Royal Mail privatisation may allow it to survive in an uncertain market

Tom Welsh
Follow Tom

The scaremongering has begun. The price of a first class stamp will rise to £1, rural deliveries will be cancelled, and the chill winds of market forces will dismantle a vital cornerstone of British life. Given its unionised workforce and historic link to the Crown, a hostile reaction to the government’s plan to dispose of a majority of its stake in Royal Mail was perhaps inevitable. But this nostalgia is wrongheaded.

Ofcom’s 2012 report into the state of the market exposed the scary reality for Royal Mail without continued restructuring. Only 1 per cent cite mail as their preferred means of communication, while just 10 per cent send post to friends or family each week. And the fall in the number of items Royal Mail handles is striking. It delivered a peak of 80m items a day in 2005-06, but only 58m in 2012-13. Letter volume growth once closely tracked GDP growth, but the link has been severed as people have shifted to faster, cheaper modes of communication. It’s a structural shift and Royal Mail has suffered. In five of the past 12 years, it has lost money.

How would privatisation change this? Royal Mail is now in profit, it has made progress in rationalising its business, and has already laid off 60,000 staff. But a landmark 2010 review by Richard Hooper noted that state control had damaged its restructuring efforts. Hooper argued that the risk of political interference in commercial decisions jeopardised cost-cutting, and that modernisation could only be accelerated by private capital. In fact, the cherished universal service could itself be at risk without the discipline of external investment.

And consider the results of a series of reports commissioned by the Centre for Policy Studies on the privatisations of the 1980s. Between 1980 and 1982, the 33 major companies sold between 1984 and 1991 received an average of £300m annually in subsidies. But post-privatisation, they paid £4.4bn a year in tax contributions to the Treasury between 1987 and 1995. Why? Privatisation forced them to respond to the demands of investors, employees and customers. Royal Mail isn’t very good at this. Ofcom reports that 56 per cent say they had problems with its service in the past year.

Those worried about the death of the Royal Mail fail to see what it could become if revolutionised by outside investment and freed from political imperatives. Deutsche Post, formerly Germany’s public postal monopoly, has over 400,000 staff and a profit margin far higher than the Royal Mail’s 3.9 per cent in 2012-13. Deutsche Post, like its Belgian and Austrian equivalents, has flourished by aggressively cutting costs and expanding into courier services. This could also be Royal Mail’s salvation. Driven by online shopping, package volumes rose 4 per cent to 1.46bn in 2012-13. But capitalising on it requires money. Royal Mail’s accounts note the need to automate and expand its network to handle more deliveries.

Royal Mail’s challenges remain huge. It has not been a monopoly since 2006 and, by 2010, less than half of all business-to-business mail was handled by its postmen end-to-end. And it’s vulnerable. In 2008, only 50 firms accounted for 40 per cent of its mail volumes. But privatisation may just give it a fighting chance.