Government to inject £1.7bn ahead of Royal Mail sell-off

The UK Government is set to inject a further £1.7bn into Royal Mail, as the operator heads towards privatisation. As the Postal Services Bill passed through parliament yesterday (Thursday), it was revealed that Royal Mail currently has around £1.7bn of debt facilities with the Government.

In order for the operator to be on a sustainable commercial footing going forward this will need to be restructured and Royal Mail’s level of debt will need to be reduced substantially, the Department for Business, Innovation & Skills (BIS) said.

This figure, combined with the company’s historic pension deficit – believed to be more than £8bn – will see the public purse taking a £10bn hit ahead of the company’s privatisation.

For this additional financial support to be provided, the Government will need approval from the European Commission, and will submit a formal state aid notification in the next few days. It hopes that the process will be completed by March 2012.

As well as allowing private investment into Royal Mail, the Postal Services Bill outlines that Post Office Ltd could move to a mutual ownership model, Ofcom will become the regulator to the UK postal industry, and the government will take on Royal Mail Group’s pension deficit. The Government made a number of amendments to the Bill in April.

During yesterday’s debate, minister for postal affairs Edward Davey said that the obtaining of state aid is crucial, along with the change of the regulatory regime. Ofcom will launch a consultation in the autumn with a view to establishing the new regulatory framework in spring 2012, BIS said.

Davey said: “Today is unquestionably a major step forward in protecting our universal postal service and our Post Office network.

“We have worked extremely hard to ensure the best possible outcomes for the taxpayer and the dedicated employees of Royal Mail and the Post Office up and down the country.

“At least 10% of the shares in Royal Mail will go to its employees as part of the sale process. Royal Mail’s staff will get secure pensions. And the proposed support will ensure that the company is on a sound commercial footing and can operate on a level playing field.”

The Postal Services Bill is expected to receive Royal Assent shortly.

Commenting on the news, business secretary Vince Cable said: “Today marks a significant milestone for Royal Mail. Legislation has now been agreed that will help tackle the huge challenges facing the company.

“Royal Mail and the Post Office are important and cherished parts of our society. It was vital we took swift action to put them both on a sustainable footing.

“Passing the legislation, reforming regulation, getting state aid approval, tackling the pension deficit – these are all vital steps that will provide momentum towards a sale of Royal Mail. They will also give the company the security and certainty it needs to press ahead with its essential modernisation programme.”

However, the passage of the Bill has not met with such optimism across the industry.

The UK Direct Marketing Association (DMA) believes privatisation will lead to price increases for commercial mailers.

Alex Walsh, head of postal affairs for the DMA, said: “While the new legislation will render Royal Mail a more attractive proposition for interested investors, we’re concerned that competition will suffer. There’s also no incentive for Royal Mail to improve efficiencies or cut costs. So, it’s highly likely that commercial mailers will be saddled with price increases along the line.

“This year alone we’ve seen a 15% hike in mailing costs. Increasing prices further will undoubtedly lead to many companies shying away from using mail to communicate with consumers and withdrawing business from Royal Mail, which it can ill afford to lose.”

In addition, Mark Lewis, CEO of Collect+, said: “For many of those who have been let down by an outdated and inconvenient service from Royal Mail over the years, the impending privatisation will mean continued confusion. Until the longer term future of the Royal Mail is decided, consumers and small businesses sending deliveries will have to put up with instability and uncertainty.

“Alternative parcel delivery services, many of which offer far greater flexibility and value for money, have highlighted the Royal Mail’s failure to match the busy lives of its customers and have started to provide much needed choice in the delivery market.”

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