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