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CASE STUDY: THE CULTURAL BACKDROPS TO PRIVATISATION: AUSTRALIA AND THE UK COMPARED
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The UK is widely regarded as the pioneer of contemporary privatisation
initiatives, having pursued major GBE sales initiatives almost continuously
since the late 1970s. Although much of the public enterprise sector
in the UK has now been sold-off, the UK was able to maintain its international
lead in 1995 largely as a result of the substantial proceeds derived
from rail privatisation initiatives. In contrast with the UK, Australia
has been a relatively 'late starter' in the privatisation arena, reflecting
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In 1995, countries in the Asian region and former Eastern Bloc nations accounted for the most significant non-OECD country privatisation initiatives as measured in terms of sales proceeds; this is illustrated in Chart 5 below. The leaders in the Asian region were Indonesia, Malaysia and Taiwan while in the former Communist states, Hungary and the Czech Republic were the most prominent, followed by Russia and Poland. For some time, South American countries have pursued active privatisation policies and in 1995, this was reflected in the high level of privatisation proceeds accruing to Peru, Argentina, Bolivia and Brazil.
Privatisation initiatives are typically pursued either through:-
In some instances governments have used a combination of public offers and private offers to facilitate a GBE sale; for example, in the case of Qantas, this company was sold partly through public floats on the stock exchange and partly through a "trade sale" to an existing corporate entity in the industry, specifically, British Airways, which purchased a 25 per cent interest in the Australian carrier. Private sales are sometimes facilitated by tendering processes whereby potential buyers are invited to tender a proposed purchase price; such methods can help ensure a reasonable sale price from a public finance perspective.
The distinction between private and public sale methods is significant to the extent that the choice of method of sale is influenced by
During 1995, international proceeds from major GBE sales through public offers were of approximately the same magnitude ($US36 632 million) as receipts from private sales ($US36 549 million) although as Chart 6 indicates, the relative importance of each form of sale varied greatly between international regions. Chart 6 shows that in 1995, mainland Western Europe and Asia relied most heavily on public sales while eastern European countries, Australia, and countries in South America and Africa relied heavily on private sales.
In those countries mainly using public sale methods, global floats were often employed, these involving the sale of shares on a number of major stock exchanges throughout the world. In the UK / Eire, proceeds from private and public sales were approximately of similar orders of magnitude.
As noted above, factors such as the nature of the enterprise and the industry within which it operates, the state of the domestic and foreign share markets and government socio-economic objectives influence the choice between public versus private sales. Australia's heavy reliance on private sales during 1995 in part reflects the sale method chosen by the Victorian Government for the disposal of its electrical energy companies. Given the size of the energy company sales, it is questionable whether the Australian share market could have sustained floats of this magnitude within the short time frame required to meet the Government's objective of reducing the level of the State's public indebtedness as swiftly as possible. In addition, the Victorian Government's apparent desire to tap into the expertise and capital resources available from foreign energy companies were no doubt important factors in selecting the private sale option.
Where GBE sales involve a very high degree of political sensitivity and community interest such as was evident with the disposal of part of the Federal Government's equity in the Commonwealth Bank and the sale of Qantas, there would appear to be 'public interest' arguments for choosing the public sale method of disposal. Public sale arrangements give the traditional owners (i.e. taxpayers) the option of buying a direct stake in the enterprise as well as readily facilitating employee share ownership schemes. The Qantas Airways float was the only significant Australian public sale of a GBE in 1995; all the other GBE sales illustrated in Chart 7 below were private offers.
During 1995, eastern European countries relied heavily on private sales, no doubt in part reflecting the relatively under-developed state of the share markets in those countries. For example, in eastern European countries where privatisation was of particular importance such as Russia, the Czech Republic, Hungary and Poland, most if not all major sales of state firms were undertaken through private sales.
International sales of GBEs in 1995 were mostly concentrated in the energy industry, the transport and communications sector, manufacturing and the finance and insurance industry. This is illustrated in Chart 8.
The Research Service frequently receives enquiries from Members of the Australian Parliament seeking general information about the state of play with privatisation initiatives in particular industries in overseas countries. Accordingly, the following discussion provides a basic overview of recent international privatisation initiatives within those industry sectors where the Australian Federal Government has a corresponding direct interest, namely
Privatisation in the manufacturing sector is not a significant policy issue for Australia. Unlike countries such as the UK, France, Italy and many eastern European economies, there has been minimal Australian government participation in manufacturing industry in modern times. Therefore, overseas privatisation policies affecting manufacturing industries are not addressed.
In the following sections, examples of the key privatisation initiatives in each sector are addressed, the sales processes used are outlined and some of the key policy issues arising are identified.
In the transport sector, the scene was dominated by a small number of relatively large asset sales, these chiefly taking place in Britain, Australia and Canada and with railways and to a lesser extent, civil aviation, accounting for most of the sale activity. Major transport GBE sales are summarised in Table 1 and Chart 9 below. The Table indicates that most transport GBE sales were undertaken through private sales in 1995 with the exception of Qantas and Canadian National.
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Country Name of Enterprise Sale Proceeds Type of Sale
$US millions
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Canada Canadian National 1522 Public Offer
Canada Air Traffic Control 1090 Private
Australia Qantas 1070 Public Offer
UK Angel Train Contracts 1060 Private
UK Angel Train Contracts 1059 Private
Malaysia Naval Dockyard 120 Private
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By far the largest transport GBE sales over the past year have been the series of privatisation initiatives associated with the on-going privatisation and franchising out of the various corporate units which formerly comprised the state-owned British Rail (BR). Unlike most GBE sales, BR is not being sold as a single entity. Instead, it has been split into some 25 passenger train operating companies, a major rail infrastructure company (known as Railtrack) and over 75 other supporting companies including a number of freight haulage companies, infrastructure support companies and rollingstock leasing firms. Initially these companies have been established as wholly-owned subsidiaries of BR and at present, many retain that status pending the sale of each individual company on a progressive basis over the next few years.
During 1995, the sale of four of these rollingstock leasing companies accounted for nearly 20 per cent of the total proceeds of the UK Government's privatisation program in that year; media critics of the BR privatisation process have claimed that these companies were substantially underpriced in order to guarantee a successful sale. Supporters of the rail privatisation process argue that it is encouraging better use of the railways, greater responsiveness to customer needs, better investment prospects for rail infrastructure, lower taxpayer subsidies for railways, a higher quality service and better value for money for the travelling public(2).
Through 1995, moves were under way for the sale of some of the passenger franchises and freight train operating companies including several major players, namely the Great Western Trains Company and South Western Trains Ltd. The first private passenger train companies commenced independent operations in early February 1996. All British passenger train companies taking on former British Rail services will do so under franchising arrangements which are typically negotiated to last for 15 years.
Initially, Government subsidies will be paid out to the franchisees but these are to be phased out as the expected efficiencies to be reaped from private operation eliminate the need for rail passenger subsidies. This has already led to moves to eliminate some loss making passenger services (for example, the Highland Chieftain sleeper train link between London and remote communities in the western Scottish Highlands) and widespread community concerns that the UK's rail privatisation arrangements fail to adequately recognise the important social role of public transport(3). It is significant that a number of the winning bidders for the passenger train franchises have been major bus and coach operators because this trend raises concerns about the prospect of a decline in competition between the coach and rail industries. In this respect, the take over of the Midland Main Line rail franchise by the National Express coach company is to be investigated by the Monopolies and Mergers Commission(4).
In relation to rail freight, a US railroad company, Wisconsin Central, has recently purchased some of the former BR train operating companies responsible for national rail freight haulage and the operations of the Royal Train. Foreign ownership of rail operating companies has to date been rare throughout the world. Thus the Wisconsin Central initiative is quite novel and is particularly noteworthy as this same company also purchased the New Zealand Railways in the early 1990s. It will be interesting to observe whether such moves initiate a trend towards the globalisation of railway companies as has occurred in the airline and multi-modal freight forwarding industries (e.g. Australia's TNT). There have been media reports that Wisconsin Central is interested in commencing rail operations on parts of the Australian rail network.
In relation to infrastructure, the Railtrack company was fully privatised through a single float in May 1996. Critics of the process argued that Railtrack shares were grossly undervalued and that the sale process contained a number of 'sweeteners' provided at great cost to the taxpayer but designed to guarantee a successful sale. The Railtrack sale was regarded as one of the most difficult in Britain's privatisation history. This was because the sale was accompanied by repeated warnings from Labour Party spokespeople to the effect that a Labour Government would be an active regulator of Railtrack to ensure that the company served the broader national interests as its first priority. In particular, Labour was concerned that Railtrack should not used as a milching cow for the liquidation of valuable public assets, in particular, its property holdings in the larger cities.
Labour has not gone so far as to propose the renationalisation of Railtrack should the Party be elected to Government(5) nor has it given a commitment to re-nationalise the train operating companies or the rollingstock leasing companies. Critics of the BR privatisation process argue that consumers and taxpayers are the losers because of the fragmentation of the previously integrated "seamless" national rail network and because privatisation has meant that the Government is now paying higher subsidies to the new train companies to enable them to show a commercial return compared to the subsidy levels previously paid to BR(6) .
Another concern has been that over the course of the BR privatisation process, (effectively initiated in April 1994), new investment in track infrastructure and rollingstock has declined substantially in the light of the uncertainty over the future of the fragmented BR in private hands. Critics note that while the Government has allowed infrastructure investment to run down, it has directed very substantial funds to facilitate the very complex and cumbersome rail privatisation process, for example, legal and allied consultancy costs - such outlays being considered a huge deadweight loss compared to the social and financial returns which might have been achieved if the funds had been directed at the maintenance of BR's infrastructure investment program.
The float of the Canadian Government's national rail freight operator, the Canadian National (CN) in 1995/96 was the largest single asset sale by any Canadian government during that year. It was also the largest share issue in Canada's history; with proceeds of $US1522 million, it accounted for over 31 per cent of total Canadian privatisation proceeds during 1995. Shares were offered on both national and overseas stock markets. As in the case of British Rail, the CN was an historical amalgam of former privately owned railroads which had been integrated into the single Federally-owned national rail system some 70 years ago. The Canadian Government had considered retaining some equity in the CN but in the event, it has sold its entire interest in the railway.
The sale of the CN was reported to have been a "huge success" and very heavily subscribed. The market's apparent perception of healthy prospects for the CN may be based on the sound financial performance of the US railroad industry in recent times. US railway companies are reporting strong financial performances following deregulation of the rail industry in the US and the accompanying widespread merger and restructuring activity among many of the private rail firms which dominate the US rail industry,. The CN's growth strategy relies heavily on expansion into US freight markets and with this in mind, it has taken over a number of smaller regional US rail companies.
It is significant that private investors in Canada were allotted 20 per cent of CN shares while the remaining 80 per cent of shares were split evenly between Canadian and foreign institutional investors. As part of the privatisation package, the Federal Government forgave CN debts of some $C900 million but retained the Railways' non-rail assets including some significant real estate and property interests.
Towards the end of 1995, the Canadian Minister for Transport announced that a review would be undertaken into the future of long distance passenger rail service in Canada and this would include consideration of the possible privatisation of Via Rail Canada, the country's national passenger rail corporation, which is presently owned by the Federal Government.
In contrast with the Australian approach in which the government rail operators retain a dominant role, a number of overseas countries have sold their national rail services entirely to strategic private consortiums / investors. For example, New Zealand Rail was sold to the US railroad, Wisconsin Central in 1993 and some 51 per cent of Chile's Ferrocarriles del Pacifico (its national rail freight operation), was sold to a private consortium which embraced investment fund and rail industry interests. Although it took effect in 1993, the privatisation of former New Zealand Rail (now known as Tranz Rail) remains of significant interest to international privatisation observers.
Tranz Rail had achieved profitability prior to privatisation and while still in government hands, had reduced its employment from 22 000 to 6000. Since privatisation it has shaved employment levels further, to around 4500, while concurrently expanding long distance passenger services without any need for direct government subsidies. It is among the few railways in the world to operate passenger services without incurring reported losses and does so with a highly unionised workforce. A full assessment of the 'success' of the New Zealand Rail privatisation initiative would require detailed consideration of whether its sale price was set at a commercially realistic level or whether the NZ taxpayer has provided a windfall transfer to the new private owners through the disposal of the rail system at less than its true commercial value.
In Japan, there has been some limited privatisation of one of the nationally-owned rail companies (JR East); Japan has not pursued privatisation with any great vigour in any part of its economy suggesting that the ideological bases of privatisation policies elsewhere may have limited application in Japan's cultural and political context(7)
One of the most recent rail network sales is that of the Bolivian railway company, ENFE, which was partially (50 per cent) sold to a Chilean rail operator, Cruz Blanca; although operational assets are to be retained in Bolivian Government ownership, they will be made available to the private operator under a 40 year concession arrangement while the government will also receives rents and tolls for the use of stations, buildings and the rail tracks. The Government of Brazil is to progressively privatise the Federal railway system from the second half of 1996 and extending into 1997. Other countries addressing the rail privatisation question over the past year include South Africa, Argentina and Mexico.
Because of the underlying public interest significance of rail infrastructure, rather than proceed with complete disposal of rail assets to private interests, some governments have opted for the granting of operating rights (or concessions) to private interests. During 1994, Argentina granted a number of ten year concessions for private interests to operate parts of the national rail network. Legislation passed by the Salinas national government of Mexico in 1995 has facilitated private investment in Mexican railways under fifty year concession arrangements. Private companies are permitted to operate various stretches of the Mexican rail network, provide train services and to manage railyards and terminals.
In most western economies, there is broad public recognition of the important social, environmental and national development roles of railways; but invariably such roles have adverse effects on their financial viability which in turn can make them less attractive privatisation candidates.
To some degree the rail privatisation models being adopted by countries such as Britain and New Zealand are potential models for other countries to follow to the extent that they have attempted to reconcile the unprofitability of many rail activities with private ownership. However, in the case of Great Britain, this has meant the introduction of quite complex and costly Government regulatory frameworks within which the new private owners and franchisees are required to operate.
The British experience suggests suggest that while public policy may seek to reconcile the inherent unprofitability of many forms of socially significant rail service under private ownership, the alleged efficiencies and cost savings to be derived from privatising and franchising arrangements have yet to be proved. Notwithstanding this, the indications are that rail is likely to be a very active field of privatisation activity in the years ahead.
The Australian rail industry has traditionally been a mixed public-private sector area of activity. The private sector has long been active in the fields of rollingstock manufacture and in the infrastructure equipment industry. But Australia's main rail networks were largely built by the early colonial governments and remain mainly in public ownership to this day. Private rail networks mainly consist of commodity-specific railways such as the iron ore lines in north west WA and in the Middleback Ranges of SA and the Queensland coastal sugar lines.
The National Competition Policy adopted by the Federal and State/Territory Governments during the course of 1995 is progressively enabling private transport firms to utilise the government owned rail network and compete directly with the government rail authorities. During 1995/96, several private rail operators commenced services - most notably, Specialised Container Transport Ltd (SCT) and TNT, both firms operating regular rail freight services linking Melbourne, Adelaide and Perth and at this stage using rail authority crews and rollingstock.
The National Rail Corporation, which was set up in 1991 to operate interstate rail freight business in Australia, is a jointly owned Federal-State Government company. At the time of its establishment, it inherited substantial operating losses from the interstate freight businesses previously run by the state and Commonwealth rail systems as well as substantial track and terminal infrastructure deficiencies which still adversely affect its efficiency in many areas. In the circumstances, National Rail has not been an obvious immediate candidate for privatisation even though it does not have any formal community service obligations (sometimes seen as a barrier to privatisation) comparable with those undertaken by Australian National and some of the State rail systems.
The approach being pursued by the UK Government in splitting up the former unified national rail industry into many smaller companies with narrow regional orientations contrasts markedly with the Australian Government's approach which has seen the recent establishment of National Rail as the first nationwide rail operator in Australia's history. The NRC has taken over from the former fragmented interstate rail freight services provided by various state and Federal rail systems. Thus, whereas the Australian Government has been concerned to improve rail's productivity and competitiveness relative to other transport modes and to enable rail to offer a "seamless" national network, the British approach concentrates more on encouraging efficiency through the transfer of rail to private firms and on stimulating competition between alternative rail service providers through rail passenger service franchising.
Privatisation initiatives in the air transport sector have taken three main forms:-
Of these three categories, the sale of airlines has tended to attract the most attention. Invariably, Government-owned airlines have been symbols of national prestige and their disposal has tended to be accompanied by considerable political debate. However, in reviewing 1995, it was Canada's sale of its air traffic control system which brought forth the largest privatisation proceeds of any sale in the air transport industry, yielding $US1090 million or 22.4 per cent of Canada's privatisation proceeds for that year. The provision of air traffic control infrastructure and services remains dominantly a public sector provided function in most overseas countries and in Australia; it is not an area which has attracted much interest on the privatisation front to date, no doubt because of its intrinsic safety-oriented function.
Until recently, the sale of airports was not been as common a feature of international privatisation programs. Outside of the UK and some smaller countries, there has been a general view that airports are of such significance to the national interest that the pursuit of public policy objectives is most effectively facilitated through direct public ownership. Even in the US, airports are typically owned by local town councils or by autonomous public authorities such as the Port authority of New York and New Jersey. The US Federal Government has traditionally maintained a high level of national policy control over airports through its operational (i.e. safety and environment related) regulatory controls and through the provision of substantial capital funding support for airport infrastructure development.
However, public sector budgetary pressures are likely to see increased privatisation of airports and greater private sector involvement in airport infrastructure provision in many economies in the years to come. For example, as recently as November 1995, the German Cabinet confirmed plans for disposal of its equity in major airports including Hamburg, Cologne/Bonn and Berlin-Brandenburg Flughafen. The German Federal Government is also encouraging the German state governments to dispose of their equity holdings in the national airports system(8).
During 1994, the Government of Denmark partially privatised the former Copenhagen Airports Authority while in 1995, the British Government pursued a policy of "encouraging" the sale of local authority airports. One such case is Coventry Airport which was sold to a joint venture of Airport Management and Investment (51 per cent) and local council interests; the new "owners" received a 125 year lease. In mid-1995, the Government of Austria undertook a global share offering in Vienna International Airport, reducing its stake from 40 per cent to less than 18 per cent.
Other developments in train include those of the Government of The Netherlands which is moving to sell its equity in Schiphol (Amsterdam) Airport, while governments in Mexico. Argentina and Bolivia are addressing the sale of their national airports. The rapid growth in air traffic among the 'tiger economies' of South East Asia is imposing substantial investment demands on airport operators; in response, private equity is contributing in a major way to the development of new airports such as at Hong Kong and Kuala Lumpur. In Japan, one third of the cost of the new Kansai Airport, built on a man made island off the coast of Osaka, was met by private companies and individuals. In August 1996, it was reported that the Philippines Government is to privatise Manila Airport and the majority of the country's provincial airports over the next few years(9).
Apart from the Qantas sale, airlines did not figured prominently in international privatisation activity over 1995-96 although a number of prospective sales were launched or considered, for example:
It is of interest that air traffic control systems are not presently on the asset sales agendas of Australian State and Federal governments notwithstanding the prominent Canadian initiative; nevertheless, the sale of the Commonwealth's remaining equity in Qantas over the course of 1995 represented one of the world's largest single transport sector privatisation initiatives for that year, yielding $US1070 million to the Australian Government. This has enabled its main industry-based shareholder, British Airways, to consolidate "partnership arrangements" with Qantas; such arrangements are aimed at giving Qantas greater effective "mass" in international airline markets and to assist its competitiveness and viability in an era increasingly dominated by industry globalisation and strategic partnerships.
The Federal Government's planned sale of long term leases in individual Federal Airports Corporation airports (with restrictions on cross ownership) in 1995-96 contrasts with the sale of the British airports network, where the network was kept in place and sold as a single entity. The rationale of the Australian approach is to facilitate competition between airports. This assumes that traffic is not necessarily "captive" to individual airport locations; it is unclear at this stage how valid this assumption is in the Australian content.
Privatisation in the area of sea transport has not been a particularly high profile area of activity at the international level, but the following examples of sale initiatives in progress during 1995 are illustrative of recent overseas approaches to privatisation in the shipping and seaports sector.
In Britain, during 1995 the UK Government launched the privatisation process for the three "trust" ports of Tyne, Ipswich and Dover under a scheme administered under the Ports Act of 1991 which established procedures for the voluntary privatisation of trust ports. Six other ports have already been sold under this arrangement and the Port of Dundee in Scotland is presently in the process of being privatised under the Act, the Transport Secretary may compel port trusts with annual turnovers exceeding $US8.5 million in two out of the last three years to privatise themselves.
As part of the privatisation activity at the state government level in India, a number of small to intermediate sized sea ports are being offered on lease to the private sector. Investors are being permitted to fix their own charges for port services and are allowed to follow their own industrial policies without being governed by the Dock Workers (Regulation of Employment) Act 1948. There has also been considerable private interest in the operation of innovative water transport services in various parts of the country utilising hovercraft and catamaran vehicles; there are legislative controls which curtail private provision of water transport services in India at present.
Other sea transport privatisation initiatives during 1995 included:
Looking to the future, more substantial public port sales seem likely; for example, it has been reported that the Government of Brazil will privatise its 31 Federal ports towards the end of 1997(11).
In the 1980s and into the 1990s, the sea transport sector did not generally feature on the privatisation agendas of State or Federal Governments in Australia. As is the case overseas, this situation may have partly reflected the marginal financial viability of many enterprises engaged in the provision of shipping services and port infrastructure - circumstances which make such enterprises more problematical candidates for sale. In addition, many sea transport functions of government have traditionally been seen largely in the context of meeting broader non-commercial priorities such as regional and industrial development goals.
Recent privatisation activity in Australia's sea transport area have been dominated by the proposed sale of ANL and the moves to privatise a number of ports in Victoria. The planned sale of the Australian National Line (ANL) to the UK-based P&O shipping group was put aside by the then Australian Federal Government towards the end of 1995 largely in response to labour concerns about the proposed sale arrangements. However the sale of ANL's share in the Australian Stevedores operation did proceed, while in February 1996, the Victorian State Government concluded the first sale of a regional port, the Port of Portland, in the south-west of the State.
Private port ownership is not a new phenomenon in Australia, for example, Australian mining companies such as the BHP have long been engaged in the provision and operation of private ports and/or supporting infrastructure. Similarly, throughout its modern history, Australia has seen significant private sector participation in its domestic shipping sector although this has declined with the onset of rail and road competition, particularly over the last 20 years.
Through the mid 1990s, telecommunications has been among the most active areas of international privatisation activity reflecting the rapid growth of the industry with its accompanying high capital requirements. Many national governments have been reluctant for public sector budgetary reasons to provide the substantial capital injections now required to finance the massive investments in new technologies and infrastructure which public telecommunications carriers (PTCs) need to ensure their long term viability.
In addition, the increasing globalisation of the telecommunications industry has fostered an environment supportive of privatised PTCs while the privatisation trend has in itself assisted in the emergence of global telecommunications carriers. Chart 10 and Table 2 below summarise the major instances of telecommunications company sales in 1995.
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Country Name of Enterprise Sale Proceeds Type of Sale
$US millions
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Netherlands KPN2 3438 Public Offer
Belgium Belgacom 2450 Private
Indonesia PT Telekom 1590 Public Offer
Spain Telefnica de Espaa 1336 Public Offer
Czech Republic SPT Telecom 1320 Private
Portugal Portugal Telecom 988 Public Offer
Bolivia Entel 610 Private
Netherlands KTA 435 Private
UK BR Telecoms 205 Private
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Within the European Union, the move towards a liberalised telecommunications network from 1997 has been an additional spur to governments to establish their PTCs on a more commercial footing and, in particular, to establish "strategic partnerships" with other national telecommunications companies through the use of privatisation arrangements which invite such strategic shareholdings.
Telecommunications carrier sales accounted for a significant proportion of large scale equity transactions in Europe in the mid 1990s. Denmark and the Netherlands initiated some of the biggest PTC sell-offs with stakes of 48.3 per cent of TeleDanmark and 30 per cent of the Dutch national carrier, KPN raising over $US3000 million and $US4000 million respectively. The Danish sale was carried out through a global offering which was focussed most strongly on the Nordic countries, the UK and mainland Europe; in addition, substantial shares were offered in the US in the form of a "registered offering". The Danish initiative was motivated primarily by the coming liberalisation of the European telecommunications industry rather than by ideological dispositions to "downsize" the public sector or by public revenue raising motives.
The Dutch carrier, KPN has faced increased competition in its home market as its former monopoly has been progressively reduced; for example, in September 1995 a rival mobile phone network was launched while the Government moved during 1995 to licence a second fixed telecoms network. Concurrent with the staged privatisation of KPN, and the growth of competition in its home market, the carrier has taken on a multi-national character through its 25 per cent stake in Unisource, a joint venture with the telecommunications companies of Spain, Sweden and Switzerland. The Dutch Government is committed to retaining a 33.3 per cent equity stake in KPN until 2003 as well as creating its own 'golden' share(12) in the company - an arrangement which gives it limited strategic control of the company.
Notwithstanding the huge scale of financial returns on the KPN part-privatisation, the Dutch Government is reported to be "taking time out" to critically assess privatisation policies following high level studies which have cast doubt on whether privatisation is any guarantee that costs will be reduced ; for example, studies carried out by the National Institute for Public Spending have shown a pattern of increasing operating costs of organisations which have been either privatised or commercialised(13). Nevertheless during December 1995, the Netherlands Government unveiled plans to divest the stated-owned broadcasting facilities company, NOB, in several tranches; the sale is to be aimed at institutional investors and would be spread over several tranches. This was followed up in January 1996 by a Dutch Government announcement that it would consider selling off its 59 per cent stake in Nozema, the national radio and television mast operator (the Dutch public broadcasters have a combined 40 per cent stake in Nozema).
Another prominent European PTC sale was in progress in late 1995 and early 1996 with the disposal of a 49.9 per cent shareholding in Begacom, the Belgium state-owned national carrier for some $US2450 million. The buyer was a consortium led by Ameritech and included Singapore Telecom (itself partially privatised in 1993) and Tele Danmark. As with some other western European countries, the sale did not generate a great deal of political debate; there is not the polarity of views within the Belgium community about the virtues of private versus public ownership evident in English-speaking countries.
Belgium has a long tradition of public/private joint venture partnership co-operation and a corresponding low level of public sector ownership; the country has never undergone a process of mass nationalisation of major industries as occurred in countries such as post-war Britain. The indications are that the main motives were in providing the Belgium Government with a useful source of cash at a difficult time for the public budget as well as a recognition of the need for Begacom to be made efficient and competitive quickly in view of the 1997 liberalisation of the EU telecommunications industry.
Portugal Telecom was also subject to partial privatisation through a global equity offering during mid 1995; prior to the initial 27 per cent equity tranche being put on the market, the national Parliament passed a law limiting private ownership in the carrier to 49 per cent In June 1996, the Portuguese Government announced that it had successfully sold a further 22 per cent of its stake in Portugal Telecom, reducing its equity share in the company to 51 per cent. This was among the most successful of Portugal's privatisation initiatives as measured by stock market interest in the sale; demand for shares in the global offer was four times larger than the number of shares on offer. The sale yielded Portugal some $US950 million. In October 1995, the Government of Spain moved to reduce its equity in Telefonica (then amounting to about a one third shareholding) by some 12 per cent through an international tranche; sale proceeds amounted to $US1336 million.
Although Eire does not have a long record of privatisation initiatives, its industry policy objectives have been a major driving force behind its recent decision to sell a strategic stake in its national PTC. During the second half of 1995, the Eire Government decided that Telecom Eireann (TE) would be permitted to sell a 35 per cent strategic stake in the company to a foreign partner. This initiative has been seen as essentially derived from the National Government's industry policy directed at drawing in offshore expertise to enable the development of Eire's telecommunications network to meet the needs of multinational companies as well as being a response to the need to prepare TE for competition in line with EU directives which will open up domestic telecommunications networks to competition from 1998. It is also a response to the need for a significant capital injection into TE.
During January 1996, the Government of Eire launched the sale through the tender method involving six major international telcos including BT, Bell Atlantic, Singapore Telecom, the Netherlands' KPN and Sweden's Telia and members of the Unisource consortium. The new partner will not be chosen on the basis of price alone; its approach and industry development plans will also be significant.
Italy has also been moving to sell public equity in its Stet telecommunications company, this being one of a number of major privatisation initiatives set out in the Berlusconi Government's wide ranging privatisation program announced in mid October 1994. There have been delays to the implementation of this program, apparently attributable to trade union opposition and the need to pass relevant legislation through the Parliament to establish appropriate regulatory arrangements for the newly privatised industries. The Italian Government finally agreed in August 1996 to privatise Stet in early 1997 and to break off and sell its non-core businesses such as its computer software unit, Finsiel, its Yellow Pages publisher, Seat and Sirti, its telephone equipment manufacturer(14)
Britain was among the pioneers in the field of PTC privatisation, with its national PTC, British Telecom (BT) being privatised progressively since the 1980s. Quite separately from the BT network, the rail industry of Britain has traditionally operated its own telecommunications network known as BR Telecoms; during December 1995, this network was sold privately to the British telecommunications operator, Racal.
In June 1996, the French Government initiated a plan directed at the partial sale of France Telecom beginning in 1997; the Government would retain 51 per cent of the company with a maximum of a further 10 per cent being reserved for employees. An accord reached with the relevant trade unions provides for the progressive retirement of surplus employees.
Possibly the most significant telecommunication carrier sale initiative in the immediate future is that of Deutsche Telekon (DT), the government-owned national carrier of Germany. An initial flotation of DT shares is planned for November 1996 and is expected to raise some $US8 billion-$US10 billion. A second tranche is planned for 1998. The November 1996 share issue will promote special incentives, including free shares and discounts, in an attempt to attract up to two million individual investors. At present, only five per cent of the German population hold shares. About 40 per cent of the issue is to be allocated to individuals with the remainder being allocated to domestic and international institutional investors. If the issue is oversubscribed, preference will be given to individual investors. A fifth of the company is to be sold through the new share issue. In order to encourage longer term share holdings, an incentive offer of one free share for every 10 held for three years will also be made available. DT shares are to be listed in eight regional bourses in Germany as well as in New York, Tokyo, Toronto, Montreal and London.
Beyond Europe, major PTC sales included the telecommunications companies of Indonesia and Pakistan. In 1994 the Government of Pakistan offered 11.6 per cent of its shareholding in the Pakistan Telecommunications Corporation through domestic and international tranches. The first tranche was heavily oversubscribed by foreign institutional investors resulting in the use of an auctioning system in the second tranche to determine an appropriate share price. Overall proceeds were nearly $US 1000 million; this was the first global privatisation initiative by any government in south Asia.
The Indonesian initiative involved a $US1100 million offer of shares in Indosat, the principal Indonesian provider of international telecommunications services. This sale was by means of a public float and was well received by the market; it was supported by the rapid and successful growth of the Jakarta Stock Exchange. The success of the Indosat sale led the government to announce in late 1994 that the domestic operator, Telkom would also be subject to privatisation. The Telkom float was initiated in mid-November 1995 with simultaneous share offerings in London, New York and Jakarta. Initially the aim was to sell 27.5 per cent of Telkom's share capital but this was reduced to 19 per cent in response to a lower than expected international demand.
Other likely PTC privatisation initiatives activated during 1995 include the public carriers of Thailand, and Turkey. During 1995, the Government of Thailand initiated studies into the sale of 25 per cent of the equity of the Telephone Organisation of Thailand (TOT) to a strategic partner. In the case of Turk Telecom, some 49 per cent of the enterprise is to be sold.
The Government of Brazil is moving to sell off its cellular and conventional telephone networks. At the state level, Rio Grande do Sul is planning to sell 35 per cent of its telephone company in November 1996; this is the only state company outside of the federally controlled telecommunications system.
The sale of the Australian Government's satellite telecommunications carrier, Aussat, to the Optus Group in 1991-92 put Australia somewhat "ahead of the game" in privatising key telecommunications infrastructure. However current overseas trends suggest that Australia could well become "an odd man out" in continuing with substantial public ownership of our main terrestrial telecommunications carrier, Telstra (in fact, it may be argued that Telstra has been effectively semi-privatised for some years to the extent that a number of its subsidiaries have been joint ventures with private interests since their establishment). As the discussion below reveals, different countries pursue public telecommunications carrier privatisation for a range of diverse motives and there may be legitimate socio-economic and political reasons to justify retaining Telstra (or some Telstra functions) in public hands reflecting concerns quite unique to Australia.
On the other hand, many of the telecommunications carrier privatisation examples referred to below have been motivated by the huge requirements for capital needed by contemporary telecommunications carriers for them to remain competitive in an environment increasingly characterised by the growth of large, private, multi-national telecommunications carriers in lieu of the more traditional publicly-owned, nationally based carrier regime. It is therefore a valid issue to consider whether Australia should continue to support Telstra within the present public ownership arrangements, notwithstanding its efforts over recent years to take-on a more multi-national identity, particularly in the south-east Asian region.
The finance sector, which encompasses banking and insurance, has been an active area of privatisation through the mid 1990s reflecting a range of circumstances including
The sale of public financial institutions has been quite widespread among members of the OECD as well as among non-OECD countries, including former Communist-Bloc economies. In recent years, Australia has been a significant initiator of financial institution enterprise sales, noteworthy examples in 1995 being BankSA (the former State Bank of SA which was sold to the Advance Bank Group), BankWest (sold by the Government of Western Australia to the Bank of Scotland) and the State Government Insurance Commission of South Australia. More recently, the sale of the Australian Government's remaining 50.4 per cent shareholding in the Commonwealth Bank in mid-1996 has also been significant.
On the international scene, major sales of financial institutions undertaken in 1995 were dominated by France, Germany, Sweden, India and Italy. Details of the most significant examples, including Australian cases, are summarised in the Table 3 below and in Chart 11.
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Country Name of enterprise Sale Proceeds Type of Sale
$US millions
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Germany Bayerischer Versicherungs 1740 Private
Italy INA 2 1000 Public Offer
Sweden Nordbanken 893 Public Offer
India IDBI 758 Public Offer
Australia BankWest 685 Private
Australia BankSA 525 Private
France BFCE 500 Private
Norway Fokus Bank 291 Public Offer
Peru Banco Continental 256 Private
Portugal Banco de Fomento e Exterior 120 Public Offer
Australia SGIC,SA 125 Private
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Not shown in Table 3 are the many sales of smaller financial institutions, particularly in former Communist Bloc countries and in developing economies. Some 1995 examples include:-
In Western Europe, the French Government owned bank, Credit Lyonnais is considered a likely candidate for privatisation; the motive for the likely sale is the need to bring down the Government's budget sector deficit.(15)
A feature of the sales summarised in Table 3 is the importance of private sales, possibly reflecting the desire of many financial institutions around the world to seek growth through merger activity. In Australia, a mixture of private sales and public float arrangements have been chosen, the latter being the preferred method of disposal of the Commonwealth Bank. Given the degree of merger and takeover activity in Australian banking over the past two decades and the popular desire to keep the Bank under Australian control, it is doubtful whether a private trade sale of the Commonwealth Bank could have ever been a viable option. The Bank could justifiably retain its claim to be "the peoples' bank" in view of the fact that it has Australia's largest share registry with 274 000 shareholders. This was achieved through the sale of 29.75 per cent of the Government's equity in 1991 (raising $US960 million) and then a further 19.9 per cent in 1993, raising $US1260 million.
The recent flotation of the Federal Government's remaining 50.4 per cent interest in the Commonwealth Bank was Australia's largest stock market sale to date; even so it was over-subscribed.
The year saw a substantial level of privatisation activity, dominated by the sale of 14.7 per cent of the Italian energy giant, ENI (the state hydro-carbons holding corporation), to both retail and institutional investors and the sale of portions of two of Britain's large electricity companies, National Power and Power Gen. Other major energy industry privatisation initiatives are summarised in Table 4.
The significance of the sale of the five Victorian electricity distribution companies in the international context is apparent in the table; combined, Australian proceeds from all its energy sector privatisations in 1995 exceeded those of any other country; this is illustrated in Chart 12. More recently, the Victorian Government has sold the Yallourn Power Station ($A2.43 billion, March 1996) and the Hazlewood Station ($A2.35 billion, August 1996); the latter was sold to an Anglo-American consortium while Yallourn was acquired by a UK-led consortium headed by the PowerGen company.
It is noteworthy that during 1995, the UK Government pursued the proposed flotation of the National Electricity Grid Company. At present the Grid is owned by 12 regional electricity companies in England and Wales. As with the railways of Britain, privatisation in the electricity sector has been accompanied by the establishment of a detailed economic regulatory arrangement by the Government to oversee prices and competition in the industry. In addition the UK Government announced that it would privatise elements of its nuclear power industry in 1996.
In Canada, the Federal Government sold its remaining 70 per cent equity in Petro-Canada while Hungary successfully sold a significant stake in its electricity utility, MVM. Moves to privatise the Italian state electricity corporation, ENEL, have been the subject of scrutiny by the Italian anti-trust authority. The authority opposes sale of ENEL in its traditional uniform, vertically integrated structure as presently proposed by the Government arguing that it would create a massive privately owned monopoly and so would not yield any competitive benefits. It favours the creation of a plurality of independent producers and parallel liberalisation in the wholesale distribution area.
There are also indications in Germany that the country is moving to unravel the system of local energy monopolies which have existed there since the end of the Second World War. Germany's 'Cartel Office' (equivalent to Australia's NCCC) recently ruled against a contract giving RWE, the country's largest electricity company, exclusive rights to supply energy to a certain town (Nordhorn). This is seen as a test case for foreign and local companies keen to break into the lucrative German energy sector but which are restricted by decades long contracts between the utility companies and the towns.(16) Many of the contracts have expired or are due to expire soon. German cities earn considerable revenue from such contracts through the imposition of contract fees. Thus, the utility companies, backed by the towns and cities, remain staunchly opposed to the deregulation of the energy sector, despite calls by the UK and other European Union countries. The companies apparently fear that deregulation would diminish their monopolies and the privileges they enjoy in the distribution of energy.
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Country Name of Enterprise Sale Proceeds Type of Sale
$US millions
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Italy ENI 3965 Public Offer
UK National Power2 2810 Public Offer
UK PowerGen2 1865 Public Offer
Australia Powercor 1584 Private
Australia Eastern Energy 1532 Private
Canada Petro-Canada 1467 Public Offer
Hungary MVM Companies 1300 Private
Australia Citipower 1179 Private
Australia United Energy 1150 Private
Malaysia Petronas Gas 958 Public Offer
UK BP 780 Public Offer
Australia Solaris Energy 700 Private
Peru Edegel 524 Private
Brazil Escelsa 387 Private
Argentina Petroquimica Bahia 358 Private
Blanca
Russia Lukoil 320 Public Offer
Russia Yukos 309 Private
Canada Syncrude Canada 263 Private
Italy Ilva Servizi Energie 230 Private
Finland Neste 184 Public Offer
Hungary MOL 180 Public Offer
Russia Lukoil 170 Private
Russia Sidanco 130 Private
Peru Ventanilla 120 Private
UK Coal Products 115 Private
China Guangdong 110 Public Offer
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Over the past 15 years, privatisation has become an increasingly prominent feature of democratic, market driven economies. The trend increase in such activity in most western economies contrasts with the general satisfaction with the 'mixed economy' model prevalent in most economies in the first three decades after World War Two. The motives behind this trend are many and varied, but in general, privatisation has been promoted on its promise of increased economic growth and prosperity, arguments which are now being pursued with considerable vigour by the newly democratic nations of Central and Eastern Europe.
However, privatisation is rarely embraced unequivocally and there are many parts of the globe where public sector involvement in trading enterprises remains dominant. In certain respects, the 'jury is still out' on the public benefits and costs of privatisation. Circumstances vary greatly between countries and it is difficult to make any overall assessment of the benefits of the privatisation trend at the international level.
In some countries, the privatising debate appears to be heading in a new direction. It might be argued that in essence, what matters now is not who owns the strategic assets of an economy, but rather, how effectively they are regulated so that they perform in a manner consistent with the public interest. This concern is particularly relevant where privatised former public corporations continue to enjoy considerable market power or even monopoly status. In this respect, it is significant that Australia's National Competition Policy places the spotlight on market power and public interest issues without regard to the question of whether the corporation is in public or private hands.
