Privatisation of Royal Mail: Will this lead to further efficiency improvements?
1. Background
In recent years, the postal industry has changed. We have seen a recent boom in internet shopping, and while once Royal Mails sole purpose was to deliver letters, there is now an increasing emphasis on parcel deliveries. The shift in focus as well as the ever increasing competition in the industry, often from firms serving the 'bulk mail' side of the market such as UK mail and TNT is posing threat to the sustainability of the universal postal industry. It was decided in 2011 under the postal services act that in order to maintain competitive and to preserve the longstanding future of Royal Mail that 90% of the company would be privatised. This was seen as the most appropriate option, as the falling demand from consumers as they switched to their electronic communications came at a time where the government was not willing to add to public spending. In the event of this, responsibility for economic regulation was passed from Postcomm to Ofcom, who designed and implemented a new regulatory framework.
Throughout this report, we will look at the potential benefits and detriments of privatisation; this will be applied in order to draw a conclusion as to whether the privatisation of Royal Mail was the most appropriate action.
2. Reasons for Privatisation
One of the main reasons why privatisation may lead to greater efficiency than public ownership is that governments may not have exercised control over firms as effectively as private sector shareholders (Smith, 31 October 2013). This is because private sector shareholders have one main objective - to maximise the returns they make from holding shares. They are dedicated to making a firm profitable and successful whereas governments may allow political objectives overshadow their decisions. According to (Prosser, 2013) 'there are potential benefits of privatisation for those who buy the ideological arguments that private sector management will deliver the efficiencies and market leading practices supposedly not possible under public sector ownership'. In addition to this (Smith, 31 October 2013) also argued that government departments may lack the necessary expertise to oversee the management and operation of large and strategically important firms. As a way of avoiding problems such as this, governments in the past have set clear commercial objectives and 'regulations' for state owned firms and then proceeded to control them on an arm's length basis. (Smith, 31 October 2013) talks about the UK government establishing the Shareholder executive to exercise its role as owner of Royal Mail. However despite the government's attempt to imitate the behaviour of private sector shareholders, firms still face additional limitations as a result of public ownership. The activities of state owned organisations are restricted by their relationship with the government, for example 'they lack financial freedom to raise investment capital externally because the government is concerned about restraining the growth of public expenditure' (Wall, 2007) However, Privatisation is seen as increasing the prospects for raising investment capital, thereby increasing efficiency and lowering prices (Wall, 2007).
However, whether a company is privately or publically owned there is always the issue that managers within companies have both the power and discretion to pursue their own goals rather than those of the owners. Economists refer to this as the principle agent problem. Evidence has suggested that privately owned companies are more equipped at dealing with such problems, by implementing different strategies and theories to suit the interests of both managers and owners. For example, (Smith, 31 October 2013) said using a firms share price, unavailable to public sector owners, to observe the performance of individual firms and their managers, and offering managers future shares and opportunities of high earnings should help to align the interests of owners and managers. This idea was explained thoroughly in both W.J Baumol's theory of Sales Maximisation and the Marris Growth Maximisation theory. Marris said Growth with a minimum profit constrained is a common goal of both managers and owners. Managers desire growth because it provides higher salaries and reduces the risk of corporate takeover and owners seek growth to maximise the long term value of their shareholding. Finding a factor that combines the interest of both managers and owners may be easier within a privately owned company than public because, for example it may be difficult for the government to offer the prospect of higher salaries as they do not want to be seen as adding to current government debt, which is inefficient judging the current state of the UK economy.
Looking at cases of privatisation in the UK alone, it has been seen as a way of cutting PSBR. According to (Wall, 2007), the finance of external borrowing by the nationalized industries (public) us regarded in accounting terms as being part of public expenditure, which then ceases when these firms become privately owned. Figures show that Privatisation proceeds reduced the public sector borrowing requirement as a proportion of GDP by more than 1.5% during the late 1980's. (Wall, 2007). Furthermore, another strong argument for the privatisation of a company such as Royal Mail, would mean that a 'state monopoly' would be broken. This is beneficial to consumers, allowing them to choose to use whichever company they preferred the service of most, causing the most preferred company to become more profitable and expand in response to consumer demand. This would have a knock on effect on the companies which face falling consumer demand, encouraging them to innovate and improve their service to face going into liquidation. (Wall, 2007) said that these pressures to meet consumer requirements should also improve internal efficiency 'X-efficiency'. Changes to work and manager regimes throughout the company would be needed in response to the market pressures. In the past, many public corporations have been seen to be producer led i.e. looking after the interests of managers and employees rather than those of the consumers and shareholders. So it can be seen that privatisation introduces market pressures which help to stimulate a change of organisational structure within a firm.

3. Reasons against Privatisation
As mentioned previously, privatisation is favoured strongly as it is responsible for the creation of competitive market conditions. However, even before Royal Mail was privatised, it already faced strong competition from companies such as UK mail and DHL - more does not need to be created. (Prosser, 2013) said 'Royal Mail faces fierce competition for those increasing parcel volumes. Dangerous rivals include ultra-efficient international giants such as Germany's Deutsche Post, DHL and America's FedEx, both of which have substantial operations in the UK. Additionally, 'At the other end of the scale, logistic businesses such as Yodel are also snapping at Royal Mails heels' (Prosser, 2013). Referring back to (Wall, 2007) privatisation of these industries on the basis of 'competitive market pressures' may be seen as irrelevant. In addition, to contrast the idea that private ownership means better quality of management, this is not always the case. According to (Prosser, 2013) while several former state owned companies have flourished under private ownership such as BP, National Grid and British Gas, others have not been so successful for example Railtrack, who went into liquidation.
The basis of privatisation is at its weakest when externalities exist. What those in favour that privatisation does increase efficiency do not see is that former nationalized industries posed many externalities, which was the main reason for their public ownership. For example in the water industry, consumption of more water equals larger turnover, even if this increased consumption means more reservoirs have to be built, consequently dramatically distorting landscapes and loss of land. (Wall, 2007). Privatisation also means that whoever takeover, will want to cut private costs which leads to redundancies invariably leading to social costs. 'Whichever firm takes over will be able to make easy money. Private ownership will ultimately lead to thousands of redundancies, reduction in services and higher prices' said a spokesperson from (Week, 2009)
A final criticism of privatisation, is that the shares of Royal Mail that are being sold are technically already owned by the taxpayer. A campaign against the privatisation of Royal mail said 'The public have been consulted. The Royal Mail is ours, we use it, we pay for it, we should have a say in what happens to it.' It seems the only group who will benefit from this will be the purchasers of the new shares, who will receive the dividends paid by these new profit seeking enterprises, at the expense of the taxpayers. A further concern is that the shares of Royal Mail will be sold too cheaply in a rushed attempt to privatise. An article from the independent said 'Shares in the Mail could well be sold too cheaply, leaving the tax payers feeling cheated and prices may well increase under private ownership. (Independant, 2013) This point reflects more on the moral issues of privatising Royal mail. It highlights the clear concern of the general public to bring the industry under private ownership, something which 70% of people voted against according to the Sunday Times poll.

4. Conclusions and Recommendations
Both the empirical evidence and the economic theory suggest that privatisation can lead to an industry becoming more efficient. In a private firm, the profit motive, shareholder pressures, managerial expertise and the creation of competitive pressures formed by privatisation may lead to greater efficiency. It is clear that there are likely to be greater benefits over public ownership even if governments are to run publically owned firms as close to private regulation as possible. However, the issue of externalities forms a strong argument against privatisation; the presence of these externalities poses the reasons for which many industries were originally brought under public ownership. In addition, the idea that private ownership causes a firm to become more competitive in the market is quite irrelevant in the case of Royal Mail, as evidence shows before privatisation, the postal industry was already threatened by huge established parcel delivery giants who have large operations in the UK. However, due to the exponential growth in the online shopping trend, it was clear the government's only option was to sell the shares of Royal Mail to enable it to expand and grow to the huge demand for parcel delivery services rather than its original purpose to simply deliver letters. Therefore I believe privatisation was the most appropriate option in order to secure the future of this universal service. In the events of recent research, after years of difficult modernisation including 50,000 job losses, (Prosser, 2013) says Royal Mail is now in the black. Figures show the business made an operating profit of £403 million over the 12 months to March 2013, up from £152 million a year earlier. Based on this evidence, I believe this shows that Privatisation is not only the most appropriate and most efficient option, but is making a positive impact on the industry up to the current day.
Works Cited
Campaign, W. (2013, September). Ten Reasons Why Royal Mail Shouldn't be Privatised. Retrieved from We Own It - Public services for people not profit: http://weownit.org.uk/blog/ten-reasons-why-royal-mail-shouldnt-be-privatised
Independant, T. (2013, September). Royal Mail Privatisation: the pros and cons. Retrieved from The Independant: http://www.independent.co.uk/voices/debate/royal-mail-privatisation-the-pros-and-cons-8814217.html
News, B. (2013). Royal Mail privatisation.
Prosser, D. (2013, August 8). Royal Mail privatisation: pros and cons. Retrieved from Money Observer: http://www.moneyobserver.com/our-analysis/royal-mail-privatisation-pros-and-cons
Smith, S. H. (31 October 2013). Privatizing Royal Mail: Will It Lead To Further Efficiency Improvements?
Wall, A. G. (2007). Applied Economics. Essex: Pearson Education.
Week, T. (2009, March 9). Part-privatisation of the Post Office. Retrieved from The Week: http://www.theweek.co.uk/politics/24325/part-privatisation-post-office