Do the benefits of Royal Mail sale outweigh the risks?

Selling a British institution to a foreign billionaire is a big deal. In the case of Royal Mail, that deal is not yet done, but the company’s board has agreed to the move in principle.

The 508-year-old UK postal service, which employs around 150,000 people, has been valued at £5 billion by its potential Czech buyer, Daniel Kretinsky, and shareholders of Royal Mail’s parent company are due to vote on the deal in September.

The Labour Party has since made a pledge to “robustly scrutinise” the takeover and give workers a “stronger voice”. Business minster Kevin Hollinrake said a future Tory Government could intervene if the deal was not in the national interest.

This has led some investors to doubt whether the deal will now go through.

How could foreign investment benefit Royal Mail?

But there are good reasons for viewing this kind of foreign direct investment (FDI) as valuable to the struggling UK economy.

Research shows that foreign-owned firms are typically more productive, more innovative, and pay higher wages than their domestically-owned competitors.

There are other potential advantages. Research also suggests that attracting foreign investment can help regional development in the UK, making a significant contribution to what has become known as “levelling up”, and generating further economic growth.

Who would argue, for example, that the acquisition of Jaguar Land Rover in the West Midlands by the Indian conglomerate Tata has been anything but good for the company?

It has also had a positive impact on the area, with the deal (immediately after the financial crisis of 2008) protecting thousands of jobs both within the firm and in related businesses and supply chains.

But it doesn’t always work out that way.

What challenges does foreign investment create?

One major concern is that when business strategy decisions are made remotely, they tend to emphasise short-term gains over long-term sustainability.

And aside from the issue over whether the UK’s national post carrier should be in private hands at all, there remain questions about what specific benefits foreign ownership would bring to Royal Mail.

Buy-ups of this type often lead to 'restructuring' (job cuts) and an emphasis on efficiency. And while Mr Kretinsky has pledged no changes to working conditions for two years if he is able to buy Royal Mail, he has also promised to retain the Royal Mail’s UK tax residency for five years. These timeframes imply that both issues will be reviewed in the future.

A successful takeover also hinges on the ability of the company to generate productivity growth, usually through things like injections of capital or new technology. But it is not clear that either of these are likely in this case.

This then puts the onus on efficiency gains, leading to fears that a new Royal Mail will encourage a shift away from permanent contracts for staff towards short-term or casual employment.

It might also encourage the firm to concentrate on the more profitable parts of the business at the expense of the least profitable – like serving rural or remote areas.

How should decisions about an ‘essential service’ be made?

Finding a balance between the pros and cons of foreign ownership often comes down to the nature of the business in question.

One key element is the extent to which the location of decision-making matters, especially for essential services.

It may be difficult these days to argue that Royal Mail is an essential service in the way it was 30 years ago – before invoices, documents and all kinds of correspondence could be sent electronically. But a traditional postal service remains important, especially for small businesses.

I was reflecting on this recently as I watched an eBay seller deposit about 100 parcels at my local post office, while I was in the queue behind him.

Selling things online is how some people make a living these days, either as their main line of work or as a 'side hustle' to make ends meet.

An affordable method of delivery is crucial to their business, and even a small price increase could have a serious impact on business models that often work on small margins.

That could have a knock-on impact on the wider economy. My colleagues Stephen Roper and Vicki Belt recently published their annual State of Small Business Britain report for the Enterprise Research Centre.

They highlight the fact that small businesses account for 48 per cent of all jobs and were the biggest driver of economic growth in the UK during the last decade, despite the enormous challenges they have faced.

Are there grounds for opposing Royal Mail sale?

If the Royal Mail sale goes through, such businesses in the UK will be at the mercy of strategic decisions taken far away from them.

Equally, remote communities could lose a subsidised service they depend on.

But while is possible the UK Government may block this sale; it is difficult to see why it would do so on economic grounds.

British water and electricity companies already have foreign owners, even if they are perhaps not a great advert for it.

It is difficult to make the case for Royal Mail being an exception, unless Labour was to proceed with its promise of nationalising passenger rail. It is also hard to argue that one form of ownership would be more beneficial than another unless the state is willing to generously subsidise a better service.

In the current economic climate, that may not be something a British Government is able to deliver.

This article was originally published by The Conversation.

Further reading:

Red letter day: What next for Royal Mail after losing Post Office monopoly?

Why investors love state-owned enterprises

Five rules to make sure a takeover announcement sees shares rise

Levelling up: Four key questions to tackle regional inequality

Nigel Driffield is Professor of International Business and Deputy Pro Vice Chancellor for Regional Engagement. He is also Midlands Lead for The Productivity Institute and teaches on the Undergraduate programme.

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