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Private affairs

December 4, 2013

Privatisation of public companies in the UK was a popular trend in the 1980s and 1990s, with the Conservative government under Margaret Thatcher changing the way the likes of British Gas, British Telecom, British Rail and British Airways were run. Following the 1997 election, the Labour government maintained this status quo, but one company that always managed to remain in the public domain was Royal Mail. Even Thatcher, who was staunchly against maintaining state-run companies, left Royal Mail alone, rather than change something so notably ‘Royal’.

But things changed in early October this year when the government relinquished its majority stake, and privatisation was launched through an initial public offering (IPO).

So why select the route of privatisation? What are the benefits and are there any substantial challenges to overcome?

Alex Kalevi Dieke is managing consultant, regulatory practice for postal services, logistics and transportation, at German research institute and consultancy WIK, and as an economist, he has worked on postal regulations for 13 years. He explains the reasons why some governments turn towards privatisation: “Sometimes it has been a political fashion, which was the case in Germany in the 1990s. And then there are times when a post is considered inefficient, maybe because it’s not changing with the times, like bpost, which was privatised in 2005.”


Increased efficiency

Dieke explains that efficiency has to be improved if, for example, a post is costing a government a lot of money. This has been a key objective in all postal privatisations thus far.

Indeed, an increase in efficiency “in almost everything” is the result of the privatisation of Deutsche Post, according to the post’s vice president of regulation strategy, Wolfgang Pickavé. In 1990, when the company was already planning postal reforms that eventually led the way to privatisation, the company was “in bad shape with regard to quality of service and financial performance”, he explains, highlighting that in 2012 profits totalled €2.6bn (£2.2bn), with even higher figures predicted for this year.

“This was only possible because of privatisation. We needed to invest, first to restructure the business, then in new sorting centres where automation became the centre of operations, and then in new businesses,” he says. Deutsche Post acquired, among others, DHL and supply chain and logistics firm Exel. As a result of this total growth in efficiency, Deutsche Post DHL is now a global leader in logistics and it is able to deliver 95% of its letters by the next day, a statistic that’s matched by privatised neighbour Austrian Post.

Indeed, Deutsche Post DHL’s worldwide reach is impressive, with 475,000 employees in over 220 countries and territories. Profits come not only from its traditional mail business but also from DHL Express, Global Forwarding, and Supply Chain, which together account for two-thirds of the company’s
overall profits.

The company’s success isn’t enough, however, for it to rest on its laurels. Constant investment is required, Pickavé argues, to deal with the pressure from electronic competition. In fact, by 2015, Deutsche Post DHL, whose IPO occurred in 2000 and in which the German government has retained a 21% stake, will invest €750m (£640m) to expand its parcel facilities, implement new IT solutions, and implement innovative delivery options that will enable customers to decide where and when to receive parcels. “Thanks to e-commerce,” says Pickavé, “we’re seeing a big increase in parcel volumes. So it’s worthwhile investing, but it’s important to note that investment is possible because of the position privatisation has helped us reach.”


Fast investments

Dieke thinks that privatised posts stand out for being more innovative and quicker in modernising their operations: “By and large, privatised firms do it better and faster because there are clearer objectives set for top management by owners and shareholders, whereas governments usually set more complex, less clear objectives. There is also more accountability.”

Arno van Bijnen, commercial director at PostNL, which was privatised in 1994, has experienced a similar picture. “Our vision is threefold: reduce cost, increase prices and expand,” he explains. “The biggest opportunity for expansion lies in parcels and international mail. You have to become customer orientated in this market, so you have to run your business very efficiently.

“Privatisation alone doesn’t change the market, but it’s an important factor. We’re innovating solutions that will enable customers to be in control. We’ve developed a functionality called My Parcel that puts receiving customers in the driving seat, stating when and where they want to receive parcels, as well as a whole range of other solutions.”
 

Right: Deutsche Post DHL was privatised in 2000, but the German government retained
a 21% stake in the business


Other investment focuses
include heavy goods delivery
and installation (for instance, a washing machine is delivered
and installed, and the old one taken away), the creation of a postage stamp app, hybrid mail functionalities and Card World, which enables customers to upload a photograph and use it as the cover of a greetings card. 
 

Workforce challenges

Of course, when you consider how posts can reduce costs, you perhaps reach the darker side of privatisation: its impact on jobs and services.

Stuttgart-based Input Consulting researches labour conditions, focusing on postal and telecommunication regulations. Managing director Claus Zanker recognises that the biggest problem with privatisation is job losses: “This was the case in the Netherlands and Austria. In Germany, since 2000 about one-third of the workforce has been lost.”

Cutting staff was indeed “a very big challenge” for Deutsche Post DHL, says Pickavé. In 1990, Deutsche Post had about 380,000 employees in Germany; today, as Deutsche Post DHL, it has 180,000. But this process was “done in an intelligent way without laying off staff”, he says. “Examples of things we did included golden handshakes and early retirements. And, for some staff who remained, there were changes in workplace and duties, for example.”

At PostNL, another intelligent approach was taken – what Van Bijnen calls being “socially responsible” – with staff aided in finding new employment. Since 2006, approximately 7,500 people have been successfully assisted in obtaining careers outside the company; others took voluntary redundancy and early retirement. “But you need to have a balance between experienced and new staff,” he warns. (Read more about labour flexibility in Work in Progress, on page 44.)
 

Changing post office networks

Also as part of its reorganisation plans, which aim to deal with the dramatic 30% decline in mail volume since 2000, PostNL is investing in changing its network. Its 280 mail sorting centres will be cut to a maximum of 125 in 2014, and most bulk mail is no longer delivered daily.

In addition to labour savings, reductions are usually made in costs associated with property. Here, the traditional post office suffers, but perhaps in the modern age customers’ needs can be just as well or better fulfilled in other ways. “Initially, modernising the post office network or branch network might not be popular, but when its effects are felt – usually after between one and three years – customers are happy with the greater conveniences that are provided. More franchise setups, with post office counters in supermarkets, increases opening hours,” Dieke says.

Before privatisation, Deutsche Post controlled 28,000 post offices, many with limited opening hours, all run by its own staff. This figure has been reduced to 13,000 retail outlets providing the full range of universal services, plus 7,000 sales points that offer a limited set of services. “Although the number went down,” says Pickavé, “the opening hours went up. We no longer run outlets with our own staff – we’ve partnered with shops.

“It was not an easy transition, but through independent research that has assessed the service now offered, we have discovered that customers are very pleased because they receive higher quality and better services.”

Shops within shops were introduced in the Netherlands in the middle of the first decade of the new millennium, and the last traditional post office was closed down two years ago. “Customer demand showed they want their mail business where they’re doing other business,” says Van Bijnen. “Now our 2,600 outlets are in supermarkets and other retailers.”

The Dutch Parliament remains involved every step of the way, as Van Bijnen explains: “The government has to adapt the USO to new realities, while satisfying shareholders, employees, labour unions and the government.” To this end, it is still debating further changes. These would include 2,500 post outlets that currently have obligatory offerings being reduced to 1,000 and a reduction in the number of mailboxes. “However, we’ll probably see the introduction of more postal outlets and retail points, but the focus will shift to things like parcels, pick-up and drop-off points,” adds Van Bijnen. “The focus must be on customer needs and ease.”


Left: PostNL was privatised in 1994


And the benefits for PostNL? “Being based in these outlets creates natural customer traffic for the shop owners and PostNL, but importantly it lowers costs and you aren’t asset heavy with real estate,” says Van Bijnen.
 

 
 

Positive privatisation?

What’s needed to enable privatisation to occur with maximum impact is debatable. Input Consulting’s Zanker believes that in a private company, management is more driven by numbers and performance indicators, so efficiency is greater.

Dieke thinks that privatisation provides better incentives and rewards, as well as creativity and commercial focus. “In addition, there’s more pressure from the owners,” he says. “It’s also clear that the posts become a much more attractive employer, particularly regarding jobs at headquarters.”

“You need the infrastructure that will enable you to read and respond to pressure and the market,” says Pickavé. “We’re very proud of what we’ve achieved, but that was only possible because of the intelligent strategy implemented by our management at the beginning of the 1990s, followed by restructuring and then going international
as a logistics company.”

Whether privatisation can work everywhere is questionable. Dieke, whose views are supported by Zanker, says, “There are constraints in developing countries, where it is unclear whether postal services can operate profitably at all, because demand is so low. In others the public operator is in such bad shape that you’d rather create a new operator.”

Partial privatisation, which Kevin Slocombe, head of communications at the UK’s Communication Workers Union, calls “the lesser of two evils”, is always an option. Slocombe, who was staunchly against the privatisation of Royal Mail, comments, “One good thing about partial privatisation is that there’s the chance to campaign if the government’s still involved.”

Zanker thinks the state should always hold a relevant part of the shares because “it’s important to have an interest in the company policy” in a sector that’s both a public service and a commercial enterprise. On the other hand, Dieke says that once there is a commitment to privatise, there’s no advantage to doing it slowly. “The only serious reason for doing it slowly is that, as a government, you can’t really be sure about the value of the company you’re privatising.”

Coming back to Royal Mail, it’s yet to be seen whether privatisation will help to develop the company, or what its effects will be. Zanker argues that Royal Mail will not follow the German model and attempt to be a global player in logistics, express and letters “because you have to acquire big companies. They won’t have enough money for that strategy. But Royal Mail can learn from Germany to have good social regulations after privatisation to keep employees and unions happy.” 

And Dieke concludes, “There’s a long-term role for Royal Mail in delivering letters –volume won’t decrease forever. And there are growth opportunities in parcels that Royal Mail can participate in or leave to its competitors. Expanding to related businesses in logistics and retail might also offer opportunities.”

December 4, 2013

 

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