There’s a saying in Westminster that “good ideas have many authors”. Well, today Policy Exchange (PX) have come out backing the RBS and Lloyds share scheme which we have been pushing since our Give Us Our Fair Shares paper back in 2011. In a good report written by James Barty, PX endorse the central mechanism of our paper – to establish a free distribution of shares to the public, alongside the setting of a floor price which is repaid only at the point the shares are sold (allowing taxpayers to benefit from any upside in the share price). This concept has in the past won the backing from politicians on both sides of the Coalition, including Nick Clegg, John Redwood, Vince Cable, Danny Alexander, Stephen Williams, David Davis, Steve Baker and Matthew Hancock. Coaliticious?
If you remember, our 2011 recommendations had three key features:
This was justified on the basis that this mechanism was better than all of the other alternatives. The Policy Exchange report usefully fleshes this argument out in detail. It presents four re-privatisation options, weighing up the advantages and disadvantages of each. These are:
1) A staged sale to institutional investors, allowing the Government to sell the stakes with the best timing in order to get the best average price.
2) A traditional style privatisation with the Government offering shares to both retail and institutional investors at the same time. This could be done in stages as well.
3) A giveaway. Where the shares are simply given to the public for free as proposed by some including Nadhim Zahawi.
4) Distribution. This is where a large portion of the shares is offered to the public subject to the Government being paid back on sale of the shares, rather than on purchase. Again an institutional share offering could be made in conjunction with the distribution.
Staged sales would take a long while to get all of the shares back into the private sector, and initial tranches would have to be sold at a significant discount (the problem of the share overhang). PX estimates that it might take up to six years to get RBS back into the private sector under this scheme.
A traditional privatisation, while do-able, would be very risky for the Government: volatile share price movements could mean bad headlines with retail investors losing out, thus there would be a temptation to discount heavily. But then only those able to afford to participate could so (despite everyone being on the hook when the initial injections to the banks were made). Furthermore, James has highlighted that under EU law, discounted shares would have to be offered to all EU citizens (activate UKIP!).
The pure free give-away advocated by Nadhim Zahawi, as I have suggested, is a non-starter. It would bake in huge losses to the Government’s balance sheet (PX estimate £50 billion with both banks). Furthermore, there would be every incentive for taxpayers to make a quick buck and flog the shares quickly (given they have paid nothing for them). This is what happened in Russia with their voucher privatisations. Oligarchs or hedge funds would run round buying up the shares on the cheap and the share price would be volatile. Again, it is quite likely all EU citizens would be allowed to apply (activate UKIP!).
Finally, keeping the shares in Government hands has its own problems, as I outlined to City AM before:
“Longer-term state ownership, however, blunts decision-making, depresses value and hinders long-term competitiveness. It distorts competition by offering an explicit guarantee to certain firms and invariably leads to politically-directed lending decisions. In fact, it would be better to realise Sir Mervyn King’s ambition of getting the semi-nationalised banks back into the private sector as soon as possible."
Like us then, PX conclude that distributing the shares with a floor price is the least bad option available – “the idea behind distribution…to eliminate or dramatically reduce the overhang so that the Government, rather than selling at a discount, can actually sell at something approaching the fair value of the shares”. They also raise the point we have expressed on numerous occasions – from a political perspective, this is the only real way of letting taxpayers, who bore the risk of bailing out the banks, to benefit from any share price upside. This prevents the politicians from suffering “Gordon Brown sold off the gold cheap” type headlines.
So how does their proposal differ from ours? There appears to be 2 main differences, which are mainly reflective of new developments since 2011. First, our initial instinct was that shares should be distributed to everyone with a National Insurance number. It would thus be an opt-out or push model. The idea behind this is that it would generate the largest number of shareholders and also reward those who might not have the savvy to apply for no upfront-cost shares. PX have instead decided that an opt-in model, where you apply for shares, would work better. I have to admit, many people we’ve spoken to since the publication of our paper have agreed with PX on this. My heart says as wide a distribution as possible is desirable, but my head says that applications would paradoxically be easier, prevent fraud and lead to more interest and education in the proposal. That said, I disagree with PX that an individual should have to be on the electoral register for local elections, as well as having an NI number. Why require this sort of matching of records, and potentially exclude a large number of the public who are unregistered voters?
Second, our initial proposal was that the floor price would be the government’s original in-price. But it has since become clear, not least because of the reasons James indicates in his piece, that this is no longer appropriate. I agree with James when he said that the original injections were not an investment decision by the Government, but a means of trying to prevent the collapse of the financial system. As I’ve said before, the level at which the government sets the floor price is essentially a political decision. PX say this should be the “at the same price as any placing into the market at the time of the privatisation”. This seems sensible.
In the grand scheme of things, though, these are minor talking points. On the three main recommendations of our report, PX are entirely in agreement with us. They are right to say we should begin the re-privatisation asap, and we are pleased they support the method we, and the politicians above, have put forward for doing so.