Brussels investigates claims of unfair subsidies to Royal Mail
The European Commission began an in-depth investigation yesterday into Pounds 2.6 billion of government funding received by the Royal Mail over the past six years.
The inquiry was triggered by complaints from some of Royal Mail's competitors, including TNT and the Deutsche Post-owned DHL. They claimed that the government finance amounted to illegal subsidies and gave Britain's main supplier of postal services an unfair competitive advantage in the recently liberalised sector.
The Commission is focusing on three individual loans to Royal Mail: Pounds 500 million (2001), Pounds 1 billion (2003) and Pounds 300 million (2007). It is also examining the conditions of the Pounds 850 million that has been placed in an escrow account to reduce the contributions the company will have to make to address the deficit in its pension fund.
Both Royal Mail and the Government insisted yesterday that the financial arrangements were perfectly legal and could not be considered unfair state subsidies.
A Royal Mail spokesman said: "Royal Mail has put a very strong commercial investment case to our shareholder, the Government, and as they have said today, they only ever provide financing to Royal Mail on a commercial basis."
The Department of Trade and Industry delivered a similar message, stating: "We are confident that all financing made available to the Royal Mail's business is done so on commercial terms and will therefore meet the Commission's requirements."
If the Commission agrees that the loans have been made on commercial terms and satisfy market investor conditions, it will close the investigation. It pointed out yesterday that the inquiry could help Royal Mail if it removed any suspicions about the status of the loans.
"This could be in Royal Mail's interest since it could dispel any cloud of uncertainty hanging over the company. If we conclude that the loans do not constitute state aid or are justified state aid, then it is less likely they will be challenged in court," a spokesman said.
However, if the investigation concludes that the complaints are justified, the company will have to pay back the difference between a commercial rate of interest and the rate it is being charged on the loan.
The main complaint was lodged last October by the Mail Competition Forum, an association of seven licensed competitors to Royal Mail. The group, which includes TNT Post, approached the Commission to protest at the measures put in place to tackle the company's pension fund deficit.
David Sibbick, the Forum's secretary, insisted that the action was not designed to damage Royal Mail, but to ensure everyone could compete on equal terms. Already, he pointed out, Royal Mail enjoys major economies of scale and does not have to pay VAT, unlike its competitors.
"This is not about the price of a stamp to granny, but about offering lower prices to big business customers, which my members are also targeting," he said.
Deutsche Post, which operates as DHL in the UK, tabled the first complaint last August. The German company has itself been investigated by the Commission which, in 2002, ruled that it had received illegal state subsidies. The company is currently challenging the decision before the European Court of First Instance.
The investigation does not target the Pounds 150 million annual subsidy which was given to the company to keep open rural branches and cleared by EU regulators in February 2006.
ROYAL MAIL'S COMPETITORS
* TNT Post: Customers include Axa, Barclays, BT, HBOS, Lloyds TSB, Sainsbury, Next, T-Mobile; Thames Water; nPower; Sky; Department for Work and Pensions; Inland Revenue
* UK Mail (part of the Business Post Group): Contracts include TV Licensing; Royal Bank of Scotland
* Deutsche Post
* Hays plc
"I take the complaints received very seriously. The postal sector is increasingly open to competition and it is important to reassure competitors that the advantages of that opening are not neutralised by illegal state subsidies"
Neelie Kroes, Competition Commissioner
