Privatising The Royal Mail – Lessons for Australia Post?

If the Commonwealth Government is intent on selling off Australia Post, then one of the lessons from the UK experience is to make sure that the Australian taxpayer is not short changed, writes Peter Hunt, CEO of UK mutuals advocacy group, Mutuo.

The plan to privatise the UK Royal Mail had a long gestation period – the last Labour Government had only retreated from it when faced with union opposition and the spectre of a large pension deficit liability that it could not stomach accepting.  It was a predictable retreat – even Mrs Thatcher had balked at the idea of ‘privatising the Queen’s head.’

Yet immediately after the 2010 UK Election, the Conservative/Liberal Democrat Coalition moved rapidly to sell the business, firstly by introducing the necessary legislation and secondly by accepting the £9bn pension liability on behalf of the taxpayer.

Significantly, the Postal Services Act 2011 included provisions for the separation of Royal Mail from the loss making Post Office business and allowed for it to be sold as a separate entity, with 90 per cent of its shares privatised and 10% to be held by employees. This is reputedly the largest ever employee share issue in the UK, and separately it was announced that Post Office Ltd would be transformed into a mutual.

But why privatise Royal Mail at all?  The usual argument that Government was no good as a business owner was deployed, with the suggestion that it could not manage business as well as the private sector chief among the case for privatisation.  Of course, this failed to take account of the fact that the business had for some time been run at arms length from Government, with professional and well-regarded management in place by May 2010.

To help make the case for change, the need for capital investment in the changing business where the parcel trade was eclipsing letters, was also cited.  Though the amount of new capital needed was never publicly quantified, it made a plausible argument for external investment at a time of restricted government spending. Inevitably, much of the argument to and fro was conducted from polar ideological opposites.

In fact, strenuous efforts were made to help Royal Mail make a success of its business in preparation for a successful privatisation.  Crucially it was split from Post Office in a move that instantly lifted a loss-making burden from the firm.  Secondly, postage stamp prices were increased by more than 30 per cent in a single move that significantly improved Royal Mail revenues ahead of the planned sale.  By 2012, Royal Mail was already a successful and well-run business, posting year-end profits of £211 million.

Further capital investment is certainly needed to keep the service modernised, but it is more a decision about whose responsibility this should be than anything else.  With the legislation in place and the business ready for sale, the Government moved swiftly to complete the privatisation in 2013.

The trade unions were of course implacably opposed to the sale, and promised national industrial action to de-rail the Government’s plans.  But by acting decisively, the Government managed to outflank the Union’s strike ballot timetable – incredibly pulling off the sale before any action could legally begin.

As a consequence the share offer was successfully launched, with 600 million Royal Mail shares sold for 330p each, valuing the business at £3.3billion. So far so good.

Except that the shares were so in demand that they went up to 550p within a week, making the firm worth £5.5billion and beginning a major political row with opposition parties arguing that the taxpayer had been shortchanged by an undervaluation of around 30%.  This argument erupted again after it was revealed in January that of 21 City investment banks that supplied early valuations in May 2013, the average ranged from £4bn to £4.8bn.  The shares rose further since, to 588p each in February – 78 per cent higher than the flotation price and this has been the focus for opposition complaints about the privatisation – that Royal Mail was sold too cheap.

The story of the Post Office is interesting in itself. With approximately 11,800 outlets (mostly small shops but also in chains of retailers) the role of the sub postmaster/mistress is iconic in many local communities. Many large urban areas continue to be served by so called ‘Crown Offices,’ with approximately 8,000 directly employed post office staff. The services offered are similar to those in Australian post offices and are similarly under stress from competition from the internet and online banking.

Post Office Ltd is still subsidised by the UK government to provide services on a universal basis.  It has used recent funding to modernise the business and invest in order to lower the cost base and improve efficiency.  It is on track to meet break even and produce profits from the reformed business within the next two years.

As noted earlier, the Post Office is in the process of converting into a mutual organisation, held by its stakeholders in the public interest.  As a £1bn turnover business, this will represent the largest single mutualisation of a public sector operation.

Careful work has taken place over the last two years to refocus the business away from the government as its sole shareholder towards a combination of its customers, communities, postmasters and staff.

In many ways the approach adopted by Post Office management is an excellent example of how to create and retain trust in a large business that is undergoing huge change. This has been an inclusive process with all stakeholders represented and consulted, including trade unions who have played an important role in helping to craft the new mutual's statement of purpose.

Drawing upon the expertise of the mutual sector, Mutuo has been able to feed into this process, providing expertise early on to Government and outlining the case for a mutual and possible structural constructs.  This process is critical in the way it has built confidence in what will always be seen as an essential public service.

So what are the lessons for those debating the future of Australia Post?

A business does not have to be a PLC to succeed. The UK experience has shown that good management, free from government interference, can successfully run public services in the public interest. What’s more the Post Office example demonstrates that you can have a commercial edge whilst achieving a formal chain of accountability to those that use and work in the service.  It is an approach that could have been tried for Royal Mail.

The question is always how to focus on strong commercial skills whilst maintaining a service ethos rather than profit maximisation for shareholders. Mutuals across the world show time and again how this can be achieved and Australia has a wealth of mutual business experience to offer. It should not be ignored in pursuit of an ideological dogma.

The Australian Government should see how – in the British example – good management freed from direct control can succeed. It does not require the business to be floated to do this – Australia Post could be a successful commercial mutual, with a public service ethos hard wired into its management and governance.

If the Australian Government is intent on selling off Australia Post, then the second lesson from the UK is clear – make sure that the Australian taxpayer is not short changed.  This is an unfortunate feature of so many privatisations around the world, where Government fears of failure have led them to undervalue national assets.  Australians should be on the look out for this.

For trade unions, the lessons are both strategic and tactical.  In strategy terms, it make sense for Australian trade unions to have the vision to argue for a new type of public service business, that cannot be asset stripped and will be maintained for the public good.  This does not require it to be owned by the Australian Government, but instead it could be a public service mutual, forever protected for the customers of Australia Post.  There is simply no need to cling to an ideology of nationalized business that will fail both as an argument and vision for the future.  On tactics, whatever course is chosen, the union needs to be smart and ahead of the game – anticipating the steps to be taken by Government and not being caught reacting too slowly as in the UK.

For the public, who after all are the owners of Australia Post, I would recommend a long hard look at any proposals before they are allowed to pass.  In short the question that must always be satisfied is whether the politicians and unions are really working in the interests of Australian taxpayers and consumers.  Our experience in the UK suggests that without direct engagement from the public in this debate, the outcome is unlikely to serve them well.

Peter Hunt is CEO of Mutuo (UK), a cross sector body promoting mutual business to opinion formers and decision makers. Peter is in Australia as part of aNational Workshop Tour on public service mutuals.