A fair deal on Royal Mail privatisation

March 08, 2011 3:48 PM

After two false starts under previous governments, the Coalition is planning to privatise the Royal Mail. This time the sale is slated to take place in 2012.

The TaxPayers' Alliance strongly supports the privatisation in principle. We believe the mail will operate more efficiently in private hands, just as it already does in a number of other European  countries  including Holland and Germany. And with the demand for traditional mail services under severe pressure from the growth of email, efficiency is now a matter of survival.

But for taxpayers there are vital questions over implementation. How can we be sure the government will achieve a good price? The last major privatisation was the bungled sale of QinetiQ, which was seriously underpriced, costing taxpayers tens - possibly hundreds - of millions. And even if the government  does get a good price, will it be at the expense of the public being ripped-off in future by yet another privatised monopoly?

Because the price the government achieves will depend critically on the regulatory rules under which the privatised company will have to operate. The more onerous the rules, the lower the price any buyer will be prepared to pay.

What we know already is that the government will not require the buyer to take over the  Post Office's huge pension deficit, most recently estimated at £10.3bn - that will remain hung firmly round taxpayers' necks. The costly and problematic post office network will also remain in public ownership. Prospective buyers will therefore be bidding solely for the Royal Mail as a standalone business, unencumbered by past pension liabilities, which ought to be much more compelling proposition.

But what we actually get for it remains highly uncertain. A price of £4bn is widely quoted, but according to one recently published estimate it could be anywhere between £0.7bn and £5.7bn. It depends crucially on the regulatory regime.

Which is why the government must specify the regulations before inviting bids. It must avoid the problem encountered with QinetiQ, where lack of clarity over contractual arrangements at the outset allowed the preferred bidder later to renegotiate the price down.

It must also ensure that there is a real competitive bidding process, something which was again missing in the QinetiQ privatisation. Given the pressing need to get new management expertise and capital into the Royal Mail, a trade sale to a competitor (such as TNT or Deutsche Post) is more likely than a floatation on the stock market. But that means competitive bidding will be crucial if taxpayers are to get a good deal.

The government is under great pressure to get on with this privatisation. Not only does it need the cash to bolster its fiscal position, but plummeting demand for letter mail services means things cannot continue as is. Difficult operational decisions are needed urgently and the government lacks the expertise and ability to make them.

But that cannot be an excuse for another giveaway. Whitehall has been studying Royal Mail privatisation for years and should be fully aware of its value. This time taxpayers expect to get a fair deal.After two false starts under previous governments, the Coalition is planning to privatise the Royal Mail. This time the sale is slated to take place in 2012.

The TaxPayers' Alliance strongly supports the privatisation in principle. We believe the mail will operate more efficiently in private hands, just as it already does in a number of other European  countries  including Holland and Germany. And with the demand for traditional mail services under severe pressure from the growth of email, efficiency is now a matter of survival.

But for taxpayers there are vital questions over implementation. How can we be sure the government will achieve a good price? The last major privatisation was the bungled sale of QinetiQ, which was seriously underpriced, costing taxpayers tens - possibly hundreds - of millions. And even if the government  does get a good price, will it be at the expense of the public being ripped-off in future by yet another privatised monopoly?

Because the price the government achieves will depend critically on the regulatory rules under which the privatised company will have to operate. The more onerous the rules, the lower the price any buyer will be prepared to pay.

What we know already is that the government will not require the buyer to take over the  Post Office's huge pension deficit, most recently estimated at £10.3bn - that will remain hung firmly round taxpayers' necks. The costly and problematic post office network will also remain in public ownership. Prospective buyers will therefore be bidding solely for the Royal Mail as a standalone business, unencumbered by past pension liabilities, which ought to be much more compelling proposition.

But what we actually get for it remains highly uncertain. A price of £4bn is widely quoted, but according to one recently published estimate it could be anywhere between £0.7bn and £5.7bn. It depends crucially on the regulatory regime.

Which is why the government must specify the regulations before inviting bids. It must avoid the problem encountered with QinetiQ, where lack of clarity over contractual arrangements at the outset allowed the preferred bidder later to renegotiate the price down.

It must also ensure that there is a real competitive bidding process, something which was again missing in the QinetiQ privatisation. Given the pressing need to get new management expertise and capital into the Royal Mail, a trade sale to a competitor (such as TNT or Deutsche Post) is more likely than a floatation on the stock market. But that means competitive bidding will be crucial if taxpayers are to get a good deal.

The government is under great pressure to get on with this privatisation. Not only does it need the cash to bolster its fiscal position, but plummeting demand for letter mail services means things cannot continue as is. Difficult operational decisions are needed urgently and the government lacks the expertise and ability to make them.

But that cannot be an excuse for another giveaway. Whitehall has been studying Royal Mail privatisation for years and should be fully aware of its value. This time taxpayers expect to get a fair deal.

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