Royal Fail

Jonathan Portes, via Twitter, drew my attention to this article in The Telegraph by Tory MP, Douglas Carswell:

The article is a fantastic example of how, no matter how bad the situation, politicians are able to rise above the usual constraints of fact, logic and evidence and carve out their own reality.

It is, of course, an article in response to the report that found that the government, when selling off Royal Mail, had substantially undervalued it.

In case you missed it, on the morning of 11th October last year, the government sold off Royal Mail. By the end of that day its value was £750m higher than that for which the government had sold it. It’s a bit like selling your car to your next door neighbour, only to find that, later on the same day, they’d sold it on to your other next door neighbour for much more.

While we won’t get the £750m back from Royal Mail’s new shareholders, at least with this government, we can easily get it back through cutting benefits for poor people. Hoorah.

Anyway, back to that Telegraph article:

Far from undermining the case against Royal Mail privatisation, today’s National Audit Office (NAO) report that suggests Royal Mail’s sell off was bungled actually convinces me that it the right thing to do.

That’s some logic that only a politician could come up with – if the government hadn’t bungled it, he would have remained unconvinced on the whole affair. But because they did bungle it, he is now convinced it was a good idea.

The basis for this “logic” is that because it was sold too cheaply, it proves that that government weren’t competent in knowing what to do with it, so it’s ok to sell it for much less than it is worth. That’s like saying, “I am rubbish at driving my Ferrari, so I should sell it for the price of a Nissan Micra.”

The article moves on, apparently now forgetting that it had previously said the sale was “bungled”:

Predictably, the NAO report is being interpreted as evidence that Royal Mail was sold off “too cheap”

In fairness, it is being “interpreted” this way because that’s exactly what it says.

The article then loses itself in a very muddle-headed analysis of what determines the value of a company. Essentially we are told, as the headline suggests, that the reason for the sudden and substantial increase in valuation was because the company was privatised.

This just makes no sense whatsoever.

A share price is essentially a measure of the market’s view on the future profits of a company. Occasionally a share price will increase substantially within a day but it happens when a piece of information becomes known that dramatically changes the market’s view of the future of the company. For example, if a pharmaceutical company announces that it has developed and patented a new drug that cures a common condition for which there was previously no treatment, then their share price might suddenly go up a lot. That’s understandable because the market expects their future profits to reflect this new piece of information.

On the day that Royal Mail was sold off, their new private status did not cause them to develop, patent and announce a new, substantially more efficient, way of delivering letters. The increase in share price was simply because the government undervalued the company when it sold it off.

So where did the money go? As we found out, a small number of investors in the City bought up a huge amount of shares and sold them on shortly afterwards, making hundreds of millions of pounds of profit. It really does take a politician to come up with the bizarre kind of argument given in this article to justify why it that money should have been profit for a few people in the City rather than money for the public purse.

If the government were now holding their hands up and admitting their mistake, while simultaneously apologising to the poor people, whose benefits are now being cut, we could at least give them credit for being honest.

Predictably (hey I can use that too), it’s smoke and mirrors time and if this is anything to go on, the government’s smoke and mirrors are looking thinner than ever.

RedEaredRabbit