The Downing Street Years (117 page)

Rover had by now a superb Chairman in Graham Day who had been making great efforts to do what I had always hoped would be done — dispose of surplus assets and increase the drive for higher productivity. But that did not mean that I was happy with the sort of figures the company’s Corporate Plans contained. It retained an apparently insatiable appetite for cash — it had absorbed £2.9 billion of public money in total since we came to office in 1979 — and the Government’s liabilities under the Varley-Marshall assurances remained at some £1.6 billion. The earlier anti-American hysteria about takeovers by foreign companies of our British car production meant that the prospects for sale of the main car business did not look promising,
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though both Ford and Volkswagen continued to express some interest.

This was the position when, just before Christmas 1987, there were signs that British Aerospace might be interested in acquiring Rover. I was not immediately clear that British Aerospace’s was a serious offer. But it soon turned out that it was. There was an industrial logic in the acquisition, for the car business — if relieved of its burden of debt and provided with a substantial injection of new investment — would complement the rest of BAe’s business. Aerospace depends on
gaining a few huge contracts at inevitably irregular intervals; cars satisfy a steadier market. And, of course, the sale to BAe would have one marked political advantage: the company would stay British.

David Young was subsequently heavily criticized for the way in which the deal was struck. In fact, he played a difficult hand with great aplomb. The special financial provisions of the deal only reflected the poor state of BL after years of state ownership and wasted investment. That the terms had to be revised reflected the new interest of the European Commission in probing the details of state aid to industry, rather than being a reflection on the basic soundness of the deal itself.

Only satisfied customers can ultimately guarantee the future of a business or the jobs depending on it and Rover could not be an exception to that rule. But the effects of the disastrous socialist experiment to which the company had been subject had now been overcome; and Rover was back in the private sector where it belonged.

British Telecom was the first utility to be privatized. Its sale did more than anything else to lay the basis for a share-owning popular capitalism in Britain. Some two million people bought shares, about half of whom had never been shareholders before. But the relationship between privatization and liberalization — that is opening up telecommunications to wider competition — was a complex one. The first steps of liberalization had begun under Keith Joseph who split British Telecom from the Post Office, removed its monopoly over telephone sales and licensed Mercury to provide a competing network. Further liberalization took place at the time of privatization.

But if we had wanted to go further and break up BT into separate businesses, which would have been better on competition grounds, we would have had to wait many years before privatization could take place. This was because its accounting and management sytems were, by modern standards, almost nonexistent. There was no way in which the sort of figures which investors would want to see could have been speedily or reliably produced. So I was well satisfied when, after the delay which had been caused by the need to withdraw the original bill with the advent of the 1983 general election, British Telecom was eventually successfully privatized in November 1984.

At the same time, a system of regulation was established under the
control of an Office of Telecommunications (OFTEL) with the result that BT had to keep its price increases at a fixed level below the rate of inflation for a number of years. This was a quite new and — as it has turned out — influential departure. Not only did the ‘RPI minus x’ formula become the model for dealing with public utility privatizations in Britain: it has since been adopted overseas, for example in the United States.

The consequences of privatization for BT were seen in a doubling of its level of investment, now no longer constrained by the Treasury rules applying in the public sector. The consequences for customers were just as good. Prices fell sharply in real terms, the waiting list for telephones shrank and the number of telephone boxes in operation at any particular time increased. It was a convincing demonstration that utilities were better run in the private sector.

Many of the same issues arose in the privatization of British Gas, which had been a nationalized industry for nearly forty years. BGC had five main businesses. These were: the purchase of gas from the oil companies which produced it; the supply of gas, involving the transmission and distribution of gas from the beach-head landing points to the customer; its own exploration for and production of gas, mostly from offshore fields; the sale of gas appliances through its showrooms; and the installation and servicing of those appliances. Of these functions only the second — the supply of gas to consumers — could be described as a natural monopoly. But there were a number of considerations which argued against fundamentally restructuring or breaking up the business. The most important of these, curiously enough, was lack of parliamentary time. Consideration of privatization had inevitably been held up by the miners’ strike of 1984–5. Both the BGC and Energy Secretary, Peter Walker, were determined to privatize BGC as a whole and their full co-operation was essential if it were to be achieved as I wanted during our second term. There was much to be said for using the model of British Telecom rather than trying to come up with a fundamentally different one under these conditions.

Accordingly, at a meeting I held with Peter Walker, Nigel Lawson and John Moore on Tuesday 26 March 1985 I agreed that we should go for a sale of the whole business. The formula for regulation and the issue of liberalizing imports and exports of gas became the focus of much argument between Peter Walker who was prepared to accept a degree of monopoly as the price of early privatization on the one hand, and the Treasury and the DTI on the other who would have preferred stronger competition from the first. We were able to liberalize gas exports but I went along with most of Peter Walker’s arguments
in order to achieve privatization in the available timescale. I still think I was right to do so because the privatization was a resounding success. (The problems of the monopoly power of British Gas are now being investigated by the Monopolies and Mergers Commission.) Four and a half million people invested in the shares, including almost all of the company’s 130,000 employees.

The privatization of the water industry was a more politically sensitive issue. Much emotive nonsense was talked along the lines of, ‘look, she’s even privatizing the rain which falls from the heavens.’ I used to retort that the rain may come from the Almighty but he did not send the pipes, plumbing and engineering to go with it. The Opposition’s case was even weaker than this, for about a quarter of the water industry in England and Wales had long been in the private sector. Of more significance was the fact that the water authorities did not just supply water: they also safeguarded the quality of rivers, controlled water pollution and had important responsibilities for fisheries, conservation, recreation and navigation. It was Nick Ridley — a countryman with a natural feel for environmental issues — who, when he became Environment Secretary, grasped that what was wrong was that the water authorities combined both regulatory and supply functions. It made no sense that those who were responsible for the treatment and disposal of sewage, for example, should also be responsible for regulating pollution. So the bill which Nick introduced also established a new National Rivers Authority. Privatization also meant that the companies would be able to raise money from capital markets for the investment needed to improve the water quality.

The most technically and politically difficult privatization — and the one which went furthest in combining transfer of a public utility to the private sector with radical restructuring — was that of the Electricity Supply Industry. The industry had two main components. First, there was the Central Electricity Generating Board (CEGB) which ran the power stations and the National Grid (the transmission system). Second, there were the twelve Area Boards which distributed the power to customers. (In Scotland there were two companies running the industry — the South of Scotland Electricity Board and the North of Scotland Hydro Board.) Some attempt had been made in Nigel Lawson’s 1983 Energy Act to introduce competition into the system. But it had had no practical effect. As a result the whole of the industry was based on monopoly. The CEGB had a monopoly nationally and the Area Boards monopolies regionally. The challenge for us would be to privatize as much as possible of the industry while introducing the maximum amount of competition.

I had an initial discussion about electricity privatization with Peter Walker and Nigel Lawson on the eve of the 1987 general election. I did not intend to keep Peter at Energy so there was no point in going into detail. But we did agree that the pledge of privatization should be included in the manifesto and be given effect in the next Parliament.

When Cecil Parkinson took over as Energy Secretary after the election he found that the department’s thinking had been strongly influenced by Peter Walker’s corporatist instincts — and by their recognition that Walter Marshall would be passionately opposed to the break-up of the CEGB of which he was chairman. The prevailing idea seemed to be that the CEGB and the National Grid would be floated as one company and the twelve Area Boards would be combined into another. This would have done no more than change a monopoly into a duopoly; but Cecil changed all this. He was subsequently the butt of much malicious and unjust criticism because of the changes which his successor, John Wakeham, had to make in his original privatization strategy, particularly in connection with the nuclear power stations. In fact, it was Cecil who took the bold and right decision to reject both corporatist thinking and vested interests by breaking up the CEGB and — most crucially — removing from its control the National Grid. The grid would now be owned jointly by the twelve distribution companies created from the old Area Boards rather than by the CEGB. Whereas under the old system the controller of the grid was also its near monopoly supplier, control would now be with those who had the strongest interest in ensuring that as much competition as possible be allowed to develop in power generation. These two decisions meant that competition became effective.

Cecil Parkinson was working towards this model over the summer of 1987 and in September we had a seminar at Chequers to look at the options. At this stage none was ruled out, but I insisted that all the legislation must be enacted before the end of that Parliament. Cecil continued to work up the plans and discussed them again with me and other ministers in mid-December. No one was attracted by solutions which retained a monopoly of generation for the CEGB or its continued ownership of the grid. The real question was whether the CEGB should be divided up into just two or as many as four or five competing generating companies. Nigel Lawson favoured the more radical option. The trouble was that it was difficult to see any of these companies being large enough to keep up the very costly development of nuclear power, which I regarded as essential both in order to ensure security of power supply and for environmental reasons.

There was also Walter Marshall to consider. Not only did I like
and admire him. I also felt that we all owed him a great debt for having kept the power stations working during the miners’ strike. He was opposed to any break-up of the CEGB, but he might just be willing to go along with a two-way split in which the larger company retained the nuclear power stations. There was no way in which he would have stayed on if the CEGB had been split into four. I could not, of course, allow his views to be decisive: nor did I do so. But I hoped to obtain his and his colleagues’ co-operation in the difficult transition to the new privatized and competitive system. So at a meeting in mid-January I came down on the side of the solution that Cecil favoured. But I added that this did not preclude moving at some future time to the more competitive model which Nigel Lawson would have preferred.

Later that month I agreed that the split in capacity between the two new proposed generating companies should be 70/30. This was the plan which I tried to sell to Walter Marshall when he came in with Cecil Parkinson for a long talk one February evening. Walter — never averse to blunt speaking — did not conceal his disagreement with the approach we favoured. I agreed with him — as he knew I did — about the great importance of nuclear power. But I did not think that its prospects would be damaged by our plans. Again and again I insisted that whatever structure we created must provide genuine competition. I often found that straight talking pays dividends. On further consideration and after further discussions with Cecil, Walter Marshall said that though the CEGB would express regret at what we had decided he was prepared to make the system work. Cecil Parkinson’s plans were also strongly opposed by Peter Walker who suggested that it would take at least eight years before there was any chance of completing this competitive model of privatization. None of us was convinced by this. So on Thursday 25 February Cecil could make his statement to the House of Commons setting out how we intended to privatize electricity.

This, though, was by no means the end of the matter. As always, the prospect of privatization meant that the finances of the industry were subject to searching scrutiny, perhaps for the first time ever. And what came to light was extremely unwelcome. For environmental reasons and to ensure security of supply, I felt it was essential to keep up the development of nuclear power. The real cost of nuclear energy compared with other energy sources is often overrated. Coal-fired power stations pour out carbon dioxide into the atmosphere and no one has yet put a credible figure on what it will ultimately cost to deal with the resulting problem of global warming. But the fact remained
that there would be an immediate extra cost from nuclear energy which consumers would have to bear. This was tolerable if not popular.