Justin Urquhart Stewart: An alternative way to privatise?

The founder of Seven Investment Management says we shouldn’t rush to push RBS to the market

I don’t think I made a friend this week when I had a little disagreement on air with the author of the report from Policy Exchange, which is described as a “right of centre think tank”. He had obviously worked extremely hard to complete his report, which I am sure was a thoroughly well researched and thought through document. However, I disagreed with his central proposition regarding the privatisation structure of the Lloyds (and potentially RBS) return of the government shareholdings to the public market. Thus when asked on air in the Radio 4 Today programme business slot what I thought of it, I described it as “madness”.

Now, I wouldn’t want anyone to think that I am in any way happy to have a state-owned banking system, but equally I don’t want to see assets, which we have all been forced to support, being given back to the market when they are neither ready, nor financially secure. Both banks still have a huge amount of reconstruction to go through, with RBS still suffering from not having received suitable treatment some three years ago. It has of course made significant progress, but the size of the Gordian knot was enormous. Even today many seem to refer to the need to create a bad bank even after all this time – too late I suspect. Whereas the Americans carried out deep surgery on their banks, we seemed to think that aspirin and pastoral care would be sufficient.

The concept of privatisation, I don’t have a problem with, but it has to be at the right time and carried out in the right way. What we can learn from the previous privatisations and demutualisations was that wider share ownership does not necessarily lead to deeper share ownership and the fostering of private portfolios. The method of flotation certainly did little for the companies themselves, especially as it left them with sometimes shareholder bases of hundreds of thousands. This which was both unwieldy and expensive to maintain. Many were in fact delighted to see their shareholder register whittled down to more manageable levels, and a few were even able to actually consider addressing their shareholder base as their own advocate and supporter base.

Companies can make designs to get the shareholder base they need; what they don’t need is to have numbers foisted on them just to satisfy political dogma.

In reality, companies very rarely seem to make use of their shareholder base as a marketing arm in its own right. At Barclays I remember trying long and hard to get them to appreciate that most of their shareholders were either staff or ex-staff and, very often, customers – that is to say potentially a great advocacy base for the company if properly martialed. But all to no avail.

There are some key issues here. Firstly, the economy needs properly functioning utility banks and this needs to be accelerated to help the recovery; pushing Lloyds and RBS back to the market whilst still in recovery seems somewhat odd. Secondly, why should we as taxpayers and shareholders (albeit indirectly) not expect to have, not just our money back, but a significant profit as well? If that will take some years yet, then so be it.

However, the government is missing an opportunity here. With the glorious benefit of fully focused 20:20 hindsight, it would have been far better if we had packaged up – or at least partially done so – the flotation issues into a bundled unit trust fund of state assets, which citizens could have applied for.

This would have introduced investment to many for the first time, not in the form of small holdings of one-off stock issues, but rather a spread of different assets and companies in a range to provide an immediately more diversified investment portfolio or fund. Again, with the benefit of history this would have proved a jolly nice ‘little earner’ for Sid instead of exposing him as an innocent to the vagaries of the stock market, individual holdings and their risks.

So, too late now? Well not necessarily. The government, in its desperation to try and find assets to close the deficit and pay down debt, has been scouring the cupboards to see what’s left of the ‘family silver’. The Georgian tea set and furniture have already gone, and it seems that we might now be down to the teaspoons. However, before you write those off, they certainly have some combined value. As well as RBS and Lloyds, there is the uranium operator Urenco, the Student Loan Book, something called Plasma Rescources, The Royal Mail, the Met Office and the UK Hydrographic Office. Add to that an interesting portfolio of property from Law Courts to MoD areas and you could have the making of quite a significant FTSE 100 company made up of a compendium of assets and companies.

Now asking investors to buy into this bundle of investments as a fund might be a far more sensible and sound investment, especially for the smaller investor. The receipts, of course, would go back to the government for debt reduction, but maybe here they could also use this as a base point for the UK Sovereign Wealth fund and have a national investment vehicle to invest the proceeds in good projects for the nation’s and its citizens’ futures?

So in my view here is a great opportunity for the re-introduction of popular capitalism through a responsible structure, and hopefully we can avoid the political dogma of populist capitalism – which would seem to have the whiff of political advantage being taken prior to an election. Surely not!

Justin Urquhart Stewart is the founder of Seven Investment Management and a regular media commentator. Originally trained as a lawyer, he has observed the retail market industry for 30 years whilst in corporate banking and stockbroking.