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Lessons from the Royal Mail share scheme

    The Royal Mail share scheme has gone through in what the Daily Telegraph report as “one of the most popular share offers in UK history”. The institutional offer was 20 times oversubscribed and the retail offer 7 times oversubscribed. Some might call that “popular capitalism”, others have claimed that this shows simply that the shares were massively under-priced at 330p (and that the jump in the share price this morning is vindication of this viewpoint). Given the government still sits on a vast amount of taxpayer-owned RBS shares, it’s important key lessons on pricing and the structure of the offering are learnt. Many of us at the CPS have made the case for a direct distribution of RBS shares to taxpayers (Give Us Our Fair Shares; How the Government should re-privatise RBS), and we believe the lessons from the past few days on Royal Mail provide further evidence in vindication of that approach.

    1. There’s an appetite for shares: there has been a huge amount of coverage for, and interest in the Royal Mail offering, even though the government didn’t launch an official media campaign. The retail offer was seven times oversubscribed and now 690,000 will get just under £750 of shares. Yet this represents only a small proportion of the total taxpaying population. Re-privatisation of RBS, due to its scale, offers the opportunity to hugely widen share ownership, and this can best be achieved in the first instance by distributing the government’s existing shares to the public. It’s also worth noting here that people dismissed our idea for distribution of shares on the grounds that circa £1,000 of shares in the banks was too small an amount. Given retail investors have been allocated £749.10 for Royal Mail, this argument becomes difficult to sustain.
    2. The balance should have been more in favour of retailers: in hindsight, it’s clear that the 70:30 balance in favour of institutional investors was too high as a ratio. When RBS and the remainder of Lloyds shares are offered back to the market, it’s important the mechanism has a much higher proportion going to ordinary investors and as many taxpayers as possible are able to participate – that’s why we believe distributing the shares with a floor price is the best means of getting these shares back into the market.
    3. The scaling back has been a mess: the method through which the Government has decided to allocate the over-subscribed shares has been incoherent. 35,000 people who applied for £10,000 of shares or more were rejected outright and given no shares. Not only does this look like a punishment for those who wanted to make a serious investment in the company, but it also means people such as prudent pensioners with savings to invest and those bidding to fill their entire annual ISA allowance of £11,520 will not get any shares, whereas the Government of Kuwait will.  This also sets a bad precedent if the Government was going to look for big applications for future sales of RBS and Lloyds in a conventional privatisation with a big retail component (though, of course, these offerings would be so huge that this would be less of a problem).
    4. It’s difficult for government to get the price right, and there are political consequences: people, not least the Labour party, will now say that the government under-priced the Royal Mail shares and the taxpayer has lost out. Selling at a discount is often perceived to be a problem associated with conventional privatisation methods, but that’s mainly because governments want the offering to be seen as a success and are keen to attract buyers! It’s always easier to judge in hindsight when many of the risk factors no longer apply. However, this argument is likely to be far more potent were the Government to sell off the remaining shares in Lloyds and re-float RBS. Why? The share overhang associated with share offerings of that size is likely to be significant, and thus we might expect the share price to appreciate after re-privatisation. Given that taxpayers were extremely reluctant investors in the banks, it’s fair to say that the public would not take too kindly to having owned the shares following the moment of crisis at which none of the big institutions were willing to invest, only to give a big upside back to these very same people or other countries’ sovereign wealth funds. As conservatives, we need to make sure taxpayers are given the opportunity to participate in any upside having borne the risk of ownership of these shares.

    In all, the Royal Mail privatisation debunks some of the pessimism surrounding the appetite for big, all-inclusive share offerings. It shows there is appetite for share ownership and significant retail offerings and that the aim of popular capitalism has appeal. The Government should examine the possibility of other privatisations, such as its stakes in the Crown Estates, London Underground, the Trust Ports, the Commonwealth Development Corporation, the Royal Mint, the Met Office, Enrichment Holdings, Glas Cymru, Channel 4 – as well as RBS and Lloyds.

    Some of the perceived problems with this offering are also a microcosm of potential problems or opposition the Government might face in the much bigger task of eventually re-privatising RBS. As such it should take these critiques on board. We believe distributing shares to all taxpayers, with a floor price, would square the circles. It is the only solution which marries the economic aims of getting good value over time for the taxpayer whilst re-privatising quickly with the political aims of wide share ownership and giving the maximum opportunity for taxpayers’ to benefit from any upside having been reluctant owners of these shares. 

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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