Economics Assignment: Privatisation in Royal Mail Group Plc

Question

Task: Prepare a detailed report on economics assignment illustrating the concept of privatisation of Royal Mail Group Plc.

Answer

Introduction
As evident in this economics assignment, in the United Kingdom, privatisation has helped the economy to achieve wonders. The worldwide collapse of state socialism has created a new inescapability, which had given rise of free economic institutions. Since 1979, the United Kingdom has adopted a particular economic approach, which is known as privatisation. As of now, privatisation has done wonders for British economy because privatisation has significantly fattened the purse of the government by almost 2 Billion Pounds from 1989 to 1900 (Moore, 2021). Most importantly, the British Privatised companies have collectively enhanced a sales growth of almost 34 Billion Pounds till date since the privatisation. Example of Royal Mail can be considered here, which has been recently privatised.

Royal Mail Group Plc is a renowned British multinational courier service and postal service company. The company is headquartered in London and was established in the year 1516. After the general election of 2010, the coalition government asked Richard Hooper to bring postal sector under fully open market competition (Economics Online, 2021). Based on the review of Richard Hooper, the British Government passed the Postal Service Act 2011. As per the provision of this act, 90 percent shares of Royal Mail were privatised. Out of these 90 percent shares, 10 percent shares are hold by the employees of Royal Mail. Main objective of this report is to identify the main motive behind this privatisation of Royal Mail. The efficiency of this privatisation and performance of the company after the privatisation has been critically analysed in this assignment.

Motives behind the Privatisation
Major motive behind the privatisation was to operate in the open competitive market. For almost 500 years, the control of Royal Mail was in the hands of government. The government faced several challenges in raising necessary capital for investment in technological advancement. In order to maintain business efficiency and enhance competitive advantages, raise of capital freely was important. TNT is considered as the major competitor of Royal mail. TNT was gaining huge popularity and competitive advantages in the UK postal sector because the company was using technologically advanced applications in business operation activities and this intense market competition was affecting the business growth of Royal Mail. Therefore, the coalition government decided to privatised Royal Mail, which later helped the company to raise the capital from market effectively. Now, Royal Mail has injected capital in the business operation activities for technological advancement. Most importantly, privatisation has increased the efficiency of the service delivery activities and customers are very happy with the service portfolios of Royal Mail. As part of the privatisation, almost 1, 50,000 employees of Royal Mail has been given 10 percent of total share (Economics Online, 2021).

Economic Theory Supporting Privatisation: Keynesian Theory
Keynesian Economic Theory can be applied here to support the privatisation of Royal Mail. It is already discussed that the government decided to privatise the company in order to improve core competency, competitive advantages, and customer satisfaction. According to the principles of the Keynesian economic theory, government of a country needs to increase the demands of the products of a particular product or a particular service to boost the growth of the business. This theory holds the belief that the primary driving force in the economy of a country is consumer demand. Keynesian economic theory supports the expansion of the fiscal policy of economy because it focuses on improvement in spending on infrastructure development, unemployment benefits, and educational sustainability (Niemeier, 2012).

In this case, the employees of Royal Mail were deprived of enjoying the benefits of holding of shares of the company. The privatisation of Royal Mail allows the company to offer 10 percent shares to almost 1, 50,000 employees. Hence, this privatisation process has allowed employment benefits, which is one of the major principles of Keynesian economic theory. In addition, it is also identified that the infrastructure development was necessary for Royal Mail as the company was following same business model for almost 500 years. In order to transform the business operation activities and satisfy the demands of the target customers, the government decided to privatise the business as it helped the company to raise capital and invest in infrastructure development activities. Overall, it has been identified that privatisation has allowed Royal Mail to adopt advanced technological transformation in business. Hence, it can be acknowledged that Keynesian economic theory supports the privatisation of Royal Mail as this privatisation has ensured benefits for almost 1,50,000 employees and infrastructure development of the business.

Method of Privatisation
The privatisation of Royal Mail took place in the year 2014. The corporate structure of Royal Mail is comprised of two important operating divisions, such as GLS and UKPIL. The government understood that the demand of customers regarding postal communication and courier services is changing rapidly. In addition, strong competition from other market rivals like TNT was posing real competitive threats to the business growth of Royal Mail. Looking into this market trend, Royal Mail decided to modernise and commercialise its business model. The company was seeking for positive transformation in the business in order to ciope with changing trends in communication industry. Initially, the consumer groups and labour unions opposed the privatisation process of Royal Mail.

As per the review of Richard Hooper, the British Government passed the Postal Service Act 2011. This provision imposed full privatisation of the business of Royal Mail. Most importantly, the management of the company believed that the privatisation will help the company to satisfy the growing demand of online shopping of the customers. Later on, it was also identified that the decision of privatisation has helped Royal Mail to significantly compete in the market with the potential competitors like TNT.

Efficiency of Privatisation
There are several efficiencies and benefits of this privatisation of Royal Mail. First of all, it is identified that the company became successful in accessing the capital for investment effectively. Secondly, this privatisation was efficient because it allowed Royal Mail to raise much needed funds for treasury. It helped in improving the efficiency of the business. The allocative efficiency was necessary for Royal Mail as the demands of customers towards technology enabled postal services were increasing. This privatisation assisted Royal Mail in allocating sufficient financial resources for infrastructure development and technological advancement. These both were necessary for satisfying the customers’ demands. Last but not the least; privatisation has allowed Royal Mail to enhance cost efficiency of the business as company has reduced its delivery services from six days to five days. Hence, cost efficiency of the business and more capital application along with satisfying customers’ demands are the examples of efficiency of privatisation of Royal Mail.

Satisfaction regarding Revenue Generation
Royal Mail was partly privatised in the year 2013 and fully privatised in the year 2016. It has been identified that the operating profit has increased and revenue generation has improved for Royal Mail after the privatisation. It is studied that the operating profit has increased by 1 percent in the year 2016 compared to the previous year. In addition, it is also investigated that the growth of revenue generation has improved by 2 percent in every year for Royal Mail. Currently, it is identified that Royal Mail has a share of 53 percent in the courier business market. On the other hand, it is also identified that 41 percent of total revenue of the company has come from this courier services. All of these have taken places after the privatisation of the business. This privatisation also has helped Royal Mail in improving labour productivity because operating cost-saving during the post-privatisation period motivated the shareholding employees to boost their performance level.

In the financial year 2019-2020, it has been identified that the revenue generation of Royal Mail has increased by 4.6 percent compared to the previous years. It is true that COVID-19 pandemic has affected the growth of the business of entire postal service sector, but targeted pricing strategy of Royal Mail has helped the company to improve its revenue generation in this pandemic situation. However, operating cost has slightly increased in this COVID-19 situation, but the company is confident that they will soon recover and will enjoy the advantages of privatisation in the upcoming years (Royal Mail, 2020).

Performance of Royal Mail
The management of Royal Mail is enjoying profitable and successful business operation activities after the privatisation process. First of all, the company is successfully giving lucrative dividends to its shareholders and it is already mentioned that the employees are important shareholders of the company. It has become possible due to privatisation and this privatisation process led to maximised profitability as well as high dividends to the shareholders. The company was fully privatised in the year 2016 and it was evident that the employees were not getting additional employment benefits before the privatisation. In the year 2018, it has been identified that the shareholders received 20 percent benefits in only three months due to impressive profit maximisation. Almost a profit of 250 Million Pounds was made by Royal Mail. Apart from these dividends, the company also decided investment for better customer services. Infrastructure development and satisfying customers’ demands were major objectives of Royal Mail regarding this privatisation. However, increased profitability after the privatisation has helped the management of Royal Mail to re-inject its capital in technological development, infrastructure development, and customer services. Now, customers are really very happy with the services of Royal Mail. In addition, it is also identified that the management of Royal Mail has become successful in cutting down a cost of almost 190 Million pounds after the privatisation. These figures and facts significantly indicate that the business operation performance of Royal Mail has improved after the privatisation (Vincent, 2018).

Achievement of Privatisation Goals and Objectives Major privatisation goal and objective for Royal Mail was to secure a long-term safe and sustainable future for the company. It is already identified the demands of employees and customers were rapidly transforming in the UK postal industry. Customers were demanding efficient, technologically advanced and time-efficient services from the courier and postal companies. Different companies adopted this particular model by integrating advanced technology in the business. As a result, the sales growth and business efficiency of Royal Mail was affecting. The company achieved the goal of satisfying customer demands by leaving state ownership as privatisation allowed the company to enter into the free market and sell its shares. As a result, funds were raised and investment was made to improve technological orientation and infrastructure development of the company. This transformation positively reflected in the customer service. Now, the company is significantly satisfying the demands of customers due to this adopted transformation. Hence, one primary objective has been achieved through this privatisation.

On the other hand, the demands of employees are also satisfied through this privatisation process. It is identified that employees were demanding several employment benefits and state ownership was stopping to do so because the company was failing to raise sufficient funds to pay out the bonus. The privatisation process significantly helped the management of Royal Mail to raise money and make employees the shareholders of the company. Apart from this, capital from maximised profit was re-injected in the employee management process as it allowed the company to pay out bonus to the shareholders as dividends. Employees are important and recognised shareholders of Royal Mail. This approach motivated the employees of Royal Mail and it assisted the management in making a strong workforce (Denton, 2015).

Regulators of the Industry regarding this Privatisation
Ofcom is the regulator of the UK postal service industry. Ofcom is responsible for the investigation and monitoring of the performance of UK postal services. It is also the responsibility of Ofcom to follow the provision of The Postal Services Act 2011 and Communications Act 2003 to ensure great service and satisfaction for the consumers. Ofcom is responsible for taking effective measures whenever any kind of conflict is created between two duties. Ofcom has the authority to name and shame the service providers in case of poor practices (Foley et al., 2020).

Possible Challenges for Royal Mail
The management of Royal Mail needs to understand that the company may suffer from some realistic challenges in the near future. First of all, it is important to accept that the market demands for the postal letters are decreasing in this contemporary era of internet and e-mails. Hence, it will be really very difficult for Royal Mail in the near future to survive the postal service business (Mustchin, 2017). Despite the growing demand of courier service and parcel service operations, possible cost association with the postal services may hamper the benefits of privatisation in the near future.

Secondly, it is also an important challenge for Royal Mail to reduce the intensity of the market competition. Companies like TNT Post is giving serious competitive threats to Royal Mail and bringing differentiated services in the business. As a result, it might hamper the growth of the business and it might be a serious challenge to the privatisation of postal service of Royal Mail (Riley, 2014).

Policy Recommendations
Different kinds of policies can be introduced by the management of Royal Mail. In British work environment, the involvement of labour unions in strategy making is highly important. In this case, a policy of inclusion of Communication Workers Union might be essential as it will help the company to gain support of different stakeholders including the shareholders of the company as employees are also considered as major shareholders of Royal Mail. Introduction of such policy will create a positive perception in the minds of employees regarding favourable operational changes, pay security, and job security (Post and parcel, 2020).

Conclusion and Limitation of the Study
Royal Mail has a strong and prestigious history of effective business operations for 500 years. In the late 2000s, the state controlled company decided that the business will be privatised for better efficiency and competitive advantages. Demands of customers regarding technology-enabled postal communication and courier services were significantly increased. However, the company could not make intended transformations due to limited funds in treasury. In addition, threat of market competition was also affecting the business growth of Royal Mail. Looking into these trends and scenarios, coalition government in the year 2010 decided that Royal Mail will be privatised. In 2013, the company was partly privatised and full-privatisation of the business completed in 2016. This privatisation allowed the company to raise funds from shareholders and invest capital in infrastructure development activities. As a result, the performance of the business improved and the customers started to receive high-quality services.

There are some limitations of this study. First of all, availability of limited primary data regarding effectiveness of Royal Mail privatisation has somehow created questions on the authentication of the research. Secondly, it is also identified that entire British Postal Sector is suffering from financial challenges due to this COVID-19 pandemic situation. The privatisation took place few years back and efficiency of privatisation only can be proved after a successful completion of few years of business operation activities. Unfortunately, the current pandemic situation cannot effectively prove that privatisation has become a huge benefit for Royal Mail.

References
Denton, J., 2015. Royal Mail fully privatised for first time in its 500-year history as Government sells off remaining 14% stake. [Online]. Available at: < https://www.thisismoney.co.uk/money/markets/article-3270365/Royal-Mail-fully-privatised-time-500-year-history-Government-divests-final-14-cent-stake.html>. [Accessed on November 4, 2021].

Economics Online., 2021. Royal Mail Privatisation. [Online]. Available at: https://www.economicsonline.co.uk/Business_economics/Privatisation_of_royal_mail.html. [Accessed on November 4, 2021].

Foley, N., Conway, L., Seely, A., and Booth, L., 2020. Postal Services. [Online]. Available at: < https://researchbriefings.files.parliament.uk/documents/SN06763/SN06763.pdf>. [Accessed on November 4, 2021].

Moore, J., 2021. British Privatization—Taking Capitalism to the People. [Online]. Available at: https://hbr.org/1992/01/british-privatization-taking-capitalism-to-the-people. [Accessed on November 4, 2021].

Mustchin, S., 2017. Public sector restructuring and the re?regulation of industrial relations: the three?decade project of privatisation, liberalisation and marketization in Royal Mail. Economics assignment Industrial Relations Journal, 48(4), pp.294-309.

Niemeier, H.M., 2021. Is economics good for aviation policy? Some problems in bridging the gap between theory and policy. Journal of Air Transport Management, 96, p.102107.

Post and Parcel., 2020. Royal Mail Commits to Transformation. [Online]. Available at: https://postandparcel.info/130583/news/e-commerce/royal-mail-commits-to-transformation/. [Accessed on November 4, 2021].

Riley, G., 2014. Growing Challenges Facing Privatised Royal Mail. [Online]. Available at: https://www.tutor2u.net/economics/blog/growing-challenges-facing-privatised-royal-mail. [Accessed on November 4, 2021].

Royal Mail., 2020. Royal Mail Plc. [Online]. Available at: < https://www.royalmail.com/sites/royalmail.com/files/2020-06/royal_mail_plc_full_year_results_2019-20.pdf>. [Accessed on November 4, 2021].

Vincent, M., 2018. Royal Mail continues to show how privatisation can deliver. [Online]. Available at: < https://www.ft.com/content/fd051332-fc54-11e7-9b32-d7d59aace167>. [Accessed on November 4, 2021].