Selling public assets

The 2015/16 financial year will go down in the record books.  Despite the reputation of Margaret Thatcher’s government as privatisers, the truth is that “the sale of government assets this year will deliver the largest privatisation proceeds of all time, higher than the previous record in 1987″, explained George Osborne in last year’s Budget.


More than £30bn of privatisation receipts are projected for this financial year.  That is about 50% higher, in real terms, than the most the Thatcher administration achieved in any one year.  Recent and imminent privatisations include the government’s stake in Lloyds Banking Group and the first tranche of its RBS shares, plus the sale of loan portfolios taken over from the troubled Northern Rock and Bradford & Bingley banks.


In addition, there are other, more Thatcherite, privatisations, such as the intended sale of a portfolio of student loans.  And there is the privatisation that even Thatcher baulked at – Royal Mail.  The coalition government sold both the first tranche of Royal Mail and the government’s remaining stake in Eurostar.  In the course of the last Parliament, some £1.7bn of government land sales were also completed.


Plans for the future include sales of the Land Registry, Ordnance Survey and the balance of the Government’s stake in National Air Traffic Services.  The current administration also wants to sell-off the Green Investment Bank, a favoured project of the Liberal Democrats in the coalition government.  In addition, the Chancellor wants Network Rail to sell surplus land to pay for new rail investment.


Sell-offs also affect other parts of the public sector.  Analysis by housing charity Shelter of the impact of the Housing and Planning Act concludes that English councils will have to dispose of a third of their most valuable properties.  By Shelter’s calculations, some 4,000 council-owned homes a year will be sold, potentially generating £6bn in capital receipts.  Some £400m a year of this will be retained by the local authorities to repay debt, with £1.2bn going to the Treasury to pass on to housing associations.  As with other public asset sales, this will reduce council income – causing additional problems in the management of revenue budgets.  Councils are being encouraged to sell other assets, too, with the incentive that they will retain those receipts.


PwC’s recent report To own or not to own: Realising the value of public sector assets enters the debate on whether the sell-off strategy is correct.  It places the question in context by explaining that the UK public sector collectively owns assets valued at £1,300bn (£1.3trn), compared to £700bn of annual public expenditure.  PwC explains “it is worth noting that most private sector organisations, even the most capital intensive such as oil companies, have ratios of assets to revenues of less than 1:1, so the Chancellor is right at least to ask the question”.


The public sector asset base is diverse: ownership of shares in banks was the result of the rescue exercise following the meltdown of much of the UK’s financial sector.  There are hospital and school estates, council housing, defence land and many heritage assets that would be politically unacceptable to sell.  In some instances, assets are owned for the delivery of public sector provided services.  In other cases, the assets generate a return that can subsidise public services.  The Centre for Cities report Delivering Change: Making the most of public assets points to the example of Eastleigh council in Hampshire, which built up a commercial property portfolio that generates an income of £2.5m a year – and a profit over its borrowing costs.


Martin Jacobs, government and public sector partner at PwC, suggests that public bodies need to review asset ownership by considering whether they should deliver services directly, or outsource them, which business model provides the best value for money and how to ensure efficient and effective service delivery.  Where that consideration leads to the decision to sell assets, public bodies must prepare them in ways to maximise their value.  “The question is more complex than ‘to own or not to own’,” he says.  “If assets are to be moved out of the public sector, they need to be investor ready to realise the full benefits of the deal.  By building capability, being pragmatic, identifying the right partner and putting the right rewards and incentives in place, the chances of success will increase.”


But some argue that the programme of asset sales owes more to ideology than it does to sound management of the public finances.  Simon Wren-Lewis, Professor of Economic Policy at the University of Oxford’s Blavatnik School of Government and an advisor to the Labour Party’s Treasury team, says that the crisis in public finances has now ended.  While the case for austerity was based on an exceptionally high public debt to GDP ratio, public finances are now stronger because of the austerity cuts already adopted.  “Over the next five years debt to GDP ratios in the UK will be falling,” he wrote in a recent blog. “This means that further austerity is no longer about stabilising debt and an imagined market panic. Instead it is about an obsessive need to cut debt to GDP really fast, or more likely a desire to shrink the state.”


Professor Wren-Lewis told AB: “In my view there is no respectable general economic argument for privatisation. Privatisation simply to reduce deficit figures to meet some ad hoc target is a bad motivation, because such privatisations do nothing to help the long term position of the public finances, and in some cases do clear harm. Each privatisation should be considered in its merits.  When the UK can borrow for 50 years at a real interest rate of 0.5%, it is ridiculous to put constraints on public investment. Now is the time for the government to invest.”


By contrast, the TaxPayers’ Alliance, which has connections with the Conservative Party, is a strong advocate of privatisation.  Its chief executive Jonathan Isaby says: “Taking stock of publicly held assets should be a dynamic process where the government is continuously evaluating whether it needs to hold on to something. Often the better option for taxpayers would be to sell-off some of these, either to invest the money in essential services or simply to have more money left in our pockets in the form of tax cuts.


“Public finances being in the dire state they are with national debt getting close to £2trn, the government simply doesn’t have the luxury of sitting on expensive assets anymore. Every penny we spend as a nation in the public sector is a penny borrowed. We need to do whatever possible to work towards bringing the debt down, and that includes recovering money tied up in unwanted assets.”


It is clear that this view chimes with the Government’s.  So we can expect many more privatisations to proceed.

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