ERI Discussion Paper Series No.60
International Comparison of Privatization and Deregulation
- The Case in United Kingdom -

August 1995
Martin CAVE(Brunel University)
George YARROW(Regulatory Policy Research Centre, Oxford)
Helen LAWTON-SMITH(Regulatory Policy Research Centre, Oxford)
Colin ROBINSON(Institute of Economic Affairs & University of Surrey)



This paper offers an account and an evaluation of the reforms that have taken place in the UK telecommunications industry since the early 1980s. The period has seen major developments, including the commercialization and privatization of the dominant firm, British Telecom and - especially since 1991 - a major liberalization of entry into the industry. New telecommunications technologies have been employed. Developments over the period have been hectic, and many are still occurring. Accordingly, the process described in this paper is still incomplete, and key regulatory and market changes are occurring at - if anything - an accelerated rate.

The structure of the paper is as follows. Section 1 is devoted to an account of developments in the ownership and regulation of telecommunications. It begins with a description of regulatory institutions and ownership changes, and then discusses in turn a variety of regulatory issues including: licensing, pricing, interconnection, universal service obligations, quality, new services and mobile services.

Section 2 of the paper then analyses outturns a number of headings: number of firms and market shares; prices charged by the two principal fixed link operators, BT and Mercury; profits, investment and employment in the sector; quality of service; availability of new services; and effects on consumer surplus. As in Section 1, a separate section is devoted to mobile services. Finally, Section 3 discusses the lessons of the UK experience.

Structure of the whole text

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  2. page3
  3. page4
    1. page4
      1.1 Ownership
    2. page5
      1.2 Regulatory Institutions
    3. page7
      1.3 Licensing
    4. page11
      1.4 Price Regulation
    5. page14
      1.5 Interconnection
    6. page18
      1.6 Social Obligations
    7. page21
      1.7 Quality of Service
    8. page22
      1.8 Regulation of New Services
    9. page23
      1.9 Mobile Telecommunication Service
  4. page25
    1. page25
      2.1 Entry and Market Share
    2. page26
      2.2 Pricing
    3. page27
      2.3 Profits, Investment, Employment and Productivity
    4. page28
      2.4 Quality of Service
    5. page29
      2.5 Changes in Consumer Surplus from Fixed Link Telecommunications
    6. page30
      2.6 Mobile Services
  5. page33
  6. page37



Evaluation of changes in regulatory policy towards airlines in the UK is necessarily different from that appropriate to industries such as telecoms and electricity companies, for example, the UK's leading airline, British Airways (BA), derives a large proportion of its income from international operations. In order to avoid too narrow a focus, therefore, European Community airline policy will be considered alongside British policy, although wider international issues - - such as multilateral renegotiation of air service agreements - - will not be addressed.

In practice, however, broadening the coverage of the paper to include European Community Policy does not have major implications for empirical analysis. Although UK deregulation of airlines has lagged significantly behind developments in the United States, European Community (EC) reforms have lagged behind even more. Thus, whereas substantial deregulation occurred in the UK in the mid 1980s, major European Community reform in airlines is a phenomenon of the 1990s. As a consequence, evidence on the effects of EC policy reform is still highly limited.

The UK can also be distinguished from most of the other Member States of the EC by virtue of the fact that its major national carrier is fully, privately owned.1 In many ways the privatization of BA at the beginning of 1987 is the decisive event in the history of the UK industry over the past twenty years, not only because of the direct impact of the transfer of ownership but also because government policies on issues of deregulation and liberalization have been much influenced by the flotation.2

Arguably, privatization itself is a form of deregulation: although in principle state-owned enterprises can be required to operate as fully commercial operations, in practice they are frequently used as instruments to achieve certain types of political or public policy goals. Privatization therefore typically involves abandonment by the state of some of its very specific policy instruments. It is, of course, open to government to introduce new regulatory instruments to compensate, at least partially, for the loss, and this was the course followed in the UK in newly privatized industries such as electricity, gas, telecoms and water. Where such new regulations are substantial in scope it is, therefore, more accurate to talk of regulatory reform rather than of deregulation. In respect of airlines, however, the flotation of BA did not lead to the creation of any new agency - - the Civil Aviation Authority (CAA) continued to operate as the industry's main regulatory body in much the same way as it had previously3 - - and the reduction in the Department of Transport's control over the industry consequent upon BA's privatization can therefore properly be viewed as a from of deregulation.

Given these points, it is appropriate to begin an assessment of developments in UK airlines policy with a discussion of the BA privatization, and section 2 will be devoted to this task. Section 3 of the paper then outlines some of the main features of both UK and EC airlines policy. The main empirical part of the paper, section 4, examines evidence of the performance of BA and assesses the factors that have been most influential in determining that performance. Conclusions are summarized in section 5.

1The national carriers of other member states of the EC can be divided into those that are 100% state-owned (egs. Air France, Air Lingus), those that are majority state-owned (egs. Lufthansa, Alitalia) and those in which there is a substantive but minority state holding (egs. KLM, Luxair).

2The distinction between promoting competition and deregulation is an important one in the European context. In the UK, for example, the new regulatory agencies created during the privatization programmed have been given powers and duties to promote competition, so that in some dimensions the degree of regulation has actually increased.

3The CAA is the body responsible for both the economic and technical regulation of the industry, including matters such as issuing domestic route licenses and deciding which UK airlines to designate on particular routes under bilateral international agreements.

Structure of the whole text

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  2. page55
    1. Introduction
  3. page57
    2. The privatization of British Airways
  4. page61
    3. British and European Airlines Policies
  5. page72
    4. Economic Performance
  6. page89
    5. Conclusions
  7. page91



This paper is in two sections. The first deals with privatization and deregulation in freight markets (trucking), and the second with coach and bus markets. The argument which the paper develops is that privatization and deregulation in the freight industry in the UK has generally achieved its objectives of promoting competition, but that bus deregulation and privatization has had a number of adverse effects. In particular these include a fall in passenger trips, low profitability in large parts of the industry, and wide-spread anticompetitive behavior. On the other hand, the opening up of the market in the long-distance coach sector has been of benefit to consumers. An increasingly important area of regulation at national and international levels, and which has important implications for the operation of both industries, is that designed to combat environmental pollution.

The key differences between the two industries can be summarized as follows

(i) freight transport is much more subject to European Union (EU) regulation than the coach and bus industry. This is because the latter is primarily a domestic market and therefore has a different regulatory environment. In the freight industry, the effects of UK regulatory changes and that of the EU are inter-linked;

(ii) freight, unlike passenger vehicles, has not had a system of route licensing. Route licensing was a critical component in shaping the structure of the road passenger market, hence regulatory change operates within a different pre-existing market configuration;

(iii) unlike in the bus and coach industry where few opportunities to compete before deregulation, it had always been possible for firms to enter freight market , and

(iv) there is no evidence of restrictive practices and predatory pricing in the freight industry as in the coach and bus sector, which in the case of the latter has arisen as a direct consequence of changing regulation.

Structure of the whole text

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  2. page101
  3. page102
    1. page102
    2. page103
      Privatization and deregulation in the UK
    3. page107
      The UK industry
    4. page112
      The European market
    5. page116
      International arrangements
    6. page125
      Summary and conclusions
  4. page126
    1. page102
    2. page127
      Current operating conditions
    3. page129
      Changes in regulation
    4. page143
      Express coach deregulation
    5. page145
      Impact deregulation
  5. page148



1.A brief history

1.1 The nationalized period

The electricity supply industry in Britain was nationalized by the Electricity Act of 1947, as part of the sweeping programme of nationalizing the 'commanding heights' of the economy carried out by the 1945-51 Labor Government under Prime Minister Clement Attlee.

Prior to nationalization the industry had been regulated by the state almost from the interwar period. 1 In 1919, Electricity Commissioners, responsible to the Minister of Transport, were appointed and in 1926 a Central Electricity Board was established to construct and own an electricity grid; the Board could give directions to power station owners and the Commissioners could determine the price of electricity from power stations if the Board and the owners could no agree.

Nationalization was seen at the time as the logical next step in this trend towards greater state involvement in the industry. The initial structure of the industry under nationalization was a development of earlier regulatory schemes, designed to cope with what was perceived to be a rather complex industry. Most nationalized industries were run by a single corporation with Board members appointed by the responsible Minister. In electricity, however, there were a number of corporations.

Under the 1947 Act, a British Electricity Authority was created which took over generation and transmission and was the dominant force in the industry. It was responsible for raising finance after scrutinizing the expenditure plans of the industry as a whole. Distribution was in the hands of twelve Electricity Boards in England and Wales and two in the south of Scotland. The vertically integrated Hydro Electric Board, established in 1943, continued to cater for the north of Scotland. The industry was given a monopoly of the public supply of electricity.

Electricity supply was reorganized several times in its nationalized period in the search for an effective structure. In 1955 the two Boards in the south of Scotland were amalgamated. But the most important reorganization came in 1957 when the Electricity Act of that year established a structure for England and Wales which persisted until the industry was privatized in 1990. The 1957 Act created the Central Electricity Generating Board (CEGB), responsible for both generation and bulk transmission in England and Wales: the CEGB controlled the bulk of the industry's investment and was de facto its most powerful organization. Twelve Area Boards took electricity from the CEGB's bulk supply points, then distributed and supplied it within their designated areas. An Electricity Council had somewhat vague policy-making and co-ordinating functions: it contained three representatives of the CEGB, the twelve Area Board Chairman and six independent members appointed by the Minister.

In Scotland, two vertically integrated boards - the South on Scotland Electricity Board (SSEB) and the (smaller) North of Scotland Hydro Electric Board (NSHEB) - generated, transported and supplied electricity to consumers in their respective areas.

1The history of British electricity supply from the late nineteenth century to 1968 is summarized in R. Kelf-Cohen, Twenty Years of Nationalization: The British Experience, Macmillan, 1969, especially Chapter 4.

Structure of the whole text

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  2. page155
    1. A brief history
    1. page155
      1.1 The nationalised period
    2. page156
      1.2 Problems under nationalization
    3. page158
      1.3 The transition to privatization
    4. page160
      1.4 The electicity privatization scheme
    5. page162
      1.5 The problem of nuclear power
    6. page163
      1.6 Privatization in Scotland
    7. page163
      1.7 Regulation
  3. page164
    2. Privatization, nationalization and government failure
    1. page164
      2.1 Differences from nationalization
    2. page165
      2.2 Government failure and electricity privatization
  4. page166
    3. Competition in generation
    1. page166
      3.1 The generation duopoly
    2. page167
      3.2 Entry and constraints on competition
    3. page168
      3.3 Fuel use, entry and the 'dash for gas'
    4. page170
      3.4 The pool and its effects
    5. page172
      3.5 Entrant/REC relationships
    6. page173
      3.6 Unintended consequences and the development of competition
    7. page175
      3.7 The contracts market
    8. page176
      3.8 Efficiency gains: reducing inputs and input prices
  5. page177
    4. Consumer price trends
  6. page180
    5. Regulation
    1. page180
      5.1 The difficulties of regulation in electricity
    2. page182
      5.2 Regulating generation
    3. page184
      5.3 Regulating the regional companies
    4. page187
      5.4 Future regulatory concerns
  7. page188
    6. Effects on other fuel industries
    1. page188
      6.1 Coal
    2. page190
      6.2 Nuclear power
  8. page191
    7. Conclusions
    1. page191
      7.1 Early lessons
    2. page191
      7.2 Some advantages of the new ragime
    3. page192
      7.3 Deficiencies of the privatization scheme
    4. page194
      7.4 Necessary reforms
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