PART 2: EXAMPLES UNDERLINING KEY LESSONS
FROM REPORTS BY THE COMMITTEE OF PUBLIC ACCOUNTS
13. FLOTATIONS
Management of the Flotation
SCOTTISH OFFICE
INDUSTRY DEPARTMENT:
SALE OF
SCOTTISH POWER
AND HYDRO-ELECTRIC[40]
i. In June 1991 the Government sold all its
shares in Scottish Power and Hydro Electric, who generate and
supply electricity. Our predecessors welcomed that the Department
had built on the experience of the Departments of Energy and Trade
and Industry, who had carried out earlier flotations of the regional
electricity companies and National Power and PowerGen. They employed
bookbuilding to gauge levels of institutional demand ahead of
pricing the offer; they dispensed with primary underwriting; and
they offered a percentage of the shares for sale in a back-end
tender, securing additional proceeds of £42.25 million.
HM TREASURY: SECOND
SALE OF
SHARES IN
NATIONAL POWER
AND POWERGEN[41]
ii. In March 1995 the Treasury sold the Government's
remaining shares in National Power and PowerGen. The Committee
noted that innovations in the sale—such as encouraging investors
to formulate their own estimates of the time value of paying for
shares by instalments, resulted in more time value being included
in investor's bids than in previous sales—and reflected
the benefits from using experienced staff who had built up expertise
over several privatisations.
Selling Shares in Stages
DEPARTMENTS OF
ENERGY (NOW
DEPARTMENT OF
TRADE AND
INDUSTRY), TRANSPORT
(NOW DEPARTMENT
OF THE
ENVIRONMENT, TRANSPORT
AND THE
REGIONS) AND
TRADE AND
INDUSTRY: SALE
OF GOVERNMENT
SHAREHOLDINGS IN
BRITISH GAS,
BRITISH AIRWAYS,
ROLLS-ROYCE
AND BAA[42]
iii. None of these sales, which took place in
1986 and 1987, was phased: all the shares were sold at once. The
Committee noted that selling tranches can in the right circumstances
minimise the risk of getting the price wrong, and recommended
that departments should continue to consider the phased sale by
tranche approach that had been used successfully in the sales
of British Aerospace and Associated British Ports. In reply the
Government noted that they had a choice as to the appropriate
size of an offer above the 51 per cent level necessary to achieve
the transfer to the private sector and undertook to continue to
consider, in the circumstances of each sale, the respective merits
of full and tranche sales.
DEPARTMENT OF
ENVIRONMENT (NOW
DEPARTMENT OF
THE ENVIRONMENT,
TRANSPORT AND
THE REGIONS):
SALE OF
THE WATER
AUTHORITIES IN
ENGLAND AND
WALES[43]
iv. When in 1989 the Government's shares in
the water companies were sold, our predecessors regretted that
a phased sale was not undertaken. The Department said that the
possible benefits of a phased sale had been considered to outweigh
the disadvantages, including the cost of a further offer of shares
at a later date and the possibility that shares retained by the
Government would overhang the market.
DEPARTMENT OF
TRADE AND
INDUSTRY: SALE
OF THE
TWELVE REGIONAL
ELECTRICITY COMPANIES[44]
v. When all the Government's shares in these
companies were sold in 1990 our predecessors noted that the Department
had been concerned that a phased sale might be seen by the market
as a failure of nerve. The Department agreed that consideration
should always be given to the possible benefits arising from a
phased sale.
DEPARTMENT OF
TRADE AND
INDUSTRY: SALE
OF NATIONAL
POWER AND
POWERGEN[45]
vi. In 1991 the Government sold only 60 per
cent of its shares in these companies, in particular because of
the uncertainty of pricing them in a new market.
SCOTTISH OFFICE
INDUSTRY DEPARTMENT:
SALE OF
SCOTTISH POWER
AND HYDRO-ELECTRIC[46]
vii. Later in 1991, by contrast, the Department
sold all the Government's shares in these companies. The Committee
appreciated (given that the shares were being sold into an established
electricity market sector) that there might be cases, as here,
where the potential gains from selling in tranches might be speculative,
and recognised that the Department might not have secured higher
proceeds with a phased sale.
HM TREASURY: SECOND
SALE OF
SHARES IN
NATIONAL POWER
AND POWERGEN[47]
viii. In March 1995 the Treasury sold the remaining
shares in these companies, realising additional proceeds of some
£2.3 billion as a result of not selling them on privatisation
in 1991. The Committee noted this was consistent with the view
they had expressed on many occasions that, where the market value
of shares was uncertain, it might be advantageous to conduct such
sales in stages.
DEPARTMENT OF
TRADE AND
INDUSTRY: SALE
OF AEA TECHNOLOGY[48]
ix. In 1996 the Department sold all the Government's
share in AEA Technology and did not give explicit consideration
to phasing the sale. They told us there had been no value for
money grounds for doing so. On privatisation the shares immediately
traded at a higher premium than had been expected by the Department
and following the first month's trading climbed to higher and
increasing values. We found it unacceptable that the Department
did not give explicit consideration to phasing the sale.
Retail Incentives
DEPARTMENT OF
TRADE AND
INDUSTRY: THE
SALE OF
NATIONAL POWER
AND POWERGEN[49]
x. In the first sale of shares in National Power
and PowerGen in 1991 the proportion of shares reserved for individual
investors was more than five times subscribed, suggesting that
the level of incentives offered may have been more than was necessary.
At the same time we accepted that media endorsement, imported
to the success of a sale, may not have been forthcoming if the
media did not regard the value of incentives as sufficiently attractive.
Our predecessors therefore recommended that the nature and value
of incentives offered to individual investors should be carefully
appraised when future privatisations took place. the Government
agreed that departments should evaluate the need for incentives
in the circumstances of each sale, taking into account their objectives
for the sale and the need to generate sufficient demand to ensure
good value for money for the taxpayer in the price achieved for
the shares being sold.
HM TREASURY: SECOND
SALE OF
SHARES IN
NATIONAL POWER
AND POWERGEN[50]
xi. In attracting just over one million individual
investors, the second sale of shares in these companies in 1995
widened and deepened share ownership and a comparatively high
proportion of individuals chose to retain their shares rather
than sell them afterwards. Our predecessors noted that this process
was helped by incentives for individual investors worth £110
million and by the transfer of shares, which had been earmarked
for institutions, at an additional cost of £26 million. The
Committee were pleased to note that the Treasury achieved their
target level of applications from individuals with incentives
that were less costly than in previous sales. The Treasury welcomed
the Committee's comments. Notwithstanding the importance of incentives
in securing a successful sale, the Treasury looked to reduce costs
wherever it was prudent to do so.
Pricing the Shares
DEPARTMENT OF
ENERGY (NOW
DEPARTMENT OF
TRADE AND
INDUSTRY), TRANSPORT
(NOW DEPARTMENT
OF THE
ENVIRONMENT, TRANSPORT
AND THE
REGIONS) AND
TRADE AND
INDUSTRY: SALE
OF GOVERNMENT
SHAREHOLDINGS IN
BRITISH GAS,
BRITISH AIRWAYS,
ROLLS-ROYCE
AND BAA[51]
xii. When the departments were considering the
methods to be adopted in these sales, they examined the following
main options: a fixed price offer, a sale by tender or a sale
by partial tender (where some of the shares are sold at a fixed
price and the remainder on the basis of a common price tender).
In the sales of British Gas, British Airways and Rolls-Royce,
the departments used fixed price offers. In the BAA sale, however,
a partial tender of the shares added over £56 million to
sale proceeds. Our predecessors considered that this approach
had been highly successful and recommended that departments continue
to make a careful assessment of the most appropriate method of
sale in order to maximise proceeds. The Government shared our
view and agreed that a partial tender mechanism should be considered
as one of the options for maximising proceeds in future sales.
DEPARTMENT OF
TRADE AND
INDUSTRY: SALE
OF NATIONAL
POWER AND
POWERGEN[52]
xiii. In order to increase the openness of competition
for shares in the first sale of National Power and PowerGen in
1991, institutional investors were required to provide, in advance
of the pricing of the offer, indications of likely demand for
the shares at a range of prices (bookbuilding). Our predecessors
were pleased to note that this resulted in additional proceeds
amounting to several hundred million pounds.
DEPARTMENT OF
TRADE AND
INDUSTRY: SALE
OF AEA TECHNOLOGY[53]
xiv. In setting the sale price of AEA Technology
at 280p a share, the Department sought indications from institutions
of how many shares they would be prepared to buy over a range
of prices (bookbuilding). When bookbuilding is carried out rigorously
departments can set the sale price based on a clear picture of
demand for shares at various prices and based on evidence of the
price at which demand falls away. But in this case, the range
over which they sought bids was narrower than average and the
top of the range was 280p. They therefore had no clear picture
of the extent of demand at prices above 280p, the eventual share
price. On the day after the sale shares traded at 323.5p, a premium
of 43.5p. If the sale had achieved a price of 323.5 p, an additional
£35 million of proceeds would have been obtained. We considered
that the failure to identify the full extent of demand above 280p
using the bookbuilding procedure represented a weakness in the
way that bookbuilding was applied in this case. We recommended
that departments should conduct bookbuilding rigorously so as
to give as good an indication of likely demand at different prices
as possible and should take care that the top of the indicative
price range they give to potential investors should not constrain
the eventual price set.
Allocating the Shares
HM TREASURY: SECOND
SALE OF
SHARES IN
NATIONAL POWER
AND POWERGEN[54]
xv. In the second sale of National Power and
PowerGen, shares had been allocated to investors by the Treasury
in line with their own allocation policy. In this and previous
sales, the Treasury had been pioneering in the international capital
markets by insisting on taking the allocation decisions, with
advice from their global co-ordinators. This contrasted with private
sector sales where vendors would usually allow their advisers
to allocate the shares between investors. The Treasury's allocation
criteria had been set out in the prospectus in detail in advance
of the sale and they had, for instance, aimed to allocate shares
to institutions who were considered likely to hold them rather
than sell them shortly after the sale. Our predecessors noted
the Treasury's assurances that allocation decisions had been taken
on the basis of objective criteria which had been published before
the sale. As such allocations may result in considerable profit
for those who receive the shares. They looked to all departments
to take similar action in future sales.
DEPARTMENT OF
TRADE AND
INDUSTRY: SALE
OF AEA TECHNOLOGY[55]
xvi. In the sale of AEA Technology, contrary
to good practice, the Department did not oversee the allocation
of shares by Cazenove, their broker, to institutions which included
Cazenove and Schroders companies. As such allocations may result
in considerable profit for those who receive shares we considered
that overseeing allocations based on objective criteria, published
in advance of sale, is good practice.
Market Stabilisation
HM TREASURY: SECOND
SALE OF
SHARES IN
NATIONAL POWER
AND POWERGEN[56]
xvii. To correct any short-term imbalances in
supply and demand for a limited period after the second sale of
National Power and PowerGen, the Treasury's global co-ordinators
for the sale were entitled to buy the companies' shares to stabilise
prices at or below their issue prices. These arrangements were
activated when the companies' share price fell following an announcement
by the industry regulator of a review of regional electricity
companies' price controls. Our predecessors were told that, in
international sales of this type, it had become common practice
to build into the sale the ability, should it be needed, to stabilise
prices in the after-market. These arrangements had been agreed
with market regulators, were subject to tightly defined limits
on what could be done, and had been published before the sale.
40 42nd Report 1992-93 HC 509; Treasury Minute Cm 2354 Back
41
13th Report 1996-97 HC 151 Back
42
34th Report 1987-88 HC 211; and Treasury Minute Cm 509 Back
43
7th Report 1992-93 HC 140; and Treasury Minute Cm 2074 Back
44
16th Report 1992-93 HC 101; and Treasury Minute Cm 2145 Back
45
32nd Report 1992-93 HC 298 Back
46
42nd Report 1992-93 HC 509 Back
47
13th Report 1996-97 HC 151; and Treasury Minute Cm 3714 Back
48
60th Report 1997-98 HC 749 Back
49
32nd Report 1992-93 HC 298 Treasury Minute Cm 2279 Back
50
13th Report 1996-97 HC 151 Treasury Minute Cm 3714 Back
51
34th Report 1987-88 HC 211 Treasury Minute Cm 509 Back
52
32nd Report 1992-93 HC 298 Back
53
60th Report 1997-98 HC 749 Back
54
13th Report 1996-97 HC 151 Back
55
60th Report 1997-98 HC 749 Back
56
13th Report 1996-97 HC 151 Back
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