Should we have privatised the Royal Mail? 1

Jake Palmer

Since being floated on the London Stock Exchange in 2013, there has been much debate as to whether or not the decision to privatise the Royal Mail by the UK government has been a good one. The government, it seems, believes that by selling 60% of its stake in the company it will help to improve the efficiency of the postal service, whilst also raising a large amount of capital funds in the process which can in turn be reinvested into other areas of the economy, for example the health service, infrastructure and education, hopefully improving the long term future of the country both economically and socially.

There is sound reasoning behind this decision, as the ever increasing impact of technology continues to reduce the need for the postage of letters with a much greater emphasis being placed on the delivery of parcels instead, a market which remains competitive and is not monopolised by the state as the delivery of letters was until this week. The numbers of letters sent daily fell from around 82m in 2004 to less than 58m in 2013 and the government has stated that having already invested £3 billion into modernising the Post Office’s network of 11,500 branches it simply cannot afford to continue to provide investment to enable the Royal Mail to deal with this substantial reduction in business due to the high levels of opportunity cost associated with such sizeable sums of money. In the current economic climate especially, such ventures can no longer continue to be undertaken when so many cuts have to be made in the public sector. Furthermore, this would not be an unusual move to make with many other countries such as Germany, Austria and the Netherlands all having previously set the precedent for such an action. In Belgium, the move to privatise its national postal service has been largely successful with a drastic improvement in profitability soon after its part-privatisation in 2006, and it is now benefitting from profit margins in the region of 17%. Clearly though there is likely to be some disparity between the results seen in these countries and the potential results that will be seen in this country as many factors would have to be taken into consideration, principally who it is that would be taking charge of the company and the spare capacity available in the company relative to its counterparts in these other countries.

There are, however, a number of possible negative impacts that this decision could cause, primarily that without government control we could potentially see a large rise in the price of stamps despite increased efficiency and probable reduction in the costs of production, as shareholders look to maximise their profits. With 70% of Britons surveyed announcing that they would not be in favour of the privatisation it would seem that this is a significant point of contention. There is also some discussion as to the motives behind the government’s decision. As well as making it easier for the current government to meet its deficit targets with the arrival of between £2-3 billion as a result of selling its stake in the Royal Mail, it would also mean that in the future disagreements with the Communications Workers Union over the pay and conditions received by postmen may result in a fall in the negative publicity received by ministers compared with what they would currently receive. Although it is ok for the government to take this point into consideration, it should be nothing more than a side-benefit as it does little to benefit the long-term success of the UK economy.

Many people are also concerned by the price at which the shares are being sold, with extremely high competition for their acquisition. Analysts from Canaccord Genuity have estimated that the government may be undervaluing the Royal Mail by around 80% significantly reducing the capital that will be generated through the sale of its shares. This has led in many cases to further analysis suggesting that the government may actually be better off selling to a single buyer, leaving a private ltd. Company rather than a public one. This comes largely down to the fact that if we are to look at the principles that these types of companies are usually run in accordance with, public companies tend to be far more interested in short term success; that is making large amounts of profits initially and not worrying too much about the longer term implications that these profit maximising management decisions may have. In contrast private companies look more commonly at making investments into the business that will heighten long term aspirations. In the case of the Royal Mail, as an essential long term national service for the foreseeable future, these principles abided by in a private company would appear to be more compatible with the expected business model that the Royal Mail will use to operate. It is likely that in the near future the Royal mail will have to absorb the financial costs associated with breaking intransigent partnerships and making considerable long-term investments as they try to grow, something which a private company would be far more adept at handling. Of course, this does not necessarily mean that the Royal Mail will be managed in the same way; it simply suggests that in all probability that it would be governed far more sustainably as a private company.

In conclusion, I think that the idea to privatise the Royal Mail is a good one, as it is no longer of benefit to our economy for it to remain under state-ownership, plus the money made from its sale would be highly beneficial to the economy as would the likely increase in its efficiency. Were the government to help control any increases in prices then its sale would be almost without doubt the correct decision. However I believe that it would be a far more successful move were it to be sold as a private company as this would lead to a far more prosperous long term future for the company, therefore also increasing the benefits provided to the people of the UK.

One comment on “Should we have privatised the Royal Mail?

  1. Reply M Singh Feb 6, 2014 3:41 pm

    Jake, you have very effectively applied knowledge of Market Structures in Transport to this sector of the economy. Such transferrable skills will surely help you gain a better understanding of many economic issues that prevail in the Global market. Well done!

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