Why is the government still being questioned over the Royal Mail sell-off?

It's been over six months since the government privatised Royal Mail, yet it's rarely been out of the news since.           So why is it continuing to roll on, and why has the Finance Conduct Authority (FCA) been forced to defend its decision not to investigate?

Facts and Figures

Following the Postal Services Act 2011, a majority of the shares in Royal Mail were floated on the London Stock Exchange in October 2013. More than 50 per cent of Royal Mail shares were sold to investors with 10 per cent given to Royal Mail employees for free. The UK government kept back a 30 per cent stake.

Why it matters

On the very first day of conditional trading, share prices rose by nearly 40 per cent, sparking accusations that Royal Mail had been undervalued, at the cost of the taxpayer. Business Secretary Vince Cable has defended the deal, with some claiming it was botched, and attributed the lower price to the threat of strike action imposed by the postal workers. The BBC quoted Mr Cable, when speaking to the House of Commons business committee last month, as stoically defending the pricing: 

"Hindsight is a wonderful thing, but on the basis of facts we had, the information we had, and the knowledge we had of the company, this was a successful transaction."

However, over the past six months the market price has continued to grow; shares were priced at 330p at issue but are now around 540p. The National Audit Office claims that more than £1 billion of taxpayer's money has been squandered as a result of the undervaluation. In fact, the Commons business committee deemed this report so scathing it recalled Mr Cable to give further evidence into his decision. Couple this with the fact that one of the advisors on the floatation, Lazard Asset Management, made an £8 million profit after selling shares it had been allocated within the first week of trading, and you can see that we have a potential problem.

The share price has offered quick and easy profiteering for big banks and City investors, which has prompted criticism from trade unions and the Labour Party. One of the opposition party's MP's, and a chair of the business select committee, Adrian Bailey, has even called for Mr Cable's resignation.

Possible outcomes

It seems that this is a story that is just not going to disappear easily. This month The Independent announced Mr Cable has asked officials to investigate how the government could handle future share offers, and what lessons are to be learned from the Royal Mail initial public offering (IPO). The review is to be carried out by the Department of Business, Innovation and Skills and hopefully will encourage more transparency and public confidence in the system.

This could also impact possible future sell-offs of the government's stakes in Lloyds and The Royal Bank of Scotland. The undervaluation of Royal Mail has also caused many to question the privatisation of publicly owned companies, including the problems of regulating private monopolies.

The privatisation of Royal Mail may also cause discontent in the public, and lead to them taking their business elsewhere. While one of the main arguments for privatisation is improving efficiency because of profit incentives, the negativity surrounding cutting costs and the fragmentation of a national and well known organisation may prompt the public to mistrust Royal Mail. Watch this space.

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