The Performance of Privatisation Vol. II: Privatisation and its Effect on the Exchequer

Privatisation and its Effect on the Exchequer

Profit or Loss?


In the accompanying report, National Economic Research Associates (NERA) has presented the findings of the first independent analysis of the effect of privatisation on the exchequer. The performance of the following 33 companies has been analysed:

  • Associated British Ports
  • British Steel
  • BAA
  • British Telecom
  • British Airways
  • the 17 electricity companies
  • British Gas
  • the 10 water and sewerage companies

This report shows that a remarkable transformation in performance has occurred: these privatised companies, which once received a substantial outflow of cash from government, are now significant contributors to the national exchequer.

A Summary of NERA’s Findings

When the Conservatives came to power in 1979, the major nationalised companies were receiving large sums of taxpayers’ money. NERA’s report reveals that in the year to March 1980, the 33 companies it examined were contributing nothing to the exchequer: in fact they absorbed a total of £483 million between them, including £1,199 million in loan finance. British Steel was one of the worst companies requiring £1,020 million in the financial year 1980/81 on a turnover of just under £3 billion (thereby earning itself a place in the Guinness Book of Records).

This dismal state of affairs has been reversed. In 1987, the 33 companies examined by NERA contributed £8,374 million to the exchequer. Net contributions have continued at a high level in each of the last eight years:


In its detailed study NERA finds that:

  • The sale of shares in the 33 companies has generated average net proceeds of £3.5 billion a year between 1984/85 and 1994/95.
  • In addition, from 1986/87 onwards, the Government has received further net receipts (from taxation, dividends etc.) of between £3.3 billion and £5.8 billion a year from these 33 companies. As the chart above shows, these companies, taken as a whole, were net recipients of public sector funds in the early 1980s.

NERA concludes that this remarkable turn-round is attributable to three main factors:

  • ‘a dramatic improvement in the profitability of the companies, which has led to significantly higher corporation tax receipts’;
  • ‘dividend receipts in respect of the Government’s residual shareholdings, particularly for companies (such as BT, National Power and PowerGen) in which the Government initially retained a substantial shareholding’;
  • ‘continued interest receipts and repayments in respect of Government debt (including that owed by privatised companies)’.

The precise extent of the tax contribution made by these 33 companies is revealed in the chart below. Note that all but the electricity and water companies had been privatised by the end of 1988, when tax contributions began to soar. By mid-1991 both the electricity and the water industries had been privatised. The rising trend in tax paid can be attributed to the considerable improvement in corporate profitability brought about by improved efficiency and the private sector’s ability to identify and meet consumer needs.

Analysis of Company Trends

In nearly all the companies analysed the corporation tax contribution after privatisation has risen significantly. In some cases, such as British Telecom, the improvement has been outstanding.

British Telecom emerges from NERA’s economic analysis as a major contributor to exchequer revenues. Not only has the Government received over £13 billion in sales proceeds, but the exchequer has also ‘continued to receive over £1 billion a year after privatisation in the form of tax, dividends, interest and debt repayments’. As NERA observes: ‘Whereas in the four years before privatisation BT contributed up to £625 million a year to public sector funds, since privatisation it has generally contributed between £1 billion and £2.4 billion a year in addition to privatisation proceeds’.

Note: BT was privatised in 1984.

NERA suggests that this is surprising. However, there is a straightforward explanation for this trend. Since privatisation, BT has been able to attract outside capital as well as self-finance the huge sums required to invest in the latest telecom technology. In addition, the company is now far more efficient than it was under state ownership and it has been able to diversify into a number of different business activities, both here and overseas. In turn, the taxpayer has benefited from this improved efficiency and pre-tax profitability.

As more and more companies were privatised in the mid-1980s, the Treasury began to set tougher targets in terms of negative EFLs (external financial limits). Thus, the electricity supply industry was set a £1.3 billion negative EFL in 1987 in order to prepare it for privatisation. Although these pre-privatisation targets for the electricity companies were quite ambitious, the NERA report points out that, following privatisation, payments to the exchequer in the form of tax, interest and debt repayments have ‘generally exceeded the companies’ net contributions to public sector funds in the period before privatisation’. Furthermore, the exchequer has received £11 billion for the sale of shares in the denationalised electricity companies.

Since privatisation in 1991, the Scottish electricity companies have also become a net contributor to exchequer funds, remitting on average around £200 million a year in the form of debt interest and repayments as well as paying around £100 million a year in corporation tax.

The water industry has greatly benefited from privatisation. Previously it had been starved of capital by government, which had tended to be more concerned with the public sector borrowing requirement than with the investment needs of the water industry. Since privatisation, it has been able to raise the capital which is required to renew the vast infrastructure base of the industry and meet higher environmental standards. The capital markets are helping to provide the new loan finance for the investment programme. Thus, NERA points out that in the first couple of years following privatisation the private sector provided over £1 billion a year in debt finance – money which, under the previous regime, the taxpayer would have been asked to find. Altogether the industry invested £13.6 billion in the first five years following privatisation.

British Gas, the NERA report notes, made ‘very substantial inflows to public sector finances in the first seven years after privatisation’. The company has repaid all the public sector debt finance with which it was floated on vesting day. Corporation tax receipts have also been substantial. NERA points out that in 1994 and 1995 these tax payments reduced from their previous high of £618 million to £302 million and £220 million respectively. However, these figures should be treated with caution since the final tax paid may not be settled with the Revenue for several years as British Gas will need to agree with the tax authorities the capital allowances it can claim against tax.

After incurring a pre-tax loss of £36.6 million in 1992, attributable to the recession and the downturn in the property market, Associated British Ports has subsequently gone on to restore its profitability to new levels, achieving a pre-tax profit of £88.4 million in 1995. Corporation tax provided for in the 1995 accounts was £21.8 million compared with £18.5 million in 1994. Between privatisation in 1983 and 1995 the company paid a total of £109 million in dividends to its private shareholders.

BAA’s corporation tax payments have risen substantially since it was privatised in 1987 and ‘are now higher than the flows of interest, tax or EFL payments which the Government received from (or paid to) BAA when it was a state-owned company’. NERA further notes that ‘the private sector also receives dividend and interest payments which are very much higher than those which BAA paid to the Government before privatisation’. The following chart shows that tax payments alone are far higher than in the pre privatisation period.


BAA was privatised in 1987.

British Airways was a major recipient of taxpayers’ money before privatisation, requiring an average input from government funds of £189 million p.a. in the early 1980s. By the mid-1980s, the company had undertaken the radical restructuring programme necessary for privatisation and had become a net contributor to the exchequer. Since privatisation, BA has paid £358 million in taxes and £4.6 million in dividends on the small remaining equity stake held by government. In 1996 the tax payment increased substantially (omitted from the main reports since it lies outside its period of reference). BA’s annual report shows that the corporation tax charge was £112 million in 1996, equivalent to 19.2% of pre-tax profits. BA is now able to use its capital allowances to help it reduce its corporate tax bill. When the company was state-owned and incurring losses in the early 1980s it was unable to use such capital allowances to help it purchase new aircraft because it was not making any profits.

British Steel is another extraordinary story. The taxpayer was obliged to pour substantial amounts of money into British Steel in the early 1980s: EFL payments amounted to ‘an average of over £600 million a year between 1979/80 and 1985/86, peaking at £1.1 billion in 1980/81’. In the lead up to privatisation in 1988, due to the successes of the management team, the company was able to make an EFL repayment in the financial year 1987/88. Following privatisation, the company managed to increase profits to £733 million in 1990. After two years of losses, again attributable to a cyclical downturn and subsidies to steelmakers in other EU countries, profits swung back to £578 million in 1995. The Government has benefited from this excellent performance in so far as it has collected corporation tax payments totalling £208 million in the period between 1988 (when the company was denationalised) and 1995.

Public Debt Repayments

In addition to corporation tax receipts and dividends, the privatised companies have been able to repay the loans which they had previously negotiated with government. Under state ownership, the experience had not been so favourable. As the report points out the Government wrote off a total of £5 billion in public sector loans to the water industry prior to privatisation while ABP also had £81 million of public sector debt written off. The coal industry, which was not examined in this NERA report, was another industry which received recurrent, massive capital injections which were never subsequently repaid. For example, in 1990 the sum of £6,153 million was written off along with a £2,606 million write down of British Coal’s assets.


NERA calculates that the Government has received an average annual net inflow of between £6.7 billion and £11.5 billion in the period from 1986/7 to 1994/5. This contrasts sharply with the pre-privatisation period when the companies reviewed, taken as a whole, were net recipients of public sector funds.

About half the cash received by government is accounted for by corporation tax receipts, interest payments, dividends and the repayment of government loans. The remaining sum is made up of the sale proceeds from the flotation of the 33 companies.

NERA’s data demonstrate that privatisation has had an immensely beneficial impact on the 33 companies reviewed. The taxpayer is no longer asked to find the large capital sums required for major investment programmes such as BT’s investment in digital technology. Nor does the taxpayer incur the risk that these capital loans would never be repaid – a risk which became reality all to frequently while some of these companies were in state ownership.

Instead, these 33 companies have gone on to make considerable profits in the private sector. In turn, these companies have paid handsome dividends on the remaining government shareholdings and have generated substantial sums in corporation tax.

On this evidence, privatisation must be judged an outstanding success.




One of the pioneers of privatisation was the Centre for Policy Studies which, in 1979, established a Nationalised Industries Study Group to explore ways of introducing greater competition and private capital into state monopolies such as telecommunications, rail, the electricity supply industry and coal.

Since then, the Centre has also played a key role in formulating and proposing policies for the transfer of state owned businesses and activities such as BL, British Steel, the Property Services Agency, Associated British Ports, The Forestry Commission and the London Tube to the private sector.

Over 100 countries around the world have now adopted privatisation as a key part of government policy. The OECD estimates that the total value of equity offerings associated with privatisation flotations between 1995 and 2000 is likely to total $200 billion; however, in Britain there still remains considerable controversy over the precise benefits of privatisation. What is particularly striking about this debate is the lack of in-depth analytical work which has been undertaken on the performance of UK privatised businesses.

The lack of reliable factual material on the record of UK privatised companies was the main conclusion of a CPS conference, addressed by Rt Hon Michael Heseltine MP, then President of the Board of Trade in July 1994.

In order to fill this gap, the Centre commissioned National Economic Research Associates (NERA) to produce a series of independent research reports which will collect and analyse the available factual data on the performance of eight major public corporations or sectors which have been denationalised since 1979. These are:

Associated British Ports British Steel


BAA British Telecom


British Airways the electricity industry


British Gas


the water and sewerage companies


These industries were selected because of their importance to the economy, and also because it is possible to draw meaningful comparisons between their pre- and post-privatisation performance.

NERA - Monday, 16th September, 1996