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Benefits of Privatisation

Government’s case for privatisation centred on the aim that it would improve the efficiency and general performance of these companies, would give rise to increased competition that would broaden the consumer choice and would help the growth of the economy. Customers benefits when greater efficiency that can be achieved through privatisation is passed on to them.

Under state control, it was argued that these organisations had no incentive to strive for efficiency or to respond to the preference of the consumer because many of them did not have direct competitors, and they could also turn to the Government for financial assistance if their revenue was not sufficient to meet their operating costs. Becoming privately owned companies would compel them to satisfy both the consumer and the shareholders if they were to survive or to avoid being taken over by more efficient and competitive companies.

As privatised companies, they are more likely to respond to changes in customer demands and produce better return on capital invested. Employees also see privatisation as working in a company that has clear objectives, the means to achieve these and therefore rewards for success. Having freedom from the need to meet objectives laid down by the government, management

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could concentrate on commercial goals such as profitability, improved productivity and cost reduction.

One of the major policies of the conservative Government was to extend the ownership of wealth more widely in the economy, giving people a direct stake in the success of British Industry. Employees were given an offer of free shares and matching shares in proportion to what they bought. They were also given priority over the allocation of a proportion of the total offer. Small investors were also made aware of individual sales through extensive marketing campaigns and through the wide distributions of prospectuses and other information.

Also, when an offer was over subscribed, priority in the allocation of shares was given to small investors. Privatisation also had as part of its benefits, the creation of a “share-owing democracy” Although, privatisation has helped the economy tremendously based on the afore mentioned reasons, the opponents of this scheme, have however likened the process to “selling the family silver” disposing of important national assets for short-term financial gains.

Before privatisation, these assets were owned by the general public, but after privatisation, the assets pass to the hands of those individuals and organisations able and willing to buy shares and these include overseas nationals and companies who could ultimately gain full control of important parts of British industry unless prevented from doing so by government action, for example, through a golden share. Opponents argued also that float share prices have been too low, as evidenced by the demand for shares being initially far greater than the supply.

Therefore, it is claimed that the assets of the nationalised industries have been sold off too cheaply. If measured against some of the Governments stated objectives, privatisation appears to have been successful. By the early 1990’s private share ownership in the UK had increased to 25 per cent from 7 per cent in 1979. In view of the fact that many of these companies’ share prices were cheaper than their Net Asset Value (NAV) at the time of floatation these guaranteed quick profits for people who bought and sold straight away as prices rose.

Many shareholders who invested for longer term capital gains have also benefited from under pricing issues and in some cases received free additional shares and other additional benefits (including annual dividends) by holding on to their investment. The share prices of many of these companies have increased significantly since floatation and investors who hold onto them since would have had substantial increases in their investments portfolio.

For example Cable & Wireless shares were issued at an average price of 56p in the early 1080’s and were trading at 588p by august 1991. In addition to privatisation, the sale of council houses to private tenants has encouraged the growth of a “property-owning democracy”, in which an increasing number of citizens have a stake in the success of the economy and therefore in the performance of the private sector.

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