The Dark Side of Italy’s Postal Privatization

On this blog, Chris Edwards shared some hopeful thoughts on the fate of postal privatization - which people of a sound mind should certainly cherish. Mr. Edwards built on the news of the impending sale of a 40 percent stake in Italy’s mail delivery incumbent, Poste Italiane. If even Italians are privatizing, why are the US keeping loyal to the ideal of a government-owned post office? We certainly share Edward’s attitude towards privatization. But we are afraid that this time Italy (which indeed privatized much in the 90s, from the national telecom company to the highways) isn’t an example to imitate.

There was, indeed, a series of successful postal privatizations: Germany, the Netherlands, and the UK have shown the way. But we are afraid Prime Minister Matteo Renzi hasn’t followed their lead.

Poste Italiane is a strange animal. As with all national post services, for years now its traditional core business has been eaten up by the development of the e-mail. And yet the company ostensibly failed to adapt, for example by seizing the opportunities created by e-commerce. In seven years, revenues from mail and parcel delivery declined from 33% of total revenues to a mere 14%. Conversely, Poste Italiane diversified heavily: insurance and banking now rake in the bulk of its yearly income. This is an unhealthy paradox: the Italian government privatized its insurance company, INA, in 1994. The government-owned banks were likewise privatized in the early 90s. Now, with Poste Italiane, the government is back into the insurance business and owns the first Italian insurance companies by premiums collected.

At the same time, Poste Italiane started looking at new ventures, like mobile telecoms and retail, eventually turning its post offices into small convenience stores.

If we look at the bottom line, such a strategy payed out: the company's financials are now in much better shape, as more profitable businesses began making up for the losses of its postal unit. But if we look at the government involvement in those industries in which Poste Italiane plays a role, the picture gets murkier. Not only the government got back into banking and insurance. It did so in a rather untransparent way, shielded under the brand of his postal company.

Diversification loosened the public oversight over the company’s mission and allowed for cross subsidies and other distortions, which in turn enabled the company to leverage its postal monopoly in multiple markets.

For instance, Poste Italiane’s bank unit benefits from a huge network of 14,000 offices. There should be a post office even in the smallest of the Italian towns in the Appenini, as the public postal service shouldn’t leave anybody behind. But certainly no private-sector banking competitor could ever match such an extensive web of branches.

At the same time, even though the market for mail services in the European Union was fully liberalized in 2011, Poste Italiane’s mail unit still enjoys a monopoly right over the serving of judicial documents and it has been exclusively entrusted with the provision of the so-called universal service, a task which the government generously subsidize.

None of these concerns was addressed before the IPO. In fact, what happened was exactly the opposite. Universal service obligations were eased, the monopoly right over judicial notifications (due to expire shortly) was prolonged; the sale of single units (as opposed to shares of the group as a whole) was ruled out. In short, the appetite of investors was stimulated by reinforcing a legal monopoly.

It ain’t necessarily so. In Germany, Deutsche Post, Deutsche Postbank and Deutsche Telekom were unmerged and ultimately went their separate ways. If the same method was applied in Italy, it might well be that the IPO of the insurance or the bank branch of Poste Italiane may have been even more successful: they are indeed thriving businesses.

Not only does the privatization fail to sort out any of the remaining competitive issues, but it will hardly curb government interventions in the market. With a 60 percent stake left and no plans for further divesture, the Italian government will still be in charge of the company’s strategy. Just a couple weeks ago, the UK government sold its entire remaining stake in Royal Mail, two years after the original flotation. When is the same thing to happen with Poste Italiane? The Italian government has said nothing that may allow us to speculate that that days is going to come any soon.

It might well be that the privatization of Poste Italiane will produce some benefits. Partial privatization of companies like Eni (the Italian oil and gas giant) and Enel (the electricity utility) helped in modernizing their governance: investors disciplined the management to some extent and the government’s influence somehow weakened. And yet, the government still controls some 30% of both.

Indeed, the government is the only party which unequivocally stands to benefit from the privatization of Poste Italiane: it gets to pocket € 3,4 billion, but won’t have to relinquish control over the company.

Enav (which provides air traffic services and other air navigation services in Italy) and Ferrovie dello Stato (the railways company) are bound to the same fate. The government set to retain a majority stake in both entities, using the capital markets as supplier of much needed oxygen for public finances, but keeping a tight rein on the companies. Plus ça change, plus c'est la même chose.

Massimiliano Trovato is  a Research Fellow with Istituto Bruno Leoni, Italy’s free market think tank (www.brunoleoni.it). Alberto Mingardi is Director General of Istituto Bruno Leoni and an Adjunct Scholar at the Cato Institute.