Royal Mail privatisation: is it a good idea for the UK; is it a good idea for investors? - The Share Centre Blog

Please remember: Our website can help you make informed decisions, not provide personalised advice. If your investments fall in value, you could lose money.
Tax allowances and the benefits of tax-efficient accounts could change.

Michael Baxter

Royal Mail privatisation: is it a good idea for the UK; is it a good idea for investors?

Written by: Michael Baxter on July 11th 2013

Category: Thought for the day

There will be no Tell Sid style campaign, but neither will the company be sold off to a rival. It will be a bit like the great privatisation campaigns of the 1980s, but only a bit. Is Royal Mail a good proposition for investors, however, and what about UK plc?

Everywhere I look I read comments about how awful government run businesses are. I have a slightly different take on this. For me the markets work better than state monopolies because they experiment more. The free markets throw up lots of different companies, each with a unique proposition, and a unique way of doing things. Many of these companies turn out to be awful too, with management that would be hard pressed to manage a paper bag, let alone deliver one. It is just that businesses fail; they go bust. Businesses that succeed are either picked out by the force of randomness – they are lucky; or they happen to possess that rare quality of management with true insight. It is not that state companies are more inefficient per se, it is just that in each sector there is one state company, whereas the free markets create many.

In the long run, free markets create monopolies too, but then such companies become subject to the same errors made by state companies. This is where the concept of regression to the mean comes in. If randomness picks out winners, there is no reason to believe it will continue to pick out the same winners in the long run. And in the long run, creative destruction destroys monopolies.

The Royal Mail may or may not prove to be more efficient as a private company, only time will tell. But if the company eventually becomes more efficient and makes more money, who is to say that might not have happened anyway if it had stayed under state ownership.

Yet there is no longer any inherent reason why the Royal Mail needs to be state owned. Before we had email it was different. In the Victorian times it was very different. The creation of a state run postal service may have been a key factor in making the UK economy the world’s economic super power of the 19th century.

But communication is a tad easier these days. We might bemoan that we only get one postal delivery day, but I don’t know about you, but I seem to get rather a lot of email deliveries. I am not sure from where I get the highest per cent of rubbish: the postal service, spam email or unsolicited phone calls. There is something nice about getting a good old fashioned letter, or even a card, but it is just so expensive to send a letter compared to other mechanisms. Given this, it is hard to see how there can be a future for delivering messages the old fashioned way.

But where Royal Mail does provide a useful function is in the delivery of parcels, and as more and more of us do our shopping online, one assumes this function will grow in popularity. Okay some of the products currently delivered by post: films, books, music, can be delivered electronically. But I am not sure we will ever be able to send food or clothes over the internet – not unless 3D printing proves to be even more of a miracle technology than even the wildest tech enthusiasts’ claims suggest.

But as a deliverer of parcels there is no reason, no reason at all, why we need a state monopoly. Given this, why not privatise the Royal Mail?

If I have a reservation, and the same reservation applies to privatising banks by the way, it relates to the timing. At a time when the UK government can borrow money so cheaply and easily, there is no rush. It should take its time and choose the moment that will generate the highest price. Instead, it seems keen to sell off as much as possible, as quickly as possible so that it can boast to the electorate that it is reducing debt before the next election.

Still, I guess that is to the advantage of investors. If the timing of a sale is being determined by political expediency, rather than economics, that must mean the company is likely to be worth more post privatisation. Indeed, I am guessing that within a few years of going private, the Royal Mail will be swallowed up by someone else – DHL or TNT perhaps – and in the process may well net shareholders a tidy profit.

I guess the spanner in the works is union resistance. It may all boil down to whether the bribe, sorry shares, given to workers will be enough to avoid union militancy. I suspect it will. The unions may try to stop the privatisation altogether, but assuming that they fail, they will toe the line. After all, these days, when competition seem so fierce everywhere, union militancy applied to a private company seems to be a sure fire way of earning job cuts, and that threat alone will be enough to quieten the unions.

PS: Don’t forget, if you do choose to buy shares, you will do so over the internet. Don’t try to post your interest, because no one will get your letter.


These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: royal mail ipo, royal mail privatisation 2013

Filter view