Royal Mail Privatisation: Lessons from History Professor David Parker March 2009 SM
Once again the issue of privatisation has reared its head with a proposal to part privatise Royal Mail. To get behind the headlines I am talking today to Professor David Parker who is an expert on regulation and privatisation. Now in the case of Royal Mail, David, what are the issues and how will privatisation help? DP Well there is a considerable problem at the moment for Royal Mail, and it comes about because of European Union directives as much as anything else. Since the mid 1990s the European Union has been has been opening up the postal market to more and more competition and the effect of the 2006 directive, the latest, is to open up all post to competition from 2010 in the UK. So essentially now in the next 12 to 15 months the Royal Mail will face full competition. It already faces competition for things like bulk mailing and business mail, which is about 85% of Royal Mail’s business. SM I know you have published a history recently of Privatisation in the UK – what lessons does history teach us about privatisation, and in particular about Royal Mail? DP Well it teaches us a number of things. The first thing is, and particularly relevant to the Post Office at the moment, is the importance of competition. I don’t think it would make sense to privatise a monopoly Royal Mail, but that is not the situation we are facing. We are facing either having a state owned competitive Royal Mail, or a privately owned competitive Royal Mail. Certainly competition brings about some quite remarkable efficiency improvements and improved quality of service for customers, but of course that is what people expect. In all markets where you have got competition people have to fight for the customers’ business and the Royal Mail will have to do that. And it is already happening. We are going to see much more diversification in the type of service. I could even foresee in the next four or five years that you will have a choice whether or not the post is delivered to your home or whether you pick it up from a central collection point, which might be a local petrol station, it might be local pub, it might be the local Post Office. But we are going to see a lot more diversification in the way that mail is delivered. SM So what are the key issues that need to be considered? Professor David Parker
DP Well, it is important to have the management and hopefully the workforce on side. Now at the moment we have management on side, as I understand it, in the Royal Mail. We don’t necessarily have the workforce on side because the Union of Communication Workers has a long history of opposition to privatisation. Its forerunner strongly opposed the privatisation of British Telecom, which was part of the Post Office until 1981. So it is going to be difficult to get that Union on side, in fact possibly impossible. But what governments did in the 1980s and 90s quite superbly, was to win over the workforce even in the face of the opposition of the formal Union by offering things like preferential shares, free shares, bonus offers. So I would see that as part of some kind of package going forward, that the workforce will get some compensation for what will inevitably happen after privatisation, which is further rationalisation of employment. In previous privatisations most of the unemployment has been voluntary, that is to say people taking early retirement packages, quite attractive severance pay packages. And I think that will continue in the Post Office. We clearly will slim down, we already are doing. The Post Office has been haemorrhaging staff now for years and it will continue under private ownership. SM There seems to be completely opposing sides of the debate on this – is there any way of reconciling views on this? DP Well to repeat, I can’t see the Union of Communication Workers altering its position because it is a longstanding position that it has had and in fact most, if not all, British trade unions during the 1980s and 90s opposed each privatisation in turn. So I don’t think that is going to change. In terms of the services, the experience of privatising previous models is that services don’t actually deteriorate, they may even get better. We already have a regulator for the postal service – PostCom – that regulator will be strengthened. The government is already committed to retaining the universal service obligation and the common stamp price. Although as I say, I think in future years that might be affected by new forms of delivery of post. So there is no reason for anyone to worry that they are going to lose their postal service and one has to separate the Royal Mail from the Counters business, which is the local sub Post Offices. Now they are under threat, but again this is not really to do with the situation with the Royal Mail. It’s to do with the fact that competition in retailing, rising costs of retailing and also the fact that the government has had a policy for a number of years now of moving welfare benefits from payment over the counter in local Post Offices to direct payment into bank accounts. And as more and more of us have bank accounts, and as more and more of us retire with bank accounts, that is how we will receive our pensions. So I am afraid the days Page 2
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of the local sub Post Office are numbered under any form of ownership. SM Now what can we learn about privatisation outside the UK – either from the regulation and privatisation of industries outside postal services or generally? DP Well a number of countries around the world have either introduced some privatisation which might be 30 or 40 per cent of the shares, which is what the government, I understand, is talking about in Britain at the moment, to get some kind of strategic partner in that can bring investment funds, to majority private ownership of postal companies. The main examples in Europe, I guess, are The Netherlands and Germany, both of which privatised their postal businesses in the 1990s. The Deutsche Post a couple of years after privatisation took over and merged with TNT, the courier service and both of those are now heavily involved in the UK, particularly in business post. This is the collection and sorting, even though the delivery is still the local Royal Mail postman who has to deliver under the regulatory system that we have. So yes, there are a lot of examples around the world. It’s a trend, I don’t think we can step outside that trend, I don’t think it is going to be possible in the longer term – I will come back to that in a moment. The US is considering privatising its post office, Japan is in the process of privatising its post office. Why I say I don’t think we can step out of this is the state of the Royal Mail finances. Now in the first nine months of this financial year, which runs from the 31st October, the Royal Mail made a profit of £255 million. Now to the man in the street that is a profit, so what is the problem? But when you look at the size of the business that is not a particularly satisfactory return on capital compared to a private business. So it is profitable, but barely. And its losing share, the postal market is declining by something around seven or eight per cent a year in Britain because people are moving towards internet advertising. The junk mail which was the real basis of the Post Office’s expansion in the 1980s and 1990s is now beginning to subside because companies are finding other ways of marketing to the public and that it continue as more and more of us have broadband. And then you have the state of the Post Office’s pension fund which is insolvent. Its anywhere between £6 and £9 billion insolvent now. One might say at a time when the government is throwing hundreds of billions at banks why can’t we just throw £9 billion into the pension pot, but I don’t think that is the way the Treasury will view it. The Treasury will view it that we have raised that money that has to go into the pension pot from the private sector. So part of the selling off of say 30 per cent of the shares, the government will receive a revenue for those shares which would be effectively used wholly or partly to bail out the pension fund. And without that, then the Page 3
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tax payer will finish up bailing out the pension fund or the postal workers will not get a pension – and I suspect that is not in anyone’s interest. SM Now if privatisation goes ahead as planned, when are we likely to see any benefits from this? DP I think they will roll in, I think they are rolling in anyway now because of the growing competition, and to repeat, it’s really competition. If you change a monopoly from the private sector to the public sector, as a monopoly, then nothing really changes. Yes, you can introduce regulatory bodies that put pressure on the management to improve services and reduce prices, but that is not as satisfactory as having outlying competition and that is what the Royal Mail faces. So we are seeing it coming and I think it will come in even faster because there will then be a general acceptance throughout the business, the Royal Mail business, that changes are with us, and those of us still a little ostrich like perhaps, putting our heads in the sand and hoping it will go away, will realise that that is not possible. And that the future is a very competitive postal service – of which, hopefully, the Royal Mail will continue to have some part to play. But I think it is going to be a very different role and perhaps it may even fall to being a minority role. SM David, thank you. Page 4