The Royal Mail Wasn’t Privatized to Raise Money

The government doesn’t privatize companies to raise money. It privatizes companies to make them more efficient.

A Royal Mail post box in London, England, July 26, 2011
A Royal Mail post box in London, England, July 26, 2011 (Tim Miller)

Labour Party leader Ed Miliband took David Cameron to task during Prime Minister’s Questions this week over the sale of Britain’s Royal Mail. Citing a National Audit Office report from last month that said the country could have raised an additional £750 million had it sold the post office’s shares at the price they fetched the day the company went public, Miliband claimed the shares had been “flogged off” at “mate’s rates” to the premier’s “friends in the City,” London’s financial center.

Royal Mail’s shares spiked 38 percent on their debut on the stock market last year. On Friday, they sold at 66 percent more than their initial offering.

Cameron rightly pointed out that the sale had still raised £2 billion for the taxpayer but that was hardly the most convincing counterargument to Miliband’s insinuations. Rather, the more convincing argument was made by the liberal Adam Smith Institute’s Madsen Pirie who argued that the aim of the privatization was “not to raise the greatest possible sum for the government but to turn a state run corporation into a successful and flourishing private business.”

Privatization was always a political as well as an economic act. Its major aim was to replace state ownership and direction of industry by commercial and (where possible) competitive private-sector activity. It did so because the private sector is exposed to improving disciplines absent from nationalized industries.

No one knew what the “right” price for the Royal Mail was, Pirie further points out. Since the company had not been traded in the private sector, nor attracted private investment before, it was impossible to predict at how much the market would value it. “The pricing was cautious,” he notes, “because government wanted a successful launch into the private sector more than it wanted the highest possible price.”

Moreover, it retained a 30 percent share in Royal Mail to sell at a later time — at a higher price.

Altogether, then, the Royal Mail’s privatization was handled well and can rightly be considered an achievement of Cameron’s administration, Miliband’s hysterics notwithstanding.

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