The wrong way to privatise the post: UK Royal Mail needs a sell-off – but on the right terms

Congratulations to Allan Leighton and the rest of the management team at Royal Mail for turning a deficit of Pounds 318m four years ago into a Pounds 537m surplus last year. They also deserve praise for paying a Pounds 1,074 bonus to the group’s staff – a sensible reward for their co-operation with a remarkable transformation. The next step must now be to take Royal Mail into the private sector, but Mr Leighton’s ingenious strategy for winning government backing risks an imperfect privatisation.

Royal Mail’s turnround was helped by increases in stamp prices that added more than Pounds 400m a year to revenues. But there has been real progress on service targets following the ending of the second daily delivery. Some 33,000 jobs have been shed – about 14 per cent of the workforce – as part of an overhaul of the group’s distribution and retail network.

Much remains to be done, as Mr Leighton was quick to point out. Royal Mail wants to invest at least another Pounds 2bn over the next five years, to modernise its operations and raise margins to those of Deutsche Post of Germany and TNT, the Dutch operator. It must also fill a deficit in its pension fund of Pounds 2.5bn – which will almost double when the new FRS 17 accounting standard is implemented.

Mr Leighton believes a partial privatisation giving a 51 per cent stake to an employee share ownership trust is the way forward. This would make it easier for Royal Mail to borrow money – especially if the government could be persuaded to take over some of the pension liability. Giving a stake to the staff could make it easier for them to agree to more efficiency savings.

Perhaps as important, handing Royal Mail over to employees could be attractive to the government. The Labour manifesto said it had “no plans to privatise it” and its ambition was to see a “publicly owned Royal Mail fully restored to good health”. A confident administration could argue that creating an employee-owned company does not break such undertakings – though whether Tony Blair could convince increasingly rebellious supporters in parliament is questionable.

Yet to go for such a structure would fall well short of privatisation as the world knows it. It would give employees only an indirect stake, but would not allow Royal Mail to use its shares to make acquisitions or merge in the future. It would thus have less operating freedom than Deutsche Post or TNT which are privatised – and perhaps even France’s La Poste which is being groomed for liberalisation.

Privatisation was a great British innovation which has yielded enormous benefits for staff, consumers and taxpayers in many utilities. It is a measure of Mr Blair’s weakness after the Iraq war that he cannot say this and go ahead with privatising Royal Mail. But one day there will be a government that can go the whole nine yards – and it is essential that any partial privatisation of the post does not make this much harder to achieve.