UK Royal Mail optimistic over shares plan

Royal Mail is "optimistic" it will win government ap-proval for its plan to give a fifth of its shares to staff, while insisting this is not a back-door route to full privatisation.

Allan Leighton, chairman of Royal Mail, told MPs yesterday it would be "very straightforward" to set up a share ownership scheme for employees of the state-owned postal services operator. "We think it should start with 20 per cent," he told the trade and industry select committee. Shares, distributed equally to employees, could be traded via a trust, he said. "It's very easy to do, not at all complicated (and) our people would understand it."

Speaking after the hearing into Royal Mail's future, Mr Leighton said the government had discussed but not yet agreed the employee share proposal. The scheme, which would require parliamentary approval, is likely to run into strong opposition from unions and Labour backbenchers.

But Mr Leighton said he was "optimistic" of getting government support, stressing that Alan Johnson, the trade and industry secretary, was on record supporting the concept of employee share ownership in relation to Royal Mail. The Treasury's stance is less certain. Mr Leighton said no decision had been made on how the scheme would be funded. Staff "may or may not" be asked to pay for their shares, he said.

But the Financial Times understands the scheme being considered by the government would provide the shares free of charge to staff.

The shares scheme was only one leg in a "hat-trick" of government and regulatory action needed to prevent Royal Mail from going "pear-shaped" when the UK postal services market was opened up to full competition on January 1, Mr Leighton told MPs.

The second element of the hat-trick is Royal Mail's Pounds 4bn pensions deficit – which it yesterday warned was "likely to worsen significantly as a result of changes in mortality assumptions".

The historic pensions liability, forecast to rise from about Pounds 150m this financial year to between Pounds 400m and Pounds 500m after accounting changes next year, could not be funded out of normal cash flow, Mr Leighton said.

"There's no way that in a business like ours you can generate enough cash to do that," he told the committee. Either the government would have to pick up the tab or the regulator would have to allow extra price rises to fund the deficit repayment.

The third leg of Royal Mail's lobbying hat-trick – the Pounds 2.2bn the company wants to invest in modernisation – is also dependent on the outcome of its bitter ongoing negotiations with Postcomm, the regulator, over price controls for the next four to five years.

Asked by Labour MP Lindsay Hoyle if Postcomm's price control proposals meant Royal Mail would be "shafted", Mr Leighton said: "That's the technical term."

Royal Mail chief warns against full privatisation: Plan to give 20% of company to the staff Stamp prices 'need to reflect cost of service'
The Guardian, Sec. Financial Pages, p 26 10-19-2005
By Mark Milner Industrial editor

Royal Mail chairman Allan Leighton yesterday called for 20% of the company to be handed over to staff but warned against a full scale privatisation.

Mr Leighton said he was not certain that Royal Mail – which has a pension deficit of pounds 4 bn, needs pounds 2bn to fund its modernisation programme and faces full scale competition in the letters market from January – was "in a state that it could be privatised. I not sure that [privatisation] is the natural next step."

"I think we can get all the benefits of privatisation without going the whole hog," he told the trade and industry select committee of MPs.

Mr Leighton said Royal Mail was a commercial entity which supported public services, including the universal service obligation under which it will deliver anywhere in the UK for the same price . Building on that combination could make the company a role model for the governance of all the "great national enterprises."

He said Royal Mail would prefer a share ownership scheme to profit sharing because it was more effective in motivating staff. Asked how much of the company should go to employees, the Royal Mail chairman replied: "We think 20%." Trade and industry secretary Alan Johnson has brought in Professor Sir George Bain to look at the future of Royal Mail but has already said privatisation is not on the agenda. Royal Mail is in discussion with the industry regulator Postcomm about the amount by which it will be able to raise its prices between next year and 2009/10. The company says the economic cost of delivering first class mail is around 45p and wants to raise the price to 39p by 2009/2010. It believes the price of stamped mail should be more reflective of the cost involved. Postcomm has indicated that it thinks the increase should be limited to 4p from the current 30p.

Royal Mail's chief executive Adam Crozier said the outcome of the regulatory review– with Postcomm's final recommendation expected towards the end of next month – was vital to the company's future. It needed to be able to rebalance its prices to counter competition from new entrants who would "cream skim" Royal Mail's profitable business customers. Under the current pricing structure, business customers were cross subsidising social customers, Mr Crozier said. "If we are not able to to hold or reduce business prices we will lose market share which will put pressure on our ability to perform our universal service obligation. Once you have lost business by and large you never get it back; that's why we are so concerned to get the price control right from day one. We want a relatively level playing field."

Mr Leighton rejected any suggestion that Royal Mail was acting as a monopoly out to defend its patch. Over the last three years Royal Mail had become more efficient, had cut costs and improved its quality of service. "We wish people treated us like a normal company."

Royal Mail is paying some pounds 400m a year into the pension fund of which pounds 140m to pounds 150m went towards reducing the deficit. Changes in accounting rules would mean that in future the contribution would increase to pounds 800m of which up to pounds 500m would be used to reduce the deficit.

Royal Mail has a pension deficit of pounds 4bn, needs pounds 2bn to modernise and faces full scale letters competition