Semi-private Royal Mail?

The Postal Regulator is calling for Royal Mail to be partly privatised.

Postcomm is making the highly contentious proposal – which could lead to Royal Mail being owned in part by a private-equity firm – to an independent review on the future of postal services that has been set up by the government.

It says that Royal Mail's financial difficulties are likely to worsen considerably, without the injection of private-sector capital and management expertise into the state-owned business.

Nigel Stapleton, the chairman of Postcomm, has warned in an interivew with me that in the absence of part-privatisation the government may be required to inject a big new subsidy into Royal Mail, which it won't wish to do.

The risk of not bringing in the private sector or a subsidy would be a significant deterioration in the quality of Royal Mail's service under its obligation to deliver letters to and from anywhere in the UK at a uniform tariff, he said.

Only last week Royal Mail announced that it had made a loss on providing this so-called universal service for the first time. Royal Mail estimated that the loss for the last financial year on this its core activity was GBP 100m.

The government will find it hard to dismiss the suggestion out of hand, especially since analysts believe the independent review led by Richard Hooper is expected to come to the same conclusion.

However the Prime Minister is likely to be irked that such a divisive issue is being forced back on to his agenda.

Privatisation in any form, whole or part, is strongly opposed by the CWU, the main postal workers' union – which is also a leading funder of the Labour Party.

The CWU's opposition is shared by many Labour MPs.

Their consistent opposition has always deterred the government in the past from embracing whole or partial privatisation – even though Gordon Brown has told colleagues that he is sympathetic to the idea that Royal Mail could be sharpened up by private-sector capital and expertise.

However the government only has itself to blame that part-privatisation is back in its in-tray – because when ministers set up the Hooper review of postal services, they were well aware that PostComm was bound to make the recommendation

There are uncanny echoes of the early 1990s in Postcomm's call for part-privatisation.

The then Prime Minister, John Major, was widely seen to be on the ropes, as Gordon Brown is perceived to be today.

And an attempt by his ministerial colleague, Michael Heseltine, to privatise the postal service was ditched after opposition from backbench Tory MPs.

Postcomm is proposing that Post Offices Ltd, which controls the huge network of post offices, should be separated from Royal Mail and kept wholly in public ownership, because it already receives a substantial subsidy and is viewed as a de facto social service.

Its model for what should happen to Royal Mail is the part-privatisation of the Danish postal service, Post Danmark.

In July 2005, the leading UK private-equity firm, CVC, bought a 22% stake in Post Danmark from the Danish state. CVC and Post Danmark then bought a big stake in the Belgian post office in 2006. And this year Post Danmark announced a merger with Posten, the Swedish post office.

Mr Stapleton told me that CVC has played an important role in modernising these postal services. He believes the likes of CVC could play a similar role for the Royal Mail,

However, private-equity firms are mistrusted by many trade unionists and Labour MPs. They see private-equity firms as over-rewarded investors who are excessively ruthless in the way they reduce costs and overheads in the businesses they acquire.

Mr Stapleton tried not to criticise the current management of Royal Mail. He said that it was immensely difficult to run Royal Mail successfully given the pressure on the letters market from emails and digital technology and also the huge financial burden of a multi-billion pound deficit in its pension fund.

But Postcomm's submission does not flatter Royal Mail. It says that in April 2008 Royal Mail provided Postcomm with its projected profits and cash flows for 2006-10. These showed that Royal Mail's cumulative cash flows would be GBP 2.6bn lower than it had expected in late 2005.

Postcomm says that "in part this difference is due to lower than expected mail volumes" but a"greater impact is that of lower efficiency and the payment of significant bonuses to staff".

The regulator says that Royal Mail has failed to make some GBP 1bn of promised efficiency savings, but has still shelled out GBP 600m to staff in productivity bonuses.

A further GBP 300m of savings is failing to materialise because of "compensation for falling short of licenced quality of service standards" and GBP 700m has gone AWOL because of unexpectedly lower volumes of business.

Postcomm believes that part-privatisation would provide the cleanest solution to Royal Mail's pension problems, in that it would allow the government to take over total direct responsibility for the fund without breaching European state-aid rules.