Royal Mail privatisation – an act of ideology not of necessity or prudence

Robert Henderson

The announcement of the privatisation of the Royal Mail  by  the Business Secretary Vince Cable (http://www.telegraph.co.uk/news/uknews/royal-mail/10172284/Royal-Mail-lined-up-for-3bn-float.html)  is the marriage of the Thatcherite  privatising Zombie which has infected the whole of the mainstream British politics linked to the mania for “competition” exhibited by the EU (http://ec.europa.eu/competition/sectors/postal_services/overview_en.html).  The two ideologies – that of market economics and the goal, pursued with pathological determination,  of an ever expanding equalisation of trading conditions throughout the EU dovetailed perfectly.

The public sees Royal Mail as a public service. This is unsurprising because it has been in public hands since the 17th century and the provision of a universal delivery service to every part of the country for a standard charge existed from the time  Rowland Hill invented the postage stamp and the penny postage in the mid 19th century until the EU  interfered and ended the monopoly on letter post and small parcels in 2010.

There are clearly much broader questions of social  utility  than the cost or otherwise to  the taxpayer.  But even on the narrow and vulgar question of cost to the taxpayer there is no solid case for privatisation. Provided the letter post and packages up to a size which encompasses  the large majority of packets sent is  kept as a state monopoly,  the service could be relied upon to remain in the black whilst keeping postal charges low.  Even with the considerable weakening of Royal Mail’s monopoly over recent years it is still delivering healthy profits, viz: “ The state-owned delivery company said pre-tax profits jumped to £324m from £201m last year and a loss of £165m in 2011. Underlying operating profits soared 165pc to £403m from £152m in 2012” ( http://www.telegraph.co.uk/news/uknews/royal-mail/10070998/Royal-Mail-delivers-profits-fit-for-flotation.html).

It is true that letter numbers have  declined  considerably in recent  years, by 25% between 2006 and the end of 2012. Nonetheless, the volume is still considerable  with 16 billion letters being sent to 28 million addresses  in 2012 (http://media.ofcom.org.uk/2012/03/27/ofcom-announces-measures-to-safeguard-the-uks-universal-postal-service/). Even with the ever growing use of digital communications, it is difficult to see letters dwindling to an insignificant number in the near future. Moreover, a good deal of the recent letter decline can be attributed to the ever growing cost of postage,  with second class mail for small letters now being 55p (large letters 69p) and first class  mail  60p (large 90p) (http://www.royalmailgroup.com/first-and-second-class-stamp-letter-prices-unchanged). In 1840 when the penny post was introduced a letter of any size could be sent for one old  penny. At 2012 prices that would be 87 old pence today (7/3) , or 36 new pence.  (http://www.bankofengland.co.uk/education/Pages/inflation/calculator/).  In real terms the  modern cost of a first class large letter is nearly three times as much as its 1840 predecessor. Bearing in mind the benefit of modern sorting technology  and transport and a great reduction in the number of deliveries per day,  it is rather surprising that the cost of post has risen hugely in real terms in modern times rather than dropping.

Parcel post costs have also risen sharply for those sizes of parcel  most likely  to be used: “2kg [parcel] was previously £5.30, but this will now rise to £8 if it is bigger than 45cm by 35cm by 8cm.” (2013  –  http://www.telegraph.co.uk/news/politics/9965562/Cost-of-posting-parcels-to-rise.html and http://internetretailing.net/2013/04/online-retailer-speaks-out-as-royal-mail-changes-parcel-pricing/#sthash.4EFUCLqr.dpuf) )

These price rises have been permitted by the regulator Ofcom simply to prepare the Royal Mail for privatisation. If Royal Mail remained in public hands, with the old letter post and small parcel monopolies restored, the cost of postage could be reduced considerably because profit would not be a prime driver of the cost . In fact, with the current profits being made, even if the present situation was maintained substantial postage price reductions could be made.  The current large profits are only needed to make Royal Mail  attractive to prospective buyers of the business.

But even If the worst came to the worst and Royal Mail regularly made a loss, and the taxpayer had to  directly subsidize the cost, this would still be a benefit to the general public because it would ensure that an important public service was maintained at a price the public could afford.

The really good news for those who want  Royal Mail to stay as a public service is the immense growth in parcel post because of the already hugely expanded and ever expanding increase in Internet buying. In May 2013 this accounted for 9.7% of all retail spending excluding automotive fuel (http://www.ons.gov.uk/ons/rel/rsi/retail-sales/may-2013/stb-rsi-may-2013.html#tab-Internet-Sales). There is every reason to believe it will continue to grow substantially as people get more and more comfortable with buying online and the opportunities to buy in shops diminishes as more and more close The Centre for Retail Research estimates that stores will decline  from 281,930 today to 220,000 in 2018, a decline of 22% (http://www.retailresearch.org/retail2018.php).  This growth in parcel post will more than cancel out the reduction in revenue from  letters.

Practically allied to Royal Mail is the Post Office . Until  April 2012 Royal Mail and the Post Office were  effectively part of the same organisation, albeit as agencies of varying status. (http://www.publications.parliament.uk/pa/cm201213/cmselect/cmbis/84/8405.htm).  Now the Post Office is to be, legally, an entirely separate state-owned organisation.

A Commons committee in 2012  recognised  its public service function: “The Post Office remains an essential service which is extensively used. A third of the UK population—just under 20 million people—and half of all small businesses visit one of over 11,500 post offices every week.] The Post Office is one of the country’s largest cash handlers, processing around £70 billion of cash and £636 million of coinage every year. “
(ibid)

The official view of the Post Office networks future is rosy: “[In 2012] Paula Vennells, Chief Executive of Post Office Ltd, supported the proposals and set out her ambition for the Post Office:

If I have a vision, it is to have 30,000 post office outlets, not 11,500. It is to have standalone electronic drop boxes for mail packets. It is to have ATMs in railway stations. It is to have identity kits in town halls and libraries, all branded ‘Post Office’. But until we transform the current network and make it more sustainable, that becomes just an ambition.” (ibid)

This seems wildly improbable in the context of a privatised Royal MailAlthough  a ten year deal to maintain the existing Post Office network was agreed by the government in 2012,   it is probable that the network will be severely reduced in the not too distant future . It has already suffered a considerable contraction –  there are 11,500 Post Offices now compared with 20,000 in 1990. Many of the remaining offices,  and especially the  sub-post offices,  are struggling   because government services such as TV licence renewal have been removed from the Post Office remit and  there is a  general move towards online government services (in which the user increasingly has no choice but to use the online service) will worsen  the lot of Post Offices, especially the sub-post offices. (http://www.thisismoney.co.uk/money/news/article-1678139/Post-offices-death-by-a-thousand-cuts.html).   Politically it will be much easier to reduce a stand alone state-run Post Office network  in size or even do away with all together than one attached in some way to the Royal Mail, especially if the privatised Royal Mail and its other private competitors decide not to use  Post Offices  as parcel pickup points and the government can keep pointing the Post Office network as “a burden on the taxpayer”.   The network It does require a public subsidy but this is minute in the context of national expenditure – it was  £150 million in 2010/11 ((http://www.publications.parliament.uk/pa/cm201213/cmselect/cmbis/84/8405.htm)

There is little experience of privatised postal services  because there are few anywhere  in the world and those that have been privatised – Sweden, Finland and New Zealand – have only done so within the last 20 years.   However, a 2007 European Commission report on the liberalisation of postal services within the EU  found a common theme, namely, a reduction in post offices and increased postal charges (http://www.boeckler.de/pdf/wsi_pj_piq_post_europe.pdf).  That is exactly what is to be expected when private operators are allowed  into a state service.

Does anyone  honestly doubt that privatisation will make matters worse? After all, every major British privatisation of public  services,  apart from telecommunications  where there can be real competition,  has resulted in higher charges for at best unimproved and at worst inferior services.  Why should this privatisation be any different?

Here is a media doubter Vikki Woods writing for the free market Daily Telegraph  : “ Vince Cable said in the Commons that the time had come for the Government to step back from Royal Mail and allow its management to focus on growing the business. The sell-off “is practical, it is logical, it is a commercial decision… It is consistent with developments elsewhere in Europe where privatised operators produce profit margins far higher than the Royal Mail but have continued to provide high-quality and expanding services.” Oh, yes? He says “expansion” but I hear “shrinkage”. The universal service obligation was only five days across Europe back in 2011, and now various national mail companies are sucking their teeth and suggesting three days a week would be good. “(http://www.telegraph.co.uk/earth/countryside/10176212/Our-postman-delivers-a-sack-of-bad-news.html).

I suspect that many will have the same fears.

The Royal Mail is already much diminished from what it was. There is only one delivery a day; the cost of postage has risen massively  and much of the Post Office counter service which includes a good deal of postal work – recorded and registered letters, airmail, special delivery and so on –  has gone because of the massive reduction in Post Offices.   How long before the universal letter post obligation is reduced from six days to three days or two days? How long before a single universal charge for the whole country is abolished and hard to service areas such as the countryside are charged much more than the cities?  How long before door-to-door letter post  deliveries are replaced by deliveries to central collection points ?

Privatisation is a fraud on the public for its is selling that which belongs to everyone.  Where privatisation of state assets involves selling them  to the general public  it is a confidence trick on a par with the conman who “sells”  Nelson’s Column to  tourist.   Britons  who purchase shares in a privatised company are buying what they already own.  Think about that fact and don’t be a sucker.

The public is being doubly stung with this privatisation.  Not only will they almost certainly have, based on the experience of privatised postal services abroad, a more expensive and less comprehensive service within the foreseeable future, the funding of accrued Royal Mail pensions up to 31 March 2012 will remain as a charge on the taxpayer (http://www.royalmailpensionplan.co.uk/) rather than the new privatised company.  In short, the taxpayer is left with the debts while the buyers of  Royal Mail walk away unencumbered with the historical pension obligations.

This is something which does not need to happen. It would be perfectly possible to retain a state-owned universal postal service which would not make a loss, would make sufficient money to keep modernising  and would be much cheaper to use. All that would  be required is the political will to say no to the EU and revert to the old letter and smaller parcel monopoly.  This  privatisation is simply an ideological decision and has nothing to do with the  viability of a state-run postal service in this country.

This could well be a highly unpopular privatisation because the public  overwhelmingly view  Royal Mail as a service and have become jaundiced by previous large privatisations such as the energy and water industries, all of which have  resulted in raised prices and no great improvement in the service they provide. It could  well cost the Tory and Lib Dem parties dear at the next election.   (http://www.telegraph.co.uk/news/uknews/royal-mail/10050074/Poisonous-privatisation-of-Royal-Mail-will-cost-the-Conservatives-votes-in-2015-Bow-Group-warns-Tory-MPs.html). If it does, they will have only themselves to blame.

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