In Depth

RBS sale: does privatisation serve the public interest?

Some experts believe taxpayers may be short-changed – bringing back memories of Royal Mail sell-off

By Sophie Warnes  

Earlier this year George Osborne announced the Government will be selling off its stake in RBS, seven years after it was bailed out by the taxpayer.

This plan was put into action on August 3 when around £2.1bn of shares were sold to institutional investors, primarily hedge funds.

The problem is, at current prices, the shares are worth much less than we paid for them. The then Labour government invested £45bn in the bank in 2008; at the sale price of 330p per share this would be worth barely £31bn, although continuing improvements in the bank’s profitability might boost its value over time.

The chancellor says the Government could still make as much as a £14.3bn profit from the bailouts, if you add the money from share sales and cash generated by other banks that were bailed out at the same time, such as Lloyds.

So has selling off public assets ever been the best deal for taxpayers?

Royal Mail

The Royal Mail sell-off is one of the most recent privatisations. Royal Mail was making money at the time of the sale and the discounted offer was extremely popular, including with retail investors – although some surveys suggested only one-third of the British public actually supported the move.

The Government sold 60 per cent of Royal Mail at the end of 2013, for the price of 330p per share. As soon as the business went on the market, shares leapt 38 per cent and peaked at 615p. Shares are now worth around £5 each.

The Government gave preferential treatment to certain shareholders in the belief they would be long-term investors in the company, yet according to Chris Blackhurst at The Independent, shortly after the sale, 12 of the "Lucky 16" institutional buyers with a larger allocation cashed in for a big gain.

It has been calculated the taxpayer lost out by £750m on that first day. The National Audit Office (NAO) said the Department for Business, Innovation and Skills "could have achieved better value for the taxpayer", conceding that profits were sacrificed for certainty the transaction would be completed – setting shares at a cautious low end of the price range.

"This was to achieve the Department's priority to complete a sale within the time available, against the risks of industrial action and short-term market uncertainty," the NAO said in a report. "And to reflect the price indications of a small number of priority investors whose participation was seen as vital, as well the views of over 500 other potential investors."

An independent review carried out by Lord Myners found the Government was right to be cautious about the price when Royal Mail was floated, citing a risk the shares wouldn't otherwise be sold.

"We have not uncovered any evidence to challenge the general assertion that it was unlikely that an IPO price greater than 350-360p could have been achieved through the bookbuild process, and we accept that a decision to revise the range would have come with added uncertainty and risk," the review concluded.

East Coast rail

In 2009, East Coast rail was taken over by Directly Operated Railways, a company set up by the Government to oversee the network.

Its finances were turned around quickly: just one year later, it had more than doubled pre-tax profits. By last year, the company was reporting a profit of £225m, with £216.9m of that coming straight back to the Department for Transport. In total, since Government intervention, it has given back nearly £1bn.

The company was sold to a joint venture between Stagecoach and Virgin for £3.3bn last year and formally taken over in March. If the company continued to increase its profits under state ownership at the rate it had, projections show the taxpayer could have made back that amount by about 2021 (including profit from 2009-2014).

The Government defended the decision to sell by saying its ownership was always a ‘stop-gap’ and promises by the new owners to invest in the line will deliver new routes, new trains and service improvements such as Wifi.

Northern Rock

In 2008, following the subprime mortgage crisis, Northern Rock was nationalised by the Government. The bank was split into two parts: Northern Rock Plc and Northern Rock Asset Management. In 2012, Northern Rock Plc was taken over by Virgin Money. The other half was retained by the Government and was where the 'bad debt' was placed.

This company has recovered remarkably well under state ownership. At the end of the financial year just gone it reported an underlying profit before tax of just under £1.4bn.

Last year, the section of the bank that was sold off and rebranded reported that underlying profits had quadrupled from £13m to £60m, The Guardian notes.

Anti-privatisation campaigners say the common argument that state ownership is too inefficient to make profit in the same way as private companies is false. The state loses, they argue, when the Government pours money into projects only to sell them off to private companies once they are viable businesses. The chancellor and others counter that improvements in company fortunes after their sale is a facet of no longer being constrained in the public sector – and companies that thrive in private hands contribute more in tax long-term.

With the sale of RBS under way, the debate will rest for now. But a general election in 2020, at which the main opposition could propose at least some renationalisation of key industries, will give voters the chance to express whether or not they really feel privatisation is in the public interest.


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