Royal Mail privatisation likely (UK)

It looks likely that Royal Mail could be split up and areas of the business sold to private investors in an attempt to secure the future of the UK's universal service.

Despite previous rejections by Postcomm of Royal Mail's request to introduce zonal pricing to cover the cost of delivering to more expensive areas, Postcomm now appears to have warmed to the idea. It says that zonal pricing on business mail would be a way to help shore-up the universal service which showed a loss of GBP100m. Even Royal Mail's overall price controlled business showed a loss of around GBP 200m which is giving cause for concern. Postcomm is keen to see private investment which could entail the service being split up, particularly if the government can provide assurances that the pension deficit can be removed from the equation. The pension deficit is presently seen as a barrier to outside investment.

Royal Mail was given a GBP 1.7bn loan (which it has to pay back), to introduce new sorting equipment and modernise the way it operates but with mail volume declining annually, long-term measures are being looked at to ensure consistent funding for basic mail services. With the pension deficit to clear and a massive loan to repay, Royal Mail is under enormous pressure to reduce its operating costs.

The Communication Workers Union which says that Royal Mail should be a public service first and a business second, is not keen on the idea of privatisation and has accused the government of allowing the service to be run down to push through privatisation plans. The postal regulator, Postcomm, denies this, saying that it has been a greater than expected take-up of electronic communications such as email that has eroded Royal Mail's business and that without private capital, Royal Mail's future is grim. Adam Crozier, Chief Executive at Royal Mail, said that Royal Mail was not against the idea of partnerships that would introduce private capital.

It is unclear in what form private investment would be, but it would require a splitting up of Royal Mail to encourage investors, with Parcelforce probably the most lucrative part of Royal Mail. Postcomm is keen to see an arrangement that would provide a sustainable source of funding for the USO rather than leaving the country to pick up the cost.

Essentially, The idea behind the introduction of competition in European postal markets was to improve the transfer of goods across Europe and at the same time promote, presumably some kind of price war but with the timetable for full liberalisation out of step across Europe's 22 countries, it puts enormous pressure on those that have been first to deregulate their postal systems. Some countries are actively grabbing business elsewhere but not encouraging competition on their own soil and there is no cohesive approach to underpinning the universal service other than allowing individual countries to fund this themselves.

The EU says that each country can effectively make its own arrangements for the USO providing it complies with EU rules. If Royal Mail were privatised but the pension deficit offloaded to the entire country as well as the funding for the USO, deregulation would be a complete disaster, so Postcomm will be keen to see that any investment will underpin the USO.

La Poste, the French postal operator is already looking to part-privatise its own postal service and other European countries, particularly the Baltic states, may have little option but to privatise their entire postal services.

Liberalisation is heavily pitched in favour of business but for EU countries, funding the universal service is now a pressing issue. The UK has already slashed its post office network and it is clear that with strict rules on what kind of money can be injected into state-owned postal services and on what terms, some fairly creative ideas will be needed to ensure that the USO is secure.

In all probability, large chunks of Royal Mail's business will be privatised over the next ten years and with no one really certain as to just how low the decline in mail business is likely to drop, private capital is unlikely to be worth as much to Royal Mail as it is now. A report into the state of the UK's postal service expected in October will almost certainly underline the urgency of a sell-off.