Mail faces last post, warns DTI
Royal Mail may be forced into administration unless it is allowed to raise stamp prices, the Government has admitted.
The stark warning is contained in a Department of Trade and Industry report sent to the postal regulator Postcomm late in December.
The DTI, which is the sole shareholder in Royal Mail, warns that if Postcomm rejects requests for an increase in prices then Royal Mail won’t be able to pay back three government loans worth more than pounds 1bn.
Officially, the DTI refuses to comment on the consequences of a default on the loans. But a senior insider said: “Administration is a real possibility if Postcomm rejects the application.”
The DTI’s options are limited. The department’s report says any funding given to Royal Mail must be on commercial terms, otherwise it will breach European state aid rules. The DTI also warns that “there is no prospect of additional government money to support turnaround” at Royal Mail.
The debt is made up of two government bonds totalling pounds 500m, and pounds 544m in cash from the National Loans Fund. The money was offered last year as part of a restructuring plan devised by Royal Mail’s chairman Allan Leighton. This also includes mass redundancies which could see 32,000 people, or 16 per cent of the workforce, laid off.
The loans were agreed on commercial terms. But the DTI, in its report, says that without a favourable ruling from Postcomm “debt cannot be repaid” and “we do not believe … cashflow could support commercial borrowing”.
The DTI also reveals the decision to agree the loans was finely balanced as the Royal Mail’s cashflows are “worryingly weak”. The DTI has asked the accountants Deloitte & Touche to assess the risks to the loans. However, in its report to Postcomm, the DTI says it expects the firm to conclude “there is a reasonable case to make the investment on commercial grounds”.
A Royal Mail spokesman said: “Administration is one option, but not the only one. If Postcomm rejects the application then the Government will have to look long and hard at new ways of financing Royal Mail.” He added that if Postcomm says no, Royal Mail will take the matter to the Competition Commission.
The row between Royal Mail and Postcomm centres on future price rises. Royal Mail, which has just appointed former Football Association boss Adam Crozier as chief executive, wants to put a penny on the price of a stamp in April, taking first class to 28p and second class to 20p. Postcomm has agreed to this but wants a price cap on subsequent rises to 2.5 per cent below retail inflation over three years.
Royal Mail claims that this restriction would cancel any economic benefits from a price increase. Mr Leighton has also warned that it would threaten the “universal service” by which Royal Mail is obliged to deliver mail to remote locations.
It is understood Postcomm commissioners will meet on 16 January to discuss the matter. A final decision could be announced in February.
Postcomm has come under intense pressure from the DTI to cut Royal Mail some slack. If it sticks to its guns some commentators have speculated that the DTI could take the extreme step of overruling the regulator.
