No, the Postcode Address File should not cost £487m

In 2021 the UK government’s Geospatial Commission prepared a briefing paper for some discussions about address data. It has been released to the journalist James O’Malley after a freedom of information request.

The paper was prepared in response to the long-running campaign asking the government to deliver on political commitments to make the list of UK addresses – and other non-personal geospatial data – freely available. People could then use the data to improve public services or build innovative new businesses.

The paper includes the mind-boggling statement that a government project in 2016 estimated that the cost to the UK government of buying back UK address data from the Royal Mail would be £487m. 

Yes, you read that right. That figure was four hundred and eighty seven million pounds.

It’s a big number and – if true – one that would call into question the whole campaign.

But, it doesn’t hold up to critical scrutiny and, unfortunately, the 2021 paper repeats this estimate without questioning it.

The civil service needs to be less credulous when it comes to claims over the financial value of data assets, and the UK government needs some fresh analysis.

Valuing intangible assets is difficult, valuing a commercial product is much easier

Valuing intangible assets, like data, is difficult. I’m such a fun person that I read books and academic papers about the different ways it can be done.

But, to the Royal Mail address data is fundamentally a commercial product line. Or, to put it another way, a small business within their larger business. 

At the simplest level the product is created when Royal Mail adds postcodes to the addresses created by local authorities. The Royal Mail then sells the resulting data product – under a commercial licence – both back to the government and onto other businesses.

This product is regulated. Every year it brings in about £30m of revenue and generates about £3m in profit.

A valuation of £487 does not pass the ‘smell test’

A price of £487m values that product line at a multiple of 162 (one hundred and sixty two) times its yearly profit of £3m.

If the valuation is true then that single product line would account for 15% (fifteen percent) of the current market capitalisation of the Royal Mail’s owner, IDS (International Distribution Services).

To put that further into perspective the whole of the IDS business has a turnover of £12bn. 400 (four hundred) times the turnover of this product line of address data. Yet somehow this small product line is 15% of the market capitalisation?

The IDS annual financial report does not even mention address data. It is too small a part of their overall business.

The valuation discussed by the UK government’s Geospatial Commission in their paper makes no sense. It does not pass the smell test.

We can imagine some negotiations

But, let’s look deeper. I can imagine the Royal Mail’s negotiators asking for such a large figure from the government. Why wouldn’t you try?

The Royal Mail might have talked about the economic value that better and more accessible address data could create for the UK economy. They might be thinking that they hold a unique asset and have the UK government over a metaphorical barrel. They might have argued that the £3m a year in profit was necessary for the financial viability of the Royal Mail. The negotiators might have said that only the Royal Mail can create addresses that work for deliveries around the country and that it was a vital part of delivering the UK’s universal postal service.

But the argument in return is that most of the effort that goes into creating address data comes from local government officials around the country. That if the address data they create is good enough for other services and other delivery firms then it can be good enough for the Royal Mail too. And, most importantly, the small amount of financial value that this product line creates for the Royal Mail’s own business.

But the negotiations should have simply started with a fair market value

But, to draw a comparison to the physical world, this type of negotiation would also have been the wrong starting point.

If the government needed to compulsorily purchase a piece of land or a business to build some physical infrastructure the discussion starts at the market value that a willing seller might find on the open market. The buyer selling a piece of land does not get to claim a percentage of the larger economic value that the new infrastructure could create for society. They simply get to sell their asset at a fair price.

The negotiations for selling the Postcode Address File back into the public sector should have started the same way. This would have cut through the complexity of data valuation.

No other buyer would pay £487m for a regulated product that creates £3m in profit a year, a multiple of 162. It is not the market value.

UK government and Royal Mail need to be realistic about the market value of address data

The campaign to open up UK address data is supported across the political spectrum. Most recently it was supported by peers from four political parties – Labour, Conservatives, Greens and Liberal Democrats.

A Minister from the previous government rejected their request and referenced this flawed report from 2016 that includes this unrealistic figure of £487m. The Minister should have asked the civil servants to start again.

The new UK government is building a digital centre for government and plans to create a National Data Library to deliver better services to people, researchers and businesses. That National Data Library could create significant economic and social value for the UK, particularly if it opens up foundational datasets, such as geospatial data. Other countries are doing this and the UK is falling behind.

As part of that work the Ministers from the new Labour government should ask their officials to stop relying on their flawed, old work and carry out a fresh analysis of address data.