The Royal Mail Rip-off Continues

Estimates vary of the extent to which taxpayers were ripped off when the Royal Mail was privatised. Experts quote nice round figures like a billion pounds, or two and a half billion. Precision is impossible, but clearly the taxpayer’s loss was pretty enormous. It was a cock-up. Or maybe it was intended.

For three decades, UK governments have acted as liquidators of state assets. By raising cash, these disposals have enabled the administrators to continue in government till the next election, beyond which no politician needs, apparently, to concern themselves. It looks like pretty standard bankruptcy practice.

Of course, there is a theory which justifies and explains this dismal practice. The theory is that private enterprise is necessarily far more efficient than public. Milton Friedman told the Institute of Academic Affairs in 1976, the year of his Nobel memorial prize, that his son had drawn his attention to ‘a sort of empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise. Whatever it is.’ He, of course, offered no evidence, merely remarking ‘it is amazing how accurate it is’. Friedman’s reputation was enough to make the argument stick. But time after time, privatisations have demonstrated how wrong he was.

Strictly Vince made so many mistakes with the Royal Mail sell-off, that it’s difficult to believe it was not intentional. City insiders, Lazard, Goldman Sachs and UBS, who had a vested interest in selling off at a low price to make a quick profit, were appointed as government advisors. Not only were their organisations not barred from purchasing shares, but huge allocations were sold to they and their friends, the hedge funds and others who live for speculative killings. Nor were they required to retain their shares for any nominated period. Most were sold on day one. And, of course, Vince went along with the whole City IPO razamataz, rather than feeding the shares onto the market progressively so as to frustrate mass speculation.

So much was standard practice. Most privatised businesses are governed by normal business rules, but there was one unique feature about the Royal Mail. The new company was set up with the legal requirement to maintain the universal postal service: Sundays apart, to maintain a daily delivery and collection service at a standard price everywhere in the UK. At the same time government advisors ensured competing operators, without such legal entanglements, were allowed if not encouraged, to cherry pick the more lucrative services. That will ultimately leave Royal Mail PLC with the non-profitable services, for which the tax payer will again pick up the tab.

Royal Mail PLC’s initial share price may well have taken this legal requirement into consideration, while the day one rise most probably resulted from speculation that the requirement would have to be waived at some time in the not too distant future. Royal Mail’s bosses lost no time in warning that the requirement was not viable.

So that’s how the rip-off is continuing. In due course, discontinuation of the commitment will become an issue. Royal Mail shares will become hugely volatile and City hedgers and betters will make another killing. That’s how it works: intended by some and cocked up by others.

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