Minister to talk with UK Royal Mail‘s Leighton after tough efficiency targets agreed

Ministers are to open talks with Royal Mail over its demands for up to Pounds 2bn of investment after the postal operator agreed to tough new targets for improving efficiency.

The negotiations, which will run well into the new year, are expected to focus on several options, all of which would involve the government, which is the state-owned postal operator's sole shareholder, putting public money into the company.

With Royal Mail's financial position precarious, and trade unions fearful of another round of job cuts, its management is lobbying the Department of Trade and Industry for help.

One option under discussion would be to provide the company with a loan repayable over a number of years.

Another option, favoured by Royal Mail, could be some form of equity investment, not unlike a rights issue, under which the government would inject cash as equity in return for a bigger dividend in future.

Alan Johnson, trade and industry secretary, will lead the talks with Allan Leighton, Royal Mail chairman.

It is understood the government, which is being advised by leading investment banks, will wait to see the immediate effects of full liberalisation of the postal market on January 1 before coming to a decision.

It is likely to set out its plans on this and the politically charged issue of whether to back the company's proposals for an employee share ownership plan towards the end of February. By then, the trade and industry secretary can be expected to have received a report from Sir George Bain, the former chairman of the Low Pay Commission, whom he asked for advice on Royal Mail's future.

Ministers have ruled out pouring funds into the company to fill its huge Pounds 4bn pension deficit. But they are prepared to consider investment, following Royal Mail's acceptance of Postcomm's demands for annual savings of 3 per cent a year.

The talks will be difficult and a deal could well prove elusive. Mr Johnson would agree only to investment that provided the government with a decent rate of return. Royal Mail, by contrast, has said it cannot afford commercial rates of interest, and favours a cash injection that would give the government more equity. How it would reward the government for putting in more equity remains unclear, since it currently pays no dividend.

A considerable hurdle to investment will be Gordon Brown. The chancellor will have the final say in any decision and, given tight public finances, will be deeply reluctant to approve anything like the sums wanted by Royal Mail.

From ministers' perspective, the company's delicate financial position is bound up with the issue of whether to give employees shares in the company, a proposal Mr Johnson believes has merit because it could improve the postal operator's performance by motivating staff.

There is therefore some puzzlement in Whitehall at the fierce opposition to the plan from the Communication Workers Union, which argues that giving workers shares in a John Lewis-style scheme would be the first step towards privatisation and break a Labour manifesto pledge to keep the service in public hands.

The union has mounted a successful lobbying campaign to persuade Labour MPs to oppose any change in ownership, prompting Mr Johnson to make assurances that privatisation is not on the agenda.

In spite of his enthusiasm in principle for some form of employee ownership, the trade and industry secretary has not made up his mind. Sir George, for his part, is ambivalent about the idea, viewing it as a second order issue. When he sits down to discuss his findings with ministers, the key question will be what possible solution might put Royal Mail on a firmer financial footing.

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