70 per cent of the Royal Mail is now in private hands. Photo: Getty.
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Its share price has fallen, but the Royal Mail sale was still a debacle

The government lost between £750m and £1.7bn in selling off the Royal Mail – or three times as much as the bedroom tax might save.

An announcement today, from the recently privatised Royal Mail PLC, has reignited the debate over whether the company was sold incompently by the coalition.

A slight fall in the share price has led some to suggest its IPO was not quite the disaster it first appeared – when its share price rocketed nearly 40 per cent in one day.

But, by any measure, the sale still appears to have been an abject failure.

Royal Mail’s shares were priced at £3.30 when they floated in October. Within hours they had risen nearly 40 per cent.

The spike wasn’t an aberration, as Vince Cable – the minister responsible for the sale – tried to suggest. (The other minister involved was Michael Fallon, who has since been made Defence Secretary.) The price stayed high, and within three months it had nearly doubled in value.

The current price is back in line with the price to which it rose on the first day of trading. At that price – around £4.50 per share – the government’s mispricing cost the taxpayer between at least £750m, but at January's peak price it cost £1.7 bn.

Cable has claimed that this outcome would have been impossible to predict, and criticism is all very well in hindsight. But the department was under no obligation to sell its 70 per cent stake all at once. It used a procedure called "book-building" to choose its floation price of 330 pence, and could have pursued similar measures to calculate the value of its shares.

Instead, it relied on the advice of many of the financial firms behind the last economic crisis – some of whom have been criticised by the Bureau of Investigative Journalism over their conflicts of interest – and sold almost all of its shares in bulk.

They did this despite the fact that the pre-launch demand for shares was 24 times greater than supply. It scarcely takes an economist to consider that a mispricing.

As a result, Royal Mail’s shares rose twice as much as any other new shares did on their opening day in 2013.

The £750m lost through the sale has cost far more than, for instance, the government's roundly-criticised bedroom tax is projected to save, and is twice as much as the nation spends on museums and galleries.

But, even more distressingly, the justification for the sale – a promise of long-term capital investment – quickly unraveled. The government allocated more than a fifth of the Mail's shares to 16 "priority investors" before launch. These were ‘long term, stable investors’, Cable declared in the wake of the sale.

But, by January, 75 per cent of them had sold at least 48 per cent of their holdings, and six of the 16 no longer owned a single share.

As usual, the government was left at the whim of private institutions who were placed under no obligation to deliver. After the stratospheric rise in the company's value, these financial firms made the quick profit made open to him.

Now, hedge funds, and other financial firms that were initially classed as "non-priority, long-only" funds, hold more of the company than the 16 priority investors who were used to justify the sale.

The past year has been relatively slow for the coalition. The Programme for Government, on which they ushered themselves into power, was never formally updated, and in June they announced the fewest bills by a government in 20 years.

But the selling of the Royal Mail was one of the great changes of the past year. Unfortunately, it has simply served as the latest example of how inept the government often is at selling the "family silver".

The Royal Mail is the company that delivers parcels and letters. It is (now) distinct from the Post Office, which operates the 11,500 red-lettered branches that pepper your local high street. The Post Office remains in government hands.

The government argued the service desperately needed private capital in order to reinvest and uphold its "universal service". Putting the firm in private hands ensured it wouldn’t compete with "schools and hospitals" for government funding.

They pointed to equivalent services across Europe – in Belgium, Austria and Germany – that moved into profit after privatisation, and delivered levels of service that more than matched British standards.

But, while this argument appears persuasive, in practice the sale has shown the way government appears incapable of mandating anything to the private firms it often relies upon. It also ignores the non-monetary benefits a government-owned service can provide.

It is the same problem that has plagued the government’s attempts to reform welfare, make the banks lend more, or introduce any large IT project.  

Harry Lambert was the editor of May2015, the New Statesman's election website.

Photo: Getty
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Why Chris Grayling is Jeremy Corbyn's secret weapon

The housing crisis is Labour's best asset - and Chris Grayling is making it worse. 

It feels like the classic Conservative story: wait until the election is over, then cancel spending in areas that have the temerity to vote Labour. The electrification of rail routes from Cardiff to Swansea – scrapped. So too is the electrification of the Leeds to Manchester route – and of the Midland main line.

But Crossrail 2, which runs from north to south across London and deep into the capital's outer satellites, including that of Transport Secretary Chris Grayling, will go ahead as planned.

It would be grim but effective politics if the Conservatives were pouring money into the seats they won or lost narrowly. There are 25 seats that the Conservatives can take with a swing of 1 per cent from Labour to Tory, and 30 seats that they would lose with a swing of 1 per cent from Tory to Labour.

It wouldn’t be at all surprising if the Conservatives were making spending decisions with an eye on what you might call the frontline 55. But what they’re actually doing is taking money away from north-west marginal constituencies – and lavishing cash on increasingly Labour London. In doing that, they’re actually making their electoral headache worse.

How so? As I’ve written before, the biggest problem for the Conservatives in the long term is simply that not enough people are getting on the housing ladder. That is hurting them in two ways. The first is straightforward: economically-driven voters are not turning blue when they turn 30 because they are not either on or about to mount the first rungs of the housing ladder. More than half of 30-year-olds were mortgage-payers in 1992, when John Major won an unexpected Conservative majority, while under a third were in 2017, when Theresa May unexpectedly lost hers.

But it is also hurting them because culturally-driven voters are getting on the housing ladder, but by moving out of areas where Labour’s socially-concerned core vote congregates in great numbers, and into formerly safe or at least marginal Conservative seats. That effect has reached what might be its final, and for the Conservatives, deadly form in Brighton. All three of the Brighton constituencies – Hove, Brighton Kemptown and Brighton Pavilion – were Conservative-held in 1992. Now none of them are. In Pavilion they are third, and the smallest majority they have to overcome is 9,868, in Kemptown. The same effect helped reduce Amber Rudd’s majority in Hastings, also in East Sussex, to 346.

The bad news for the Conservatives is that the constituencies of Crawley, Reading, Swindon and in the longer-term, Bracknell, all look like Brightons in the making: although only Reading East fell to Labour this time, all saw swings bigger than the national average and all are seeing increasing migration by culturally-driven left-wing voters away from safe Labour seats. All are seeing what you might call “Hackneyfication”: commuters moving from inner city seats but taking their politics with them.

Add to that forced migration from inner London to seats like Iain Duncan Smith’s in Chingford – once a Conservative fortress, now a razor-thin marginal – and even before you add in the appeal of Jeremy Corbyn’s person and platform, the electoral picture for the Conservatives looks bleak.

(It should go without saying that voters are driven by both economics and culture. The binary I’ve used here is simplistic but helpful to understand the growing demographic pressures on the Conservatives.)

There is actually a solution here for the Tories. It’s both to build more housing but also to rebalance the British economy, because the housing crisis in London and the south is driven by the jobs and connectivity crisis in the rest of the United Kingdom.

Or, instead, they could have a number of measures designed to make London’s economy stride still further ahead of the rest, serviced by 5 per cent mortgages and growing numbers of commuter rail services to facilitate a growing volume of consumers from London’s satellite towns, all of which only increase the electoral pressures on their party. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.