Unit 3: Privatisation - The Post Office, a natural monopoly?

The coalition government has announced plans to privatise the Royal Mail by selling a majority stake in the business using an initial public offering (IPO) which could value it at more than £3 billion. 

The business has had a long term struggle to become more efficient and profitable in recent years - it faces a number of significant competitive challenges from rival postal businesses and from new technologies and a decline in the volume of letters sent.

According to Business Secretary Vince Cable

"The government's decision on the sale is practical, it is logical, it is a commercial decision designed to put Royal Mail's future on a long-term sustainable business. It is consistent with developments elsewhere in Europe where privatized operators in Austria, Germany and Belgium produce profit margins far higher than the Royal Mail but have continued to provide high-quality and expanding services."

Trade union leaders oppose the plans fearing that a move to the private sector will cost jobs and that the commitment to a universal postal service will eventually end.

On or around the point of IPO, Government will transfer 10% of its shares in Royal Mail to an employee share scheme designed to boost incentives for those who work for the business.

Background on the Royal Mail:

1. Ownership: The Royal Mail Group is currently a 100% Government-owned UK-wide company that was established as a separate ‘sister’ company to Post Office Limited on 1 April 2012
2. Leadership: The current CEO is Moya Greene, a Canadian business woman
3. Jobs: The Royal Mail has over 150,000 employees in the UK - a number of years of rationalisation has cut this figure by tens of thousands.
4. Volumes: The rise of e-mail and the internet has led to a dramatic fall in the number of letters sent through the post via the Royal Mail
5. Universal service requirement: The Royal Mail is required by law to provide a universal postal service - including delivery to any address throughout the UK six times per week, and a sufficient network of letter boxes and post offices
6. Revenues: the Royal Mail has annual revenue of £9.3 billion of which just under half comes from letters, around £4 billion from parcels and the remainder from marketing mail services.
7. Improving finances: Royal Mail Group has improved its financial performance considerably in recent years, the latest gross operating profit margin was 4,.4% although this is substantially less than businesses such as Deutsche Post which has achieved operating profit margins closer to 8%. Operating profits for the Royal Mail for the 52 weeks to the end of March 2013 jumped to £403m, up from £152m for the previous year
8. Competition: The main rivals in the UK mail industry for the Royal Mail are Deutsche Post and TNT
9. Parcels: The collection, sorting and delivery of letters has been a loss-making exercise for the Royal Mail for some years now but the parcels business is much more profitable helped by the rapid growth in online shopping. The government believes Royal Mail needs access to private sector capital to invest as it continues to change into a parcel-focused business.
10. Prices of letters: In the last two years, the Royal Mail has been given more freedom by industry regulator OFCOM to decide on the price of a first class stamp, but with a cap set on the cost of a second class stamp at 55p. From 30 April 2012, the cost of a first class stamp for a letter was increased from 46p to 60p; the cost of a second class stamp for a letter increased from 36p to 50p
    

Liberalising the Market

The postal services market has been opened up to increasing competition in recent years with postal businesses able to apply for a licence to operate in competition to the Royal Mail. There are two main channels available to new competitors:

Access competition is where the operator collects mail from the customer, sorts it and then transports it to Royal Mail’s Inward Mail Centers, where it is handed over to Royal Mail, who are paid to deliver it. Nearly 40% of mail is now covered by access competition

End-to-end competition - where an operator other than Royal Mail undertakes the entire process of collecting, sorting and delivering mail to the intended recipients. Thus far few businesses have chosen to offer this. TNT Post began trialing end-to-end delivery operations in West London in April 2012

Related Examination question: Edexcel Unit 3 - Jan 09 Question 12