* Lawmakers criticise "fear of failure and poor quality advice"
* Government launches review of bookbuilding in such sell-offs
* It wants to raise 20 bln pounds from sale of other public assets
By William James
LONDON, July 11 (Reuters) - Britain's biggest privatisation in years was blighted by a fear of failure and poor advice from state-appointed banks, a committee of lawmakers said on Friday following an inquiry into the 2 billion pound ($3.4 billion) sale of Royal Mail.
Britain sold a 60 percent stake in the postal service at 330 pence per share last October after a politically charged debate which pitted the coalition government against Royal Mail's heavily unionised workforce and the opposition Labour party.
The stock quickly rose by as much as 87 percent, prompting criticism that the price had been set too low and the government had botched the deal. The price has since fallen back, but at 473p per share remains above where it was sold.
"We believe that fear of failure and poor quality advice led to a significant underestimate of the demand for Royal Mail shares," said Adrian Bailey, the Labour chairman of the cross-party parliamentary committee which scrutinised the deal.
Some of the concerns echo those expressed earlier this year by spending watchdog the National Audit Office, which said the 500-year-old state postal operator was sold off too cheaply.
Ministers have staunchly defended the government's handling of the sell-off, which followed three failed attempts by previous administrations to privatise Royal Mail, saying they were cautious to reduce the risk of the launch being a flop in the face of possible strike action at the postal firm.
"The committee's views on the share price are based entirely on hindsight and ignore that we were selling 600 million shares - they found no evidence that the department or its advisers missed vital information prior to sale," a business department spokeswoman said in response to the lawmakers' report.
However on Thursday the government launched a review of the bookbuilding process used to collect orders for shares in such sell-offs. Over the next six years, ministers want to raise 20 billion pounds from the sale of public assets such as stakes in the Eurostar rail link, Royal Bank of Scotland and Lloyds.
Labour said the committee's report backed up their argument that the sale had been mishandled, and that the review of the privatisation process was effectively an admission from the government that it had sold the firm too cheaply.
It had previously seized upon the flotation, and the quick profits made by big banks and City investors, to reinforce one of its central arguments ahead of next year's general election - that Conservative Prime Minister David Cameron's government is out of touch with ordinary voters.
The committee report's criticism focused on the actions of the government, its independent adviser Lazard, and the two banks it hired to lead the sale of shares, UBS and Goldman Sachs.
The committee said the bookbuilding process had been carried out by the advisers in a way that meant investors did not have to reveal the maximum price they would be prepared to pay for the shares. As a result, taxpayers had missed out, they said.
While it found no evidence of impropriety by the advisers, the report criticised the fact that a separate asset management unit of Lazard had been among those granted preferential status in the allocation of shares. It also highlighted that UBS and Goldman Sachs would earn fees from trading Royal Mail shares on behalf of preferred investors, many of whom were their clients.
"It is clear to us that any perception of financial advantage must be removed from the privatisation process," the report said
"Therefore we recommend that the department give serious consideration to excluding any company involved in the selection of preferred investors, as a preferred investor."
Lazard, UBS and Goldman Sachs declined to comment.
The report also said that the government had put too much emphasis on the risk of strikes by Royal Mail staff, resulting in a share price that was too low. It criticised the decision not to raise the price once it became clear demand was high.
$1 = 0.5877 British Pounds Additional reporting by Freya Berry; Editing by Pravin Char