Privatisation

ByKanishk Agarwal (I001)Atharv Johri (I014)Idhanta Kakkar (I015)Arpit Tuteja (I034)

Public Sector vs Private Sector

Basis for Comparison Public Sector Private Sector

MeaningSection of nation’s

economy under control of Govt.

Section of economy owned and controlled

by private individuals

Objective Serve citizens Earning profit

Raises money from

Public Revenue, like tax, duty etc

Issuing shares or by taking

loan

Areas

Police, Army, Mining, Health,

Education, Electricity, Agriculture

Finance, IT, Banking,

Telecommunication, Education,

Mining

Privatisation• Privatisation is the process of transferring ownership

of a business, enterprise, agency, public service or public property from public sector to the private sector.

• The business that operates for a profit or non-profit organisation.

Why Privatisation• To reduce government involvement in commercially

viable activities

• Increase efficiency in the delivery of programs and services

• Provides competition in market place which transfers the lower price and greater choice for the consumers

Variations in Privatisation• Private sector choice for the production of

services• Entire responsibility transferred from public to

private

• Public sector choice financing with private sector operations• Joint activity of public and private

• Deregulation of private firms• Government reduces or eliminates the regulatory

imposed on private

Methods1. Share issue privatisation

• Selling shares on the stock market

2. Asset sale privatisation• Selling entire organisation to a strategic investor by

auction

3. Voucher privatisation• Distributing ownership to all for free or at lower cost

Royal Mail

Royal Mail Postal service company in the UK Established in 1516 Provides mail collection and delivery services

throughout the UK For most of its history, Royal Mail has been a public

service, operating as a government department or public corporation

Background•Rise of email and internet led to fall in number of letters sent by Royal Mail. Number of letters sent daily fell from 82m in 2004 to just 58m in 2013.

•Adding to this the growing competition within the industry, Eg.Bulk mailing services

•These challenges threaten the sustainability of the postal service, as well as the financial viability of existing postal businesses.

• Reviews in 2008 and 2010 concluded that ‘Royal Mail was In financial difficulty and that the postal service was under threat’. Recommendation was introduction of private capital

Background•Seen as a loss making and inefficient business for years. Royal Mail's core business suffered losses in 5 of the past 12 years to 2012. Overall, losses were around £1bn over this period

•Very poor management /union relationships

•Attempts to improve management and separate from the state

•Successive Governments wanted to privatise it

•Large pension deficit liability

Why Privatise Royal Mail?

•Needs access to private capital in order to grow and compete•Government was no good as a business owner•Boom in internet shopping, need investment to revamp the business accordingly•Trying to cut public spending and borrowing• Facing competition from private operators such as TNT and UK Mail•Pension liability had to be dealt with •To put future on a long-term sustainable business. Tapping the stock market is seen as the only way of ensuring sufficient investment over the next few years

Additional benefit

•  A privately owned Royal Mail would mean that future disputes with the Communications Workers Union over postmen’s pay and conditions might cause less political damage to ministers.

• The sale will also help the Government meet the deficit-reduction targets

Royal Mail’s Main arguments for sale

•To provide access to private capital and thereby remove reliance on Govt funding which will be subject to continuing financial constraints for years•To avoid the general inflexibility to respond to rapidly changing market conditions that such reliance on Govt funding usually involves•To get away from the need to apply for clearance from the European Commission for new investment under state aid rules

Examples from around the world

• The government noted that the injection of private capital into postal services seems to have worked elsewhere

• Belgium’s postal service returned to profitability soon after its part-privatisation in 2006 and it now enjoys profit margins of 17%

• Similar increases in productivity and profitability can be seen at Austria Post and at Deutsche Post. Both companies have profit margins double that of Royal Mail

• Service quality has remained high, and both continue to provide universal services

Controversies•Unions and some campaigners opposed the sale.•The Communication Workers Union (CWU), argues that privatisation will lead to a deterioration in services and could harm working conditions for its members.•The CWU agrees that the Royal Mail needs more investment, but says this can be achieved within the public sector.

Post 2010•After the 2010 general election, the Coalition government, passed the Postal Services Act 2011

•The Act allowed for up to 90% of Royal Mail to be privatised, with at least 10% of shares to be held by Royal Mail employees.

•Sale of shares in 2 phases : 2013, 2015

Privatisation2013 -•Employees were given 10% stake for free•The first sale started in Oct 13 with shares prices at £3.30 each•Total proceeds of first sale were £1980 million•After markets opened, share priced at £4.50•Since then share has mostly ranged from £4 - £6•Government left with 30% stake

2015-• £1341m was raised and 1% shares was given to

employees• In total the government raised £3.3bn from the full privatisation of Royal Mail.

Post Privatisation •Share prices rose by 38% on the first day of conditional trading, leading to accusations that the company had been undervalued.• The Govt defended the low sale price that was finalised—saying the threat of strike action around the time of the sale meant it was a fair price in the circumstances•However, it is not clear whether value for money was achieved and whether Ministers obtained the appropriate return to the taxpayer.•Currently profits grew up by 12% from the previous year, revenues were £9.4bn

‘ A Great Triumph’• The real point about the privatisation is that even at a

hypothetical opportunity cost of £180m to the taxpayer, the sell-off was very good value for the economy.

• A well-functioning, efficient Royal Mail will create so much economic value over time that £180m will be remembered as small change.

• The sell-off allowed a big jump in popular shareholder democracy• The privatisation was also an exercise in employee share-

ownership.• On all these counts, it was a success – but the most important

change is that a better Royal Mail will help make the UK economy more efficient and more responsive.

• It was not the giant rip-off that some people had liked to believe.

Conclusion• The action that this Government has taken so far and giving

Royal Mail future access to private sector capital will ensure that the company has a sustainable and viable long term future.

• Most importantly, these actions will ensure that all can continue to have access to a high quality universal postal service.

• Both economic theory and empirical evidence suggest that privatization can lead to large efficiency gains

• In private firms, the profit motive, greater flexibility, and shareholder pressure may lead to greater efficiency, and there are likely to be benefits over public ownership

The Failure of Privatisation of Sewerage

Services in Malaysia 

Introduction• In 1994, the Malaysian Government privatised the

sewerage services throughout the country except a few states.

• The concession was given to Indah Water Consortium (IWK) for a period of 28 years.

• This is one privatisation in Malaysia which had been in controversies, confusion and consumer dissatisfaction.

• Within a short span of less than five years, the major shareholders of IWK changed hand twice with the original promoters laughing all the way to the bank.

• It then became the subsidiary company of Prime Utility Bhd. During this period, the Government, under public pressure, had also ordered IWK to reduce its charges twice.

• In year 2000, the Government "de-privatised" IWK and paid Prime Utility RM200m to take over IWK.

• IWK is now a wholly owned company of the Minister of Finance Incorporated.

IWK's chartered journey to failure

• Traditionally, sewerage services formed part and parcel of maintenance services provided by local authorities.

• The assessment rates that local authorities used to charge have all along been based on the services provided and one of the main items was sewerage services.

• When IWK started charging ratepayers for sewerage services, local authorities did not make any corresponding reduction in the assessment rates to compensate for the services they had stopped providing.

• This led to the public's hue and cry by against the privatisation of sewerage services

• To appease the taxpayers' anger, IWK countered with promises and came out with grand schemes to improve the existing sewerage systems in the country.

• However, they raised more questions than answers, which made the ratepayers even more dissatisfied

• Due to rampant public outcry, the Government ordered several reviews of IWK's charges and services.

• The first of these was in early 1996 when the Government announced that IWK's current charges and services were unacceptable and that it wanted IWK to resubmit a fresh proposal for negotiation. 

• In mid-1998, the Government announced that it would review the whole concept of privatization of sewerage services.

• It was good news to know that the Government had finally woken up and realized the inherent deficiencies in the existing privatization contract.

References• http://www.economist.com/blogs/economist-explains/2

013/10/economist-explains-9

• http://www.mondaq.com/x/272104/Economic+Analysis/Privatizing+Royal+Mail+Will+It+Lead+To+Further+Efficiency+Improvements

• https://en.wikipedia.org/wiki/Royal_Mail

• http://www.telegraph.co.uk/finance/economics/11302648/Royal-Mails-privatisation-will-help-to-make-the-UK-economy-more-efficient.html

• http://www.bowgroup.org/sites/bowgroup.uat.pleasetest.co.uk/files/Return%20To%20Sender%20-%20Bow%20Group%20Briefing%20%20Paper%20on%20the%20Privatisation%20of%20Royal%20Mail%20(1).pdf

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