When is a privatised company not a privatised company?

Ofcom, the UK government agency that regulates the Royal Mail, has conceded that the national carrier can reduce its letter deliveries from six to possibly as few as three per week. The company was split from the Post Office and privatised a decade ago. I still have my shares in it. But in what is known as the Universal Service Obligation, it is legally obliged to deliver to anywhere in the UK for a fixed price — which, in the case of letters, is an eye-watering £1.25 for first class and 75p for second).

Of course, fewer people send letters these days, preferring email for important and personal communications. So letter volumes have fallen, and the Royal Mail is hurting as a result. Ofcom says the company could save £100m-£200m by cutting deliveries to five per week, and £400-£650 by cutting them to just three per week.

The British government has insisted that a six-day service should remain and that Saturday deliveries, in particular are (for some unspecified reason) “sacrosanct”. And the Communication Workers Union (CWU), which represents Royal Mail staff, says the three-day delivery idea is unacceptable, would destroy Royal Mail and cost thousands of jobs.

How can you privatise a company that is effectively a national monopoly of letter delivery (and, at the time, a near-monopoly in parcels delivery) only for it to get itself into debt and have to cut back its service? With a national monopoly and a national infrastructure system, you would expect it to be rolling in cash.

The answer is that it hasn’t really been privatised at all. Royal Mail was privatised, but it still isn’t allowed to operate as a private company. Politicians insist it must charge the same to carry a postcard from Land’s End to John O’Groats as it does to carry one from No.8 Acacia Avenue to No.13 Acacia Avenue. A government agency decides how much it can charge and what days and times of day it must deliver on. And the same powerful union that made the Royal Mail notoriously unreliable is still doing the same.

The point of privatisation is not who owns a company. It is about setting a state-owned organization free to explore innovative ways of providing its service better, quicker, faster, and of developing new services that give consumers even greater value. When you privatise something as a monopoly, though, it has very little reason to bother itself with that.

For a little while, Royal Mail relied on its lucrative parcel delivery service, Parcelforce, another near-monopoly, to keep the whole tub afloat. And yes, it is still the UK’s biggest parcel carrier. But Parcelforce has had the stuffing knocked out of it by other, more nimble and innovative carriers like Hermes, DPD, Yodel, DHL and Amazon. And many customers prefer those others as being quicker and more reliable (some even nickname the Royal Mail’s effort as ‘Parcel-farce’).

There are lessons to this for the future of other state industries too. Many years ago, when we had a pro-market government, I asked the head of a US-owned international hospital provider — whose clinics and hospitals were very impressive indeed — why they didn’t offer to take over and run an NHS hospital to show how it could transform the treatment and care of NHS patients. His answer was blunt: he would prefer to build a new hospital that might actually work efficiently, and hire management and staff that were steeped in the culture of customer service, rather than the gloomy culture of the NHS. And indeed, when one private company did take over an NHS hospital, though the improvements were tangible, the legacy culture eventually overwhelmed it.

Since then, looking at many other state organizations has convinced me that privatising an unreformed, monopoly service is a mistake. You really have to create the conditions by which you can grow something new — something innovative, competitive and customer-focused. That was the idea of the internal market in health and education: the government still pays, so everyone can access the service, but it is provided by various independent companies or non-profits, so that customers also have the benefits of choice and competition. Of course, it wasn’t long before the civil service stifled that sort of innovation by swamping the new providers with regulation. And that’s a problem we have seen often, from buses to schools. But it’s a problem we can solve.