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Privatisation of Royal Mail

Business ethics are the standards of conduct according to which business decisions are made [Jones and Pollitt (1998, p.5).]. So much has been said about the Royal Mail. The question of whether it should or should not be privatized remains the subject of many diverse opinions. Some contends that the postal service is less efficient than the other western European counterparts and therefore there is a need for it to be mordernised.

Tony Benn once said that “the programme of socialism is some times associated with nationalism” [www.publications.parliament.uk]. It is true that at one time Charles II when he the then general postmaster, he nationalized the post. Some analysts argue that he did so so that he could open other people’s letters by creating the Royal Mail.

When Margarret Thatcher was prime minister defended the institution despite the she was a well known arch-privatiser. She once told the underlings that the stamps had the Queens head. Actually there is no problem with a private firm having the title “royal”. It should be noted that the Royal Bank of Scotland is a private institution.

Peter Mandelson, a business secretary insouciantly waltzed back into office and told the Financial Times that “if I had stayed

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as trade and industry secretary in 1998, I would have allowed the private sector to buy stakes in the Royal Mail. If I had not been forced to resign, it would have happened.” [www.ft.com/cms/s/0]”. It is surprising that after 10 years this was still an unresolved issue. Following a study by Richard Harper Mandelson now says he will proceed with a part privatization.

The 2005 Labour Manifesto said that they had no plans to privatise it [www.image.guardian.co.uk/sys-files/politics]. “But if the first bunch of shares sold still leaves the government with over 51% before the general election then we reckon we are in the clear,” said Mandelson. It should be known that the EU has rules on competition restricting subsidies which force post office closures.  Right now what should be done is to raise money to offset the Royal Mail’s pension deficit.

The Communications Workers Union (CWU) which once a big Labour party’s paymaster is now not interested in any private capital being brought to the Royal Mail. CWU argues that only public ownership can guarantee a “universal service.” However, their credentials when it comes to guaranteeing a service are hardly helped by calling its members in Coventry, Liverpool Stockport, Oldham, Oxford, Crewe and Bolton out on strike on 19 December – the day before the last Christmas posting day for first-class letters [www.guardian.co.uk/uk/post].

While the postal market has been deregulated for private individuals sending our Christmas cards, parcels and letters, the Royal Mail still has an effective monopoly. It’s not just the strikes that been crippling the Royal Mail in recent years but the restrictive practices [www.royalmail.com/portal/rm]. Fifteen years after the Dutch postal service, KPN, was sold by the state, now it has become a world class company. Germany’s Deutsche Post has also been another success story after privatisation. However, the Royal Mail has been languishing and resisting new technology.

As Mandelson said in his announcement that Hooper reports that the Royal Mail is less automated and less efficient than its western-European counterparts. It is true because in modern European postal companies, 85% of mail is put in walk-order by machine for delivery to the individual home or business whereas in Britain, in local delivery offices, it is still done entirely by hand. The Royal Mail urgently needs to catch up with the new technology.

When it comes to share ownership, the workforce will be allocated free or discounted shares.  The CWU should tell their members not to turn down the free shares because this is one of the features of other privatizations which have transformed the motivation of the workforce and industrial relations. The Royal Mail should have been fully privatised many years ago if it were not for a thriving business that have invested around the world and raised capital free of political interference. It could have managed with fewer post office closures and less threat of our Christmas cards arriving some time in 2009. But despite its late delivery, Mandelson’s announcement is a step in the right direction as Harry Phibs puts it in the Guardian [www.royalmailpostofficeprivatisation.htm].

By Postal Regulator calling for Royal Mail to be partly privatised is making the highly contentious proposal. This could lead to Royal Mail being owned in part by a private-equity firm – to an independent review on the future of postal services that has been set up by the government. It says that “Royal Mail’s financial difficulties are likely to worsen considerably, without the injection of private-sector capital and management expertise into the state-owned business.”[www.news.bbc.co.uk/1/business]

The chairman of Postcomm, Nigel Stapleton warned in an interview with Harry Phibs of The Guardian that in the absence of part-privatisation the government may be required to inject a big new subsidy into Royal Mail, which it won’t wish to do. ”The risk of not bringing in the private sector or a subsidy would be a significant deterioration in the quality of Royal Mail’s service under its obligation to deliver letters to and from anywhere in the UK at a uniform tariff”, he said. That was on December 17, 2008.

At one time Royal Mail announced that it had made a loss on providing this so-called “universal service” for the first time. Royal Mail estimated that the loss for the last financial year on this its main activity was £100m.

The government found it hard to dismiss the suggestion out of hand, especially since analysts believed the independent review led by Richard Hooper was expected to come to the same conclusion. However the Prime Minister was likely to be irked that such a divisive issue is being forced back on to his agenda.

Privatisation in any form, whole or part, is strongly opposed by the CWU, the main postal workers’ union – which is also a leading Labour Party funder. The CWU’s opposition is shared by several Labour MPs. Their consistent opposition has always deterred the government in the past from embracing partial or whole privatisation-however much Even though Gordon Brown told colleagues that he was sympathetic to the idea that Royal Mail could be sharpened up by private-sector capital and expertise [www.cwu.org].

Postcomm is proposing that Post Offices Ltd, which controls the huge network of post offices, should be separated from Royal Mail and kept wholly in public ownership, because it already receives a substantial subsidy and is viewed as a de facto social service [www.psc.gov.uk]. Its model for what should happen to Royal Mail is the part-privatisation of the Danish postal service Post Danmark [www.postdanmark.dk].

In July 2005, the leading UK private-equity firm, CVC, bought a 22% stake in Post Danmark from the Danish state. Post Danmark and CVC then bought a big stake in the Belgian post office in 2006. And in 2008 year Post Danmark announced a merger with Posten, the Swedish post office. Mr Stapleton told The Guardian that CVC has played an important role in modernising these postal services. It is believed the likes of CVC could play a similar role for the Royal Mail [www.guardian.co.uk].

However, private-equity firms are mistrusted by many trade unionists and Labour MPs. They see private-equity firms as over-rewarded investors who are excessively ruthless in the way they reduce costs and overheads in the businesses they acquire. Mr Stapleton while criticising the current management of Royal Mail, said that “it was immensely difficult to run Royal Mail successfully given the pressure on the letters market from emails and digital technology and also the huge financial burden of a multi-billion pound deficit in its pension fund”.

Nevertheless Postcomm’s submission does not impress Royal Mail. It said that in April 2008 Royal Mail provided Postcomm with its projected profits and cash flows for 2006-10. These showed that Royal Mail’s cumulative cash flows would be £2.6bn lower than it had expected in late 2005. Postcomm said that in part this difference was due to lower than expected mail volumes but a greater impact is that of lower efficiency and the payment of significant bonuses to staff.

The regulator says that “Royal Mail has failed to make some £1bn of promised efficiency savings, but has still shelled out £600m to staff in productivity bonuses.” The further £300m of savings is failing to materialise because of compensation for falling short of licensed quality of service standards and £700m has gone AWOL because of unexpectedly lower volumes of business. Postcomm believes that part-privatisation would provide the best solution to Royal Mail’s pension problems, by allowing the government to take over absolute responsibility for the fund without breaching European state-aid rules.

Discussion

What is the most shocking fact is that it would have been obvious to the government and postcomm that by allowing competition in the competitive bulk mail markets it would lead to a loss for Royal Mail as its universal service has always been held up by its other profitable ventures. Either the government must stop such competition or levy a non universal fee on the other companies to make up for the losses that the Royal Mail makes on providing its universal service.  While the Royal Mail needs to be modernised it shouldn’t be at the expense of any further cuts in service to its customers. Part privatisation would damage not only the Royal Mail but its universal service as they would seek to exit such an agreement if its rivals don’t have to provide a universal service or help pay for it.

To echo these sentiments, it has been noticed that over the past couple of years that latest collection times have been getting earlier in the afternoons from many post boxes. The decline in the services being provided by Royal Mail in recent years has done great damage to its reputation and it has been the ordinary taxpayers and householders who lose.

In an age when improved public services and longer opening hours, more customer friendly services, etc, are supposed to be promoted we have Royal Mail which seems to be trying to drive itself out of business. The benefits of competition could have been more effectively realised if the Postcomm and Government -another non accountable semi autonomous government body, had insisted that any entrants to the mail market should have been allowed so long as they competed on an equal basis with Royal Mail, e.g. daily universal nationwide collections and deliveries of all sizes of postal items, and not let them pick the lucrative parts of the postal business in order to undermine Royal Mail.

The regulator has created very rigid price control mechanism for royal mail which stops it lowering its prices to win back work. A national newspaper illustrates this point perfectly[www.guardian.com]. For example, as the rules stand, if Royal Mail agrees with Busybank to reduce margins on business deliveries, it’s obliged by Postcomm to offer the same margin reduction to all other postal companies that use Royal Mail’s network for fulfilment of their rival services.

Consequently, their costs automatically go down, and they can go back to Busybank with an even better offer to trump Royal Mail’s. The upshot is that no matter how lean and mean Royal Mail becomes, it will by default make its competitors even more efficient. Its disadvantage is structural and hence it cannot win.

People often forget that the Royal Mail is already a private company; it is just the case that the Government owns 100% of the shares. This Government has whittled away at the services that Post Offices were allowed to offer. That obviously affects revenue and profitability. The management decided that POs could not get involved with certain business possibilities.

That limits the scope at a local level. Royal Mail is restricted in its pricing approach to business post – which is a massive area. But Royal Mail is obliged to deliver the most expensive to the customer’s door, on behalf of TNT Post and others. One thing to ponder about is why aren’t POs allowed to sell TNT or other suppliers’ service offerings, where they best meet the local customer’s requirement? That would add opportunities.

There is no doubt that electronic communication will continue to eat away at “letters”. But you can’t send a pair of gloves for Grannie’s birthday through e-mail and similar small items are very expensive to ship if you have to use a full “courier” service. Royal Mail should require a given set of services from Post Offices, but not impose restrictions on other services they choose to offer. The fall in quality of the postal service is annoying, but then again many people hardly ever receive anything important by mail any more.

For any documents it’s much more efficient to use email attachments, which can reach the sender in any country within seconds. The only important documents people receive by mail tend to be to do with tax or occasional premium bond cheques, all of which could be sent by email if the government would use that medium. Parcels are a different matter of course, but they don’t require a postman to deliver them daily. I would like to see private companies offer a service that would make delivery between 6 and 12 pm 7 days a week, thereby avoiding the need to traipse around to some depot to pick up items that cannot be put through your letterbox.

It is important to realise that not everyone has a computer, but would not the current government subsidies be better spent on providing a grant to allow all households to have an internet connection and basic PC with scanner .The fact is that the day to day postal delivery service is not and cannot ever be profitable. It was sustained by the Post Office being able to subsidize this through its other more profitable services.

The reason they are therefore in this mess is precisely because of privatisation and not in spite of it, i.e. all their profitable services have been hived off in the so-called ‘interests’ of competition. If PostComm want to solve the problem then it is very simple. Give them back the monopoly to sell stamps, pay TV licences, utility bills, deliver parcels and so forth. It is tempting to blame Brown and New Labour for all this mess, but to be fair; this is due to poor legislation by successive governments since Thatcher.

Conclusion

Royal Mail and PostCom are hell bent on privatising the mail service. Money is being wasted on a colossal rate to present a false image of the state of the company. Management levels are at an all time high despite supposedly being cut back, money is being repaid back to the pension fund etc. All that needs to be done is the scrapping of Saturday deliveries; all competition only provides a premium Saturday delivery. The contract on delivery standards is up in 2 yrs or so, by then Royal Mail will be private and the savings on doing away with Saturday deliveries will go 100% into the share holders’ pockets. Nobody will miss bills and junk mail on a Saturday and hence it should be ended and the Royal Mail be given a chance.

Reference:

  1. Barry, N. (1998), ‘Government and Business Ethics’, In Jones, I. and

Pollitt, M. (eds.) The Role of Business Ethics in Economic Performance, Basingstoke: Macmillan.

  1. Eatwell, J. (1998), ‘Ethics and Self-Interest’, In Jones, I. and Pollitt, M. (eds.) The Role of Business Ethics in Economic Performance, Basingstoke: Macmillan.
  2. Cohen, M. (1998), ‘Evidence of a New Environmental Ethic: Assessing the Trend towards Investor and Consumer Activism’, In Jones, I. and Pollitt, M. (eds.) The Role of Business Ethics in Economic Performance, Basingstoke: Macmillan.
  3. Jones, I.W. and Pollitt, M.G. (1996), ‘Economics, Ethics and Integrity in

Business’ Journal of General Management Vol.21, No.3, pp.30-47.

  1. www.cwu.org
  2. www.guardian.co.uk
  3. www.bbc.co.ke
  4. www.ft.com
  5. www.royalmail.com
  6. www.pulications.parliament.uk
  7. www.image.guardian.co.uk

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