Post on Post…

I’ve been leery of writing about the Government proposal to part privatise the post office, because most of what I’ve read has been (on the one hand) jargon rich policy briefing papers and (on the other) high decibal outrage.

When that happens I like to try and get into the thickets a bit, and frankly, what I write as a result is long and boring. So steel yourselves, mon freres.

The trouble I have with the anti-privatisation arguments is that the best ones I’ve heard are tactical ones.

These can be summed up as: “It’s incredibly unpopular and will divide the party when it needs to be united, so we should leave it until after the next election (or to the Conservatives, should they win). Why pick a fight now?”

That’s very true.

But the problem is that it raises the question of why you bother to be in Government at all. If something needs to be done and you put it off merely for your own electoral convenience, you’re only storing trouble up for yourselves. I thought we learnt that lesson from 1997 to 2001.

And besides, the version of privatisation a future Conservative government might introduce could be radically different from the third of equity a Labour government will open up.

So what are the arguments?

The government, and the Royal Mail, argue that they need capital to modernise and to meet their pension obligations. The CWU agrees on the pensions, and to a certain extent on the need for modernisation, though they’re not so impressed by the argument on efficiency.

Compass argue that Royal Mail is not  inefficient by European standards, but that it’s too cheap.  The Compass paper argues that the German Mail charges a lot more than the Royal Mail, and implies that by bringing UK prices in line with Germany, enough revenue would be created to fund any needed modernisation.

There’s one obvious downside to making the mail more expensive for consumers – you’re making sending letters and packages more expensive. Generally it’s good to avoid that if you can.

So, setting aside the idea of jacking up Mail prices substantially, the debate is about funding  Royal Mail pensions and modernising the organisation. Both of these require significant sums of capital.

The question is should this capital investment come from the state, from relaxed rules on allowing the Royal Mail to raise debt or from outside partners?

The argument for debt would be most effective when debt is incredibly cheap and easy to access. Sadly, that’s no longer true.

I’m sure that Royal Mail would be able to raise funds, but the servicing of that debt would be relatively expensive, and would really just replace one future liability (Pension Fund) with another (debt).  The Royal Mail currently spends about £800 million a year servicing it’s pension fund. Replacing that with spending a little more servicing debt seems rather pointless.

The next obvious source of funds is the owner – the state.

The Government is proposing to pick up a £6 billion charge on the Royal Mail pension scheme. In the great tradition of union negotiation, this part of the offer has been accepted and the debate has moved on. But it’s worth pausing a while to look at this.

£6 billion  is not small change. In fact it’s a bigger deal than the private partner. The CWU is quoting on their website an article that says that of the government promise on pensions that:

The cost of this obligation will be so huge it will dwarf the funds raised by the partial sale… ..the Government is in fact proposing to pay someone to take the Royal Mail off its hands… …if the money the pension fund needs was instead diverted into the business, it would pay for enough investment to transform Royal Mail’s prospects

The CWU doesn’t seem to follow the implication of how that course of action would affect the pensions of their members.

But there’s an important point here – if the State is able to pick up the £6 billion for pensions, why should it not just offer the extra couple of billion the Royal Mail needs to modernise?

Good point. The answer is: it did.

The Royal Mail has a debt facility with the government of almost £1.2 billion to fund modernisation. It’s used £85 million.

That suggests that the problem with the Royal Mail is organisational and cultural as much as it is capital based*.  Which is why the Hooper report suggests that there’s a fundamental shortcoming in the Royal Mails ability to drive through change which requires management transformation at all levels.

So if there exists the possibility of getting the capital for modernisation and the expertise to make it happen from a private partner, why oppose it?

Well, you would want to avoid outside partners if experience showed that introducing private equity into nationalised industries doesn’t work, that the industries collapse. However, even the hardest line left winger finds it hard to argue that, given NATS and the performance of various wholly privatised bodies.

You’d also want to avoid outside partners if history showed that the consequences of private involvement would be so negative for both the workforce and customers that it wouldn’t be worthwhile.

Here I have sympathy with the unions, which is why having a private partner has to be a better solution than a private owner. Frankly, what we’re talking about here is the managment of the transition from burdened to modern- whether it is sympathetic or brutal.  Consumers are also protected, because although the Mail is a monopoly, the regulator controls prices, so a private firm wouldn’t just be able to jack up prices and act as a monopolist.

Finally, you’d want to avoid private partners if they got all the profit and the state was left with nothing. Which is why minority partnership, rather than full privatisation is the proposed plan. If modernisation works, the Government would own seventy per cent of the Mail, and get seventy per cent of the dividends. Since there’s been little sign of modernisation happening without that private support, this seems like a good deal.

I accept that the governments proposals on Royal Mail are deeply divisive and difficult, and that there’s a strong tactical argument for leaving this fight well alone.  I suspect a lot of Labour people feel like that.

The trouble is, if you decide to leave every tricky fight alone, pretty soon you’re just running from fight to fight, without actually doing anything. 

Do we need to pick this one? Tactically I’m not convinced. It’s going to require a huge expenditure of political will at a time when the Government is facing many pressures.

Yet I can’t help feeling that if this is the right thing to do, the government deserves a lot of credit for being willing to argue a hard case at a cost to Labour’s own political unity.

If nothing else, it shows the Government is prepared to act, not quietly defer tough choices to some later time or some other party.  

 

*It could also suggest that no modernisation is needed. But since Lindsay Mackie of the New Economics foundation says in the Guardian website “everyone is agreed that there needs to be modernisation… …and for that there has to be capital investment.”  (See her comments to her article) and both the Royal Mail and the CWU seem to agree on the shortcomings of Royal mail management, I have no trouble believing that the fault lies with the organisation.)

Full Disclosure: I’ve got history here too. I once wrote a long post on Post offices during which I condemned Lib Dem plans to part privatise the post office and using the proceeds to fund Post Offices as “superficially attractive.. but.. just pouring money at the problem“.   My problem then wasn’t with the basic concept of a private partner, but with the way the proceeds was used.)

12 Responses to “Post on Post…”

  1. newmania

    Harriet Harmann presented the part privatisation of the Royal Mail as a crusade to ensure its future on Sunday .It is ,as she said part of the fabric of the Nation . If answer to the future of things that are the….’ fabric of the nation ‘ ,is privatisation then the swift demise of the Labour Party is also part of that answer.
    Mandelson has been telling the Unions that if they are unable to put their jobs at risk Labour will lose the next election. He is also talking to the 139 MP`s on the Labour side who are rebelling . . The Labour Party is funded and controlled by the Unions now as it was in the 70s . The Unions are concentrated in the Public Sector which between 1997 and 2007 achieved earnings increases of 35% (29% in the private sector ) . This is in addition to retaining working practices from the stone age, jobs for life and final salary pensions . Said paymasters of the Labour Party are well aware that we are about to enter a bit sectional war for dwindling resources and they are the nail that sticks up( Old Jap proverb , when the nail sticks up bang it down )
    The only possible tactic their puppets the Labour Party can try is to remind them that if they are brought down, then Mr. Cameron may deal more harshly with them ,still .That is the game of poker being played. We pay the losses.
    If the Private sector has better experise then they should run it whithin some regulatory framework.

    Reply
  2. Paul

    Hopi

    An interesting and considered post; though I do not agree with everything (or even very much) it’s good to see rigour brought to the debate. For what it’s worth I think you write the correct number of words for a post – you write more than others because you do detail, and that’s a good thing. Readers who do not like detail can look elsewhere, but they are missing out the important bits.

    I may respond to this particular post at my place, especially around the assumptions you appear to make re: ‘getting the capital for modernisation and the expertise to make it happen from a private partner’.

    But a straight question first:

    You say: .The Royal Mail has a debt facility with the government of almost £1.2 billion to fund modernisation. It’s used £85 million.

    Yes 21 Jan in the Guardian we have: ‘Responding to the criticism, Adam Crozier, Royal Mail chief executive, said that £600m had already been spent on modernisation. “We have plans in place to spend every penny of the £1.2bn … over the plan’s lifespan to 2011.”

    Where’s your £85m from? I’m sure it’s sourced, but I’m interested on how and why the two figures are different

    Reply
  3. hopisen

    Paul,

    I got it from the lords debate I linked to, where Mandelson says in col 749…

    “A little over a year later, we provided debt facilities of over a billion pounds, but these were not taken up and used by the Royal Mail. They were then effectively rolled over into debt facilities that we renewed in 2007, which amounted to £1.2 billion to assist the Royal Mail’s modernisation plans, plus the use, incidentally, of £850 million additional reserves on the Royal Mail balance sheet to support the pension fund. So we have not exactly been doing nothing.

    The harsh truth is that—and this goes to the heart of the issue—despite these debt facilities that the Government have made available, Royal Mail has drawn down only £85 million. By March this year, Royal Mail had spent only approximately one-third of what it had intended to spend in its original master modernisation plan.”

    http://www.parliament.the-stationery-office.com/pa/ld200809/ldhansrd/text/81216-0003.htm

    I suspect the £600m figure is the 1/3 of the overall modernisation capital requirement RM set for itself, as I seem to remember that being in the region of £2 billion

    Reply
  4. Paul

    Apogoies -I’ve foudn the £85 m – missed it on first skim read of Hansard (it’s at column 794 for those who want to look). It looks like the £600m Crozier quotes is part of a sum larger than the £1.2bn, but I’m not clear what that sum is.

    So there appear to be two possible readings of this, but isn’t a simple one that Adam Crozier and co are rubbish and should be fired, and that privatisation is a red herring if all that’s needed is to use the money that’s already there and get someone more capable than Crozier and Co to do so. Billy Hayes might be up to it. Anyway, stealing from my pown post here…

    Reply
  5. Andreas Paterson

    Hopi, your post puts forward some interesting stuff forward including some that I didn’t know. One I didn’t realise was that the government would be taking the strain for pension fund, not the private partner. I also didn’t realise that there were already funds put aside for restructuring. Both of these would seem to further undermine the case for part privatisation.

    The big problem I have is that the Hooper report quite clearly identifies the problems with the Royal Mail in the form of working practices, technology, pay levels etc. It then goes on to suggest a strategic partnership as a way of achieving this. What I just don’t get is why such a partnership is necessary, why is it necessary for a partner firm to take a stake in order to bring the changes through.

    The changes required are obvious all that’s required is for the management team to go ahead and implement them, if they are unable to do this, you really have to ask what exactly they and their collossal salaries are for.

    There is also the issue of further fights with the unions, the clear implication of the proposed changes is that there will be job losses. Why fight the unions now over an ideological point when the real fight is ahead and will be a bloody one.

    Reply
  6. hopisen

    Andreas- I think the slippage in that crique is in conflating top level management with the organisation.

    Imagine some 19th kingdom, where the chiefs of the imperial naval staff turn to the emperor and say “you know, what, oh, Mighty one, we really need some of those nifty ironclad ships if we’re not going to be wiped out by our enemies, but no-one here knows how to build any”.

    The emperor might feel justified in lopping off their heads for being such idiots, but while the sight of their horrified eyes gaxing up from the dust might offer some fleeting satisfaction, it doesn’t really help him solve the problem that the navy doesn’t know how to build ironclad ships, even if it knows it should be building those ships. The value of someone who knows how to build such ships is therefore pretty high and they’d be an excellent strategic partner.

    In the old days, you’d just spy on them, bribe them or kidnap them. Now you give them an equity stake.

    Reply
  7. Andreas Paterson

    I’m sorry Hopi, I just don’t accept that. We’re talking about updating the structure of an organisation not learning advanced technologies.

    Looking at the major problems for the Royal Mail:
    Working Practices – This basically comes down to an argument over shift patterns and early leaving, it’s easy enough for any manager to change the conditions the difficult part will be the scrap with the unions.

    Above Market Pay – I’d like to keep this particular Royal Mail anachronism myself, but cutting the pay of staff ain’t rocket science.

    Network Structure – Would require plans for a new structure to be drawn up, a look over the structures used by foreign operators might be handy. It would also need a study to prioritise which delivery offices and mail centres could potentially be closed. Such a study would be unique to the British Geography so I don’t see what a foreign provider could provide.

    Automation – Mainly about machines for sorting mail at various levels, I’d assume this would need some kind of mechanical sorting combined with some kind of OCR recognition and a manual process to deal with handwitten letters.

    I’m not sure if off the shelf machines exist to do this but it wouldn’t surprise me. If not then something could be constructed, none of the technology is beyond us.

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  8. hopisen

    Andreas, can you think of many organisations where the entire management has just been wiped out and replaced with ‘better’ leaders without a major negative impact on performance? For some reason the pre WW2 red army springs to mind…

    Your argument seems to be that such renewal is easy – only prevented by afailure of management will. If that’s the case, you seem to be arguing that all that is needed is a bob mcgregor to come in and shake things up. I hope you’re wrong…

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  9. donpaskini

    Hi Hopi,

    I think there is another point to this, which is that is that the problem isn’t just tactical. There doesn’t seem to be any overall political strategy which this policy fits into.

    Any government has to pick and choose – sometimes doing the Right but Repulsive thing even if it annoys lots of your supporters, sometimes doing the populist thing even if it means putting off tough decisions.

    But there doesn’t seem to be any overall framework at the moment which shows why it might make sense to pick a fight and do the unpopular technocratic thing over the Royal Mail (or Heathrow before that).

    Like you say, a government which runs from fight to fight doesn’t end up doing anything. But equally, a government which gets into every fight imaginable, no matter how damaging or pointless, will end up getting a heavy beating.

    Reply

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