25 January 2018

The flawed logic of renationalising Royal Mail


Compared with Labour’s plans to nationalise parts of the energy and water industries, bringing Royal Mail back into government ownership is comparatively small cheese. The market capitalisation of Royal Mail is around £4.5 billion whereas, for example, the upfront cost of nationalising the water industry could be in excess of £86 billion. However, the rationale behind nationalising the mail sector is equally flawed.

The sale of Royal Mail was, of course, not without controversy. In 2013, the Coalition government sold 60 per cent of the state’s shares in the company to its employees and private investors at a price of £3.30 each. The share price then increased by 38 per cent on the first day of trading, leading the National Audit Office to investigate whether the sale represented value for money. But Lord Myners, a Labour Peer who oversaw an informal review of the sale, was clear that the price seen in the aftermath of the sale could not have been achieved.

And we should not forget the position Royal Mail was in before privatisation. It was generally recognised that the company’s efficiency was very poor. By 2007, it was 40 per cent less efficient than its competitors, and the Hooper Review in 2008 concluded that its position was unsustainable. Particularly striking was that while private mail companies in Germany and the Netherlands were facing greater end-to-end competition than Royal Mail, they were achieving high profit margins from their mail operations. By contrast, Royal Mail’s financial position was becoming increasingly precarious, making an operating loss in 2007. And, of course, there were other issues, not least that it had one of the largest pension deficits in the UK.

Operating profit margins of Western European postal companies, 2007 (%)

In summary, Royal Mail was crying out for private sector capital and expertise. And now it’s got this. Since privatisation, £1.5 billion of much-needed investment has been ploughed into modernising Royal Mail’s IT and delivery office network. The company is now much more sustainable, delivering more parcels each year than all of its competitors. And employee relations have improved, with employee engagement rising from 20 per cent in 2010/11 to 57 per cent in 2016/17.

The renationalisation of Royal Mail would be relatively small fish – if a multi-billion-pound price tag can ever be described as inexpensive. But as with the utilities, it is hard to see the rational of doing so, given that the service is performing better in private hands.

This is the latest in the CapX series on nationalisation. The other posts can be found here, here and here.

Daniel Mahoney is Deputy Director and Head of Economic Research at the Centre for Policy Studies.