When And Why Was The Post Office Privatised?

Over a decade ago, the bulk of Royal Mail was privatised. The process took roughly two years and was finally completed in 2015. Today, the firm trades under a different name – International Distribution Services (LSE:IDS), reflecting both its original UK operations and later international expansion into markets like Canada.

The new name certainly seems more accurate for the underlying business. However, there’s also speculation that this decision was an attempt to move away from the Royal Mail brand, which has been riddled with controversy and has now confirmed scandals since its privatisation.

But why was Britain’s leading postal service privatised?

When was the Post Office privatised?

The privatisation of the Post Office actually began in 2011 when Parliament issued the Postal Services Act 2011. This essentially allowed the British government to begin selling its shares in the Post Office to public investors as well as begin the restructuring of the business.

Eventually, in 2013, the government sold 60% of its shares by floating them on the London Stock Exchange. The Royal Mail was now a publicly traded stock that investors both at home and in institutions could begin buying and selling on the open market.

The British government still held 30% ownership in the business until June 2015, when half of this was once again sold. However, this time, it went exclusively to institutional investors such as pension funds and mutual funds. Later in October, the government’s remaining shares were sold or gifted to employees, completing the privatisation process.

Why was the Post Office privatised?

The government’s decision to relinquish its stake in Royal Mail was made for a variety of economic, political, and ideological reasons. However, in general, there were four primary goals.

1. Raise Capital – By divesting Royal Mail, the government was able to raise a considerable sum of capital. It also shifted the burden of future investments onto private investors, allowing the national budget to be reallocated into public services and national debt reduction.
2. Attract Foreign Investment – The privatisation of a public entity served as a signal to foreign investors that the UK was committed to a market-based economic model attracting fresh capital into Britain’s economy.
3. Improve Efficiency – Prior to its privatisation, the Post Office was struggling with rising expenses driven by operating inefficiencies. Through private ownership, the firm would be forced to innovate, streamline operations, and improve the quality of service.
4. Create Competition – Prior to privatisation, the Post Office essentially operated as a legal monopoly. This lack of competition removed the need to innovate and improve the quality of service.

There were additional reasons behind the call to privatise the Post Office. The rapid rise of the e-commerce industry was a trend the UK government was eager to capitalise on. Through privatisation, the availability and quality of parcel delivery would encourage more online spending from consumers, resulting in higher economic GDP growth. It also solved a recurring challenge where the monopoly was being significantly restricted by European anti-trust regulations.

How have Royal Mail shares performed since privatisation?

So, how did it all turn out? A few of the government’s goals were a success. Competition in the British postal market has flourished with new couriers for businesses and individuals to choose from. A total of £3.3bn was raised from the government’s divestment. And international investment in the UK increased.

However, as for the Post Office, the assumption that privatisation would lead to efficiency gains proved inaccurate. In fact, performance continued to decline, and this is clearly reflected in the stock chart.

Since October 2013, the shares of International Distribution Services have delivered an all-time loss of 24%, with the stock price falling off a cliff by 75% between 2018 and 2020. For reference, the FTSE 100, over the same period, delivered a total return of +85%.

The efficiency gains failed to materialise. And the relationship between management and the employee unions became adversarial. This translated into postal strikes, hundreds of millions in lost revenues, lacklustre profits, and rising debt.

Even in more recent years, the firm continues to find itself riddled with problems. A regulatory investigation was launched in 2023 against the firm for failing to meet minimum performance targets. This included:

• Deliver 93% of first-class mail within one working day of collection.
• Deliver 98.5% of second-class mail within three working days of collection.
• Complete 99.9% of delivery routes.

The actual numbers achieved by the company stood at 73.7%, 90.7%, and 89.35%, respectively.

In the meantime, the revelation that more than 900 sub-postmasters were wrongly prosecuted as a result of a faulty IT system hasn’t exactly helped the group’s reputation. While the business is now under new management, significant legal repercussions may still be brought against it.

What are the disadvantages of privatisation?

When privatisation is executed correctly, there will be numerous advantages, as we’ve already discussed. However, it also comes paired with several disadvantages.

Under private ownership, the pursuit of profits and efficiency often translates into job losses. Employees can often be made redundant, resulting in large initial layoffs and further potential job cuts in the following years. The pursuit of lowering costs can also result in cutting corners, which in some instances can be harmful to society, employees, and members of the public.

A business review can also result in significant price increases to pass on costs of service enhancement to customers. It can also lead to certain regions of the country being given priority and better infrastructure. Private companies seldom invest in areas where profits can’t be efficiently made, resulting in reduced quality of service in rural areas compared to urban cities.