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10 Jun

Privatisation of Royal Mail

Posted by Tom Cantor in Privatisation, Royal Mail

The privatisation of Royal Mail came a step nearer this week with the government’s formal notification to the stock exchange of an imminent IPO (initial public offering). The sell-off will be Britain’s most ambitious privatisation since that of the railways in 1994.  The Royal Mail comprises two main operating divisions – UKPIL (UK Parcels, International & Letters) and GLS (General Logistics Systems) with UKPIL generating some 84% of the £6.1bn revenues earned in 2012/13 (Source: Royal Mail share service). Since the government announced its intention to privatise back in 2010 opposition from unions and consumer groups has grown, including the very real threat of strike action by Communication Workers Union (CWU). None of this has dented the government’s enthusiasm for a floatation which will create Royal Mail plc. Privatisation of the Royal Mail will mean the end of nearly 500 years of state control. Despite the protests the truth is that attempts to commercialise and modernise the Royal Mail at a time of considerable change in the communications industry, it has failed to adapt to a changing market, and to a large extent has brought privatisation upon itself. The spread betting firm IG has already launched a grey market on Royal Mail’s valuation, with early indications that Royal Mail will have an initial worth of just under £3bn.

The origins of the post office date back to the 16th Century when Henry V111 encouraged the development of a network of postmasters across England. This network became available for use by the public in 1635 under the reign of Charles 1st. Stamps were introduced in 1840, followed by the first letter boxes in 1852. In 2006 it lost its coveted monopoly of post, and while the attempt to part-privatise the post office in 2009 failed, the coalition government announced its plans for a full privatisation in 2010. This week formal notice has been given to the stock exchange that privatisation will take place, and the expectation is that this will happen in November. As part of the sell-off around 150,000 employees will be given 10% of the shares, worth at least £2000 (Source: ITV.com).

A significant argument in favour of privatisation is that Royal Mail will be free to raise capital to invest in much needed new technology which will enable it to compete against rivals such as TNT. With the growth of online shopping (estimated at 10% per year - source: Retail Research) the newly privatised Royal Mail will be able to compete more effectively for a share of this growing market.

Indeed, Business Secretary Vince Cable believes that privatisation is the only way to make the Royal Mail a sustainable business and has pointed to the already successful privatisation of postal services in Germany, Austria and Belgium.

There are several other theoretical benefits of privatisation. As well as being able to access capital for investment, and of course providing much needed funds to the Treasury, efficiency improvements are also likely to follow, including improved allocative efficiency as prices will be allowed to correspond to the marginal cost of service supply. It is also likely that there will be an increase in productive efficiency, where rationalisation will enable average costs to fall. Of course, the devil is in the detail, and exactly how many cost savings will be made is unknown. As it stands, reducing the 6-day a week delivery service to 5 would seem an obvious place to start, but this is unlikely given the government’s commitment to a 6 day service (the Universal Service Agreement) until at least 2022. Critics have argued that, like other utilities, the post office’s infrastructure makes it a natural monopoly, which means that privatisation could see the future break-up of the infrastructure, with a loss of economies of scale and the possibility of ‘wasteful’ competition.  On the latter point, competition does not necessarily stimulate greater demand, and may simple spread the existing market around several smaller operators, who may well end up being less efficient than the state monopoly. Of course, the solution to this is to separate out the infrastructure (including post boxes, post offices and collection) from the delivery service – much in the same way that BT was privatised.  It is for this reason that the UK government did indeed separate the Post Office from Royal Mail in 2012, with the Post Office network remaining under state control.  So while you might post your letter in a Post Office red post box, it might be delivered at the other end by a completely different company who is contracted to work for Royal Mail. How all of this pans out remains to be seen, but what is clear is that mail is a complex business in which the application of new technology has its limitations. There is no real substitute for the postman’s delivery round.

Of course, privatisation and rising prices – at least in the short run – tend to go hand in hand and, in anticipation of privatisation Ofcom, the communications regulator, has given the nod that it will shift to a much lighter touch regulatory regime (Source: FT) which will enable Royal Mail to price is products and services at the market rate. Good news for prospective shareholders, and possibly not so bad news for its 150,000 employees. A more sustainable business does not necessarily mean wholesale job cuts. If the German experience is anything to go by, perhaps the single most significant benefit for a privatised Royal Mail is that it can embrace globalisation and compete for new contracts outside of the UK.  Deutsche Post, the world’s largest provider of postal services, now operates in 200 countries and employs nearly half a million workers, and has grown through mergers and acquisitions, including purchase a 25% stake in DHL – something only possible following its own privatisation. Meanwhile, the Communication Workers Union is due to send out ballot papers to its 125,000 members on 20 September, the result of which will determine whether a strike goes ahead. The union must be buoyed by that fact that its last strike, in 2009, put to an end the planned part-privatisation of Royal Mail. But conditions have changed since then and, despite its unpopularity, there is absolutely no doubt that privatisation will go ahead as planned.

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