Privatisation

Between the 1930s and 1950s, most of the public utilities in the UK, such as gas, water, and electricity, were taken over by the state via a process called nationalisation.

The main motive for nationalisation during this period was to ensure a coordinated approach to production and supply to ensure economic survival and efficiency in the face of war, and post-war reconstruction.

However, by the late 1970s it was becoming apparent that these utilities, and other state-owned firms, were suffering because:

  1. They were being managed ineffectively and inefficiently. The principal-agent problem is highly relevant to public sector activities. The managers of the utilities were not required to meet any efficiency objectives of the state, and there was growing criticism because these industries were protected from competition, and hence had become increasingly ‘X’ inefficient.

  2. The nationalised industries had no power to raise capital on the open market. If they needed funds for investment, they would have to compete with other government spending departments, like education, health, and defence.  This is one reason why there was considerable under-investment in these industries.

To resolve these problems and to generate revenue for the government, many State-owned industries and firms during the late 1970s through to the early 1990s were sold off to the private sector through a process called privatisation.

The major privatisations in the UK during that period were Rolls Royce motors (1973) BP (stakes sold off between 1977 and 1987), BA (1987), Steel (1988) and Coal (1994), and the utilities: gas (1986), electricity (1990-1995), telecoms (1984-1993) and water (1989).

In the wake of the financial crisis the Northern Rock bank (2012) was privatised and the Lloyds Banking Group was part-privatised in 2013.  Most recently, Royal Mail has been added to the list, when it was privatised in 2013.

Read more on Royal Mail privatisation

Many of the privatised utilities are also natural monopolies. With a natural monopoly, the role of the regulator is to act as a surrogate competitor to the privatised, natural monopoly. In doing this the regulator can make up for the missing contestability found with natural monopolies.

 

See also:

EU Competition Policy

Contestable market theory

Banking regulation

Financial crisis

Transfer pricing