By Richard Johnstone | 11 July 2014
The government’s sell-off of the Royal Mail amounted to a wealth transfer to foreign governments that raised around £2.5bn less for taxpayers than similar deals in the 1980s and 1990s, a privatisation expert has said.
In an article published in CIPFA’s Public Money and Management journal, Professor David Parker, the government’s official historian of privatisation, said the floatation was particularly poor value for money for British taxpayers.
Parker, who is a member of the government’s Regulatory Policy Committee as well as emeritus professor of privatisation and regulation at Cranfield School of Management, acknowledged that setting an offer price for an initial public offering in a privatisation was always difficult. This was due to the need to balance the shares on offer with the projected demand for them, which creates a tendency to price conservatively.
However, the under-pricing of Royal Mail seemed to be ‘particularly generous’ when compared to past privatisations, he said.
Although share price appreciation on the first day of trading – which was 38% – appeared to fall in the mid-range of gains made during the major privatisations of the 1980s, this was due to some payments for shares in firms such as British Telecom being made in installments.
In a like-for-like comparison of the full price for shares, rather than the initial amount paid, the Royal Mail float saw the largest first-day gain of nine sell-offs examined. The fully paid figure for BT, by way of comparison, was only 33%.
‘In other words, the immediate gain to Royal Mail’s shareholders was even larger than the gain made by investors in BT on a fully-paid basis for the shares,’ the report stated.
Overall, the privatisation was likely to have raised around £2.5bn below similar deals in the in the 1980s and 1990s, Parker said.
Much of this lost revenue went to the sovereign wealth funds of overseas governments as the share price increased. These funds were among the biggest investors in the Royal Mail, as the government attempted to minimise the sale of shares to hedge funds and other short-term purchasers.
‘As large volumes of the shares were bought by foreign investors including sovereign wealth funds, there was a wealth transfer overseas… in effect to foreign governments,’ he added.
‘With the shares seriously under-priced and the exchequer bearing the pension deficit, it is difficult to judge this sale as obviously good value for taxpayers.’
This is the latest report to criticise the government’s privatisation of the Royal Mail, and follows criticism from the National Audit Office and the business, innovation and skills select committee.
Business Secretary Vince Cable this week ordered a review into the process for government privatisations, as recommended by the NAO.
