The Privatisation of Royal Mail Presentation to ICEA by David Stubbs

Key findings Privatisation of Royal Mail is seen as a necessary step if it is to adapt successfully to a changing world. However there are risks involved in rushing through a sale, and whilst private involvement in the business may be important it is only one part of a wider transformation which may be necessary to secure its future.

Points for discussion How does privatisation in the postal sector differ from that of other utilities? What is the track record of privatisation in post so far? Is privatisation or competition more important in order to generate efficiency and innovation in the sector?

Presentation contents Why is privatisation seen as a necessary step? How far is it financially necessary in the short run? What may be the main benefits of privatisation in the long run? What are the main risks going forward? How far does privatisation address these risks ?

Why is privatisation of Royal Mail is seen as a necessary step?

What are the current problems of Royal Mail Industrial relations difficulties- strikes 2007 and 2009; Market decline- fall in volumes for traditional mail products; Possibility of accelerating electronic substitution; Low returns and profitability compared to turnover (lack of funds for capital expenditure;) Pensions fund deficit; Relative inefficiency compared to rivals.

Why did the Hooper Report argue that privatisation was necessary? Key problem of political interference; Need separation of business from govt and injection of postal management expertise; Problems of the business urgent if it was to survive- given volumes decline and more competitive nature of internet retail traffic; Pension funds deficit; Business also needed access to capital to give it funds to modernise.

What were its main recommendations? Part privatisation; Separation of Post Offices Ltd from Royal Mail; Pensions fund liability taken over by UK Govt; Merger of Postcomm into Ofcom

How far is privatisation financially necessary for Royal Mail in the short run?

Royal Mail can survive in the short run without private capital Royal Mail largely still architect of its own fate- can offset impact of volumes decline or end to end competition with cost reduction; Key decisions to be taken in relation to cost efficiency and wages; Should be able to take benefit from effects of recent £1.2 bn investment and finance next round of capital expenditure

Royal Mail could improve its financial position….(1)

Royal Mail could improve its financial position….(2)

Royal Mail and its regulator can ensure it has access to necessary funds Our figures assume £200m of additional capital expenditure each year; Our figures do not assume real price rises which could allow for additional funds; Negotiation between regulator and RM about incentives in the price control for further efficiency and margins. But key threats of changing volume mix, more rapid volumes decline or industrial action

What may be the important benefits of privatisation in the long run?

National Posts have used a range of aggressive and defensive strategies

Private partnership likely to lead to more aggressive strategy Example of typical privatisation effects; greater efficiency and innovation Examples from DHL and TNT in the postal sector- higher prices, higher margins, heavy spend on network building through acquisitions, spend on diversification and innovation.

Drive for greater profits likely to lead to… Increased cost efficiency- additional 2 per cent per year? Drive for increased margins; Greater drive for innovation and move into logistics and express services

What are the key risks going forward?

Weakened regulatory supervision Protracted regulatory uncertainty Risks of period of regulatory transition; Risks of Royal Mail being allowed to indulge in financial indiscipline in relation to capital expenditure and acquisitions.

Market and business instability Greater than expected volumes decline creating financial insolvency; Significant end-to-end competitive entry eroding RM’s mail market share; Renewed industrial action and damaged business reputation.

Failure of Royal Mail to compete Future growth lies in competitive fulfilment traffic (annual market growth of 15 %) Internet retail distribution annual growth of £1bn plus- competitive area- logistics and postal providers; Need for Royal to become more consumer aware in line with new consumer driven demand.

Conclusions

How does privatisation relate to these risks? May increase likelihood that Royal Mail can reduce costs and fight for new business; Possibility though that sale may occur below true value and that privatisation may make industrial conflict worse rather than better; Need for careful planning and consideration of alternatives as well as privatisation model.