1

Massimo Florio, Department of Economics, Business and Statistics, University of Milan

THETHE WELFARE EFFECTS WELFARE EFFECTS OFOF PRIVATIZATION PRIVATIZATION

ANDAND UTILITY REFORM UTILITY REFORM

Inter-American Development Bank, Washington DC April 25, 2005

Presentation based on:Carrera J., Checchi D., Florio M. (2005), Privatization discontent and its determinants: evidence

from Latin AmericaFlorio M. (2004), The Great Divestiture. Evaluating the welfare impact of British privatizations

1979-1997, Cambridge (MA), Mit PressBrau R., Florio M. (2004), “Privatisations as price reforms: Evaluating consumers’ welfare changes

in the UK”, Annales d’éconmie et de statistique, n.75-76, 109-133Florio M. (2003), A State without ownership: the welfare impact of British Privatizations 1979-1997

2

• Privatization has been a major policy reform in the last 20-30 years. Chile and UK paved the way to a worldwide trend, then the transition economies followed. Denationalization is still important in many EU countries and elsewhere, including Latin America.

• Utilities (electricity, gas, telecom, water, etc) are often the

key industries for a privatization policy. Changes in economic welfare potentially affect millions of users. There are concerns about redistribution impacts, and increasing popular opposition in some countries (particularly in LA, but in the UK and elsewhere as well)

• We need to evaluate welfare changes caused by utility reforms in order to offer feasible policy advice.

• If possible, we need to disentangle the welfare effects of privatization from regulation and liberalization. These in principle are different policies: we can observe and evaluate different combinations (across countries, over time)

RESEARCH MOTIVATION

3

EARLIER RESEARCH • There is a huge empirical literature on privatization (Megginson and Netter,

JEL, 2001); 1717 books in Amazon; 1516 books at the LSE Library, thousands papers in REPEC and SSRN, etc.

• This literature however typically focuses on efficiency in a narrow sense. Most of the research takes a business economics, or financial perspective. Limited evidence on allocative efficiency, very few studies on welfare effects.

• Most of the literature concludes that privatization raises profitability . This is true, but not very relevant for economic welfare (monopoly profit argument) 

• Many productivity studies in the EU, Latin America, and elsewhere typically consider company accounts or crude productivity indicators some years ‘before’ and some years ‘after’ divestiture and find that labor productivity increases ‘after’ divestitures (less strong evidence for TFP) . However, with this approach, you very often would get the same for nationalization in the ‘50s and ’60 in Western Europe. We need long time series, and control for exogenous shocks. Florio (2003) and Florio and Puglisi (2005) study 40 years of British Telecom data, and find no statistically significant impact of ownership change.

4

EARLIER RESEARCH (2)

• Galal et al (1994), Newbery and Pollitt (1997), Newbery (2000), Pollitt (several papers), and others use social cost benefit analysis to study specific companies or industries. Florio (2004, The Great Divestiture. Evaluating the welfare impact of British Privatisations 1979-1997, Cambridge (MA), the Mit Press) uses CBA to evaluate the whole UK programme (1979-1997).  

• Waddams Price and Ugaz (2003) study redistribution effects in LA. See also Chong and Lopez de Silanes (2003), Estache (2003, Several country studies: Galiani et al (2003), Anuatti, Neto et al (2003) on Brazil; Aspiazu ans Schorr (2003), Chisari et al (1995), Galiani et al (2003) on Argentina, Barja et al (2002) on Bolivia, Paredes (2001) on Chile, Torero and Pasco-Font on Peru (2001).Example: Delfino and Casarin (2003)

5

EARLIER RESEARCH (3)Table 1 – Changes in consumer surplus - Argentina - USD (1999)

Income group Telecoms Electricity Gas Water and sewerage

Total

DS DS/Y DS DS/Y DS DS/Y DS DS/Y DS DS/Y E/Y

Average 70.6 0.33 29.2 0.12 - 22.8 - 0.16 - 48.6 - 0.10 28.4 0.18 7.6

1stquintile(poorest) 9.6 0.27 - 0.4 - 0.06 - 15.2 - 0.35 - 45.8 - 1.85 - 51.8 - 1.27 16.7

2ndquintile 30.1 0.31 14.6 0.15 - 18.5 - 0.20 - 47.2 - 0.97 - 21 - 0.27 9.6

3rdquintile 54.8 0.39 26.9 0.19 - 21.6 - 0.15 - 48.1 - 0.66 12 0.00 7.0

4thquintile 75.5 0.35 39.6 0.19 - 24.2 - 0.11 - 48.3 - 0.44 42.3 0.25 5.3

5thquintile(richest) 131.5 0.30 61.5 0.15 - 29.5 - 0.07 - 51.15 - 0.22 112 0.33 3.4

Source: adapted from Delfino and Casarin (2003, tab. 7.2, p.161 and tab. 7.3, p. 165) and our own calculations (total impact). Tariffs at December 1999, USD, before taxes, consumption data 1996- 97 from Instituto Nacional de Estadistica y Censos, Statistical yearbook, Buenos Aires 2000. DS = E1

[ (P1- P2)/P1] [1+0,5 ε[ (P1- P2)/P1]] , where E1 is initial expenditure level, E2 final expenditure level, Y

adjusted household income, ε price elasticity (assumed to be –1 for telecoms, - 0,5 for electricity and gas, and 0 for water and sewerage in the reference scenario).

6

Privatization discontent in Latin America

Carrera, Checchi and Florio (2005) analyse privatization discontent in Latin America. Evidence of wide dissatisfaction: Latinobarometro (2002), 18522 respondents in 17 countries to the question:“The privatization of state companies has been beneficial to the country?”

AROUND TWO THIRDS DISAGREE. (Similar evidence for several polls in the UK, MORI and other surveys)

Table 2 – “Privatization has been beneficial to the country” – Latin America 2002

Item cases % cases %

Strongly agree 1,573 8.49 1,573 9.37

Somewhat agree 3,781 20.41 3,781 22.52

Somewhat disagree 6,993 37.76 6,993 41.65

Strongly disagree 4,441 23.98 4,441 26.45

Do not know 1,271 6.86

Non respondent 463 2.50

Total 18,522 100.00 16,788 100.00

7

Research question: does perceived privatization failure reflect distributional issues?

We use: 1. the full demographic information on the individual

respondents (including age, sex, education, employment, if they access to drinking water, sewage, telephone, if they own a refrigerator, pc, washing machine, car, etc…);

2. a privatization dataset including 430 events in the LA countries, with several information including the share of utilities (gas, water, electricity and sanitation) in total proceedings;

3. macroeconomic controls: GDP growth, Gini index, government spending, measure of deprivation.

8

FINDINGSWe find statistically significant evidence that privatization discontent in LA increases with:

large and quick divestitures programmesa high proportion of utilitiesincome inequality in the country;and whenthere are macroeconomic adverse shocksthe respondent is poorthe respondent is relatively better educated.

Several of these features could be observed in the archetypal privatization story: Great Britain

9

Fig. 1 -Estimates of the impact of education and socio-economic level on support to privatization – Latin America 2002

illite

rate

unco

mpl

prim

com

pl p

rim

unco

mp

secd

com

pl s

ecd

unco

ml t

ert

com

pl te

rtvery

goo

d

good

aver

age

bad

very

bad

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

very good

good

average

bad

very bad

10

Fig. 2 -Estimates of the impact of education and ownership of durables on support to

privatization – Latin America 2002

primary

sec ondary

tertiary

basic

electric

luxury

-0.12

-0.1

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

basic

electric

luxury

11

Research objectives

An evaluation of the long-term welfare impact of divestitures of public enterprises in the UK

MotivationBritish privatisations are an ideal case study in economic-policy evaluation

Five reasons:

1) The UK case study is a large scale one and in principle major welfare impacts should be observable in the long run

2) An assessment of the British experience is relevant for an international debate on the economic role of the state.

3) We have long time series for several industries, and we can study two quite different policy environments (before and after 1979)

4) We can capitalize on a wealth of high quality empirical analysis (more than 300 papers and books)

5) No previous evaluation on the overall impact (on individual industries Galal et al 1994, Newbery and Pollitt, 1997, Waddams-Price, Hancock 1998, Newbery 2000).

12

The CBA framework

Different approaches:

1) microdata:

- partial equilibrium

- general equilibrium

2) inter-temporal public budget at shadow prices

3) macroeconomic welfare function

13

STEP 1: CONSUMERS• gross welfare change for consumers through observed

prices change• (indirect effects on other industries and then other

consumer prices)• less counterfactual welfare change under continued

public ownership • less correction for distributional welfare weights• (or less additional extra-profits:output valued at

marginal cost)• (and less excess burden of additional extra-profits)

CONSUMERS NET SOCIAL WELFARE CHANGE

14

STEP 2: SHAREHOLDERS

net present value of gross (extra) profits less price paid to by the privatized

assets less NPV of corporate taxes (less windfall tax) distributive correction for high incomes

 SHAREHOLDERS NET SOCIAL WELFARE CHANGE

15

STEP 3: TAXPAYERS

privatization proceeds corporate taxes (and windfall tax) less foregone extra-profits correction for the shadow pricing of public

funds

SHAREHOLDERS NET SOCIAL WELFARE CHANGE

16

STEP 4: EMPLOYEES

change in wages under private ownershipless counterfactual change under public ownershipcorrection for shadow wages EMPLOYEES NET SOCIAL WELFARE CHANGE

17

STEP 5: OVERALL BALANCE

CUNSUMERS NSWC SHAREHOLDERS NSWC WORKERS NSWC TAXPAYERS NSWC WELFARE IMPACT OF PRIVATIZATIONS

18

CONSUMERSPrice trendsComparison between the trends in nominal prices “before” and “after”

privatizations a) Electricityb) Gas c) Water d) Buse) Railways f) Telecom Scarce evidence of structural breaks following privatization, and different

shocks:• regulatory impact (price controls)• liberalization (monopoly, duopoly, regional oligopoly, collusion, open

competition)• exogenous/endogenous change in costs• side-impact of other policy changes (eg. environment laws) • changes in quality, information, contractual arrangement

19

Fig.3 – Water. Retail prices (relative to RPI) – 1995 = 1

Figure 7.7 Water. Retail prices (relative to RPI). 1995 = 1

Source: NEDO (1976), ONS (various issues)

0.6

0.7

0.8

0.9

1.0

1.1

87 88 89 90 91 92 93 94 95 96 97 98 99

PRIVATISATION

Figure 7.7 Water. Retail prices (relative to RPI). 1995 = 1

Source: NEDO (1976), ONS (various issues)

0.6

0.7

0.8

0.9

1.0

1.1

87 88 89 90 91 92 93 94 95 96 97 98 99

PRIVATISATION

0.6

0.7

0.8

0.9

1.0

1.1

87 88 89 90 91 92 93 94 95 96 97 98 99

PRIVATISATION

20

Fig.4 – Electricity. Retail prices (relative to RPI) – 1975 = 1

Figure 7.8 Electricity. Retail prices (relative to RPI). 1975 = 1

Source: NEDO (1976), ONS (various issues)

0.8

0.9

1.0

1.1

1.2

1.3

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIVATISATION

Figure 7.8 Electricity. Retail prices (relative to RPI). 1975 = 1

Source: NEDO (1976), ONS (various issues)

0.8

0.9

1.0

1.1

1.2

1.3

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIVATISATION

21

Fig.5 – Gas. Retail prices (relative to RPI). 1975 = 1

Figure 7.9 Gas. Retail prices (relative to RPI). 1975 =1

Source: NEDO (1976), ONS (various issues)

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIVATISATION

Figure 7.9 Gas. Retail prices (relative to RPI). 1975 =1

Source: NEDO (1976), ONS (various issues)

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIVATISATION

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIVATISATION

22

Fig.6 – Coal. Retail prices (relative to RPI) 1975 = 1

Figure 7.10 Coal. Retail prices (relative to RPI). 1975 = 1

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIV

Figure 7.10 Coal. Retail prices (relative to RPI). 1975 = 1

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIV

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIV

23

Fig.7 – Rail. Retail prices (relative to RPI) 1975 = 1

Figure 7.9 Gas. Retail prices (relative to RPI). 1975 =1

Source: NEDO (1976), ONS (various issues)

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIVATISATION

Figure 7.9 Gas. Retail prices (relative to RPI). 1975 =1

Source: NEDO (1976), ONS (various issues)

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIVATISATION

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIVATISATION

24

Fig.8 – Bus. Retail prices (relative to RPI) 1975 = 1

Figure 7.10 Coal. Retail prices (relative to RPI). 1975 = 1

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIV

Figure 7.10 Coal. Retail prices (relative to RPI). 1975 = 1

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIV

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

PRIV

25

Fig. 9 - Household expenditures on privatized utilities services, 1974-1998. Percentage share of total consumption

Source: our processing of ONS data

0.00

0.50

1.00

1.50

2.00

2.50

3.00

74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

phone rail bus electricity gas water coal

26

Fig. 10 – Welfare changes by privatised industry. Millions 1994 costant Lst – 1984-1999, at median years expenditure

Privatised utilitiesPhone Rail Bus Electricity Gas Water Coal TOTAL

Privatisation year 1984 1995 1989 1990 1986 1990 1995Median year 1991 1997 1994 1994 1992 1994 1997E* 6842 3144 2808 8082 5684 4014 499P* 0.88 1.19 1.14 1.01 0.85 1.52 0.82P1 0.98 1.18 1.04 0.97 1.02 1.14 0.85P2 0.6 1.22 1.19 0.8 0.71 1.7 0.8

0.6 0.8 0.9 0.5 0.7 0.5 0.20.875 0.573 0.756 0.893 0.9 0.938 0.992

Welfare measures

First order approximations

"Modified WP-H" : M= E* (p1 – p2)/p* 2779.243 -113.960 -417.030 1360.337 1815.768 -2225.584 22.609 3221.382"Socially weighted": 2431.837 -65.299 -315.274 1214.781 1634.191 -2087.598 22.428 2835.065

Distributive correction -12.50% -42.70% -24.40% -10.70% -10.00% -6.20% -0.80% -11.99%

Second order approximations

"Unweighted" :

3092.939 -112.155 -389.159 1417.579 2010.828 -1917.087 22.721 4125.666"Socially weighted" (Linear or quadratic-in-logs Engel curves)

2706.322 -64.265 -294.204 1265.898 1809.745 -1798.228 22.539 3647.807First order "error" 11.29% -1.58% -6.68% 4.21% 10.74% -13.86% 0.50% 28.67%

ii qX ,mx i ,

id~

iqXi

iii q

q

qbdXW

ii

,2

iii dqXddW

iqXi

ii q

q

qXW

ii

,21

27

SHAREHOLDERS & TAXPAYERSSocial dimensions •“popular capitalism” •share owners from 2,5 millions ‘80s to 11end ‘90s, but•54% of individual shareholders own shares in only one company•83% of individuals own portfolios of no more than 3 shares (unefficient, marginal, shareholding)•and only 17% in four or more.

•In 1957 almost two-thirds of shares were owned by individuals. In 1997: 16,5%

•Foreign sector the biggest owner: 24%

•Then unit trusts, pension funds, etc.

28

Underpricing-BT recorded a price difference of 33% after the first trading day (subsequent tranches were less underpriced). -tender offers (ABP, BAA, BP, Britoil, C&W, Enterprise Oil): underpricing was nil-a multiple of the value of the offering: e.g. 32 times for BA, 35 times for ABP, typically 7-8 times greater than supply. Cawthron (1999): the IRR of 38 placements up to 1997, based on the return for the holder of a share at May 31st, 1997 assuming that the share was purchased at the issue price or on the secondary market 24 hours later. The difference between the two rates gives us an idea of the underpricing. The absolute difference in the real IRR varies from a minimum of 3-4 points to over 10 (on average 5.7 points) (25% difference).  Levis (1993) examines 712 IPOs in the UK over the period 1980-88, roughly the same period as that studied by Vickers and Yarrow (1988) and finds that the average abnormal adjusted return after 24 hours is 14.3%.

29

Abnormal returns in the long term International empirical literature shows that with ordinary IPOs, subsequent negative abnormal returns correct the excessive reaction of the market. Levis (1993) finds that for a period of 36 months there is evidence of underperformance also in the case of the UK: the cumulated abnormal return of the IPOs as a whole was 55.72%, that of the privatised firms was almost double: 96.91%. Florio, Manzoni (2002): sample of privatised firms (55 cases), extending the analysis to different periods of time: 1 year, 5 years, 10 years (for the latter the sample was reduced to 14 cases). We excluded the first month, so the initial underpricing is not included. We confirm that there is clear evidence of abnormal returns in the long run (using the FTA index as a benchmark).The cumulative abnormal returns are 21% at one year; 30% at two years; 57% at five years; and down to 38% at 10 years (for a smaller sample). We decompose the results by subsamples, particularly by industry, and by the time of the public offering and other variables.

30

Fig. 11 - Electricity industry performance

First Milan European Economy Workshop Milan, May 31st, June 1st, 2002

Figure 5.A.5 Electricity industry preformance

Figure 5.A.6 Telecommunications industry performance

0

0.15

0 .3

0.45

0 .6

0.75

0 1 2 3 4 5 6 7 8 9Y ears after the Privatiza tion

CAR%

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 1 2 3 4 5 6 7 8 9Y ears after the Privatiza tion

CAR%

31

Fig. 12 - Telecommunications industry performance

The great divestiture evaluating the welfare impact of British privatisations, 1979-1997 Massimo Florio

First Milan European Economy Workshop Milan, May 31st, June 1st, 2002

Figure 5.A.5 Electricity industry preformance

Figure 5.A.6 Telecommunications industry performance

0

0.15

0.3

0.45

0.6

0.75

0 1 2 3 4 5 6 7 8 9

Years after the Privatization

CAR%

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0 1 2 3 4 5 6 7 8 9

Years after the Privatization

CAR%

32

Fig. 13 - Energy industry performance

The great divestiture evaluating the welfare impact of British privatisations, 1979-1997 Massimo Florio

First Milan European Economy Workshop Milan, May 31st, June 1st, 2002

Figure 5.A.7 Energy industry preformance

Figure 5.A.8 Transport industry performance

-0.1

0

0.1

0.2

0.3

0 1 2 3 4 5 6 7 8 9

Years after the Privatization

CAR%

0

0.2

0.4

0.6

0.8

1

1.2

0 1 2 3 4 5 6 7 8 9

Years after the Privatization

CAR%

33

Fig. 14 - Transport industry performance

The great divestiture evaluating the welfare impact of British privatisations, 1979-1997 Massimo Florio

First Milan European Economy Workshop Milan, May 31st, June 1st, 2002

Figure 5.A.7 Energy industry preformance

Figure 5.A.8 Transport industry performance

-0.1

0

0.1

0.2

0.3

0 1 2 3 4 5 6 7 8 9

Years after the Privatization

CAR%

0

0.2

0.4

0.6

0.8

1

1.2

0 1 2 3 4 5 6 7 8 9

Years after the Privatization

CAR%

34

Source: HM Treasury, 1999

Fig. 15 - Public sector net worth - net debt (% of GDP)

0

10

20

30

40

50

60

70

80

90

100

70-7172-7374-7576-7778-7980-8182-8384-8586-8788-8990-9192-9394-9596-9798-99

Public sector net worth

0

10

20

30

40

50

60

70

80

90

100

Public sector net debt

35

HM Treasury (1998) admits that:“privatizations may have had an effect on net wealth insofar as the balance sheet valuation of the underlying asset was different from the privatization proceeds received; in some cases the differences seem to have been significant and we think that this would mainly reflect inaccurate valuation in the balance sheet data (or perhaps valuation on a different basis).”

36

WORKERS

Fig. 16 - Employment – Thousand units

100

150200

250

300

350400

450

500

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96

BRITISH RAILWAYS privatisation

100

150200

250

300

350400

450

500

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96

BRITISH RAILWAYS privatisation

37

Fig. 17 - Employment – Thousand units

50

70

90

110

130

150

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96

BRITISH GAS privatisation

50

70

90

110

130

150

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96

BRITISH GAS privatisation

38

Fig. 18 - Employment – Thousand units

100

150

200

250

300

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96

BRITISH TELECOM privatisation

100

150

200

250

300

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96

BRITISH TELECOM privatisation

39

Fig. 19 - Relative Average Hourly Wages of Males Full-Time Manual (Source: ONS, NES data)

.8.9

11.1

1.21.3

1.41.5

1.6hou

rly

1970 1980 1986 1990 2000year

GAS

.8.9

11.1

1.21.3

1.41.5

1.6hou

rly

1970 1980 1990 2000year

ELECTRICITY

.8.9

11.1

1.21.3

1.41.5

1.6hou

rly

1970 1980 1990 2000year

WATER

.8.9

11.1

1.21.3

1.41.5

1.6hou

rly

1970 1980 1990 1995 2000year

RAILWAYS

40

Fig. 20 - Relative Average Hourly Wages of Males Full-Time Non-Manual

.7.8

.91

1.11.2

1.3hou

rly

1970 1980 1986 1990 2000year

GAS

.7.8

.91

1.11.2

1.3hou

rly

1970 1980 1990 2000year

ELECTRICITY

.7.8

.91

1.11.2

1.3hou

rly

1970 1980 1990 2000year

WATER

.7.8

.91

1.11.2

1.3hou

rly

1970 1980 1990 1995 2000year

RAILWAYS

41

Fig. 21 - Relative Average Hourly Base-Wages of Males Full-Time Manual

.8.9

11.1

1.21.3

1.41.5

1.6bas

is

1970 1980 1986 1990 2000year

GAS

.8.9

11.1

1.21.3

1.41.5

1.6bas

is

1970 1980 1990 2000year

ELECTRICITY

.8.9

11.1

1.21.3

1.41.5

1.6bas

is

1970 1980 1990 2000year

WATER

.8.9

11.1

1.21.3

1.41.5

1.6bas

is

1970 1980 1990 1995 2000year

RAILWAYS

42

Fig. 22 - Relative Average Hourly Base-Wages of Males Full-Time Non-Manual

.7.8

.91

1.11.2

1.3bas

is

1970 1980 1986 1990 2000year

GAS

.7.8

.91

1.11.2

1.3bas

is

1970 1980 1990 2000year

ELECTRICITY

.7.8

.91

1.11.2

1.3bas

is

1970 1980 1990 2000year

WATER

.7.8

.91

1.11.2

1.3bas

is

1970 1980 1990 1995 2000year

RAILWAYS

43

Conclusion: a conjecture on the overall welfare balance

The assumptions:- we focus on 4 agents:• consumers,• workers, • shareholders, • taxpayers. -We guess the actual welfare change for each group, then we

sum the values: the balance is the gross welfare change for the society.

- The net welfare change is defined as the actual gross value, less a virtual value for a counterfactual scenario of continued public ownership

- All values are expressed in constant 1995 sterling- the social discount rate we use is real 5% - end of the period 1979-1997 and then stay unchanged with

an infinite time horizon: we convert all yearly values in their NPV perpetuity

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RESULTS a) ConsumersWithout any shadow pricing and with a prudent benchmark counterfactual (nationalized industry would have been able to offer only 50% price decrease), the observed consumers net welfare change at 1997 was around Lst 2 bn. With shadow pricing and correcting for redistributive impacts, there is probably a small net welfare loss as compared with optimal regulation or continued public ownership at marginal costs. b) Shareholders1) pay to buy shares,2) enjoy capital gains by underpricing and ouperformance3) pay corporate taxes. Suppose extraprofits (gross of taxes) were £7 billion per year. Taking the Corporate Tax rate, which is around 30%, as a reference point we would have £2.1 billion yearly as a tax burden for the shareholders. Taking the higher estimate supplied by HM Treasury (1995), or data by NERA (1996), we would have £2.8 billion, whose perpetual value at 5% is £56 billion. Thus the Treasury receives around £126 billion of discounted sterling, £70 billion from privatisation proceeds + £56 billion from corporate taxes. Buyers pay £70 billion and they appropriate excess profits, net of taxes, of £4.2 billion a year, whose perpetual value is £84 billion.The result is a net benefit to shareholders of £14 billion, or 20% of underpricing.

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c) Taxpayers 

Conversely the loss suffered by taxpayers is equal to all of the underpricing. The above reasoning can be easily repeated. The Treasury, on behalf of the taxpayers sold at £70 billion assets worth £84 billion to the buyers, thus it was unable or unwilling to extract by them all the potential rents. Correction for the shadow price of public funds.Because public funds have a shadow price due to distortionary taxation, with a 0.30 correction, the net loss to the taxpayer is around £18 billion.  

d) Workers 

We did not find clear evidence that employment and pay under the counterfactual would have differed much from the actual trend under private ownership. Blue-collars suffered a welfare loss and top managers and part of the white-collars enjoyed increased rents. But the evidence so far is not enough to guess a figure for the average workers’ welfare change. Presumably there was a regressive redistribution of income, but we are unable to quantify it. Thus we suggest no change.

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CONCLUSIONOverall balance without shadow prices: Our overall result, without the use of any shadow price, would be that: • taxpayers suffered a loss of £14 billion,•but this was cancelled out by the equivalent transfer to shareholders (privatization price doesn’t matter here),•workers’ welfare was probably slightly negatively affected, but overall this impact was negligible, •consumers enjoyed a perpetual net discount on prices worth around £ 35 per capita during the privatisation years 1979-97, or a perpetuity of £700 per capita. With indirect effects and the most generous assumptions, no more than £1000 per capita. This is also the overall perpetual welfare change for the UK.

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Overall balance with shadow prices

•If we consider monopoly profits as costly rents,

•we introduce a shadow price for public funds of 0.30,

•welfare weights in order to account for regressive redistribution of the income,

•then there is a per capita perpetual welfare net loss of less than £400, or £20 pounds during the privatisation years.

 

This offers us a conjecture on a range of values.

 

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Concluding remarks and further research

•Industry by industry evaluation

•Sensitivity analysis for the values of the various parameters involved in the calculation, including shadow prices and welfare weights.

•Microdata on impact on consumers

 

The measurable net social benefit of British privatisations was low. The highest value we may conjecture is around Lst 50 per capita (at 1997). (The lowest is a loss of around Lst 30 per capita). This is on yearly basis, 0,004 of private consumption (or 0,06 of the utilities bill).