Sorry we're closed: Royal mail edition

Although it may not link with what we are learning about in economics at the moment, the privatisation is a very important matter and is likely to affect our lives in the future. Yes the UK government has recently sold off 52.2% of the country's postal service, the Royal Mail and are now at the end of their first full week of being traded on the London Stock Exchange.

For many British people, the shambles of rail privatization which happened in 1993 casts a long shadow over the sell-off. The swiftness with which it was done has added to suspicion that, like the privatization spree instigated by Margaret Thatcher in the 1980s and 1990s, it was done mainly for the benefit of big business. However, even Margaret Thatcher balked at privatizing the Royal Mail. The UK government has been widely criticized for undervaluing the shares, which it priced at 330 pence but which jumped to as high as 490 pence on Monday. They have been hovering around 470 pence the rest of the week. 

In a clear example of fumbling with the stable door after the pony express has bolted, a group of government ministers plan to review the pricing strategy. Despite over 70% of the British public being opposed to the sell-off, small investors couldn't resist the opportunity to make a quick bit of money. Around 350,000 small investors bought share blocks worth 750 pounds directly from the government. They saw a profit of around £300 on the first day of trading, and many rushed to cash out their gains.

However, this issue of share price is detracting from the long-term concern that the Royal Mail is now beholden to its shareholders, and its service will follow the same downward turn as seen in the country's rail system. Services will be cut to deliver more profit. There are examples from overseas such as the sell-off of the Belgian and Dutch postal services has been touted as success stories. However, the success is usually given in terms of their profitability. Many customers and workers at the services would disagree. A shift toward shorter-term staff contracts and reduced benefits has seen a loss of experienced staff and a drop in service quality and coverage.

The Royal Mail says this won't be the case in the UK, as it is legally obliged to provide daily delivery to all addresses in the UK for the same pricing. However, they will no longer have to do this from 2021. The main excuse the government gives for selling the stake is that it was the only way for the Royal Mail to generate cash for investment in services.

 However, thanks to rising parcel deliveries stimulated by the e-commerce boom, the Royal Mail was already profitable before this privatization move, making over 400 million pounds last year, up from 152 million pounds the previous year. With such growth, combined with interest rates at historic lows and the backing of the state, it is hard to imagine that the Royal Mail couldn't find some other way to raise capital. As in the UK rail industry, the government has created a company that is the worst of both worlds. Driven purely by profit, it will shave costs and services that don't meet its standards of profitability.

In the meantime, the taxpayer will suffer - both in terms of a poorer service, and in potentially having to bail out the company should it run into trouble. It's the same attitude that sees bankers calling for deregulation and minimal government involvement in business, only to turn around and demand government money when they hit hard times.