Royal Mail: Universal Failure

ASI Fellow Eben Wilson examines the future of the UK postal service, arguing that price controls and regulation has taken a heavy toll on the Royal Mail, preventing innovation, stopping them from matching revenue to costs, and letting the organisation be captured by special interest groups. In this context, a free market approach built around privatization, deregulation and competition is the only rational way forward.

Some months ago I was asked to comment on a BERR paper about “The Future of the Universal Postal Service in the UK”. The first paragraph said “The Government is firmly committed to the universal postal service; the ability of 28 million homes and businesses across the country to receive mail six days a week, with the promise that one price goes everywhere”.

That single sentence stopped me in my tracks. Essentially, anything within that paper from then on, seen from the point of view of rational economics, has to be balderdash. (I had a look later – most of it is).

Now, as the rumblings of the unions about Royal Mail reforms in working practice threaten, again, to break out into open warfare after the “Christmas truce”, the national press is, again, reporting that the universal postal service is under threat.

This debate is interesting, not because of the arguments, but because there shouldn’t be any argument at all that the universal service is a nonsense. It breaks all tenets of successful business enterprise and is in dire need of reform. So why does a government department with that label insist on continuing with it?

If you were offered a shareholding in a national enterprise with a long-standing asset base, trained workforce, and dedicated management you might invest. But if you were then told that it had to sell its products at the same price to everyone, and any price changes needed government approval, you would rightly be leery.

Price controls and regulation are pathogenic to enterprise; pricing flexibility and product innovation make enterprises learn and grow. The Royal Mail is a marvelous case study in the pathogenesis of failure. The universal service rule is 170 years old – time enough for numerous effects of its pathology to emerge. Here are just three killer mechanisms:

1) The match of revenue to costs is wildly askew.

170 years ago the postman in a rural area would have been paid about five pence a day. Delivering fifty letters by hand and on foot would have made the post office 45p in margin. That would have paid for his uniform, his local sorting office and its staff and a contribution to the long distance postal network.

On a rough estimate, today’s postman costs around £150 a day in wages, tax, van depreciation and other costs such as uniform and staff support services. He needs to deliver upwards of 500 items to earn that amount of revenue. Are there ten times as many homes? Is ten times as much mail delivered per household? Of course not.

The loss of multi-day and weekend services, the introduction of post buses, the reduction in sorting offices – all of these things tell us that the internal arithmetic of the universal service is cock-eyed.

2) Innovation simply has not taken place.

The Royal Mail’s Post Office operation is a bizarre business – or perhaps it should be a bazaar business – as anyone who goes into a Post Office knows. It offers a diverse range of products and services, mostly delivered at their point of issue by expensively trained human beings fiddling with sticky bits of paper. There appears to be no rationalization of the service processes. The queuing, the fiddling about with stamps and stickies, the puzzling over forms and handing over of cash are all endemic to a not-very-efficient output system that generates thousands of small payments.

Why are many services not franchised to other outlets, for example travel agencies to obtain your passport? Why aren’t there machines that weigh your parcel and vend the paid-for stamp that you put on before sliding your parcel into the sorting bags? Why isn’t the Post Office the largest provider of on-line services in the country – even via terminals in its own post offices? Why do we not all pay for all such services on a debit card (even one provided by the Post Office itself)?

Innovation has simply not happened, except perhaps for the most arcane and obtuse mail pricing structure; what other organization would get away with charging £1.78 to do something and make you buy tokens in £1, 50p, 2 x 10p, 1 x 5p, 1 x 2p and 1 x 1p denominations to achieve a result? The answer lies in the third pathological influence below.

3) Interests protect their position as failure happens.

The Royal Mail has, in my view, been failing for decades; essentially since the 1960’s when mechanized services became the norm. As a business model, the idea of hand-delivering physical product everywhere at the same price is clearly nonsensical. On the way, it also missed out on its biggest chance of success – the internet and on-line delivery of services. It has allowed this competitor to enter its market and hasten its decline. As it has declined, its workforce has been holding on to its privileges by using collective worker power and government patronage over its monopoly status. This has ossified the way it operates, unable to manage its way out of its past, surviving only on actual and regulatory subsidy which only help to make its operations.more sclerotic The Royal Mail desperately needs its “Wapping” moment as happened to the printed media.

So why do politicians cling onto their silly romanticism about the Royal Mail and its Universal Service. Essentially, because they look at the problem the wrong way; seeking to see what can be “done” about it, rather than what needs to be undone. Politicians love to be seen to be practicing discretion and judgment with the appearance of great wisdom. In doing so, they pander to misguided consensus; that postal services should be available to all, that post offices should be kept open, that the elderly and poor somehow rely on the post office, that stamps are important, that prices need to be controlled. All of these things are badly judged and unwise. They allow the Royal Mail labour force to become part of the institutional fabric resisting change (while in fact promoting their own financial interests) and they prevent the Royal Mail from finding out what is for.

The parliamentary Business and Enterprise Committee recently produced a report called “Post Offices – Securing their Future” – an enquiry into the future of the Post Office. Perceptively, the report asks in its third paragraph “What is the Post Office for?” and declares: “This may seem a strange question to ask, but it goes to the heart of the actions needed to sustain a modern network.”

Precisely, and politicians are the last people to decide what those actions should be. All they do is cost us more and more money trying to save a failed institution.