Should the Royal Mail be sold?

[TrueBlueTerrier]

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Plans to sell Royal Mail are back on the table, but should we do it and what would it mean?

Business secretary Vince Cable isn't too popular with the unions right now. The Trade Unions Congress (TUC) has revoked his invitation to speak at their Autumn do this year.

Obviously they're not happy about the coalition's stance on spending cuts and they probably feel doubly betrayed by the Lib Dem's apparent enthusiasm for the axe.

And, as a cherry on the cake, Cable and his fellows have revived one of the Brown government's more controversial proposals: the injecting of private money into the Royal Mail.

What's happening?
The coalition government wants to push forward with plans to sell off at least part of the Royal Mail. Under previous proposals from Labour, just over half of the Royal Mail's shares would be divided between the government and staff. The other 49% would be sold to private companies to raise funds for investment.

A majority of Lib Dem and Conservative MPs support part-privatisation, which suggests that any plan this time around has a much better chance of going through than the previous rejected Labour scheme.

Postal services minister Ed Davey has suggested that legislation will be passed by next June. Ideas range from selling part of the company to a private operator to a 100% flotation. In other words, selling shares on the stock market, not dissimilar to the way the utilities were privatised under Margaret Thatcher.

Why sell the Royal Mail anyway?
The Royal Mail isn't an unprofitable business. It made £404 million in the 2009/10 financial year, up £83 million on the previous 12 months, on a turnover of £9.35 billion. Royal Mail put the improvement down to modernisation efforts and lower costs. But the group is hardly without its problems.

The biggest is its pension deficit - an issue familiar to many of Britain's once-public companies, such as BA. The Royal Mail pension deficit clocked in at £10.3 billion as of 31 March 2009. And although it had narrowed to £8.4 billion by March this year, that's still pretty brutal.

That's much bigger than any FTSE 100 company's pension black hole. The Royal Mail had already agreed in 2006 with the pensions regulator to pay in £270 million a year over 17 years to close a much smaller gap of just £3.4 billion.

But then the stock market was pummelled by the financial crisis. Hence the increased deficit.

The £100 billion hole in company pensions

Filling the black hole
The scheme is now closed to new joiners - they join a 'money-purchase' scheme, rather than the far more generous final salary scheme.

This will make the Royal Mail's contribution rate far lower than before. But the new deficit will still take around 35 years to pay off at the current rate.

The payments are strangling the company's ability to invest in modernisation and the pensions regulator is apparently a little worried about what sort of precedent that might set for other pension schemes if it accepts this.

That's one issue. Another, wider, issue, is the fact that people just don't send as many letters as they used to. More than 60% of the British population has access to the internet and letter volume is falling by around 7% a year.

On top of that, labour relations are not great between Royal Mail's heavily unionised workforce and company management. There's no doubt fault on both sides, but that's irrelevant.

As British Airways is finding out, a company that is saddled with a strike-prone workforce will end up losing out to more reliable operators.

What strikes really cost us

How will privatisation help?
Businessman Roger Hooper wrote a report, Modernise or Decline, on Royal Mail in 2008. He's now been asked to revise it by Cable.

The basic argument hasn't changed. As well as the pension deficit, Royal Mail is hugely inefficient. For example, there are many inflexible and expensive labour practises - in 2008, labour costs accounted for around 66% of revenue, the highest in Europe apart from in Spain.

His argument is that the taxpayer can bail out the pension fund, but on condition that a private operator takes a stake in the company and helps it to become more efficient. In other words, you sort out the crippling pension deficit and at the same time, bring in private management with its focus on profits to create a more efficient service.

Ed Davey, the Lib Dem junior minister putting together the plans, is adamant. "We have got to get private capital into [the Royal Mail]. There is no spare public capital about." And, obviously, selling off a chunk of the Royal Mail would bring in money for the government.

This is all very well, but it's not necessarily entirely fair to Royal Mail. One other problem the company has it that private companies have been allowed to compete in the business market since 2006, which has resulted in Royal Mail losing some of its most-profitable work.

Meanwhile, it still has to deliver ordinary letters anywhere in the UK for the price of a stamp - nearly 90% of Royal Mail's income is price-controlled. On top of that, Royal Mail is only able to borrow a very small amount of money on its own behalf, so it's unable to access private capital by other means.

How would it affect users?
The rationale for privatisation comes down to two very simple things. One, something needs to be done about the pension deficit. Two, the way the Royal Mail is run needs to improve.

If privatisation involves the taxpayer taking on the pension deficit, that's a couple of hundred pounds for every British household added to the national debt. That could overwhelm any benefit seen from the sell-off.

As Steve Lawson points out on the postal industry blog, HellMail, "with so many private pensions already massively reduced (or lost altogether in some cases), that seems to be asking a great deal". But the reality is that taxpayers won't get a say. So that's tough for us.

As for improving the way Royal Mail is run, well, apparently the coalition favours a privatisation model whereby postal workers get the chance to hold free or discounted shares.

The idea is they'll get behind renewing the company and co-operate more closely with management, as they'll be owners too. It could work, although I suspect that the transition from militant, unionised worker to card-carrying shareholding crony capitalist won't be an easy one.

The other fear is that the universal service obligation - the need to deliver anywhere in the UK for the same price - could be threatened under private ownership.

But Hooper has said this was at the core of his review and, according to the Adam Smith Institute, New Zealand hasn't seen significant problems in maintaining a similar guarantee since privatisation, even with a cut in the price of stamps.

The truth is that privatisation is as much about getting a troublesome company off the government's hands in exchange for a cast-iron pension guarantee, as it is about producing a better service.

That's not to say that it won't. But, as a consumer, I won't be expecting any obvious sweeping improvements to my service any time soon.

Would it be worth buying?
So if Royal Mail ends up on the block, should you be in the queue to buy shares?

It's hard to say at this early stage. However, it's not promising that problems finding a potential buyer were part of the reason that Lord Mandelson's sale plans ended up being shelved.

Bidders were partly put off by the prospect of strike action - the Communication Workers Union (CWU) is dead against privatisation.

If the pension problem is dumped on the taxpayer, then Royal Mail becomes a perfectly viable company. However, it's also one that is likely to have to go through quite a serious and potentially painful culture change if it ends up in private hands.

Its profit margins are tiny - the Royal Mail Letters unit of the business made just 2% margins - which probably means more modernisation and cost-cutting, which won't be popular with unions. Meanwhile the more profitable aspects of its business have been under attack by rivals for a long time.

Obviously, you'd have to wait and see for the price of any offer and the state of the company at that point, but I'd be hard-pushed to find a good reason to buy Royal Mail as it stands just now.

John Stepek is editor of MoneyWeek

[DirtyHarry]

(sighs)
Should British Gas be in private ownership? Of course not.
Should our electricity suppliers be in private ownership? Of course not.
Should our nations water be in private ownership? Of course not.
And why not? Because we're all being robbed blind by the privateers to whom, we meekly handed over these services to, and boy, oh, boy, what a boon it has proved to the senior executives of those companies that have made the usage of such basic necessaties, almost a luxury for millions of Britons.
Is Britain that monumentaly stupid, that much in a state of apathy, that unwilling, or unable, to learn from her mistakes, that the Royal Mail will be meekly handed over to more carpetbaggers?

Privatisation will only benefit overpaid senior executives, the rest of us can look forward to having the most expensive postal service in the western world.

[eian687]

and how many are owned by or have large stakes in are not even BRITISH

[DirtyHarry]

and how many are owned by or have large stakes in are not even BRITISH

All of them.