The cost of Royal Mail Privatisation

The last Labour government proposed the part-privatisation of Royal Mail but backed out in enforcing the move ahead of the general election and the likely response by postal workers.

The incoming ConDem government did not waste much time in moving to privatise the service. They claim that it is inefficient and no doubt are motivated by the potential revenue they will make from selling off this public service.

The reality is somewhat different and this post looks a little closer at the realities behind the privatisation as it exposes what happens when market forces are introduced to a public service - as is currently happening elsewhere in health and education. Royal Mail demonstrates where market forces inexorably lead.

The Claim of Inefficiency

To understand what is happening to the Royal Mail today we have to go back to see where it originated to see what was so special about it's business model.

As many of us will know, in 1840 Sir Rowland Hill introduced the world's first postage stamp in Britain: the Penny Black. 

Now there were postal services long before 1840 provided by a wide variety of private operators  but what was important and allowed Britain to issue the first ever stamp was that the Melbourne's Liberal government of the day had decided that it was in the interests of British industry and a closer political union that it cost the same to send a letter from Hyde Park to Charings Cross as it did to send one from Kinsale to Charings Cross. The penny was a universal charge for any standard letter; if it was a parcel then you paid for a tuppenny blue at twice the price. 

The essence of the system was that although a letter could be delivered within London for far cheaper than a letter from Cork to London, the one would subsidise the other and allow costs to be minimised through economies of scale. And given legislation monopolising the delivery of mail, the system worked exceptionally well.

The introduction of the penny black and Sir Rowland Hill's postal service caught on like wildfire and revolutionised communications. Businesses in outlying areas benefited from lower postal costs and the goal of connecting all areas of the United Kingdom more intimately was advanced considerably. Within two decades virtually every country in the world had introduced a monopolised postage system with a fixed national postal rate.

This situation remained the case until the reforms of Margaret Thatcher who opened up the 'monopoly' of Royal Mail under the pretence of offering choice - but the reality of allowing private companies to make profits. They did this not by somehow increasing efficiencies but by cherry-picking the profitable elements.

The costly deliveries were left with the Royal Mail which suffered displacement in commercial deliveries from the like of TNT Post and UK Mail. The situation was compounded with the development of the internet and a reduction in postal volumes. Without a monopoly of the lucrative commercial sector and lower economies of scale the postal service suffered a dramatic reduction in profits and embarked on reducing staffing levels and lowering conditions and pay. There is estimated to be a £10 million pension fund gap at Royal Mail which has been inherited as a result of its transfer from government to a publicly-owned company.

The introduction of the market opened the door to privatisation and the Government moved to separate the delivery of the mail from the network of Post Offices. These two companies now separated both experienced a severe contraction - most apparent in rural areas of places like Fermanagh where offices have closed and postal deliveries occur later and later in the day.

The 'inefficiencies' which are reflected in Royal Mail losing an estimated 6.4p on every letter delivered are the natural consequence of the introduction of market forces and profit-making to the sector. These losses are now being used to justify the outright privatisation of the service.

The Costs of Privatisation

The advocates of marketisation will argue that privatisation will reduce costs further and that value to the consumer will increase. But this is totally untrue.

Far from postal rates falling they are now set to rise as the postal regulator, PostComm, has just agreed the highest increase in cash terms since first class post was invented. First class post is set to increase from 41p to 46p and second from 32p to 36p. This represents a 12% inflation which the ordinary working household will have to pay and which will hit households in an entirely regressive way.

The reason that postal rates will rise by this unprecedented amount is that the Government are 'fattening up' the company for private sector investors. They will have be sure that they will make sufficient profit to justify their investment so just as was the case with the botched privatisation of NIE, consumers will foot the bill of private profit-making. And just as in the case of NIE, Royal Mail will have a near monopoly position on delivery of non-commercial mail so there will be no likelihood of competition benefiting the consumer. 

It is likely that shareholders will demand management secure 'additional' profits by means of further cuts to workers' pay and working conditions and possible cuts to the pension guarantees that they currently enjoy. As such, it is likely that this privatisation will simply undermine the quality of service and the high regard with which the Royal Mail is currently held. 

Rural communities need to stand against this privatisation. The lies that underpin this ideological assault on another core public service need to be exposed and we need to support our postal workers when they take action against this retrograde move. Sir Rowland Hill's concept of a universal postal system is worth defending and continues to be relevant even in the internet-era.