Royal Mail Privatisation

Is Royal Mail your grandparents', parents', and your first choice for sending holiday greeting cards? Is it also your go-to option for sending presents to friends? It might have been a government-baked household name with a long glorious history, but do you know that Royal Mail has been privatised? Below, the article will go through the reasons for the privatisation, and the pros and cons of the move for the organisation, for the delivery market, and for consumers.

About Royal Mail Privatisation

Royal Mail was established in 1516 as a British postal service operating as a department under the control of the government.

Figure 1. Royal Mail stagecoach in 1805Source: Pyne, W H (William Henry), Public domain, via Wikimedia Commons

Following the first step – partial privatisation in 2013, and the final sale completed in October 2015.¹ It was said the privatisation was caused by the shifting in the focus of types of postal services at Royal Mail as a result of the rising demand for parcel delivery services.

For the government, it would be more efficient to fund the shifting processes if Royal Mail was privatised.

While for Royal Mail, the privatisation was also an opportunity for it to gain competitiveness on prices, services innovation, and variations of services.

What was Royal Mail's main source of income before privatisation?

Letters delivery was the main service provided by Royal Mail. However, due to the shift in communication methods, the demand for letters posting dropped. The internet raised the number of people online shopping, which in turn, increased the need for delivery services of parcels.

Royal Mail's Share Price

Just after the government started to sell off Royal Mail in 2013, the share price of Royal Mail rose by 38%.² The share price of Royal Mail back in 2013 just before the sell-off was 330p and had soared to 455p.² It made a 57% increase in its share price over seven years after the privatisation despite a sudden drop in 2018 after its profit warning.²

Economic Factors that affect the privatisation of Royal Mail

The main driving force that influences the government's decision to privatise Royal Mail was mainly to acquire capital for the development of Royal Mail's parcel delivery services.

However, the decision would have been influenced by many different economic factors. Examples of these economic factors include government policies, law, interest rates, taxes, wages, exchange rates, inflation, unemployment rate, and demand and supply. But the main factor that caused the privatisation of Royal Mail was demand. The decrease in demand for letter services and the soaring needs for parcel delivery services are the main driving factor for Royal Mail to shift.

Advantages and Disadvantages of privatisation of Royal Mail

There are many advantages and disadvantages to the privatisation of the Royal Mail. Let's consider a few of them.

Advantages to Royal Mail's privatisation

There are many advantages to the privatisation of Royal Mail. Some are:

• Increase in government revenue. The government raised £3.3bn from selling its stake in Royal Mail.³ The UK government could use this increase in revenue to fund other government projects that benefit the wider economy, which will lead to an increase in aggregated demand (AD). However, some critics argue that it was sold off too cheaply.
• Increasing competitiveness and efficiency. The privatisation of Royal Mail will cause the firm to face more competition from other firms. If Royal Mail are to maintain its market share of 34%, they must be efficient and competitive.⁴
• Lower prices for consumers. Royal Mail and its competitors must remain competitive if they are to continue making profits and increasing their market share. This often benefits consumers as they receive lower prices for their services.

Disadvantages to Royal Mail's Privatisation

There are many disadvantages to the privatisation of Royal Mail. Some are:

• Higher prices for consumers. The Royal Mail was a natural monopoly, meaning that it is a firm with very high fixed costs and it is only practical and efficient to have one firm producing the goods in that market. Privatising a natural monopoly could see the fragmentation of the firm, resulting in an increase of its average cost of production, loss of economies of scale, which could ultimately result in higher prices for consumers.
• Government lose out on extra revenues. Although the government benefit from the large sum they receive from selling Royal Mail, they lose out on the continuous revenue Royal Mail generate annually. For example, Royal Mail's revenue rose by 7% to £6.1bn in 2021, which is far greater than the £3.3bn the government received from selling the firm.⁵
• Taxpayers lose out. According to the National Audit Office report, the privatisation fees for Royal Mail amounted to £12.7m.⁶ While speculators have benefited from the privatisation of Royal Mail by £750m, ultimately the taxpayers have lost out, as any losses are covered by the taxpayers.⁶.

Is the privatisation successful?

The privatisation was conducted with an aim to gain competitiveness in the market, raise revenue, and improve innovation. Royal Mail has seen some benefits from its privatisation. For example, the firm has received more revenue in parcel services than it has from letters in September 2021.⁷

As mentioned earlier, the reducing needs for sending letters and increasing demands for parcel delivery were two main factors driving the privatisation. However, the handling costs of parcels are also higher than handling letters.

Figure 2. Annual operating profit of Royal Mail from 2013 - 2021 - StudySmarterSource: Statista, www.statista.com

As we can see in Figure 2 above, it can be argued that the privatisation didn't contribute to the increase in revenue. To clarify, the substantial rise in revenue in 2014 was due to the sale of Royal Mail. Moreover, due to the sudden increase in demand for parcel delivery because of the soaring number of online shopping orders, the revenue finally rose at the end of 2020 and in 2021. It was also found that the revenue contributed by parcel delivery was less than letter postal service until October 2020. While it looks like a long-term loss is happening, the gain in profit was actualised ahead of plan for four years. This was the first time that Royal Mail gained more revenue from parcels than letters.⁷

Sources:

1. UK Parliament: Privatisation of Royal Mail research briefing https://commonslibrary.parliament.uk/research-briefings/sn06668/

2. The Guardian: Royal Mail shares rose 38% as Labour complains of knockdown price, https://www.theguardian.com/uk-news/2013/oct/11/royal-mail-share-price-buyers-profit

3. This is Money: Royal Mail fully privatised for the first time in its 500 year history, https://www.thisismoney.co.uk/money/markets/article-3270365/Royal-Mail-fully-privatised-time-500-year-history-Government-divests-final-14-cent-stake.html

4. Statista: Market share of leading courier service providers in the UK, https://www.statista.com/statistics/1245558/courier-service-providers-market-share-united-kingdom/

5. The Guardian: Boost for shareholders as parcels help Royal Mail to £311m profit, https://www.theguardian.com/business/2021/nov/18/boost-for-shareholders-as-parcels-help-royal-mail-to-311m-profit

6. National Audit Office: The Privatisation of Royal Mail, https://www.nao.org.uk/report/privatisation-of-royal-mail-plc/

7. The Guardian: Royal Mail gets more revenue from parcels than letters for first time, https://www.theguardian.com/business/2020/nov/19/royal-mail-gets-more-income-from-parcels-than-letters-for-first-time