To fight Britain’s privatisation dogma, Labour should look to the US military, Singapore, Taiwan...

State-owned enterprises can be successful, as some unlikely global examples prove

• 
• • Ha-Joon Chang
  • The Guardian, Thursday 31 July 2014 18.23 BST

A Honeywell computer under the control of Michael Caine In the 1967 film Billion Dollar Brain. It was used to connect to the Arpanet – developed by the US military as a precursor of the internet.. Photograph: Snap/Rex Features

Since Margaret Thatcher came to power in 1979 the UK has led the world in privatisation. The Conservative government sold off state-owned enterprises throughout the 1980s and the 1990s – electricity, oil, gas, rail, airline, airports, telecommunications, water, steel, coal, you name it. In the worldwide fever for selling off state assets that gripped those decades, the rest of the world looked up to Britain as the guiding example.

Privatisation was halted under Labour. However, the belief in the superiority of the private sector was such that, when it brought the rail infrastructure back under state control in 2002 following a series of rail disasters, Labour made sure it did not take the form of re-nationalisation – at least in legal terms. Network Rail, the owner and operator of the rail infrastructure, was set up as a private company, although on a not-for-profit basis and without shareholders.

When the coalition came to power in 2010, it resumed the privatisation drive with gusto. It privatised Royal Mail – the “crown jewels” that even Thatcher balked at selling. However, in recent months the tide has started to turn, albeit slowly.

Even while planning to sell off almost every remaining state-owned enterprise, from plasma supply to helicopter search and rescue, the coalition has had to make an embarrassing climbdown over its plan to privatise student loans. More importantly, in the past few months the Royal Mail sell-off has been fiercely criticised. Moya Greene, its chief executive, has questioned the viability of its universal service obligation. Abandoning this would mean that customers who live in less accessible or sparsely populated – and thus less profitable – areas wouldn’t get their letters delivered, or would have to pay more for them: the end of the postal service as we know it.

In the meantime, the Labour party has made the lack of competition and the suspected collusion in the privatised energy industry a key issue in its promise to “fix broken markets”, and has caught voters’ attention by announcing its intention to partially reverse rail privatisation. Although its fear of being branded anti-business has prevented it from proposing outright renationalisation of the railways – despite the support for such a move from most of the electorate – it has declared that if it wins the 2015 general election it will “reverse the presumption against the public sector”, and let state operators bid for rail franchises.

However, if it is really to overturn the privatisation dogma, Labour should do more than reverse the presumption against the public sector: it should tell people that the public sector is often more efficient than the private sector.

Even while there are many examples of inefficient state enterprises from all over the world, including the UK, there have been many successful such businesses throughout the history of capitalism. In the early days of their industrialisation, 19th-century Germany and Japan set up state-run “model factories” in order to kickstart new industries such as steel and shipbuilding, which the private sector considered too risky to invest in. For half a century after the second world war, several European countries used state businesses to develop technologically advanced industries: France is the best-known example, with household names like Thomson (now Thales), Alcatel, Renault and Saint-Gobain. Austria, Finland and Norway also had technologically dynamic state-run enterprises.

The most dramatic example, however, is Singapore. The country is usually known for its free trade policy and welcoming attitude towards foreign investments, but it has the most heavily state-owned economy, except for some oil states. State-owned enterprises produce 22% of Singapore’s national output, operating in a whole range of industries – not just the “usual suspects” of airline, telecommunications and electricity, but also semiconductors, engineering and shipping; and its housing and development board supplies 85% of the country’s homes. Taiwan, another east Asian “miracle” economy, also has a very large state-run sector, accounting for 16% of national output.

Posco, the state-owned steel company in my native South Korea, was initially set up against World Bank advice but is now one of the biggest steel companies in the world. (It was privatised in 2001, but for political reasons rather than poor performance.) In Brazil, Embraer – the third largest civilian aircraft manufacturer in the world – was initially developed under state control; and the country’s state-owned oil company, Petrobras, is the world leader in deep-sea drilling.

Arguably the most successful state enterprise in human history, however, is the United States military, which has almost single-handedly established the modern information economy. The development of the computer was initially funded by the US army; the country’s navy financed the research that created the semiconductor; and the US Defense Advanced Research Projects Agency developed the Arpanet, the precursor of the internet.

When people realise that the history of capitalism is full of highly successful state enterprises, the rush for ever more privatisation can be halted. If the Labour party puts forward this case, it will not only gain popularity in the run-up to next year’s general election – it would also be doing something of lasting benefit for Britain.

The Privatisation of Royal Mail: how hedge funds cleaned up

OLIVER WRIGHT  , JIM ARMITAGE , MARK LEFTLY

 The Independent

Tuesday 29 April 2014

The Royal Mail flotation scandal has deepened after officials finally admitted that hedge funds were among the “priority investors” sold hundreds of millions of pounds of shares.

The Business Secretary, Vince Cable, has repeatedly insisted that the handful of key investors offered Royal Mail shares on preferential terms were long-term institutional investors. This was to ensure the new company started with “a core of high-quality investors” who “would be there in good times and bad”. He promised to marginalise “spivs and speculators”.

But sources in the Department for Business have confirmed to The Independent that around 20 per cent of the shares it had allocated to 16 preferred investors had gone to hedge funds and other short-term investors. This would equate to around £150m of Royal Mail shares – 13 per cent of the entire stock sold by the Government. The companies bought in at the float price of 330p a share. The shares shot up within seconds of trading, eventually peaking within weeks at more than 600p, allowing the hedge funds to bank vast profits at the taxpayers’ expense.

Mr Cable is now under mounting pressure to name the priority investors given preferential deals in the form of extra-large share allocations, which his department has so far withheld citing commercial confidentiality. Unions have called for his resignation over the “botched” handling of the sale.

A recent National Audit Office report revealed that of the 16 priority investors, half had sold their shares within weeks of the flotation.

Vince Cable refuses to apologise over the losses, and says Royal Mail remains fragile (Getty)
Sources close to Mr Cable told The Independent that hedge fund involvement had been necessary to give the new stock “liquidity” and that the practice was entirely normal in share offerings. They added that they made up a small minority of the total share allocated to institutional investors.

But the revelation contrasts with Mr Cable’s previous statements on the sale. He has said institutional demand was so strong that the Government would be able to allocate shares to “responsible long-term institutional investors” rather than speculators.

An analysis of Royal Mail’s share register shows that Och-Ziff, an aggressive US-based hedge fund, had a holding of 10 million shares on 15 October, the day the company’s shares started trading. A week later it had reduced its holding to 3.5 million shares. It is not known if Och-Ziff was allocated shares or bought its holding from other institutional shareholders who sold out as soon as shares started trading.

Lansdowne, another hedge fund which is known for its close links to the Conservative Party, also appears to have received an allocation of around 18 million shares, at a cost of just under £60m. Lansdowne said the owners of the shares are Lansdowne’s clients not Lansdowne. It is understood that Lansdowne has not sold any shares.

The revelation that the Government knowingly sold off Royal Mail shares to hedge funds is likely to come under scrutiny today when the Public Accounts Committee questions the Department for Business’s Permanent Secretary and representatives of the investment banks who handled the sale on behalf of the Government.

The PAC will examine what advice was given by investment banks including Goldman Sachs, UBS and Lazard and why the shares were priced so cheaply. It will also demand to know why Lazard has been appointed to run the vast majority of major privatisations under the current Government following previous revelations by The Independent.

Shares in Royal Mail were floated on the London Stock Exchange last October (Getty)

Today in openly hostile exchanges with MPs on the Business Select Committee, Mr Cable refused to apologise over accusations that the Government sold Royal Mail on the cheap. He argued that the 360-year-old postal service remained “a fragile company”, despite becoming a City favourite since shares debuted in October.

Conservative committee member Brian Binley said that government advisers had underpriced the shares out of the “fear” of being unable sell them at a higher but more accurate valuation. “I don’t understand why you are being so obstinate about getting this right when you so palpably got this wrong,” Mr Binley admonished William Rucker, the chief executive at lead adviser Lazard.

Business minister Michael Fallon insisted that the Government had sold the shares “at the best price we possibly could have got at that particular time”. Committee chairman Adrian Bailey mocked this claim as “absolutely Alice in Wonderland”.

Mr Fallon also indicated postmen and women were partly to blame for the suppressed price of the sale, because the unions had “no interest in lifting the threat of industrial action”.

However, the Business Secretary conceded that he would have to take a close look at whether selling shares in the markets was the best way of privatising public assets.

He also promised to “reflect” on whether the full list of the 16 major institutional investors should be revealed. Mr Cable has agreed to privately hand the list to Mr Bailey.

Then and now: What Cable said

“We are in a position to ensure we do get the right type of investor community – pension funds, insurance companies that hold the savings of millions of people. That’s the type of community we want.”

Vince Cable to MPs in  October 2013. (At the same hearing he said the Government would be able to block shares from going to “spivs and speculators” in favour of “responsible long-term institutional investors”.)

“We wanted to make sure that the company started its new life with a core of high-quality investors who would be there in good times and bad, interested in  Royal Mail and the universal service it provides for  consumers over the long term. We were told if we sought a higher price, these investors would have walked away, leaving the company exposed to short-term  hedge funds with different objectives.”

Mr Cable in an interview in December 2013

“Having a long-term investor base remains a basic objective, and we  have achieved that fundamental objective.”

Mr Cable in the Commons on 1 April 2014

Judge the Royal Mail sale in three months, said Vince Cable. Time's up

Today's share price confirms the company was grossly undervalued, cheating the taxpayer out of billions of pounds

• 
• • Alex Andreou
  • The Guardian, Thursday 23 January 2014 12.41 GMT

'It turns out that the sale of Royal Mail was, in fact, completely botched.' Photograph: Dan Kitwood/Getty Images

"There's no way we will sell Royal Mail 'on the cheap'," promised the government in its Royal Mail: Myth-Busters factsheet, issued before the sale of most of our stake in the public asset, last October. Many commentators at the time thought the sale was irrational and the company grossly undervalued.

When shares finally opened for conditional trading, their price jumped from the government's valuation of 260p-330p each to more than 450p. The business secretary, Vince Cable, dismissed this as of "absolutely no significance … it is froth and speculation". He asked to be judged on what the price looks like in three months' time.

Well, three months have come and gone and the price of the shares is, at the time of writing, sitting pretty at over 600p each, with a high of 610p a few days ago – an 80% climb on their original price. This suggests that the company was undervalued by a giant £2.8bn: six times the projected saving this year by the imposition of the bedroom tax; six times the amount of money the government hopes to save by the imposition of a levy that is causing misery to thousands of vulnerable people and their carers up and down the country. And Royal Mail could have further to go yet. JP Morgan predicts the price will settle at about 700p a share. Earnings-per-share forecasts bear this out – they estimate a 30% gain this year.

So, now that it turns out that the sale of Royal Mail was, in fact, completely botched and has cheated citizens of billions of pounds' worth of value, where is the apology? Where are the resignations? If something like this had happened at local government level, there may have been questions of criminal prosecution. Why do our representatives in Westminster feel that they don't have to apologise when they get it so disastrously wrong, that they don't even have to give an account of themselves? They can simply ignore criticism; wave it away as if it were an unsavoury smell.

Goldman Sachs and UBS, the companies paid a stonking £16.9m by the government for managing the privatisation, were questioned about the price discrepancy by a parliamentary committee in November. They denied any impropriety, claimed the 330p price was correct according to their research and described the whole fiasco as a "well-executed transaction". Less than a week later, Goldman Sachs issued a note to its investors, advising them that the price of the shares would settle at about 610p.

When it emerged that the very companies advising on the sale were offered millions of shares in Royal Mail, shares which today represent a potential profit of over £35m, the Department for Business, Innovation and Skills said there was no possibility of conflict. This was because shares were offered to the investment arms of the banks and there are"Chinese walls" in place between them and any employees working on the sale. When it transpired that one of the biggest potential private beneficiaries from the flotation was hedge fund management company, Lansdowne Partners, and that George Osborne's best man, Peter Davies, was part of their management team, more denials came: "At no point was George involved in, or even made aware of, the allocations," said a Conservative spokesman. More "Chinese walls". Sir Paul Ruddock, Lansdowne's former chief executive, was awarded a knighthood last year after donating £500,000 to the Conservative party, although he denies the two are linked and stresses that his knighthood was for his services to arts.

Royal Mail has already announced its first post-privatisation price rise on business rates, explicitly to "help secure the sustainability of the Universal Service". Meanwhile, Royal Mail's chief executive, Moya Greene is rumoured to be in line for a £1.5m pay packet. After all, she has magically doubled the company's value in three months, hasn't she? Vince Cable is vowing to do his best to block such a package. Oh, the bitter irony … Vince Cable "playing boss", three months after selling the service, at a bargain basement price. Talking tough on a single payoff, three months after presenting City investors with a bumper £2.8bn bonus. Of our money.

The easiest way to get rich quick is to work for the banks

MARK STEEL 

Thursday 12 December 2013

The easiest way to get rich quick is to work for the banks and badger the vulnerable to buy insurance

Once you’ve accepted the rules – all that matters is selling a policy – there are no moral barriers

Who’d have guessed this? Lloyds has been fined £28m, for encouraging staff to sell policies to people who neither needed nor wanted them. Those who sold the most won cases of champagne, and those that didn’t could have their salary halved.

This proves that the banks take regulations seriously, as they’re adamant that members of staff who don’t break the regulations will be dealt with severely, and only those who break them all day long will be given any rewards.

This illustrates one of the many changes in the 50 years since the Great Train Robbery, as now Ronnie Biggs would make more money and satisfy his urge to rob much more, if he got a job WITH the bank.

One member of Lloyds staff was so terrified at not reaching his quota, that he sold a policy to his own wife. It’s just as well they’ve been caught or he’d start on his kids next, saying: “You don’t want an ice cream like your stupid friends. Instead I’ve sold you a Lloyds Super Value Triple Interest Bonanza scheme. You might cry now, but you’ll thank me for it in 10 years when it’s worth sod all.”

They must have been desperate to sell these packages, pleading with the elderly that: “You’ve got to put your savings into a Lloyds Advanced Finance Protection Account dear, otherwise with interest rates the way they are, you’ll have to sell your grandchildren to an Albanian child trafficking gang and that could be quite nasty. Don’t worry about the form, I’ll fill in the details.”

This wasn’t the result of a few maverick uber-salesmen. It was the bank’s policy to create a culture of sell sell sell with no excuses for failure. They were probably sent on motivational courses, with a team leader explaining: “If a customer is hesitant about whether to sign, give them a nudge, by dragging them into a basement and getting a colleague to make a film as you stand by him with a sword, preaching there’s no place on Earth for those who don’t believe in the almighty Lloyds Bonus 5-Year Investment Fiscal Funtime Account. That should close the deal.”

One policy they were offering was a “critical illness” insurance, one of these schemes they sell by looking earnest and saying: “We all hope it doesn’t happen, but if, God forbid, you DO get pecked to death by a pterodactyl, normal policies won’t cover you and then your loved ones will face a life of destitution and heroin abuse, so it’s worth it for peace of mind and it works out at only £8 a minute’.

Once you’ve accepted the rules of this game – that all that matters is selling another policy – there are no moral barriers. If you got up at a team talk and announced you’d sold a policy to someone with Alzheimer’s, then went back the next day and sold them another one as they’d forgotten they’d bought one already, there’d be high fives and your name would be written on a “dude of the day” board. But a Lloyds spokesman said: “The group recognises its oversights during the period in question and apologises.” Oversight? How could mis-selling billions of pounds worth of twaddle be an oversight?

Does it need to be on a “to-do” list, that goes: “Clear boot of car – water plant – don’t bark at thousands of staff that they’re pathetic maggots if they don’t sell lorry loads of scuzzy investment plans – buy Sugar Puffs”.

Those train robbers must wish they’d thought of that. “Your honour, we recognise that taking up our positions by the railway line, assaulting the crew, running off with sacks of cash and planning to spend it on a life of debauchery was an oversight. Only we’ve been very busy lately, so it slipped our mind, but we do apologise.”

Where you have to give the banks credit, is this took place after the crash, after they’d been told they really should try harder next time to not bring down the world economy. It was after the £80bn bailout, after the world gasped: “How did we let it happen”, and they’ve carried on exactly the same.

But who can blame them? Unlike the crash in the 1930s, no new regulations followed to stop them behaving like this. The banks could be caught squirting uranium into the eyes of kittens, it could turn out that the deaf signer on the podium in Soweto is a chief executive of Royal Bank of Scotland who’s been awarded a bonus of £40m, and that the England cricket team was injected with ketamine by the board of Northern Rock. And they’d apologise for the oversight and the Government would announce an enquiry to report in the year 5000.

And this is the business method we’re informed is essential to make anything work properly. So now it must apply to everything else as well. The Royal Mail, for example, was too sluggish without private investment and initiative, so hopefully that will now be free to go the same way. You’ll pop into the Post Office for a stamp and be told: “You know it really would be sensible to post a parcel as well. I’d suggest you should send one to Brazil, and to be really secure, fill it up with rubble first. There we are, that will be £700.”

Because they only need three like that a day to win a weekend break in Dorset. 

This privatisation of the Royal Mail would be a national disaster

The Royal Mail must remain in British ownership and remodelled like Germany's Deutsche Post

• 
• • Will Hutton
  • The Observer, Sunday 14 July 2013

A great British institution: the Royal Mail. Photograph: Tim Graham/Getty Images

Britain is 159th in the world league table that ranks investment as a share of GDP. This is not new. Owners of British companies have long been permitted a feckless lack of responsibility. Smart countries, from the US to Germany, make sure that they insulate their companies as far as they can from the myopia and short-term greed of stock markets. Instead, the British approach to ownership exposes our companies to stock market thinking: shrivelling investment, cutting back on innovation, minimising training and hoarding cash to please their irresponsible, transactional owners.

It is a national disaster that another great British organisation, the Royal Mail, is to be cast into this maelstrom. (As I explain later, a more imaginative "protected" private model could work.) The directors of the Royal Mail will be under the same relentless hammer as those in every other British plc. They will put up prices as much as the regulator will allow, cut into universal provision and relentlessly contract out as much of the delivery to the lowest paid, least protected workers; none of this will be enough to satisfy their owners.

Eventually, the directors, vastly enriched with share options, incentive plans and 200% bonuses, will run up the white flag. Within a decade, the Royal Mail will be sold overseas, probably to another state-owned postal service, if not to a private equity fund based in a tax haven. Who knows? It could even be the Chinese communist party that ends up owning this great British institution.

You don't need to be a great seer to predict this future. It is exactly what has happened with our privatised water and energy companies. Economists will say the mail service is more efficient, rather as they discussed the way financial deregulation promoted banking efficiency up to the financial crash of 2008 without ever anticipating the costs of the crash that overwhelmed those gains. By one yardstick, this "efficiency" is guaranteed: the Royal Mail's 150,000 workforce will shrink.

But economists' definition of efficiency is pathetically narrow. It will take no account of the lost tax revenues when the Royal Mail is owned offshore, nor the cost of the state guarantees that will be necessary to support crucial investment. (See the demands from the privatised Thames Water and BT are seeking for their investment in, respectively, the super sewer and national broadband.) Neither will it measure the social impact of a diminished, expensive and fractured postal service, part of the glue that holds the country together, nor the need for state support if some unexpected event threatens. In short, any efficiency gains from privatisation have to be qualified by large costs, some of which only become obvious over decades.

Thus, although all the big six energy companies are more efficient in the sense they produce more power, with fewer employees, than they did a generation ago, any calculus of gains and losses must include the price guarantees the government offers to secure the investment Britain needs in renewable energy and nuclear. Centrica, withdrawing from its partnership with EDF Energy over building nuclear power stations, acknowledged its shareholders wanted higher returns over a shorter period than any deal the government might offer.

If energy provision in Britain were only to be delivered by British privately owned plcs pleasing their tourist stock market owners, they would all build gas-fired power stations, an energy mono-culture that would make the country reliant on one energy source. It would also be environmentally disastrous. The state cannot stand back.

We know all this, but somehow there is a political and cultural incapacity to face the reality. State ownership is seen as cumbersome, socialist, bureaucratic and hidebound. Private ownership is seen as none of those things and little mention is made of the acute depredations wreaked in the private sector. Try getting Ukip to promise that it would oppose the Royal Mail being owned by a Cayman Islands private equity fund, an Arab sovereign wealth fund or some plutocrat. There is silence. Ownership does not matter.

The Department for Business website talks loftily of ensuring that the Royal Mail has the necessary access to investment through privatisation, "untying its hands", as business minister Michael Fallon puts it. But this is the same Department for Business that was so concerned that privately owned plcs were short-termist and anti-investment that it commissioned John Kay to investigate. Even if his report shrank from any meaningful action, it at least dramatised the problem.

The model of privately owned postal companies competing in a regulated market is not a priori wrong: it seems to work in Germany with the privatised Deutsche Post. It is just that British private ownership structures maximise every adverse possibility and outcome. We are about to experience a boom in parcel deliveries as online shopping explodes. Universal parcel delivery is going to become an indispensable utility. Any government that consigns this crucial service to British-style private ownership – for a mere £3bn with 10% of shares given free to workers as a blatant bribe – is as short-termist as the stock market.

Instead, with ownership configured more imaginatively, the Royal Mail could become a de facto trust, a British postal and logistics group ready to exploit the coming boom. A creative government would transform it into a private trust with its own supervisory board on top of the management board, modelled along the lines of Deutsche Post that pro-privatisers like to cite but without ever doing any homework on the detail. For this model would be charged with ensuring managers protect and improve Britain's universal postal and parcel service, as well as seeking other commercial opportunities. The board would have public interest directors along with directors elected by the workers, enfranchised by the collective ownership of, say, a quarter of the shares in an employee ownership scheme. External investors could thus only buy into an organisation whose constitution, purpose and ownership were permanently shaped to deliver public good.

No such template has been floated. It is an opportunity Labour should seize as the embodiment of responsible capitalism. If Ed Miliband and Chuka Umunna were suitably adept, they could even create a parliamentary majority, with dissident Lib Dems and Tories, for it. Apart from ideologues, no one thinks privatisation as it has been practised works and everyone knows that in a decade the Royal Mail will probably be foreign owned. On this, the Communications Workers union and the Labour party are right. But supporting the status quo is insufficient to win the argument. What they need is an alternative prospectus. There is nothing to lose and everything to gain.