Time to address Royal Mail privatisation – Government moves are sticking plaster, not surgery

Royal Mail is an elephant taking part in a dog show. It is much larger than its rivals but is the wrong sort of animal to compete successfully. Political cowardice over many years and across the party divide has resulted in a sorry mess. Even if the annual results show the organisation improving, nothing will fundamentally change as long as Royal Mail stays in the public sector.

The government yesterday went a little way towards addressing the Pounds 5.6bn pension fund deficit, investing in modernisation and paying for restructuring the lossmaking Post Office network. Ministers are also likely to grant Allan Leighton's request for some form of share scheme for employees. The management team is doing a good job and so deserves to be listened to when it says a staff share ownership trust will work. But it is hard to believe that a cash bonus scheme – such as the one that has paid out for two successive years – would really be much less effective. Cash bonuses would also avoid the risk of making real privatisation harder. In short, this is no more than sticking plaster when drastic surgery is required.

Royal Mail customers, employees and management have suffered as successive governments shied away from privatisation. John Major's government talked about it but backed off. At least his faint-heartedness was based on the real prospect of parliamentary defeat. Back in the days when Tony Blair had political capital to spend, the prime minister, Gordon Brown and Peter Mandelson all recognised that privatising Royal Mail was the best way forward as the market was opened to competition. Personal rivalries ensured the chance was lost.

Alongside these failures of political nerve, government has made Royal Mail's life tougher in two ways. First it gave the power to liberalise the market to an independent regulator. Postcomm turned out to be a rare visionary in this tale of political myopia. It introduced full liberalisation from the start of this year, three years before it had to and ahead of other European countries. Now, as public bodies seek greater efficiency, they are cutting down on the business they do with the Post Office. Shrinking revenues and high fixed costs are a bad mix.

Royal Mail's outlook is bleak. Operational improvements will not save it. With no sign that this government is steeled for privatisation, there is an opportunity for the Conservatives. Previous Tory enthusiasm for the idea foundered on the thorny issue of rural deliveries and post office branches. This need not be a showstopper.

The best option is for the government to guarantee levels of public service it is prepared to support and then contract out, providing them to a private sector Royal Mail. The Tories flunked the decision last time they were in power. David Cameron should not duck it now. It is one more way he can show he can break with the past.

'Fantastic' deal offers hope for future in which Royal Mail is sorted The government's financial package increases the operator's chances of survival once the postal market is opened, writes John Willman
Financial Times UK, London Ed1, Sec. NATIONAL NEWS, p 3 05-19-2006
By By JOHN WILLMAN
The long-awaited "financing framework" for Royal Mail was finally announced by the government yesterday, but if anyone was expecting to see billions of pounds pumped into the postal operator they will have been severely disappointed.

A loan facility that has never been drawn on was extended, Pounds 850m of the company's reserves was moved to a different bank account and unspecified funds were promised to keep the post office network afloat.

Yet while it was far from the cash bail-out some had expected from the government, it does offer the former postal monopoly hope that it can survive in a market that was fully opened to competition at the start of the year.

It is also structured in a way that minimises the chances of competitors accusing the government of subsidising the company.

The main challenge facing Royal Mail will not be that it cannot find the money needed to automate its local delivery offices, which continue to sort mail by hand in a manner that postmen of a century ago would recognise: Postcomm, the regulator, has agreed increases in prices that will allow modernisation to solve that.

Instead, the real difficulty for the organisation is its pension deficit, which has increased from Pounds 4.5bn to Pounds 5.6bn over the past three years. Like many schemes with more retired and deferred members than those still working for the company, increases in the value of its investments have been more than outweighed by rising longevity.

Although Postcomm's price formula allows Royal Mail to pay off the deficit over 17 years, much can happen over such a long period. The pensions regulator meanwhile is urging employers to eliminate deficits over 10 years or little more.

The position is complicated by the arrival of competition in the postal market on January 1. Royal Mail depends on just 500 big business mail-users for half of its Pounds 6bn turnover, but competitors such as TNT Post and Business Post have been luring away some of these lucrative customers.

Having already invested in automation and with no pension deficits to shrink, they can offer lower prices and better service. The danger for Royal Mail is that it is left with the less profitable mail and must continue to deliver to every home and workplace the mail handed over by competitors for the "final mile" of delivery.

The nightmare for the company's pension scheme trustees is that Royal Mail could find itself in financial strife long before the deficit is closed. This is a fear the pensions regulator will share since, taking the deficit into account, Royal Mail has negative net assets to the tune of more than Pounds 3bn.

Yet if they insist on shrinking the deficit at a faster rate, Royal Mail will have to raise prices further – and become more uncompetitive. Yesterday's deal offers one way out of this.

Alistair Darling, trade and industry secretary, has agreed that Pounds 850m of Royal Mail reserves, built up from profits in the past, can be put in a special account to reassure the pension scheme trustees. If Royal Mail was failing, the trustees could draw on it – but there is no payment from the government into the scheme now that could be construed as state subsidy. If not needed, it will be returned to the government as shareholder.

The extension of the loan facility of Pounds 900m bolsters Royal Mail's finances, but again involves no subsidy. It will allow the company to go ahead with its Pounds 2bn investment programme, but will be on commercial terms and must also be repaid.

Royal Mail has one other problem, however: what to do about the loss-making post office network, which loses more than Pounds 2m a day. The third leg of yesterday's financing framework is a promise of government support to keep open post offices in rural areas and deprived communities.

This is the only part of the package that could involve cash payments, but the amount has yet to be determined – it will depend on the results of a government review of the network that will decide what it wishes to retain. However, Mr Leight-on said it could amount to up to Pounds 1.3bn of support.

Competitors were studying the details of the package last night to see whether there was evidence of state aid, illegal under European Union rules. Nick Wells, chief executive of TNT Post said: "We will ask the European Commission to get involved if needs be – we are going to look closely at the options with our lawyers."

But Mr Leighton was in no doubt that he had secured a result. The package was "fantastic", he said.