Great Britain Announces Plans to Privatize British Telecom Summary

  • Last updated on November 10, 2022

The British secretary of state for industry announced plans to transform British Telecom into a private company and to allow the sale of a majority stake in the new company to the general public. Following the sale, nearly half of the company’s workforce became shareholders.

Summary of Event

In the early 1980’s, one of Great Britain’s largest and best-known companies was British Telecom. It was a giant in the field of telecommunications, the fourth-largest such company in the world, employing some 240,000 workers. Best known for running the country’s telephone service, it was reaching out into several high-tech areas in a rapidly expanding field. The British Post Office previously had a monopoly as the supplier of telephone service, but in 1981 the government had established British Telecom as a separate public corporation and introduced some modest competition into the industry. British Telecom was largely unloved, noted for its bloated workforce, high prices, poor service, and failure to secure adequate investment funds to keep up with developing technology. British Telecom Telecommunications;privatization [kw]Great Britain Announces Plans to Privatize British Telecom (July 19, 1982) [kw]Privatize British Telecom, Great Britain Announces Plans to (July 19, 1982) [kw]British Telecom, Great Britain Announces Plans to Privatize (July 19, 1982) [kw]Telecom, Great Britain Announces Plans to Privatize British (July 19, 1982) British Telecom Telecommunications;privatization [g]Europe;July 19, 1982: Great Britain Announces Plans to Privatize British Telecom[04920] [g]United Kingdom;July 19, 1982: Great Britain Announces Plans to Privatize British Telecom[04920] [g]England;July 19, 1982: Great Britain Announces Plans to Privatize British Telecom[04920] [c]Government and politics;July 19, 1982: Great Britain Announces Plans to Privatize British Telecom[04920] [c]Trade and commerce;July 19, 1982: Great Britain Announces Plans to Privatize British Telecom[04920] [c]Business and labor;July 19, 1982: Great Britain Announces Plans to Privatize British Telecom[04920] Jefferson, George Jenkin, Patrick Thatcher, Margaret

On July 19, 1982, Secretary of State for Industry Patrick Jenkin announced in the House of Commons that the government intended to privatize British Telecom. He justified this move partly on the grounds that the company, because of its protected nationalized status, tended to raise investment funds simply by raising rates rather than by increasing efficiency. Privatizing the company would force it to seek investment funds from commercial markets, necessitating that the company become more efficient and respond to market forces. Jenkin stated that the government would transform British Telecom into a private company and introduce legislation that would allow the sale of 51 percent of its shares to the general public. He further announced that a new Office of Telecommunications would be created to regulate the industry, promote competition, and investigate consumer complaints. The general election of May, 1983, temporarily interrupted the passage of the bill, which did not receive Royal Assent until April, 1984.

Jenkin’s announcement was hardly a surprise. When the Conservative Party of Margaret Thatcher assumed power in 1979, it began to roll back the boundaries of the welfare state and nationalized industry, introduced mainly by socialist governments after World War II. It was Thatcher’s intention to modernize British industry by subjecting it to competition and market forces. By this time, nationalized industries had become unpopular, being perceived by the public as uneconomic, inefficient, a drain on the public treasury, and dominated by arrogant and irresponsible trade unions. The government had already made a start prior to Jenkin’s announcement, having privatized approximately a dozen industries, including either parts or all of Jaguar, British Petroleum, and British Aerospace.

A crucial decision was made when the government decided not to split British Telecom into smaller units for sale, as was being done by the U.S. telecommunications monolith American Telephone and Telegraph (AT&T). Breakup would have allowed smaller new British companies to enter the field and compete more effectively, but George Jefferson, chairman of British Telecom, marshaled some powerful arguments against the move: It would be difficult to find buyers for the company’s unprofitable divisions, breakup would hinder British Telecom in competing with foreign giants internationally or defending itself within the domestic market, and British Telecom was the only logical choice to serve as Great Britain’s flagship company in the emerging global telecommunications market. Jefferson’s arguments prevailed, but the victory exposed the government to charges that it was simply transforming a state-owned monopoly into a privately owned one.

Everything hinged on the successful sale of Telecom’s shares, which would be of historic proportions. The sale of some three billion shares worth five billion U.S. dollars would be four times larger than any flotation in Great Britain’s financial history. The sale was a particularly daunting task in a country that had no tradition of widespread stockholding. Whereas one out of every five persons in the United States held stock, the figure was one out of twenty-five for Great Britain. Ensuring a successful sale meant careful coordination among government ministers, civil servants, Telecom management, bankers, lawyers, stockbrokers, and advertising agencies. It led to arguably the largest advertising campaign in British history. Millions of brochures and prospectuses were distributed, automated phones answered as many as 150,000 calls a week, and advertisements reached the public via the press, radio, television, and posters. An eight-car train traveled thirty-five hundred miles around the country drumming up publicity and providing information. The government admitted to spending the equivalent of about forty-two million U.S. dollars on advertising; indirect costs have been estimated as in excess of three hundred million U.S. dollars.

The Conservative government took other steps to ensure a successful sale. It allowed stock to be purchased in small amounts and on the installment plan, gave buyers free vouchers that could be used to pay off telephone bills, and promised one free share to every ten held if the buyer kept the stock for three years. The government also thought it important to bring in as many British Telecom employees as possible, the assumption being that the workforce would be more efficient if it participated in the company’s ownership. Every employee who applied for stock was given fifty-four free shares. In addition, there was a discount scheme whereby buyers of a few shares could receive two shares for the price of one, while those who purchased larger numbers of shares were given a 10 percent discount. Despite official union opposition to privatization, approximately 45 percent of the workforce ended up with shares.

The official enrollment period lasted from November 20 to November 28, 1984. Despite some early gloomy predictions, the sale was a spectacular success. It was oversubscribed by four times, and on the first day of trading the stock soared 50 percent. Eventually about two million people became owners of the stock. Much to the government’s satisfaction, a large number of people held only a modest number of shares, thus allowing Thatcher to claim that the sale benefited the average citizen and not only the rich. Taking into account the enormous publicity campaign, the ferocious backing given by the government, the sense of excitement and expectation, and the sale’s enormous success, the privatization of British Telecom ranks as one of the more dramatic events in the modern history of business and commerce.

Significance

The privatization of British Telecom had a profound effect on business, politics, and culture. It played a key role in helping to broaden the base of shareholders in Great Britain. Although it is arguable whether the Thatcher years established a shareholding democracy, as Conservatives claimed, there is evidence that the number of shareholders approximately tripled between 1979 and 1987, making Great Britain the second-largest country in terms of individuals owning shares, behind only the United States. Moreover, the vast publicity campaign surrounding the sale of British Telecom did much to educate an uninformed public about the stock market and the essential nature of an enterprise culture. In the future, the public had less trepidation about entering the stock market and providing investment capital for British firms.

Equally significant is that the sale’s success emboldened the government to accelerate the pace of privatization. Many other industries were sold off to the public, including parts or all of British Airways, Rolls-Royce, British Petroleum, and British Gas. In several cases, these flotations were oversubscribed, sometimes by four or five times. In a sense, the government became a victim of its own success, in that it thought it had a mandate to privatize such crucial companies as Thames Water and British Rail. The public began to exhibit distinct uneasiness about placing such essential services into the hands of private entrepreneurs.

The impact of privatization was felt well beyond Great Britain. The apparent success of privatization was closely monitored by other countries that had nationalized industries that were aging, were inefficient, required enormous subsidies, or produced goods that no longer commanded large markets. Countries in Western Europe, Scandinavia, Africa, and the Far East, and especially those that once composed the Communist bloc, became interested in the privatization process and hoped to emulate Great Britain’s success. The late 1980’s and early 1990’s saw a frenzy of privatization in the former communist countries and Western Europe.

To demonstrate how economics can influence politics, it could be argued that the privatization program helped the Conservatives win the general election of 1987 and gave them an edge in future elections. The substantial sums of money raised by privatization meant that the government could grant tax cuts, thus gaining favor with the electorate. Moreover, since shareholders are substantially more apt to vote Conservative rather than Labour, the sale was tantamount to broadening the political base of the Conservative Party. The early threats of the Labour Party, later jettisoned, to renationalize some of the privatized industries undoubtedly scared some shareholding voters into the Conservative camp.

Moreover, privatized industries helped to reduce the power of British trade unionism, which historically has had close ties with the Labour Party and furnished substantial sums of money at election time. Privatized industries tend to reduce their workforces, sometimes in massive numbers, thereby reducing the potential number of union members. By giving employees a stake in the companies they worked for, privatization helped to reduce labor-management antagonism and led to better labor relations. Although many factors account for the substantial decline of trade union power during the Thatcher years, the privatization of several nationalized firms ranks among the more important.

One must be cautious about claiming too much for the privatization program and presenting it as a miracle cure for every ailing industry. Thatcher’s critics on the Left point out that British Telecom was a unique case, unrepresentative of the challenges facing other nationalized industries in Great Britain and abroad. They emphasize that it was a healthy company prior to privatization, showing impressive growth and a pretax profit in excess of one billion U.S. dollars in the year prior to its sale. In addition, British Telecom paid a 7.4 percent dividend, higher than that of AT&T, and had an impressive price-earnings ratio of nine to one. In other words, these left-wing critics contend, British Telecom was a flourishing enterprise; profits, growth, and increased productivity would have occurred whether it remained in the state sector or was placed in private hands.

Socialists complained bitterly that the initial pricing of British Telecom shares was ludicrously low, perhaps only half of what it should have been. The sale thus was at best a case of frivolously squandering the nation’s assets in a giveaway to the rich and at worst a crude and cynical attempt to bribe the electorate into buying shares and voting Conservative. Even detached observers expressed uneasiness over the advertising campaign, since it raised serious ethical and political questions as to whether governments should enter the business arena and try to influence the general public into buying a particular stock.

Paradoxically, some of the most effective criticism came from the Right in Great Britain. Right-wing critics point out that the privatization of British Telecom did not lead to any dramatic increase in competition, lower prices, or better service. Indeed, after privatization, the company retained many of its bad old habits in terms of service and pricing, and its appointed competitor, Mercury Communications, was so small that it afforded no real challenge. Many of these right-wing critics claim that Thatcher betrayed her own stated intention to introduce more competition and that the privatization simply transformed a government monopoly into a private monopoly. These critics argue that her government would have better honored its self-professed principles if it had liberalized the company and introduced real competition instead of worrying about whether the monopoly was state-owned or privately owned.

The privatization of British Telecom doubtless was an important event in the modern history of Great Britain. It affected crucial areas of advertising and politics and generated a healthy public debate about whether the country should embrace an enterprise culture. If the sale had flopped or if the newly privatized company had not continued to deliver growth and profits, the subsequent privatization programs of Great Britain as well as those of other countries would likely have been adversely affected, if not scrapped. It is significant that Margaret Thatcher and her cabinet colleagues, when reflecting on their years in office, often referred to the privatization program as one of their proudest achievements, citing British Telecom as its most shining example. Posterity will judge whether such pride was justified. British Telecom Telecommunications;privatization

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Curwen, Peter. “British Telecom Has Privatization Delivered Competition?” In Recent Controversies in Political Economy, edited by Russell Lewis. London: Routledge, 1992. Argues that although the government desired to introduce competition in the telecommunications industry, experience suggests that British Telecom was able to evade the full brunt of competition and retain its monopolistic character.
  • citation-type="booksimple"

    xlink:type="simple">Harris, Kenneth. Thatcher. Boston: Little, Brown, 1988. One of the few interim biographies of Thatcher that deals specifically with the British Telecom issue and places it within the larger context of the privatization program and Thatcher’s economic philosophy. Takes a very pro-Thatcher stance.
  • citation-type="booksimple"

    xlink:type="simple">Newbery, David M. Privatization, Restructuring, and Regulation of Network Utilities. Cambridge, Mass.: MIT Press, 1999. Discusses the history of ownership and regulation, privatization, and theories of regulation, with attention to deregulation in the United Kingdom.
  • citation-type="booksimple"

    xlink:type="simple">Newman, Karin. The Selling of British Telecom. New York: St. Martin’s Press, 1986. A useful introduction that focuses on the expensive and skillful public relations campaign to persuade the British public to buy shares in the new company. No footnotes or bibliography. Contains an interesting collection of plates depicting samples of advertisements.
  • citation-type="booksimple"

    xlink:type="simple">Thatcher, Margaret. The Downing Street Years. New York: HarperCollins, 1993. A lengthy and controversial account of her years as prime minister. These memoirs contain a vigorous defense of the entire privatization program, emphasizing how revolutionary it was.
  • citation-type="booksimple"

    xlink:type="simple">Vickers, John, and George Yarrow. “Liberalization and the Privatization of British Telecom.” In Privatization and Regulation: The UK Experience, edited by John Kay, Colin Mayer, and David Thompson. New York: Oxford University Press, 1986. Offers a brief history of this event and argues that the government would have been wiser to promote liberalization and competition rather than privatization. For the advanced student.
  • citation-type="booksimple"

    xlink:type="simple">Zahariadis, Nikolaos. Markets, States, and Public Policy: Privatization in Britain and France. Ann Arbor: University of Michigan Press, 1995. Examines case studies of privatization in the oil, telecommunications, and railroads sectors in Great Britain and France.

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