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Royal Mail Privatisation

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Royal Mail Privatisation

Is Royal Mail your grandparents', parents', and your first choice for sending holiday greeting cards? Is it also your go-to option for sending presents to friends? It might have been a government-baked household name with a long glorious history, but do you know that Royal Mail has been privatised? Below, the article will go through the reasons for the privatisation, and the pros and cons of the move for the organisation, for the delivery market, and for consumers.

About Royal Mail Privatisation

Royal Mail was established in 1516 as a British postal service operating as a department under the control of the government.

Royal Mail Privatisation royal mail stagecoach StudySmarterFigure 1. Royal Mail stagecoach in 1805Source: Pyne, W H (William Henry), Public domain, via Wikimedia Commons

Following the first step – partial privatisation in 2013, and the final sale completed in October 2015.1 It was said the privatisation was caused by the shifting in the focus of types of postal services at Royal Mail as a result of the rising demand for parcel delivery services.

For the government, it would be more efficient to fund the shifting processes if Royal Mail was privatised.

Private capital for Royal Mail will be good for both business and consumers; it will be a more efficient, better capitalised, faster‐moving company better able to meet the needs of its customers.

- Royal Mail: Myth Busters, Department for business, innovation & skills

While for Royal Mail, the privatisation was also an opportunity for it to gain competitiveness on prices, services innovation, and variations of services.

Privatisation involves shifting ownership from state-owned assets to the public sector. Examples of privatisation can include railway, energy supplies, and factories. This usually involves the sale of state-owned businesses to private ownership.

You can learn about privatisation in more detail by checking out our 'Privatisation' explanation!

What was Royal Mail's main source of income before privatisation?

Letters delivery was the main service provided by Royal Mail. However, due to the shift in communication methods, the demand for letters posting dropped. The internet raised the number of people online shopping, which in turn, increased the need for delivery services of parcels.

Royal Mail's Share Price

Just after the government started to sell off Royal Mail in 2013, the share price of Royal Mail rose by 38%.2 The share price of Royal Mail back in 2013 just before the sell-off was 330p and had soared to 455p.2 It made a 57% increase in its share price over seven years after the privatisation despite a sudden drop in 2018 after its profit warning.2

Economic Factors that affect the privatisation of Royal Mail

The main driving force that influences the government's decision to privatise Royal Mail was mainly to acquire capital for the development of Royal Mail's parcel delivery services.

However, the decision would have been influenced by many different economic factors. Examples of these economic factors include government policies, law, interest rates, taxes, wages, exchange rates, inflation, unemployment rate, and demand and supply. But the main factor that caused the privatisation of Royal Mail was demand. The decrease in demand for letter services and the soaring needs for parcel delivery services are the main driving factor for Royal Mail to shift.

Advantages and Disadvantages of privatisation of Royal Mail

There are many advantages and disadvantages to the privatisation of the Royal Mail. Let's consider a few of them.

Advantages to Royal Mail's privatisation

There are many advantages to the privatisation of Royal Mail. Some are:

  • Increase in government revenue. The government raised £3.3bn from selling its stake in Royal Mail.3 The UK government could use this increase in revenue to fund other government projects that benefit the wider economy, which will lead to an increase in aggregated demand (AD). However, some critics argue that it was sold off too cheaply.
  • Increasing competitiveness and efficiency. The privatisation of Royal Mail will cause the firm to face more competition from other firms. If Royal Mail are to maintain its market share of 34%, they must be efficient and competitive.4
  • Lower prices for consumers. Royal Mail and its competitors must remain competitive if they are to continue making profits and increasing their market share. This often benefits consumers as they receive lower prices for their services.

Disadvantages to Royal Mail's Privatisation

There are many disadvantages to the privatisation of Royal Mail. Some are:

  • Higher prices for consumers. The Royal Mail was a natural monopoly, meaning that it is a firm with very high fixed costs and it is only practical and efficient to have one firm producing the goods in that market. Privatising a natural monopoly could see the fragmentation of the firm, resulting in an increase of its average cost of production, loss of economies of scale, which could ultimately result in higher prices for consumers.
  • Government lose out on extra revenues. Although the government benefit from the large sum they receive from selling Royal Mail, they lose out on the continuous revenue Royal Mail generate annually. For example, Royal Mail's revenue rose by 7% to £6.1bn in 2021, which is far greater than the £3.3bn the government received from selling the firm.5
  • Taxpayers lose out. According to the National Audit Office report, the privatisation fees for Royal Mail amounted to £12.7m.6 While speculators have benefited from the privatisation of Royal Mail by £750m, ultimately the taxpayers have lost out, as any losses are covered by the taxpayers.6.

Is the privatisation successful?

The privatisation was conducted with an aim to gain competitiveness in the market, raise revenue, and improve innovation. Royal Mail has seen some benefits from its privatisation. For example, the firm has received more revenue in parcel services than it has from letters in September 2021.7

As mentioned earlier, the reducing needs for sending letters and increasing demands for parcel delivery were two main factors driving the privatisation. However, the handling costs of parcels are also higher than handling letters.

Royal Mail Privatisation Annual operating profit of Royal Mail from 2013 2021 StudySmarter OriginalsFigure 2. Annual operating profit of Royal Mail from 2013 - 2021, StudySmarter Originals.Source: Statista, www.statista.com

As we can see in Figure 2 above, it can be argued that the privatisation didn't contribute to the increase in revenue. To clarify, the substantial rise in revenue in 2014 was due to the sale of Royal Mail. Moreover, due to the sudden increase in demand for parcel delivery because of the soaring number of online shopping orders, the revenue finally rose at the end of 2020 and in 2021. It was also found that the revenue contributed by parcel delivery was less than letter postal service until October 2020. While it looks like a long-term loss is happening, the gain in profit was actualised ahead of plan for four years. This was the first time that Royal Mail gained more revenue from parcels than letters.7

Royal Mail Privatisation - Key Takeaways

  • Privatisation involves shifting ownership from state-owned assets to the public sector.
  • Royal Mail was established in 1516 as a British postal service operating as a department under the control of the government.
  • Royal Mail started its privatisation in 2013 and finalised it in October 2015.
  • The privatisation aimed to help Royal Mail adapt to the increasing demand for parcel delivery services.
  • Due to the surge in online shopping in 2020, and the subsequent soaring need of parcel delivery, Royal Mail was able to make profits four years ahead of the plan after privatisation.
  • The high labour cost for parcel services prevented Royal Mail from making profits after privatisation

Sources:

1. UK Parliament: Privatisation of Royal Mail research briefing https://commonslibrary.parliament.uk/research-briefings/sn06668/

2. The Guardian: Royal Mail shares rose 38% as Labour complains of knockdown price, https://www.theguardian.com/uk-news/2013/oct/11/royal-mail-share-price-buyers-profit

3. This is Money: Royal Mail fully privatised for the first time in its 500 year history, https://www.thisismoney.co.uk/money/markets/article-3270365/Royal-Mail-fully-privatised-time-500-year-history-Government-divests-final-14-cent-stake.html

4. Statista: Market share of leading courier service providers in the UK, https://www.statista.com/statistics/1245558/courier-service-providers-market-share-united-kingdom/

5. The Guardian: Boost for shareholders as parcels help Royal Mail to £311m profit, https://www.theguardian.com/business/2021/nov/18/boost-for-shareholders-as-parcels-help-royal-mail-to-311m-profit

6. National Audit Office: The Privatisation of Royal Mail, https://www.nao.org.uk/report/privatisation-of-royal-mail-plc/

7. The Guardian: Royal Mail gets more revenue from parcels than letters for first time, https://www.theguardian.com/business/2020/nov/19/royal-mail-gets-more-income-from-parcels-than-letters-for-first-time

Frequently Asked Questions about Royal Mail Privatisation

Royal Mail has been privatised since 2015, although it was partially privatised in 2013.

Some pros of royal mail's privatisation are:

  • increased government revenue.
  • increased competitiveness and efficiency.
  • lower price for consumers


Some cons of royal mail's privatisation are:

  • higher prices for consumers
  • government looses out on extra revenues.
  • taxpayers loose out.

The government sold Royal Mail in order to acquire capital for the development of Royal Mail's parcel delivery services. 

Yes, the Royal Mail is privatised.

The Royal Mail was privatised starting in 2013 and finalised in 2015.

Final Royal Mail Privatisation Quiz

Question

When was Royal Mail established?

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Answer

Royal Mail was established in 1516

Show question

Question

When did the privatisation of Royal Mail begin?

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Answer

2013

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Question

In what year was the final sale of Royal Mail completed?

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Answer

2015

Show question

Question

Define privatisation 

Show answer

Answer

Privatisation involves shifting ownership from state-owned assets to the public sector.

Show question

Question

What was the main service provided by Royal Mail?

Show answer

Answer

Letters delivery was the main services provided by Royal Mail

Show question

Question

What service has Royal Mail seen an increase in?

Show answer

Answer

The delivery services of parcels

Show question

Question

What was Royal Mail's share price in 2013?

Show answer

Answer

The share price of Royal Mail in 2013 was 330p

Show question

Question

Name two economic factors that influenced the privatisation of Royal Mail.

Show answer

Answer

Any two from:

  • government policies
  • the law
  • interest rates
  • taxes
  • wages
  • exchange rates
  • inflation
  • unemployment rate
  • demand and supply.

Show question

Question

What are the advantages to Royal Mail's privatisation?

Show answer

Answer

  • increase in government revenue
  • increase in competitiveness and efficiency
  • lower prices for consumers

Show question

Question

What are the disadvantages to Royal Mail's privatisation?

Show answer

Answer

  • higher prices for consumers
  • government lose out on extra revenue
  • taxpayers lose out

Show question

Question

What was the main cause to Royal Mail's increase in revenue during 2020 and 2021?

Show answer

Answer

The surge in online shopping in 2020 and 2021 increased the need of parcel delivery, which benefited Royal Mail and saw its revenue rise.

Show question

Question

Why did the government sell Royal Mail?

Show answer

Answer

The government sold Royal Mail in order to acquire capital for the development of Royal Mail's parcel delivery services.

Show question

Question

Is Royal Mail privatised?

Show answer

Answer

Yes

Show question

Question

How much did the UK government receive from selling Royal Mail?

Show answer

Answer

£3.3bn

Show question

Question

How much did the privatisation fees for Royal Mail amount to?

Show answer

Answer

£12.7m

Show question

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