Funding from the private sector will help Royal Mail deliver a valued universal service (UK)

Postcomm said that a universal service that is financially viable and safeguarded for the future is most likely to be achieved through a radical transformation of the governance and structure of Royal Mail.

Postcomm concluded in its first submission to the independent review of the postal market that Royal Mail’s current business model is unsustainable and that, unless some bold actions are taken very quickly, it is highly likely that its letters business will move to a position of managed – but accelerating – decline.

In its second submission Postcomm says:

– With the mail market now in structural decline, because of the increasing impact of e-mail and the Internet, Royal Mail needs access to private capital and a stronger set of incentives to enable it to restructure and become more profitable;
– Partnerships with the private sector, such as we are seeing in some European countries, could serve as a catalyst to more rapid transformation and greater efficiency from the universal service provider;
– As competition develops in segments of the market, it can replace regulation as the force which protects customers’ interests. This – and the need for much more transparency about the costs of Royal Mail’s business – will be a major theme of Postcomm’s proposals for the regulatory framework post April 2010;
– The transformation of Royal Mail will ensure a more dynamic mail market that can respond quickly and effectively to changing customer needs as mail increasingly is challenged by electronic media.

Postcomm believes competition and liberalisation should continue to be promoted as they are delivering far better customer focus and strong incentives for all mail operators to innovate and to become more efficient. Competition has already benefited large customers, and choice is now becoming available to smaller businesses. The regulator also urges the removal of artificial barriers to postal market entry – including the removal of new entrants’ VAT disadvantage – which could encourage wider competitor involvement in the collection, sorting and delivery of mail.

Notes for editors
The Danish and Swedish postal services will be combined with the intention of forming a more competitive operation. The Swedish state and the employees of Posten would own 60 percent of the new company, while the Danish state together with the employees of Post Danmark and CVC Capital Partners will own 40 percent. The postal businesses in Sweden and Denmark will continue to operate as national entities using the same brands they use today.
Royal Mail is currently exempt from value added tax (VAT) across its business (not just universal service products) but its competitors are not. This gives the company a pricing advantage for many of its products, and therefore distorts the market. Changes to VAT are not within Postcomm’s remit and must be made by HM Treasury.
Postcomm’s suggestion is that all postal operators should be subject to the same rate of VAT.
A fifth of Royal Mail's upstream volumes are now handled by Access operators at a cost less than half Royal Mail is able to achieve. For larger customers this has kept prices around 5% lower than they would otherwise have been and slowed the rate of market decline. The pricing structure for Access is designed to ensure that these third parties pay a price that reflects Royal Mail's delivery costs across its network.
60% of Royal Mail's costs are delivery where it still handles over 98% of all addressed letters. Postcomm is advocating market testing of Royal Mail's delivery operations and partial outsourcing to third parties (subject to strict quality of service standards) if Royal Mail cannot demonstrate that it is the most efficient provider.
A report has been produced for Royal Mail which suggests that over the four years of the current price control – through to April 2010 – the company now expects to generate £2.5billion less cash than was foreseen in Postcomm’s price control modelling.
In part this is because mail volumes are tracking below the expectations of both Postcomm and Royal Mail when the control was finalised in late 2005. However over half of the difference is because Royal Mail is now expecting to achieve efficiency improvements significantly below the 3% per annum targeted in the price control – yet despite this, the company will be paying substantial performance bonuses. This provides a vivid demonstration of how much cash can be generated to fund the universal service without recourse to the taxpayer if Royal Mail is able to transform its business radically, as other former state-owned monopolies have done after their markets were liberalised.
The case for a demerger of Post Office Ltd from the Royal Mail Group to support a sustainable network for the future and to recognise its important social role is not dependent on the input of private capital.