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.

In praise of Sweden

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We're all familiar with the idea that Sweden is a social democratic hellhole where you cannot keep even an extra penny or krone for yourself but it gets taxed off you and used for the benefit of "society". But as our Danish correspondent has been pointing out here those Nordic social democracies are not quite as they seem. High tax rates, yes, high levels of redistribution, yes, but underneath that social democratic bonnet there's (to use the phrase of one commentator here) a surprisingly liberal capitalist economy purring along.

As is shown by the Swedish Government's reaction to Saab:

The “orderly wind-down" of Saab, one of Europe’s best-known car makers, began on Friday after talks to sell the business to Dutch car maker Spyker broke down.

The Swedish enterprise minister said the closure was “dismal news" and that GM “could have done much more for Saab over the years". However, the centre-right government has refused to bail out the business.

Recall the decades long mess that was British Leyland, the scurrying Ministers trying to "protect" the carcass of Rover, the screams that the White Van manufacturer must be "saved". Our reaction, or rather our Government's reaction, in the UK was that if no one wanted to buy the vehilces and no one wanted to buy the company that made the vehicles then we must support it with money pilfered from the pockets of those who didn't want to buy the vehicles.

The Swedish reaction is *shrug*, OK then, no one wants what the factory produces, close down the factory then. The land, the labour, the capital, will go off and do something else, produce something that people do want to buy.

Which is the more capitalist reaction, which is the more liberal and which is going to contribute most to future prosperity? Quite, it's the Swedish.

It isn't just their education system that we can learn lessons from you know.

The power of localism

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Tom’s excellent blog on the nightmare of ‘world government’ hits upon a very strong argument for localism. As Tom put it:

When all is said and done, there is one, final check upon a government’s ability to oppress its people. It is the mechanism used by Cubans when they tie empty oil drums to the chassis of old cars and try to paddle to Florida, or by North Koreans who manage to sneak all the way from the Yalu River to Bejing to try to slip into foreign embassies and beg for freedom. It is the ability to escape.

But this ‘exit option’ could be extended far beyond nation states. After all, even though it may be possible to move to a different, freer country, doing so is generally inconvenient. If we were to radically devolve power within nation states, however, that exit option would be very much enhanced. You could, in a sense, create a competitive ‘market’ in governments. And if you could change your government by moving from, say, Norfolk to Suffolk, you would have a far more genuine ‘choice’ about the policies you are subjected to than you could ever get at the ballot box.

The instinctive reaction of most English people to this suggestion would be incredulity. But look at Switzerland. Its 26 cantons exercise by far the greater part of that country’s political power, taking prime responsibility for healthcare, welfare, law enforcement and public education, as well as taxation. The most populous canton is Zurich, with some 1.2 million inhabitants, while the least populous (excluding the half-cantons, which band together) is Jura, with 70,000. And yet despite their small size, they seem to do rather well: the Swiss enjoy low taxes and excellent services.

There is no question that England’s traditional counties could operate effectively with a similar degree of autonomy. There would be numerous advantages to this: local governments would be more responsive and accountable than distant ones, they would be able to tailor policies more appropriately to local needs and conditions, and they would be able to innovate and learn from other jurisdictions. Moreover, competition between jurisdictions for businesses and residents would likely drive down average tax rates, while encouraging better use of taxpayers’ money.

Of course, in some areas the governments that resulted from localism would be even worse than the Westminster government. This is unfortunate. But if we believe in choice and competition, and further believe that those areas that adopt free market policies will prosper and inspire others, then we really should be prepared to let go of centralized power and see what happens.

The Brothers twitch

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altThe fiasco of Unite’s strike ballot of BA staff brings back memories of the 1970s when the Trade Unions were immensely powerful. Their leaders, now mostly dead, were household names and strikes were endemic – most notably at the Longbridge and Halewood car plants. The economic damage was immense and no politician – until Mrs Thatcher hove into view – was prepared to tackle the Trade Unions head-on. But successive Acts of Parliament in the early 1980s virtually emasculated them. As manufacturing industry declined, so did their clout.

Now, with a modest domestic car manufacturing base, a coal industry – under the struggling UK Coal – which is a shadow of its former self and a declining steel sector, union disruption has been minimal. Indeed, in the latter’s case, every effort has been made to save the Tata-owned Redcar steelworks, whose closure was confirmed recently.

However, there are two companies where union power remains entrenched. Despite BA’s privatization, it still remains heavily overstaffed, especially compared with such highly successful operations as Easyjet and Ryanair: admittedly, neither flies regularly beyond Europe.

Strong management is needed if BA is to prosper. Perhaps, Ryanair’s garrulous – and acerbic – Chief Executive, Michael O’Leary, should be piloted into the Chief Executive’s seat. And, of course, like an eternal millstone around its neck, is BA’s accursed £3.7 billion pension deficit.

Poor productivity is also an endemic problem at Royal Mail – and similar solutions are needed. In terms of ownership, privatization – under a strict regulatory regime as applied to the water sector – offers the best option. Of course, in terms of economic damage, Trade Unions can validly point to the unprecedented financial bill for supporting Royal Bank of Scotland inter alia.

But the BA scenario has seen the Brothers twitch once again. With heavy public sector job cuts almost inevitable after the Election, will Trade Union power now reassert itself?

The politicisation and corporatisation of universities

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In a devastating attack upon academia, the Higher Education Funding Council for England (HEFCE) has proposed that university funding should be tied to "economic, social, public policy, cultural and quality of life impacts".

The results of its introduction would have awful consequences. Writing in the Telegraph, Professor of philosophy, Ralph Wedgwood, sets out how his own subject would be entirely politicized if the Research Excellence Framework came to pass. Impact would be measured through the ability of arguments to change law, which would inevitably favour academics who pandered to the politicians. The same would be seen across all areas research. Politicians might as well be giving the lectures.

Educators for Reform have been leading the attack against this preposterous idea. They are rightly concerned that it would also corporatise universities, ‘turning our world class research universities into nothing more than functionalist extensions of corporate Research and Development departments’, crowding out private sector research.

This is part of Lord Mandelson’s ideology of controlling research, whereby the lines between government, university and business are blurred. This is both disturbing and bad policy. It is disturbing because politics, business and education should be kept as separate as possible to help ensure power is divided. It is bad policy because governments and quangos will obviously prove unable to determine what research will be of value.

Pygmalion in the classroom

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The investment in future growth By and large scholars in the social sciences accepts the assumption that an increase in the educational level of a population leads to higher productivity, and thus increased wealth. It is therefore thought to be of great importance that a government does everything in its power to increase the educational level of its population. However, first we should ask what is actually within their power.

A popular assumption made by many is that there exists a linear relationship between the amount of money used on education and the quality of the output. To a certain degree this might be true. However, as with many other investments in productive capital, in this case human capital, the marginal product of an additional pound used on education (production) will diminish and after a certain point you will experience a fall in output. Also, the quality of output i.e. the quality of education and the achievements of students is dependent on many other factors apart from funding.

Perhaps psychology plays a part. ‘Pygmalion in The Class Room’ is a study undertaken by Robert Rosenthal and Lenore Jacbosen in 1965. It shows that higher expectations from teachers towards pupils’ achievements increases the knowledge and IQ of those the pupils. In short the achievements of pupils are closely related to the teachers belief in the abilities of the pupils. In fact, an increase in money spent on education might not be as effective as teachers believing in their students. As such, instead of putting more money into education, governments might be better off decreasing the administrative burden placed on teachers. This might allow more teachers the space and time to inspire.

Groupthink

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When the Climate Change Bill passed through parliament last year, I read the cost benefit assessment ministers are obliged to produce for any bill. Amazingly, it put the potential costs (of reducing carbon emissions by 60%) at £205 billion ($331 billion)—yet the maximum benefits (of reduced climate change damage) were estimated at only £110 billion. This is the first time any government had asked parliament to support a bill that its own figures say will do more harm than good. Yet just five of us voted against it. At least I had the satisfaction of pointing out that while the House was voting for a bill based on the assumption the world is getting warmer, it was snowing in London in October for the first time in 74 years. I was told, "extreme cold is a symptom of man made global warming."

Peter Lilley, 'Global Warming as Groupthink' WSJ

It's the debt and the spending

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Edmund Conway makes a shrewd observation in the Telegraph. It is not just that "for the first time since the start of the financial crisis, investors demanded a bigger premium in return for holding British debt than Spanish," bad news though this is. Nor is it that "the Bank of England has embarked on a quantitative easing scheme that involves printing enough money to buy the annual economic output of Denmark." It is that our time-honoured formula for dealing with runaway debt and runaway spending - by runaway inflation - will probably never work again. Could we try it again, damaging and humiliating though it would be?

Look at the figures. About a quarter of our debt is index-linked bonds, which rise automatically with inflation. And many of our liabilities, including public sector pensions, state pension and PFI, are now also tied to inflation. It means that the option of cheating our creditors by repaying them in devalued pounds is no longer a valid one. Four-fifths of our debt, says Conway, is inflation-proof.

What, then, can we do? You stop the spending spree, cut back the public sector, stop financing a pre-election spending spree on debt, and start a programme of retrenchment and repayment. Coupled with that must be tax reductions to boost incentive and growth, to generate the wealth that can repay that debt. It will be done, but not by this government. Maybe, just maybe, it might be done by the next one.

Madsen Pirie's "101 Great Philosophers" can still be ordered in time for Christmas presents.

Father Christmas: Public health pariah

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Christmas: a time for festive cheer, family and eating rather more than normal. Not for Dr Nathan Grills. Writing in the British Medical Journal, the traditional Christmas wish of ‘goodwill to all men’ has been extended to cover protecting the public from the horrific, dangerous, yuletide threat that is Father Christmas. Utterly po-faced, Dr Grills accuses Father Christmas of acting in a reckless way that could “damage millions of lives". Some of his crimes are as follows:

- embarking on high-speed air travel without wearing a seatbelt or helmet, and partaking in dangerous sports such a roof-surfing
- blatantly ignoring the drink-drive limit by consuming copious measures of brandy
- equating obesity with cheerfulness and joviality
- encouraging parents to expand their own waistlines by scoffing the mince pies left out for him
- ever so occasionally being depicted with - shock-horror - a pipe in hand.

No doubt Father Christmas also glorifies the unlawful entering of people’s homes.

Likening Father Christmas’ selling power to that of Ronald McDonald, the author is concerned that Mr Christmas is sending young, impressionable children into a spiral of unhealthy behavior, which must be stopped. The answer? Give the fat man an ever-so-socially-correct makeover, swapping mice pies for celery sticks and the reindeer and sleigh for running shoes.

This report beggars belief. Father Christmas is an adored figure across the globe with an approachability and mysticism that would be utterly undermined if he served as government propaganda for healthy living. The idea that he drags children into a life of drink-driving obesity is absurd. Encouraging illustrators the world over to ease the conscious of the over-anxious, do-gooding ‘experts’ is appalling. Luckily, I’m very confident that this article will just result in incredulous laughter.

All the same, I don’t want Father Christmas to be at risk of developing liver failure, so I’ll leave him a nice bottle of Nanny State beer by the fireplace this year.