La Poste faces rough ride as it looks to compete in new EU

The run-up to the French referendum on Europe's new constitution promises to be a busy time for La Poste.

Not only is France's state-owned post office preparing to deliver 43m copies of the constitution to voters before they go to the polls on May 29, but at the same time parliament will be voting on a law designed to allow La Poste to compete in Europe's liberalised postal markets.

Some executives fear the May 12 vote, which is likely to trigger a fresh political debate on the future of the post office, could be hijacked by those advocating a No vote in the referendum.

So while the new business is welcome in the short term, the intense focus the referendum may bring on La Poste's future could be more of a burden.

These conflicting attitudes to the referendum reflect La Poste's awkward position in France. It is both a commercial business needing to cut costs to prepare for greater competition and a state-owned public service that is jealously guarded by the French public and politicians.

Jean-Paul Bailly, chief executive, says La Poste is "badly understood" by the French. He complains they do not see it as an industrial business, like other state-owned companies, such as SNCF, the railway operator, or EDF, the power utility.

Although it is the second largest employer after the state, with 300,000 staff, of whom two-thirds are civil servants, La Poste is viewed as the "friendly, local and simple" face of its postmen. Although it stopped hiring civil servants three years ago, it is still saddled with a Euros 57bn (Pounds 39bn, Dollars 75bn) pension deficit.

Plans to close some of its 17,000 branches provoked uproar last year. Protests by thousands of local politicians this year underlined their strong attachment to rural post offices.

This forces Mr Bailly to tread a delicate line when talking about the Euros 3.4bn modernisation of its mail operations or plans to replace only one out of every two postmen who retire.

The proposed law to approve postal liberalisation includes measures to help La Poste cope with increased competition, such as allowing it to launch a postal bank and creating a fund to compensate it for losing its mail monopoly.

Privately, executives at La Poste admit it is also being prepared for an eventual privatisation. But they say it is too politically sensitive to talk about at the moment.

Such concerns do open the door to opponents of the European constitution – opinion polls suggest 58 per cent of voters will vote No in the referendum – to play on public fears about branch closures and job cuts at La Poste as part of a wider campaign against rising liberalism in the EU. This in turn could put pressure on the government to rein in post office reform, which would be dangerous for La Poste.

Mail and parcels are still sorted by hand in many of its distribution centres, meaning it lags behind its European rivals Deutsche Post in Germany, TNT in Holland and Royal Mail in the UK. Without massive investment to install more efficient technology, La Poste risks losing big chunks of its domestic market when it is opened to more competitive rivals.

The referendum could also affect La Poste by changing the political landscape, says Marc-Andre Feffer, its head of strategy, legal and regulatory affairs. "If there is a No vote, we are likely to get a new prime minister, and that could have an impact on La Poste's relations with its state shareholder."

Under EU regulations, the legal monopoly on letters fell from 350g to 100g in 2003 and will drop to 50g next year. Parcels are already open to competition. Letters are due to be fully liberalised by 2009.

This meant the government had to open up the Euros 35m contract to distribute Europe's new constitution, weighing 283g, to competition.

The fine balancing act of running a state business is nothing new for Mr Bailly. Before joining La Poste in 2002 he spent eight years as head of RATP, the Paris transport authority, where he was credited with transforming a militant and inefficient body into a profitable and well-run business.

He knows La Poste – which yesterday announced net profits of Euros 374m for 2004, up 85 per cent from a year earlier – is an even tougher challenge.