20th Anniversary of the Creation of BT

How Joseph rang up a global revolution -article in Yahoo Finance by John Blundell

I AM alarmed how time accelerates. I would have guessed that phones were privatised ten years ago. In fact, today is the 20th anniversary of the government selling off of 51 per cent of the former GPO's telephone system to create BT plc. Initially described as denationalisation, the idea now ripples around the world. Privatisation is the tangible form of the death of the idea we called socialism.

Cynics can identify two reasons for the innovation. The Treasury said it couldn't afford the Post Office's requests for huge tranches of capital to re-wire Britain, so getting us all to buy shares in the Post Office's monopoly was simple, good sense. The other factor was General Galtieri. His decision to invade the Falklands and the subsequent British victory emboldened the Thatcher government - or one man in it.

Margaret Thatcher and her team had done little to sell off the state's vast warehouse of assets since 1979 other than returning BP (LSE: BP.L - news - msgs) in October 1979 to the market. Then, enter the self-effacing and diffident Sir Keith - later Lord - Joseph, the secretary of state for industry. Given the success of liberalisation around the world since, it is surprising how alone Joseph was back then.

BT was a utility central to the commerce of the nation. Michael Foot, the Labour Party leader, talked of it as the "electronic spine" of the country being damaged. He predicted paralysis. Former Tory prime minister Harold Macmillan mocked it as "selling off the family silver".

Time leads us to forget the detailed texture of the past. Only half of the current population can recall the style-free, black Bakelite phones, the absence of services such as answerphones, the endless waits and wheedlings to get a new phone line. The GPO ran the nation's phones as it still does our letters.

Joseph asked the market for a fraction less than £4 billion - a stupendous sum 20 years ago. The Stock Exchange, the Chambers of Commerce, the CBI, the Civil Service and BBC all said it couldn't be done. Not only would the market be unable to digest such an unprecedented sale, but the talk of competition was also plainly silly and unworkable.

Joseph himself admitted that he was alarmed at the prospect of quality falling and prices rising with every street littered with new cables. He said he simply knew his core principle was correct - that competition would reveal options hidden to all participants - that markets are "discovery procedures".

Nobody, not even the engineers, foresaw the explosion of mobile phones. Initially, they were as big as bricks, heavier and worked only intermittently. Nobody among the bankers and brokers who brought BT to the market remotely guessed what was being opened up from the long sleep of the monopoly.

All sorts of gadgets emerged. Faxes, devised by a Caithness inventor when Edward VII was on the throne, had been kept a secret. Within a year of BT becoming private, every business was humming messages on the new digital machines. We had heard of cordless phones as a sci-fi idea, but soon they were in the stores.

Instead of being left within the cosy circle of underwriters, the government launched a popular advertising campaign and sold shares to 2.3 million new investors - people who never dreamt of talking to a stock broker. Nearly all the BT employees joined in the fun too, with 6 per cent of Brits owning shares in 1979 and 26 per cent by the time the Tories left office in 1997.

Excited, thrilled and a little amazed by the triumphant auctioning of the shares, the government went on to sell British Airways (LSE: BAY.L - news - msgs) , British Gas, the electricity and water companies (except in Scotland, for reasons of political funk). The state found other long forgotten assets in its loft - Amersham International, Cable & Wireless (LSE: CW.L - news - msgs) , Jaguar, BAA (LSE: BAA.L - news - msgs) and swathes of property.

The sales allowed the government to cut taxes, but it was the more intangible gains that shine across the years. Capitalism had been a frightened, timorous creature. It half regarded itself as a remnant of the past. The sale of BT transformed the psychology of the market - it suddenly felt itself to be the tide of the future; not just modern but competent.

It was plain that the greater successes were due not just to the legal change of becoming a plc. Once alternatives emerged, efficiencies flourished. We take it for granted that there is lively competition among airlines today; 20 years ago it was regarded as a merely quixotic. EasyJet (LSE: EZJ.L - news) and Ryanair (Dublin: RYA.I - news) would not be allowed to fly through skies closed by monopoly.

A new British expertise emerged. Conferences enticed policymakers worldwide to learn how it could be done. Merchant bankers and consultants flew to every continent to explain how Britain had rekindled its economic vitality and how entities that demanded tax funds for their eternal losses were suddenly the sources of huge revenues as their potentials were revealed.

In so far as Thatcherism describes one bold and determined woman, it was a vivid symbol of the counter- revolutionary story unfolding to everyone's surprise. The truth is it was Joseph's project. He was awarded the rarefied title the Companion of Honour and a peerage, but I think he went to his death, in December 1994, unappreciated for the extraordinary transformation he had worked. He was a kind and courteous man and could not manage either conspiracies or gossip, so he was mocked as "a mad monk".

What stands out to me, 20 years later, is how no committee of experts, however learned, can guess the future. Markets are miracle working devices that allow us to discover opportunities and then, crucially, to transmit information about them through the language of price.

Telephones were ripe for a total re-scripting. Electro-mechanical devices could be swept away by digital ingenuity nobody had really comprehended. The notion of going without a mobile seems antiquarian and cranky now. In November 1994, it was not a gleam in anybody's eye.

There are still no shortages of candidates for privatisation. All our public sector agencies are sclerotic with bureaucracy. Individual diligence or competence is of diluted value if you have little or no price information to act upon or if your salary is secure regardless of how you perform. As matters stand, there is a sort of stand-off on the policy battle: the markets are allowed to perform the duties we regard as commercial while they can then be taxed to feed the public sector.

I would like to see Joseph's tide of liberalisation sweep far further. We could certainly bring much more to the Stock Exchange as quoted companies, but it is the alternatives that intrigue me. The common feature of any innovations has to be that customers - as parents or patients or pensioners - must enjoy the right to go elsewhere.

There is no reason Edinburgh's clever money men could not bring some of these ideas to prominence in Scotland, but I fear there is something in the Scottish psyche that blocks innovation. Why waste your time when our subsidy and intervention-loving leaders will entertain no loosening of the state's domination?

Almost every nation is adapting to the Joseph idea. There have been many mistakes. The dismemberment of British Rail was done as the European Commission stipulated - with minimal competition. The Russian privatisations seem to have been gifts to a few well-connected Communist cronies. Yet who, outside the Scottish Executive, believes in state or municipal monopoly any more?

• John Blundell is director general of the Institute of Economic Affairs

By: JOHN BLUNDELL -- 23-Nov-04

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