit. Thealternative of an autonomous regulatory authority, to be installed as soon aspossible, was strongly pushed by a majority in Parliament, which criticised theslow implementation of the open network provisions and lack of markettransparency. After complaints put forward by service providers and largebusiness customers, about KPN/PTT Telecom overcharging for leased lines,the Minister responded in 1996 by forcing the incumbent to cut its charges forthe lines by about 25 per cent (after having consulted an ad hoc committee ofexperts). She also decided, eventually, to endorse the setting up of anindependent telecommunications authority ahead of the 1998 deadline.

CONCLUSION

The largest Dutch employers’ organisation, VNO-NCW, although officiallycommitted to privatisation, once argued that privatisation would be unnecessaryfrom an economic point of view because many public enterprises alreadyconform to market conditions, a large-scale sale of government shares mightupset the market, and the proceeds might be used for increased governmentspending (Andeweg, 1994). Indeed, the economic record of public utilities inthe Netherlands is excellent by any international standards. However, once aprivatisation movement is on its way in neighbouring countries and the economyis booming, so that many potential market entrants appear on the scene, whatis to be done? If, moreover, the stock market keeps on reaching new highs dayafter day and the economy is in excellent shape, then why shouldn’t privatisationbe tried?

Certainly for a small, extremely open economy such as the Netherlands itwould be difficult to ignore developments elsewhere in Europe. Thus, the Dutchprivatisation programmes can be interpreted as a ‘curtsy to the times’ ratherthan the result of a positive, grand design to revitalise the economy. Althoughthe caretakers of the process may not be aware of it themselves, they maysimply have been affected by one of the most influential viruses that periodicallyaffects their largest of private firms, a mergers and acquisitions bandwagon.

In this chapter we have pointed to the fact that the Netherlands’ largestcommercial firms are amongst the most active in mergers and acquisitions.The only way for government enterprises to participate in the ongoing mergerwave, however, is to privatise them. Thus, we have been able to witness the 1.4billion ECU takeover of Australia’s TNT by KPN soon after it was privatised.Certainly we should see the amalgamation of the four remaining Dutchelectricity firms, if only to prevent a takeover by Electricité de France – despiteoverwhelming evidence from the empirical literature that most mergers andacquisitions are not able to produce synergy and expected cost savings (for arecent account, see Sirower, 1997). As Scherer once argued, in this age ofwidespread neurosis and psychosis, the line between rationality and irrationality


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 thelong term is a sucker’ (Kuttner, 1986: 19).

Yet, there is something typically Dutch in all this. The Dutch way ofprivatisation is characterised by a two-stage approach, emphasising anincremental adjustment of the public enterprises to the new market conditionsand avoiding the radical option of selling a majority of the state assetsimmediately. As a first step, state enterprises are restructured and brought underprivate law, without touching upon ownership and market conditions. Next,the independent state-owned company is given some breathing space to becomea market-driven corporation, before (some of) its shareholdings are sold off.Employment levels are protected as much as possible to overcome any resistanceto change on the part of the employees. The transitional period of pseudo-privatisation (in Dutch, verzelfstandiging or corporatisation) helps to improvethe value of a private share offering by gradually building up the tension andallowing the players-to-be to get used to the modes of doing business in amodern economy, sheltered from disruptive market forces (though the officialargument is to enable the operator to become more efficient). Infrastructurecompetition and third-party access to the public network are either non-issuesyet (e.g. gas, electricity and also water) or started to feature on the policyagenda only when the privatisation of the utility was scheduled and the flotationexecuted (e.g. KPN/PTT Telecom). Regulatory issues to be negotiated andsettled at the industry level, like universal service requirements, consumerprotection, interconnectivity, third-party network access, and fair competition,play either a minor role (e.g. telecommunications and electricity) or are notconsidered at all in the policy process.

NOTES

1 Dutch merger control applies to concentrations which (1) entail a merger of firmsthat together have a worldwide turnover of 250 million Dutch guilders (approx. 125million ECU) or more, on the condition that (2) at least two of the firms concernedin the concentration have a turnover within the Netherlands of at least 30 millionDutch guilders. Different thresholds, and in some cases regulations, apply to thefinancial services industry.

2 KPN is the newly adopted name for Koninklijke PTT Nederland; it is the parentcompany of PTT Telecom and PTT Mail. It has recently been announced that thetwo 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 ’, EuropeanEconomic Review, 40, pp. 979–87.


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 ofTelecommunications Governance Regimes in France, the Netherlands and the UnitedKingdom (1980–1994), Delft: Eburon.

Kuttner, R. (1986) ‘ The Truth about Corporate Raiders ’, New Republic, no. 194 (20January), pp 14–19.

Lewington, I. (ed.) (1997) Utility Regulation 1997, London: Centre for the Study ofRegulated Industries/Privatisation International.

Porter, M. E. (1990) The Competitive Advantage of Nations, London: Macmillan.Schenk, H., (1998) Mergers, Efficient Choice, and International Competitiveness: Band-

wagon Behaviour and Implications for Government Policy, Cheltenham: Edward Elgar(forthcoming).

Schenk, H., Renirie M., Koene, R. and Chan, C.-W. (1997) ‘Large Manufacturers fromthe Triad: Aggregate Concentration and Ex Post Competitiveness. With Referencesto the Position of Dutch Firms’, Management Report, Rotterdam: GRASP, ErasmusUniversity 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 andParadoxes, London: Pinter.

ACKNOWLEDGEMENT

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

accounting principles 99(n15)acquisitions 242Agence de Réglementation des

Télécommunications 30Agencia Industrial del Estado 192, 196,

198, 202–4, 205, 206agent–principal theory 2, 6, 31, 38, 49–

51Aharoni, Y. 30, 31Aiginger, K. 85(n4)air transport: deregulation 25; EU rules

24–5; Germany 109–10; Ireland140, 141–2, 147–8; Netherlands244, 245; Scandinavia 14, 172; UK237

Airbus 109–10Alchian, A. 124Aldeasa 213, 216(n37)Alexandersson, G. 179AMAG, Austria 75, 77Anastassopoulos, J. P. 10Andeweg, R. B. 15, 35, 255Andreff, W. 12, 37Andréosso-O’Callaghan, B. 11antitrust authorities 164–5, 249, 254–5Arbeitsgruppe 117, 118Armstrong, M. 226, 233, 235asset sales 12, 19–20, 70, 208–9Austria: AMAG 75, 77; banking 37, 71,

73, 74, 79–81, 84, 85(n6); BUAG77, 78; bureaucracy 71; deregulation81–3; electricity industry 81–2;nationalisation 84; ÖIAG 18, 74,75–6, 77; OMV 76; ownership/regulation 72, 81, 82–3; politicalparties 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 utilities73–4; railways 73, 82; reform 72–4;state intervention 30, 71–2;telecommunications (PTO) 81, 82

Austrian Industries 74Aziende Autonome 153, 154, 170(n5) Bacon, R. 125Balladur, E. 93Bank Austria 80, 85(n6)banking: Austria 37, 71, 73, 74, 79–81,

84, 85(n6); Denmark 181; Germany102–3, 106–7, 109, 117; Greece128, 133; Ireland 148; Italy 13, 152,164, 165, 170(n9); Scandinavia 172;Spain 194, 209

bankruptcy 10, 139, 140, 162Barca, F. 164Barrett, S. 141, 142Baumol, W. J. 49Bavaria 108, 110, 115Belgium: favoured investors 36;

privatisation 17; privatisationrevenues 84; public enterprises 11;state-owned companies 151

Birnie, J. M. 137Bishop, M. 34, 219, 225, 237, 238Blanc, G. 10BMPT 113Bös, D. 11, 31, 50, 56, 58, 61, 62, 64,

174Boycko, M. 31Boyd, C. W. 173British Airways 237British Energy 233British and Irish Steam Packet

Company 146British Telecom: duopoly 228;

performance 237; privatisation 27,

Index

Contents 259

219; regulation 225; RPI-X-regulation 56, 225

BUAG, Austria 77, 78Bundesanstalt für vereinigungsbedingte

Sonderaufgaben 117–18Bundesminister der Finanzen 105, 115Bundesregierung 117bureaucrats 52, 53, 57–8Burns, P. 28, 234, 235, 236, 237bus industry 178, 225Bussiammattilainen 179Button, K. 236 CAA 142cable networks 229, 253cabotage services 25Campsa 197, 200Canada, privatisation 222capital markets 36, 37–8, 42capitalism: French 94–5; popular 107,

208Cartelier, L. 211centrally planned economies 123CEPS Working Party on Utilities 23Chevènement, J. P. 99(n8)Chicago School 124Chubb, B. 139CIE, Ireland 139civil service status, state employees

35–6, 45(n19), 67(n21), 115Clarke, T. 126coal industry 60–1, 232, 235Coast Lines Ltd 146collaborative research and development

243commercial distribution 192, 201commercialisation 111communication services 201; see also

telecommunicationscompany control, legal rules 208–9competition: European Union 6, 38, 78;

and liberalisation 22; Netherlands244; ownership 32; privatisation 8,177, 211–13; public ownershp 5,182–6; regulation 226;telecommunications industry 28, 30,210

competitive tendering 207, 224Conservative party 12, 45(n28), 218consumers, privatisation 39contestability theory, market entry/exit

140context setting 40–1

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, 60Cook, P. 236corporate governance 163–4corporatisation 36, 70, 159, 161, 256Corte dei Conti 154, 170(n8)Cosh, A. D. 34Cowan, S. 226, 233, 235creative destruction 101Creditanstalt, Austria 79–81Cremér, H. 174Cullen, L. M. 137Curwen, P. 28, 219Czada, R. 106 Daly, M. E. 136–7, 138, 144Dasgupta, P. 127Davy Research 144, 145De Fraja, G. 57, 62–3, 64, 173De Jong, H. W. 248decentralisation 11, 195democratisation of public sector 97Demsetz, H. 124denationalisation 107, 246Denmark: GiroBank 181; privatisation

4–5, 16–17, 179–80; privatisationreceipts 18, 84; public enterprises11; public ownership 172, 180;railways 179; state-ownedcompanies 151;telecommunications 16–17, 179;transport 179–80

deregulation: air transport 25; Austria81–3; EU 23–4; Germany 102,110–15; Spain 196; UK 224–5

Deutsche Bundesbank 107, 117Deutsche Bundespost 111–13Deutsche Telekom xiv, 15, 28, 43(n4),

111–12, 113, 114, 119devolution of power 119Dirección General del Patrimonio del

Estado 200–1distribution policy 54–6Dnes, A. W. 231Donahue, J. D. 30Dunning, J. H. 106duopoly 62–3, 64–5, 228Dussauge, P. 10 EBN, Netherlands 251economic policy 1–2, 6–7

260 Contents

economic welfare 39–40, 126The Economist 103efficiency: allocative 33, 53, 70;

audited 220; privatisation 2, 7, 19,32–3; productive 33; public/privatesector 30, 32–3, 34, 125–6, 173–4;public services 157; regulation 7;socially optimal 168; state-ownedcompanies 174, 191

Eggerston, T. 124The EIU Global Privatisation Manual

147Electricidade de Portugal 13Electricité de France 27electricity industry: Austria 81–2; and

coal supplies 232, 235; cross-country comparisons 26–7; Ireland140, 142; miners’ union 60–1;nationalisation 232; negotiated thirdparty access scheme 27; Netherlands249–51; Portugal 13; prices 232,233–4; profits/welfare losses 234–5;regulation 249–51; restructuring234; Spain 209, 212–13; UK 26, 38,60–1, 231–6

electronics industry 196Elf Aquitane 12, 13Ellwein, T. 119Eltis, W. 125employees: civil servant status 35–6,

45(n19), 67(n21), 115; privatisedindustries 238; as shareholders 61–2, 94

employment: Ireland 136; restructuring73; state industries 30; state-ownedcompanies 151–2; state ownership10–11; trade unions 61

employment policy 56–7, 165Endesa 14, 209, 212–13, 216(n36)energy industries: see coal/gas/

electricity industriessentes públicos 201Enti di gestione 154, 157, 158Enti Pubblici 154, 158EOT, Greece 130EPON, Netherlands 250EPZ, Netherlands 250equity 36, 208–9Ernst, J. 236Esser, J. 110, 111, 115, 120Estrin, S. 173European Centre of Enterprises with

Public Participation 191

European Commission: liberalisation ofmarkets xiv; negotiated third partyaccess scheme 27; public utilities23–4; telecommunications industry28–9; transport 24–5

European Economy 133European Monetary Union xiv, 1,

44(n8)European Single Market 1, 247–8European Union: air transport 24–5;

competition 6, 38, 78; cross-countrycomparisons 12–19; deregulation23–4; industrial restructuring 41–2;Ireland 137, 138, 140; MergerControl Regulation 249; Netherlands245, 247–8; ownership 1, 20–2;privatisation 20–30; voice telephonyliberalisation 30, 113, 253

expropriation 54, 72externalities 38, 124, 126EZH, Netherlands 250 Fábricas Reales 197Feldstein, M. 56, 125Fenwick, J. 224Ferreras, P. 204, 206Fianna Fail 138, 143financial advisers 40Financial Times Survey 25Fine Gael 143Finland: air transport 14; governments

174–5; post office 26; privatisation4–5, 14–15, 174–6; privatisationreceipts 18, 84; public ownership172, 174–6; public/privateprofitability 188(n25); stateindustries 44(n7); state intervention30; telecommunications 176;transport 176

Finnair 14Fitzgerald, G. 139–43flagship companies, Spain 197, 203–4Fokker Aircraft 244, 245Fölster, S. 179Fomento de Construcciones yContratas 210Foray, D. 29Forman, A. 224Foy, M. 140, 143France: accounting principles 99(n15);

capitalism/financial structures 94–5;electricity industry 26, 27; foreignownership 37; industrial policy 88–9, 96–7, 99(n8); investment 98(n3),

Contents 261

99(n7); legislation 12–13, 91–2;nationalisation 40, 89–92; noyauxdurs 37, 38, 43, 94, 99(n18); partypolitics 12–13, 89–90, 92, 96; postoffice 25; privatisation 1, 3, 12, 19,40, 92–6, 222; privatisation receipts18, 20, 84, 95–6; public enterprises11, 151; public/private sectorindustrialists 35; public sector 10,90, 105–6, 157; public utilities 93;railways 24, 44(n11); stateintervention 30, 97; state ownership10, 12; telecommunications industry13, 28, 30; trade unions 35

France Télécom 13franchising 70free trade 21–2, 243–4Friedman, M. 124fuel distribution sector 212 Galal, A. 39Gantner, M. 83Garcia Delgado, J. L. 14, 31gas industry: liberalisation 44(n13);

Netherlands 251–2; regulation 251–2; Spain 200, 209–10, 212; UK 237

Gas Natural 209–10, 212Gasunie, Netherlands 251–2General Auditor’s Office of the

Netherlands 243German Federal Bank 102–3German reunification 15, 101, 116, 117Germany, East 101, 115–18Germany, West: aircraft industry 109–

10; banking 102–3, 106–7, 109, 117;decentralisation 11; deregulation102; 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; industrialassets 105; neo-liberals 101, 103,108; party politics/privatisation107–15, 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; publicservice efficiency 157; publicutilities 104; railways 114–15;regulation 114; research institutions107; restructuring 105; state assetssold 12; state intervention 30; state-

owned companies 151;telecommunications industry 28,110, 111–14; trade unions 35, 61,116, 117

Giblin, T. 137Girobank 16, 181golden shares 36, 208, 228Goldmann, W. 76Goldstein, A. 150, 152, 156, 157, 159,

161, 163Goodwin, P. B. 179Gouph, I. 125government 10, 19–20, 52, 53; see also

state intervention; state ownershipGraham, C. 236Grassini, F. A. 31Greece: 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-ownedcompanies 127, 128–9, 151;telecommunications 17, 130, 133

Green, M. 237Green, R. 232, 234Greencore 144, 145Griffith, Arthur 137gross fixed capital formation 10–11Grossman, S. 34Grout, P. A. 61–2, 64Grupo Indra 196, 215(n10, n11)Grupo INI 199Grupo Patrimonio 200Grupo Téneo 199Guiomard, C. 137 Haffner, R. 19Hager, W. 10Hall, W. 37Handelsblatt 109Hart, O. 34Haskel, J. 174Hayek, F. A. 124–5Heald, D. 125, 218, 225, 225Heinz, W. 104Herr, C. 114Hesse, J. J. 119Hickel, R. 117Himmelmann, G. 104Hitchins, D. W. 137Hitiris, T. 24HM Treasury 221, 222, 223, 228, 229Hohn, H. W. 107

262 Contents

Holland, S. 40Horn, M. 31housing, public to private 74, 219, 223Hulsink, W. 28Hutchinson, G. 237 import substitution 144income distribution 34industrial policy: France 88–9, 96–7,

99(n8); Italy 170(n2, n13); marketfailure 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 10information: agent–principal theory 31;

asymmetric 53, 65–6information services 201Institute of Economic and Industrial

Research 133institutions, hierarchies 51–3Instituto Nacional de Hidrocarburos

199, 200, 215(n13)Instituto Nacional de Industria 198,

199, 206international cooperation, Netherlands

244–5internationalisation 39investment: France 98(n3), 99(n7);

inadequate 38; privatisation 19investors, favoured 36–7, 43; see also

noyaux dursIPIC 76Ireland 136–9; air transport 140, 141–

2, 147–8; banking 148; electricityindustry 140, 142; employmentstatistics 136; in EU 137, 138, 140;Fianna Fail 138, 143; Fine Gael143; Insurance (Amendment) Act(1938) 145; monopolies 148;National Prices Commission 141;nationalisation 140; politicalpatronage 143; population 137; pricecontrol 141; privatisation 4, 17,143– 7; privatisation revenues 84;protectionism 138, 141, 147; publicenterprises 11; shipping industry140; state assets sold 12; stateenterprises 138–43, 151; stateintervention 30, 136–8, 147; stateownership 17; subsidies 139–40;tariffs 138; telecommunications 142;

trade unions 147; transport 141–2,148; and UK 137, 138

Irish Ferries 146Irish Life Assurance Company 136,

144–6Irish Life Group 145–6Irish Shipping/B and I Line 146–7Irish Shipping Company 140Irish Steel 139, 141Irish Sugar Company 136, 143–4, 145Irish Sugar Manufacturing Company

140ISDN 112Istituto Nazionale della Assiurazioni

(INA) 13Istituto per la Ricostruzione Industriale

(IRI) 13, 152, 162, 163, 170(n2)Italian Corporation Law 157, 162Italy: Amato government 158; Antitrust

Authority 164–5; Aziende autonome153, 154, 170(n5); banking 13, 152,164, 165, 170(n9); bankruptindustry 10; EFIM 162, 163;electricity industry 26, 27;employment/value added 151; ENI162, 163; Enti di gestione 154, 157,158; Enti Pubblici 154, 158; foreignownership 37; industrial policy170(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; postoffice 25; price controls 159;privatisation 1, 4, 13, 40, 150–1,158–64, 165–9, 222; privatisationreceipts 18, 20, 84; public debt 157–8; public enterprises 11; publicsector 105, 151–5; public serviceefficiency 157; public utilities 164;regulatory structure 159, 164–5,169; shareholding 45(n24); stateassets sold 12; state enterprises 151,153–6, 161; state intervention 30,152–3; state ownership by sectors152; telecommunications industry28, 170(n10); trade unions 35

IVG, Germany 106 Jacbson, D. 11Jahreswirtschaftsbericht der

Bundesregierung 103, 110Japan, privatisation 222Jenkinson, T. 34

Contents 263

Jensen, M. C. 31Jones, L. P. 39Juppé, A. 93 Kääriäinen, S. 176Kay, J. 126, 219, 225, 238Kay, J. A. 6, 126Kennedy, K. 137Keogh, D. 143Kingston, W. 138Kingston-upon-Hull 227, 228Kirkpatrick, C. 236Kivinen, K. 176Knauss, F. 104knowledge, dispersed 124KPN 256(n1)KPN/PTT 246, 252–5Kuttner, R. 256 labour conditions 247labour productivity 237–8, 240(n8)Laffont, J.-J. 53Laidlaw, B. 227Länder 102–4Lane, J. E. 16Lee, J. J. 140, 142–3legislation for privatisation: France 12–

13, 91–2; Greece 129, 130, 132;Italy 157, 158–9, 160, 162

Lehmbruch, G. 119, 120Lehmkuhl, D. 114leisure services 224liberalisation: airline industry 25;

competition 22; gas industry44(n13); markets xiv, 8–9, 12, 30–8,39; monopolies 70; sectors 212,227–8; telecommunicationsequipment market 29; trade 21–2;voice telephony 30, 113, 253

licence tendering 83licenses, telecommunications 229liquidation, voluntary 208–9Littlechild Report 226local government 223–5localisation 154, 165Lufthansa 109–10, 115Luthje, B. 111Luxembourg 11, 17, 151 M-form organisation 126Maastricht criteria 19–20, 22, 44(n8)McDowell, M. 137, 140, 143McHugh, D. 137Magnox Electric 233

management: accountability 31–2;nationalised firms 90–2; public/private sectors 31–2, 34, 125–6,127, 173–4; risks 44(n17); utilityfunctions 50, 52– 3, 57–60, 166

management buy-outs 222, 223Manning, M. 140manufacturing, public ownership 70,

86(n10)market liberalisation xiv, 8–9, 12, 30–

8, 39market, mixed 64–5market entry/exit 140market failure 8, 38, 104, 126–7, 173Martin, S. 8, 34, 36, 42, 237Martinelli, A. 31, 165Marxism, state/capitalism 124, 125Mason, D. 228Mayer, C. 34Meckling, W. H. 31Mediobanca 164Meenan, J. 137Mercury 28, 228, 229merger 208–9, 249, 255–6(n1)Meth-Cohn, D. 19Miliband, R. 125military equipment 197Millward, R. 34, 173minister/regulator 53Ministerio de Industria y Energia 202Mitchell, W. C. 30Mitterrand, François 92, 93monetary policy 49monopolies: 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 Commission220

Monopolkommission 103, 109Monsen, R. J. 10Morin, F. 94–5, 100(n19)Mueller, D. C. 123Muller, W. 19multinational companies, Netherlands

242, 243 Nash bargaining for wages 62, 63, 64,

182national control, diminishing 41National Freight 237National Grid Company 233

264 Contents

National Health Service 218National Power 233national preference clause 78National Tourist Organisation, Greece

130nationalisation: 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, 72negotiated sales 207negotiated third party access scheme 27neo-liberals, German 101, 103, 108,

111neoclassical economics: competitive

capital markets 36; consumers 39;economic growth 123; privatisation33; 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 industryregulation 249–51; employers’organisations 255; EU 2 245, 247–8;foreign policy 244–5; free trade243–4; gas industry regulation 251–2; industrial policy 243–5; InterimAct (1996) 253; mergers 255–6(n1);post office 26; privatisation 6, 15,222, 245–7; privatisation receipts18, 84; public enterprises 11; publicutilities sector 243, 245;redundancies 35; shipbuilding 243;state industries 31, 151; stateintervention 245–6; subsidies 243;Supervision Networks and ServicesUnit (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, 64Neue Zürcher Zeitung 113New York Times 115New Zealand, privatisation 222Newbery, D. 232, 233, 234, 235, 236Nicoletti, G. 150, 152, 156, 157, 159,

161, 163

Niskanen, W. A. Jr 30Noppe, R. 111noyaux durs 37, 38, 43, 94, 99(n18),

164Nuclear Energy 233Nugent, N. 10Nwankwo, S. 230 OECD (1989) 108OECD countries: privatisation 222;

state receipts/outlays 123Office of Electricity Regulation 234–5,

236OFTEL 29, 225, 229–31ÖIAG, Austria 18, 74, 75–6, 77oil industry, Spain 200; see also Repsol

oligopoly, mixed 183OMV, Austria 76OTE, Greek telecommunications 17,

130, 133ownership: Austria 72, 81, 82–3;

collective 90; communal 124–5;competition 6, 32; cross-countrycomparisons 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; socialobjectives 173–4; state 5;transferred 70, 73

Parker, D. 8, 25, 28, 34, 36, 52, 173,

223, 230, 231, 237, 238Parris, H. 15Partecipazioni Statali 152partial equilibrium model 34PDDE 140, 145PDSE 141Pearce, R. D. 106Peel, Robert 137performance, privatisation 34, 236–9,

240(n6)Pérotin, V. 173Pestieau, P. 15Peters, W. 58Philips 244Pint, E. M. 56, 57, 173Pitelis, C. N. 123, 126, 127political patronage 143politics, privatisation xiv, 7, 12–13,

43(n1), 71–2, 89–90, 92, 96, 101107–15, 218, 224

Pollitt, M. 232, 233, 235, 236Porter, M. E. 243

Contents 265

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 13Posner, M. V. 152, 154post office 25–6; Austria 81; cross-

country comparisons 25–6; Germany25–6, 44(n15), 45(n19), 111–13;Spain 196; trade unions 45(n19),111, 112–13; UK 25, 26, 227

Postbank 111–12, 113, 246PowerGen 233Preussag 107price 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; publicenterprises 55; telecommunicatons230–1

Priewe, J. 117principal–agent theory: see agent–

principal theoryprivate sector: management 31–2, 125–

6; and public 173–4; state holdings10

privatisation 17, 66(n3), 70, 173, 221–2; banking 79–81; competition 8,177, 211–13; consumers 39; control37, 41, 208–11; countrycomparisons xiv, 1–2, 3–6;economic costs 4, 8; economicfactors 1–2, 40, 158–9; efficiency 2,7, 19, 32–3; employment 238;European Union 20–30; groupbenefits 40; industrial firms 74–9;industrial policy 6–9, 88–9;investment 19; methods 93–4, 207–8, 222–3; motives 70, 220–1; partial59–60, 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; profitability237; public utilities 49, 110–11,225–31; rationales 11, 19–20; salestechniques 159, 163–4; stateintervention 3, 4, 8; stateshareholding 36; symbolic 107–10;trade unions 35, 221, 60–3; andunemployment 40, 127, 129, 132,133; see also legislation; regulation

privatisation, by country: Austria 3,17– 18, 70–1, 74–81, 222; Belgium17; Denmark 4–5, 16–17, 179–80;Finland 4–5, 14–15, 174–6; France1, 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 177productivity 33, 90, 237–8, 240(n8)profit maximising 67(n11), 125–6profitability: privatisation 188(n25),

237; public ownership 181,188(n25); Spanish state enterprises194; wage bargaining 182–3;welfare losses 234– 5

property rights 6, 11, 31, 124protectionism: Ireland 138, 141, 147;

Spain 197, 199PTT, Netherlands 254public auction 207public choice theory 30, 32–3, 38, 123public debt 130, 157–8, 169, 207public enterprises 12; employment/

valued added 11; France 151; tolimited liability companies 16;pricing 55; UK 219–20, 223; seealso public sector; state enterprises

public goods 126public housing, right to buy 74, 219,

223public officials 52public ownership: competition 5, 182–

6; manufacturing 70, 86(n10);measuring 85(n4); profitability 181,188(n25); responsibility 73;Scandinavia 172, 174–80; structuralobjectives 173, 180–1; welfare 54;see also state ownership

public-private partnership 104public sector: Austria 105; cross-

country 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; tradeunions 147, 246–7

public sector employees, civil serviceprivileges 35–6, 45(n19), 67(n21),115

public telephones 231public transport 225public 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 railways 24, 44(n11); Austria 73, 82;

Denmark 179; France 24, 44(n11);Germany 114–15; Spain 196, 199;Sweden 44(n11), 178; trade unions24; UK 44(n11), 219

Ravenscraft, D. J. 34recapitalisation 95–6, 162–3Redor, D. 10, 19, 35redundancies 35Rees, R. 126Reeves, E. 144Regeringens proposition 177Regional Electricity Companies 233,

235REGULASY-model: asymmetric

information 65–6; distributionpolicy 54–6; privatisation/regulation51–4; utility 49–51; utility functionof manager 59

regulation: competition 226; cost-plus72; economic 226; efficiency 7;electricity industry 234–5, 236,249–51; gas industry 251–2;Germany 114; Italy 159, 164–5,169; monopolies 231; privatisedutilities 225–31; quality 226;REGULASY-model 51–4;telecommunications industry 29–30,229–30, 252–5; UK 225–6, 227

regulators 50, 52, 53, 54–7regulatory capture 169, 170(n11)Reichard, C. 104Renfe 199, 215(n9)rent seekers 30

Repsol 14, 200, 202, 203–4, 215(n15,n17), 209–10

research and development 243research institutions 107residual claimant’s theory 124, 125resource allocation 49, 123, 126resource utilisation 124, 126restructuring 33, 41–2, 72–4, 105, 234retail-price index 56returns to scale, increasing 38revenue generation 44(n9), 70, 78Richardson, B. 230Ricke, H. 112Rome Treaty 21–2, 24, 249RPI-X price cap 33, 56, 67(n11), 225–

6, 230, 231, 233–4, 239(n1)RSV, Netherlands 243, 244Rumasa 14, 200–1, 215(n20)Rutsaert, P. 29 Sachverständigenrat 117sale: direct 222–3; negotiated 207;

partial 207; trade 223Saynor, P. 15Scandinavia: air transport 14, 172;

banking 172; privatisation 4–5;public ownership 172, 174–80;value added statistics 187(n2); seealso Denmark; Finland; Sweden

Scandinavian Airlines System 172Scharpf, F. W. 119Schenk, H. 242, 249Scherer, F. M. 34Schimank, U. 107Schneider, V. 28Schumpeter, Joseph 101Scott, C. 22Seat 14, 36, 207Seaton, J. S. 231Seibel, W. 120self-management, nationalisation 91–2SEP, Netherlands 250–1service sector 157, 201Shapiro, C. 30, 51share flotation 222–3share prices 95, 99(n16)shareholders: dispersed 34; employees

61–2, 94; hard cores 209–11; Italy45(n24); large 31–2; non-employees62; 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 267

Shaw, K. 224shipbuilding industry 17, 133, 243shipping industry, Ireland 140Shleifer, A. 31Shonfield, A. 105Silberston, Z. A. 126Single European Act (1986) 22Single European Currency 20Sirower, M. L. 256SKF Espanola 14Smyth, H. 146social market economy 3, 110, 120–1social security, pay-as-you-go 125social welfare 166–7Sociedad Estatal de Participaciones

Industrials 192, 196, 198, 202–4,205, 206

Sociedad Estatal de ParticipacionesPatrimoniales 192, 196, 201, 205

Soete, L. 29Spain 197–202; Agencia Industrial del

Estado 192, 196, 198, 202–4, 205,206; banking 194, 209;decentralisation 195; deregulation196; Dirección General delPatrimonio del Estado 200–1;electricity utility 209, 212–13;electronics industry 196; entespúblicos 201; entrepreneurialgroupings 210–11; favouredinvestors 36; flagship companies197, 203–4; fuel distribution sector212; gas industry 200, 209–10, 212;oil industry 200; Partido Popular204; postal services 196;privatisation 5, 14, 194, 196, 222;privatisation receipts 18, 20, 84;protectionism 197, 199; publicenterprises 11; public sector 191–3,194, 195, 196, 197, 202–4; railways196, 199; service sector 201;shareholder hard cores 209–11;Sociedad Estatal de ParticipacionesIndustrials 192, 196, 198, 202–4,205, 206; Sociedad Estatal deParticipaciones Patrimoniales 192,196, 201, 205; state contributions195; state enterprises 31, 192, 193,194, 196–206; state-ownedcompanies 151, 199; strategicalliances 210; telecommunicationsindustry 28, 209, 210; transportindustry 192, 201

specific-rights share 208

Spiller, P. 230state aid 22, 195state assets sold 12state enterprises 172–3; behaviour 35;

employment 30; Finland 44(n7);Ireland 138–43, 151; Italy 151, 153–6, 161; losses 156–7; modernised204–6; Netherlands 31, 151; aspolitical culture 147; privatisation206–8; reorganised 201, 202–4;social goals 154; Spain 31, 192,193, 194, 196–206; stateintervention 30; technology 10;welfare maximisation 30; see alsopublic enterprises; state-ownedcompanies

state failure 4, 9, 124, 125state holdings, private companies 10,

36state 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; efficiency174, 191; employment 151–2;Greece 127, 128–9, 151; monopolies196; Spain 151, 199; welfare 186–7

state ownership: agent–principal theory31; economic importance 10–11;employment 10–11; France 10;industrial policy 5; Ireland 17; Italy152; public choice theory 32–3;public utilities 21, 22–3; sectoral152; telecommunications industry28; see also public ownership

state receipts/outlays 123state-sponsored enterprises 173state takeover, industry failures 10Steel, D. 225steel industry 74, 76–7, 109Stevens, B. 222Stigler, G. 58, 124Stiglitz, J. E. 127strategic alliances 45(n29), 210subsidies 23, 25, 49, 139–40, 174, 243Supervision Networks and Services

Unit (TND) 254–5Sweden: 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; stateintervention 30; telecommunicationsindustry 28, 178; transport 178;welfare 178

Szymanski, S. 174 Tabacalera 213tariffs 29, 138technocrats, private 57–8technolease schemes 243, 244technological change 10, 42, 60technologically sophisticated industry

196Tele Danmark 16–17Telecom Eireann 142telecommunications: Austria 81, 82;

competition 28, 30, 210; cross-country comparisons 27–30;Denmark 16–17, 179; EuropeanCommission 28–9; Finland 176;France 13, 28, 30; Germany 28, 110,111–14; Greek 17, 130, 133; Ireland142; Italy 28, 170(n10); licenses229; Netherlands 28, 252–5; prices230–1; public telephones 231;regulation 252–5; Spain 14, 28, 209,210, 215(n10), 216(n36); stateownership 28; Sweden 28, 178; UK27–8, 56, 219, 225, 227–31

telecommunications equipment market29

Telecommunications Organisations ofGreece 130, 133

Telefónica 14, 210, 215(n10), 216(n36)Telia 28, 178Téneo 199, 202, 203–4, 205Thompson, D. 34Thompson, D. J. 6Tinbergen, J. 245Tirole, J. 53trade sale 223trade 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 office45(n19), 111, 112–13; powerchanges 12, 63–5; privatisation 35,60–3, 221; public sector 147, 246–7;railways 24; as rent seekers 30; TU-model 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; seealso air transport; bus industry;public transport; railways

Treuarbeit 107Treuhand 115–18TU-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 privatisedindustries 238; favoured investors 37;gas industry 237; Housing Act (1980)223; and Ireland 137, 138; LocalGovernment Acts (1988, 1992) 224;Local Government Planning and LandAct (1980) 224; Monopolies andMergers Commission 220; NationalHealth Service 218; nationalisation 10,12, 219, 220; party politics 218, 224;post office 25, 26, 227; price controls33; privatisation 1, 2, 5, 12, 34, 220–5;privatisation receipts 18, 84; privatisedutilities 225–31; public enterprises 11,106, 151, 157, 219–20; public housing219, 223; public/private sectorindustrialists 35; public transport 225;railways 44(n11), 219; regulatoryoffices 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 250UNCTAD 222unemployment and privatisation 40, 127,

129, 132, 133user charges 219utilities: see public utilities

Contents 269

utility: management 50, 52–3, 57–60, 166;monopolistic 51–4; REGULASY-model49–51; TU-model 50

utility maximising 123 VA-Stahl, Austria 76–7, 78VA-Tech, Austria 76, 77value added 10–11, 151–2, 187(n2)Van Bergeijk, P. 19VEBA, Germany 106, 107, 108Veljanovski, C. 225Vermögenspolitik 107Vernon, R. 35VIAG, Germany 106, 108–9Vickers, J. 31, 126, 221, 226, 227, 233,

235Vishny, R. W. 31VNO-NCW, Netherlands 255Vogelsang, I. 230voice telephony 30, 113, 253Volkswagen 14, 107, 108–9 wage earner funds 16wage negotiations 62, 63, 64, 182–3

wages: cut 40; equilibrium values 65;public transport 225; TU-model 62–3,66

Walters, K. D. 10Wassenberg, A. 243welfare: 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, 246Weyman-Jones, T. 235, 236Willig, R. D. 30, 51Willner, J. 19, 173, 174Wise, P. 37Wolf, C. 124Woll, A. 101Woolf, S. J. 152, 154working conditions, state industries 30Wright, V. 40 X-inefficiency 58, 72 Yarrow, G. 31, 126, 221, 227

Documents

David Parker Privatization in the European Union Theory and Policy Perspectives Industrial Economic Strategies for Europe 1998