12 Sep 2013

Is privatisation the right move for Royal Mail – and for us?

And would Postman Pat have approved? Channel 4 News looks at the wisdom of selling off Britain’s 500-year old delivery service.

In a move not even sanctioned by the ultra capitalist Margaret Thatcher in the 1980s, the government has kickstarted the process of selling shares in Royal Mail in an initial public offering expected to be worth almost £3bn.

Ministers may have been encouraged by similar and successful European privatisations over the last 20 years, but British reaction to the move has been mixed, with the Communication Workers’ Union (CWU) set to vote on strike action over the issue by 3 October.

Moya Greene, the chief executive of Royal Mail, received a frosty reception when she spoke to 1,500 CWU members today about the plans. They fear for their jobs, and perhaps with good reason.

Historic role

Dating back to Henry VIII’s era, last year the Royal Mail delivered 99 per cent of all letters to 29m UK addresses. It also holds a leading position in the UK parcel delivery sector, accounting for one third of revenues in the sector last year.

Market analysts back the privatisation following recent successful moves in Austria, Germany and the Netherlands to do the same. Although there are fears of a knock-on effect to the UK’s sprawling network of post offices, especially those in remote areas which are often the only shops providing essential services.

Additionally, Europe’s privatised delivery operations generally benefit big corporate customers while members of the public deal with higher prices for small deliveries.

By the time Mrs Thatcher resigned in 1990, more than 40 state-owned businesses employing 600,000 workers had been put into private hands, including British Gas, British Airways, British Telecom, and British Rail. But when it came to Royal Mail she said she was “not prepared to have the Queen’s head privatised”.

The government is pushing ahead with its controversial privatisation of Royal Mail, but says it won't affect the Post Office

Later trade secretaries from both the Conservatives and Labour proposed sell-offs but were constrained by opposition from within their own parties. Tony Blair and Gordon Brown were keen to avoid battles over the matter with a union previously run by Alan Johnson, a cabinet colleague.

This could likely result in the closure of smaller or more remote post offices that are less cost effective to maintain Former government adviser Andrew Graves

Some critics say the government wants to fill a hole in its finances, but Prime Minister David Cameron told BBC London 94.9 radio that current government ownership of Royal Mail in a competitive market “is a massive disadvantage”.

“You can’t get out there, borrow money, access expertise and capital from the private sector. Effectively we are setting this business free to be able to do that, to respond to the competition,” he said.

Economics v politics

The government’s privatisation plans are a “surprising move” according to professor Andrew Graves from the University of Bath’s School of Management, who worked with several governments over the last 20 years on plans to privatise Royal Mail.

“Economically, privatisation makes sense, however, politically this is quite a dangerous prospect for the current Conservative party,” said Mr Graves.

“The privatisation of other services in the past hasn’t always worked out as expected, and rather than the anticipated increase in efficiency and reduced costs we have actually, in practice, seen quite the opposite.”

Effectively we are setting this business free to respond to the competition Prime Minister David Cameron

“For the Royal Mail this could likely result in the closure of smaller or more remote post offices that are less cost effective to maintain.”

In fact, Royal Mail and the Post Office network of 11,500 branches were separated in April 2012, although they retain a long-term agreement whereby the Post Office sells products and services on behalf of Royal Mail.

Business secretary Michael Fallon played down concerns over post office closures, insisting in the House of Commons that the Post Office “is not for sale”.

“There will be no repeat by this Government of the closure programme that Labour implemented – far from it – this Government is committed to ensuring a sustainable future for the Post Office,” he added.

A sound business decision?

Ishaq Siddiqi, a market analyst for investment company ETX Capital, told Channel 4 News that the privatisations of postal services in Austria, Belgium and the Netherlands provide “a good gauge for UK politicians and the public alike”.

Germany’s sell-off of Deutsche Post in 2000 has been a roaring success, and “could only have grown so rapidly through the years via the privatisation”, Siddiqi said.

“It grew its business through a series of high profile and successful acquisitions which should be the model for Royal Mail and I suspect that management at Royal Mail know that acquiring will be one of the biggest drivers of profitability in the years ahead,” he added.

There will be no repeat by this Government of the closure programme that Labour implemented Business secretary Michael Fallon

“For the European region, the entry of these companies on the stock market increases the competitiveness and provides investors with a choice of postal companies to invest in.”

Royal Mail faces competition from high frequency delivery firms like Amazon, larger rivals such as DHL and FedEx but also smaller carriers.

“Are they going to be targeting smaller players? I expect them to be targeting more higher end than lower end,” Siddiqi said. “It will depend on how Royal Mail price their delivery service.”

Privatising the centuries-old Royal Mail promises to be an emotive issue tied up with jobs and wider economic prospects, But few people know for sure whether it is best for Britain.