As Tim Knox acknowledged on Thursday, the fact that the Deputy Prime Minister supports something that looks like our Give us our fair shares proposal is welcome. However, the devil is in the detail in making this policy work. We feel that the recommendations made in our paper eliminate many of the problems identified yesterday, and feel that the policy would be far weaker were the DPM not to take them on board.
In the public debate on these proposals it is important that we judge the policy on its merits rather than who is supporting it. Nick Clegg’s unpopularity meant that yesterday’s revelation received less favourable coverage than when our paper was released, but many Conservatives, including John Redwood, Steve Baker and David Davis, already support the idea. It is also important to judge the idea against the alternatives – there are difficulties with every policy, but many criticisms of this one are things a) not unique to it, or b) do not take account of problems with conventional privatisations or continued government ownership.
The CPS has little time for populist give-aways. And this isn’t one. It is an economic solution to an economic problem. The economic problem is to meet the announced government aim of ‘maximising taxpayer value’ of the shares whilst allowing Treasury to recoup its initial £66 billion outlay. The solution is to distribute shares free to all taxpayers, allowing said taxpayers to sell the shares only when they have either paid the floor price (the price government paid initially for the shares) or when the share price moves above the floor. The taxpayers are then able to keep any profit as the Treasury recoups the floor price on each share.
An initial £10 billion placing, a £5 billion convertible bond and favourable CGT treatment for early sales would drive early receipts for Treasury (at least £20 billion in the first year). The Treasury would then continue to receive funds as taxpayers sell shares as they see fit, with shares being traded through a volume-weighted automatic trading platform on an opt-out basis. In addition, the Treasury would gain from CGT receipts as shares are sold, and the trading platform would be a valuable asset in itself. They would therefore comfortably recoup the funds borrowed in 2008, and would be able to use these as they wish (we would argue, to pay down some of the national debt).
The spin-off of this, I would suggest, is a good in itself. The taxpayers who bore the risk of bailing out the banks - when the investment community was unwilling to - would be rewarded for good performance. This would avoid the government instigating a Gordon Brown-gold mistake, in which the shares are sold off to a sovereign wealth fund – below value because of the overhang – before having to deal with the unpalatable headlines of being accused of selling ‘on the cheap’ with the foreign wealth funds obtaining large profits.
So that’s the idea. You can read our full report and Q&A document for more details. But what of the criticisms levelled at the policy yesterday? Below I have addressed five of these.
The Russian experience occurred because people were given shares free, and thus were willing to sell them very cheaply. However, the floor price prevents this from happening in our policy. People simply wouldn’t profit until the share price rose significantly above the floor price, meaning the Treasury will recoup its full investment over time. Of course, every seller would have different reservation prices above this at which they were willing to sell. But this is how any ordinary market works, and it is difficult to see how this would then be any different to a conventional privatisation as Dr Butler extols.
The very reason for the policy is to maximise the value of the shares. It would allow £20 billion to be raised quickly in the first year, with a flow of revenue from share sales then finding its way to Treasury thereafter. The alternative of quick fire sales at a discount would make it unlikely that the Treasury would recoup its initial investment because of the share overhang. I find it disappointing that we are talking about “pre-election war chests” here. Let’s not forget the money was borrowed. It should be recouped, and that component of the national debt should be paid down using the proceeds. Otherwise it is a generational transfer. But if the government is in the game of ‘buying votes’, then it will still have a significant pool of funds from the sales by 2015.
It is certainly true that there would be an initial cost to administer the policy, and the £250m figure is one that we recognise. But this completely ignores the costs of the alternative conventional privatisation, where investment banking fees are likely to be at least £1 billion. In addition, the automatic trading platform would itself become an asset which could be rolled into the Post Office. Frankly, objecting to this on cost grounds is nonsense. If there was a retail public share issue then there would still be costs of administration and education which would not be far different from our policy. Our discussions with experts in this field suggests that the computer technology and systems required for this already exist at very low cost, and this would be far less challenging than the 1980s privatisations given improvements in technology.
We agree with Dr Butler here that the electoral roll would be a daft means of distribution as it is. We would prefer the National Insurance register to be used for the distribution. This would also easily allow the government to implement age cut offs for eligibility and would provide unique identifier numbers. It is certainly true that the clean-up would be challenging, but we must remember that a retail privatisation open to the whole of the general public would require almost exactly the same provision, in case of universal take-up.
The issue of corporate governance appeared in various articles yesterday. There are two points that I would make in response. Firstly, contrary to the way the policy was portrayed, we expect that in the long-term interested and institutional investors will be the shareholders of the banks. The mechanism of the policy is devised to ensure Treasury recoups investment, not to create a ‘nation of shareholders’ in the long-term. Thus, those ‘interested in holding shares’ will do. In the interim, it is difficult to see how ownership by taxpayers would result in significantly different outcomes than the alternatives. The risky lending undertaken in the build up to the financial crisis occurred with interested, institutional investors on board. Likewise, the existing large stakes by government haven’t significantly changed pay and bonus behaviour. So it is unclear to me why Prof Booth thinks this is such a problem.
In conclusion, we recognise that this policy is a longer-term aim, and we think Mr Clegg was seriously misguided in declaring his interest in it at a time of sovereign debt crisis in the Eurozone. Having said that, Mr Clegg’s involvement doesn’t make this bad policy. The idea solves an economic problem with a consistent and well-judged solution.
Let’s imagine that the shares are flogged to the Qataris, the discounted revenues squandered on a politically calculated tax break and then the shares double in value. Would this really be a good deal for UK taxpayers?