Royal Mail delays drawing on funds for modernisation

Royal Mail, the former postal monopoly, has yet to draw on a Pounds 1.2bn loan made available to automate its operations under a new financing framework arran-ged more than a year ago.

The investment package announced last May by Alistair Darling, trade and industry secretary, was intended to help Royal Mail compete against the new breed of private-sector postal operators after it lost its mono-poly at the start of 2006.

But although big business mail users are deserting Royal Mail in droves, Britain’s dominant postal operator has failed to take advantage of the new system. HSBC and Lloyds TSB are the latest to shift their bulk mailings to UK Mail, part of the Business Post Group.

News that TNT, one of Royal Mail’s biggest rivals, has been granted the right to launch a legal challenge over the state group’s exemption from VAT will come as another blow.

The fall in business customers and the growing competition from its rivals are not the only problems for Royal Mail. The number of items of mail fell last year for the first time in decades, with most in the industry expecting further declines in the future as email and other digital messaging systems replace “snail mail”.

In addition the government has been unable to find a high-profile business executive from the private sector to be deputy chairman and succeed Allan Leighton as chairman next year. And now the postal union is balloting members on a strike over this year’s pay offer, warning of more fights ahead over changes in working practices, staff cuts and the plan to close the pension scheme to new entrants.

Mr Leighton has told staff the business has reached a “tipping point”. “This is not about pay,” he says. “It is about change which is fundamental to what we need to do. For we have to change the way we work to compete successfully, and for once we can fund it.”

A priority is to invest in the equipment routinely used by continental European operators and its new competitors, which include TNT Post, the British arm of the Dutch postal giant, and UK Mail. This would replace hand-sorting of mail, closing the gap with private-sector operators which are 40 per cent more efficient.

But negotiations over the rescue package have dragged on and it was only last week that Mr Darling signed off on the details of post office closures to stop the Pounds 4m-a-week losses incurred by the network.

Royal Mail has continued to lose business to private operators. Banks, utilities, local authorities, charities and even a government department have signed contracts with the competitors, who collect and sort the mail before handing it over to Royal Mail for final delivery.

New equipment is being tested, but Royal Mail is not prepared to invest until it has negotiated new working arrangements with the Communication Workers’ Union to produce efficiency gains.