Tuesday, March 07, 2006

Why not privatise the Royal Mail

Just realised that my original post on this didn't explain why we shouldn't just privatise the Royal Mail - I very carefully explained that selling any shares would either be tantamount to privatisation, or else they wouldn't sell, and then didn't say what was wrong with privatisation in the first place.

Firstly, if our policy is to be privatisation of the Royal Mail, then the case for privatisation has to be made openly and publicly, rather than simply be a consequence of a motion that is passed for other reasons and argued on some other basis. I don't think it's right to commit the party to effective privatisation of the Royal Mail without Conference knowingly voting for privatisation.

Secondly, Royal Mail letter delivery is a natural monopoly. This is because of a very ingenious scheme devised by a Mr. Rowland over a century and a half ago. In the modern delivery sector, it's known as the USO - the Universal Service Obligation. The rule is that the Royal Mail is obliged to deliver to every address in the country at the same rate and cannot offer discounts to that rate based on the location of either the sender or of the addressee.

Without USO, delivery prices would be based on cost, which would competitively drive down prices in urban areas, and drive up prices in rural areas, especially in remote regions such as the Scottish Highlands and Islands. If you don't believe me, check out courier prices, which is a genuinely deregulated market.

The monopoly on letter delivery (which is enforced by requiring anyone other than the Royal Mail to charge a minimum of £1 per item) is natural, in that there is an expensive infrastructure that would be very costly to duplicate for a competitor. The simplistic solution of removing the monopoly, but simultaneously imposing the USO on any competitor wishing to move into the same market, would result in no competitor entering the market - the Royal Mail has a large, expensive, fully amortised infrastructure, and any competitor would need to build one from scratch and would then have to pay for the financing costs, while simultaneously needing to undercut RM to build market share. It's only interesting if you can drive RM out of the market and then raise prices to take a large monopoly rent once you own the market yourself.

Is there really a big infrastructure cost? Yes: post boxes, and the delivery network. The sheer number of postmen is huge, and would cost a fortune to recruit. The rest of the network is equivalent to something the couriers already have, but just on a much bigger scale; still, they certainly could scale up the sorting/processing function. It's also massively inefficient to have multiple delivery networks. With letter post, you really do need to have a postman passing every delivery point every day; with couriers, you only need a van down a given road once a week or so. Change that to vans of two or three different companies sharing that demand and it's fine; change to two or three postmen and you're paying two or three times the infrastructure cost.

OK, so it's a monopoly. Private monopolies are a problem; they seek to obtain monopoly rent and to turn that into profit. With barriers to entry on the scale of the USO/postal service, any private monopoly could easily raise letter prices significantly to take a large monopoly rent.

So we have the option of scrapping the USO, which would make for cheaper postal services in urban commercial areas (where each delivery point is getting a sackful daily anyway), not much difference for suburban areas, and increases for rural areas, with big increases for genuinely remote areas as they lose the cross-subsidy.

Or we have to accept the natural monopoly that is implicit in the USO and cross-subsidy. If we accept that, then our options are a regulated private monopoly, a public sector operation, or a third-sector public-interest corporation.

The arguments against the pure public-sector operation, in an area where a profitable business is possible, are manifold. The two principal problems are political interference in commercial decisions, and the public sector's tendency to take out all the profit and not leave in enough for reasonable infrastructure investment.

The arguments against a regulated private monopoly are more to do with regulatory capture, and the perennial struggle against monopoly rent in a case where ultimately the important business decisions are being made by a regulator which is inevitably not in possession of the full facts, as the business will be continually arguing for ever higher stamp prices and bending every rule in sight to get them.

Public-interest corporations, well-designed, do not have the incentives for monopoly rent that the private sector does - there is neither dividend, nor any possiblity of senior management directly benefitting through stock options, or even large salaries.

Now, if it's a pure staff co-operative, without customer involvement, then there is a risk of taking monopoly rent to finance excessive staff levels and over-generous salaries and benefits. A customer co-operative, like the mutual model for building societies and the likes of the Co-operative Retail Society and the Co-operative Bank, should avoid the worst of that model, though there may still be a tendency to a bit of excess fat in a non-competitive environment.

Anyway, that's the case on ownership models proper, that I failed to make in the previous post.

1 comment:

Joe Otten said...

I think you are right that regulated private monopolies are somewhat unsatisfactory. The regulator is always less well informed than the regulated, and there will always be a danger of a quicker buck from lobbying or misleading the regulator than from geniune innovation.

But none of the alternatives are particularly satisfactory either. Mail delivery, while effectively a regulated private monopoly at the USO end of its business, is in competition for B2B mail, parcels and so on. A public interest corporation or a public sector operation may struggle to compete in those fields.