Monday, 19 May 2014

Surrey Seems To Be The Hardest Word

There are myriad reasons why I'm not affiliated to any political party, and elaborating on them will be worthy of a Blog post of its own one day. But for now, one significant reason - the one that's relevant here - is that I abhor the political ethos that ensnares politicians so much on vote-winning and popularity mongering that they are all but forced to dispense with any sincere apologies or admissions of being wrong.

Sadly, politicians are handcuffed and gagged by popularity pressure to the extent that they cannot be seen to admit to past mistakes or concede to being wrong. A really embarrassing instance of this occurred in a recent episode of Prime Minister's Questions on BBC Parliament, with Ed Miliband and David Cameron going head to head over the Royal Mail share price fiasco. Clearly the coalition government (largely in this case Vince Cable and Michael Fallon) underestimated the share price (although I have my suspicions that there was 'do or die' pressure from investors to sell low). Ed Miliband tried his hardest to get David Cameron to concede the under-valuation, and Cameron kept ducking the issue, instead criticising Labour for their time in power - in particular Gordon Brown's under-valuation of the gold he sold off. The whole tit-for-tat exchange was as transparent as a piece of cling film.

I picked the Royal Mail shares example because it is a perfect example of an error for which the coalition government could easily be forgiven*, and thus an error for which Vince Cable and Michael Fallon could easily plead contrition. Instead we had Vince Cable on Question Time with Labour's smug twit of a Shadow Secretary for Business Chuka Umunna enjoying the benefit of hindsight to let rip into him. It would have been much more impressive if Umunna, or any detractors, had had the foresight to say all this before the sale - but as far as I know no one predicted the boom, not even the experts. In fact, the soundest advice at the time was to not pitch at too high a price.

It was daft of the government to promise that shareholders would be in for the long haul, as profit-seekers would fairly obviously be likely to cash in when the price surge flooded in double quick time. But aside from that, this was one of those unpredictable events, and, as it turned out, mistakes, for which the government could have covered itself in more glory by showing regret and being publicly contrite.

What goes on with the price of a stamp?
Despite its privatisation, Royal Mail is still not free to run as it wishes - it is regulated by the government through Ofcom to ensure what's called a 'Universal Service' for customers, which guarantees that service standards (affordability and deliverability) must be available to all addresses in the UK. This regulation acts as a guarantee that now privatised there will not be the issue of whether Royal Mail carries on delivering to and collecting from more rural properties. The coalition government fears that without regulation Royal Mail would be tempted to stop all services that were not cost-effective, and that naturally rural folk would be more displeased than urban folk, as many would miss out on vital deliveries and collections. They needn't worry.

Because not every place of residence or business is in the same geographical proximity to a city or town centre, Royal Mail operates under a system in which there is potentially an involuntary cost on a quite large segment of society (urban folk) for the benefits of small segment of society (rural folk). For example, suppose for simplicity sake that it costs £1 to provide postal collections and deliveries to rural folk, and 50p to provide to urban folk (including a Royal Mail profit margin). If everyone paid the same for a stamp then all customers would pay 75p. Were that the case then such a pricing policy would provide the minority rural customers with a subsidy of 25p, which would be borne entirely by the majority of urban folk.

This would leave room for competing forces. If a rival firm like TNT decides to target urban customers by charging, say, urban-rate fees of 65p then a lot of urban folk will switch to TNT which will take a lot of business away from Royal Mail and lave them with high-cost rural customers, which will then see even further price hikes for rural folk who are stuck with Royal mail.

All this sounds fine except for one problem - a privately run postal services is not like, say, a privately run waste disposal service. In the case of the latter, if it proves too costly to go all the way out to rural Surrey to pick up residents' rubbish, the waste disposal company can simply stop all collections from there and stick with more profitable built up routes. But unlike waste disposal where everything that needs to be collected is generated at source, correspondence that Royal Mail transports goes from urban to rural as well as rural to urban. That is to say, a postal service cannot discontinue rural stops without hurting urban custom, because there will be many letters generated in Norwich, Nottingham, London, Cambridge, and so forth that need to get to places like those in rural Surry scattered all around the country.

A price system which tried to factor in price per mile on top of the already existent price variables in weight and size would be prohibitively time-consuming for customers, which would hand the advantage to competing firms who could set single delivery prices. 

* Save for (perhaps) the nepotism going on with share sales to certain individuals not too far away from certain Cabinet members - but that's a separate issue from the valuation.

* Photo courtesy of