UK government gets ready to deliver billion-pound Post Office overhaul:TNT alarmed by move it sees as anti-competitive

Royal Mail and the government unveiled details yesterday of a framework agreement on an investment package aimed at allowing the company to modernise its postal sorting operations, restructure the Post Office network and tackle its pounds 5bn- plus pension fund deficit.

Royal Mail will be allowed to use pounds 850m of its own reserves and have access to a pounds 900m borrowing facility from the government, which will also provide continued support for Royal Mail's efforts to tackle the problems of its Post Office business, which lost pounds 111m last year.

The government has not put a total on the level of support that would be required for the restructuring and Royal Mail executives have acknowledged that a final figure would depend on the detail of the proposals for the network. However, they suggested it could be between pounds 1bn and pounds 1.3bn.

Royal Mail insists the Post Office needs to be overhauled. Its turnover from government work has fallen sharply and about 1,000 rural post offices have fewer than 50 customers a week. The organisation that represents sub-postmasters has already warned that thousands of branches could be forced to close when the Post Office card account ends in 2010.

The announcement did not include any decision on the controversial scheme to open up Royal Mail's capital structure by giving shares to staff. There are suggestions that a scheme, under which workers could receive up to pounds 5,000 in shares, could be announced within the next few weeks. The Department of Trade and Industry insisted no decision had yet been taken.

Royal Mail's chief executive, Adam Cro zier, described the agreement with the government as "fantastic for taxpayers, who will get a good return; fantastic for the company; for our people, and for our customers, who will get an improved service. There are no losers in this. It's a great deal from every point of view."

Allan Leighton, the chairman, denied the government-backed financing was a rescue package. "It's not a bail-out. There's a return for the investor. Our investment case is that for every pounds 1, it will get pounds 5 back."

The trade and industry secretary, Alistair Darling, said the deal would give Royal Mail the resources and borrowing facilities to secure its future. "The government's framework will give Royal Mail the commercial freedom to develop its investment programme and reach agreement with the pension trustees on terms upon which the pension deficit is managed."

However, the agreement came in for sharp criticism from TNT Post UK, one of Royal Mail's rivals in the postal market, which was opened to full competition at the beginning of the year. TNT is threatening to refer the agreement to Brussels under European Union rules on state aid. "We are alarmed at the decision to waste pounds 1.75bn of taxpayers' money and damage new competition in the postal market by giving such an enormous handout to a highly profitable organisation," said its chief executive, Nick Wells.

The Communication Workers Union, which is at loggerheads with Royal Mail management over pay and the share issue, welcomed the investment but warned there could be bad news to come. Its deputy general secretary, Dave Ward, said: "We still need to see the detail of this investment package. There could be a sting in the tail, with Royal Mail's vision of modernisation leading to the loss of up to 40,000 jobs, which the union will oppose." He described the shares plan as a "stage-managed distraction".

Royal Mail denied that it would be taking an axe to jobs, saying any reductions in staffing could be managed by voluntary redundancy and normal staff turnover. It said employees were hugely supportive of the share scheme, with 80,000 responding in favour and only three against.

The company said its operating profit before exceptional items last year had risen 17.5% to pounds 355m and it had delivered a record quality of service. The profits figure will trigger a pounds 418 bonus for staff under the company's share-in-success scheme.

guardian.co.uk/post >