Ben Harris-Quinney: Sell-off on the cheap that has failed to deliver for taxpayers

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WHEN the coalition Government announced the decision to privatise Royal Mail, my initial concern was to the maintenance of the heritage of the institution and the universal service provision.

Those concerns remain, but the subsequent undervaluation of Royal Mail in its Initial Public Offering (IPO) has created a significant deficit for the Exchequer, presenting a new raft of questions.

Royal Mail’s announcement this week that it has made record profits in the 
last quarter demonstrates further evidence of the degree to which the British taxpayer has been short-changed.

Privatisation should always be judged on a case by case basis, but the particular danger in the privatisation of a piece of the national infrastructure like Royal Mail is that it is one 
of the few remaining levers of government investment that can actually have a net benefit to the 
wider economy.

A cheap and universal mail service is an important element in building an economy that is small-business friendly and able to diversify outside of metropolitan areas.

If the Government felt it had ensured that a low-cost universal service would be maintained in private hands, then it should also have ensured a correct valuation of Royal Mail and established that the majority of shares remained in UK ownership.

It has unfortunately ensured none of these things, and as a result while Royal Mail may go on to be more successful than it has been in the past as an individual company, the British economy as a whole won’t benefit from that success.

In terms of the traceable shares, following Royal Mail’s privatisation the majority of the IPO is now owned by foreign investors, meaning that not only was the company undervalued by almost 50 per cent, but much of the private profit created by this undervaluation is going overseas. 

The UK government retains about 38 per cent of Royal Mail, largely via the Postal Services Holding Company.

When looking at the IPO, a significant proportion of the share ownership is not traceable, which makes tracking the figures difficult, but by my estimation about 36 per cent of the IPO is held by UK individual and institutional investors and around 64 per cent now rests in foreign ownership, with the largest investors being those from Kuwait, Singapore, Abu Dhabi and the United States.

This figure is reached without counting individual foreign investors who purchased shares via UK institutions and hedge funds.

There would be some crumbs of comfort in the undervaluation if the proceeds were going to UK taxpayers and companies, but not only is there now a danger that Royal Mail’s profits will be private and its losses public, but also that its profits will be foreign and its losses domestic.

In front of the Business Select Committee Inquiry into the privatisation the Business Secretary Vince Cable yesterday faced questions as to why he ignored 
advice from advisers that Royal Mail was undervalued before the flotation.

He presented the defence that the market at the time was uncertain in the face of a US default and potential industrial action within Royal Mail.

Though the banks brought in to advise on the IPO have received much of the criticism in recent weeks, it is certainly not true that they had not raised concerns that the IPO had been set too low. Both Goldman Sachs and JP Morgan are on record warning that setting a price of 330p per share represented a significant undervaluation.

I suspect the real reason for the valuation was that the Government had become determined to privatise for a short-term political win, blind to the facts or merits of the case.

Vince Cable knew that despite the majority of the public being against 
the move, with Parliamentary 
approval the only barrier to success 
was that the minimum valuation would not be met by the IPO. Setting this valuation as low as possible ensured that it would be.

Not only is this bad business, it is a gross dereliction of the duty of a Secretary of State to safeguard the assets of the United Kingdom and interests of the UK taxpayer.

While the Business Select Committee has begun to ask searching questions as to what failings may have been made, unless Vince Cable is able to provide satisfactory evidence to the contrary, it would appear the only equitable solution is an inquiry independent of Parliament.

Time will tell if Royal Mail flourishes as a private company, and I certainly hope that it does, but the loss of a 500-year-old institution as a part of our heritage, infrastructure and ownership, and the method of its passing, means that whatever happens now, Britain has lost out.

Cable Defends Share Valuation

Business Secretary Vince Cable has defended the Government’s valuation of Royal Mail – despite the newly privatised group announcing a near doubling in profits which sent its share price soaring even higher.

Ahead of the group’s stock market debut, Mr Cable had dismissed a likely jump in the share price as “froth” and said it would take months before the shares settled to their true value.

Giving evidence to the Business Select Committee yesterday, Mr Cable said market prices were not always rational.

“It will be a long time before we can take a view,” he insisted.

Royal Mail shares are now 70 per cent higher than the original flotation price of 330p.

*Ben Harris-Quinney is chairman of the Bow Group, a centre-right think tank within the Conservative Party.