Ministers set to back investment for UK Royal Mail

Ministers are expected to give the go-ahead for public investment in Royal Mail, the state-owned postal operator, after being convinced by executives of the need for new technology and equipment.

But a decision remains some way off on whether to endorse a controversial share-ownership scheme for company employees that has been proposed by Allan Leighton, its chairman.

Royal Mail has been lobbying ministers, arguing that it desperately needs Pounds 2bn of fresh investment in new equipment to survive in a fully liberalised postal market. It has a Pounds 4.5bn pension deficit that executives believe could swell further.

After long talks between the company and the Department of Trade and Industry and consultation with the Treasury, next week’s announcement of Royal Mail’s 2005 results is expected to provide an indication of the scale of probable government support and the conditions that will be attached.

Talks between ministers and Royal Mail were said by one person close to the negotiations yesterday to be “fluid”. The government was understood to still be forming a view on the precise nature of the financial support it could provide.

“We have put an investment plan to our shareholder for the future funding of the business,” Royal Mail said. “We are now waiting for their decision.”

One option favoured by Mr Leighton and which the Treasury has been examining is a rights issue-style deal, under which the government, Royal Mail’s sole shareholder, would release cash in return for more shares.

Royal Mail has been lobbying for up to Pounds 2bn of financial support. Ministers have resisted demands to bail out the company’s pension fund but have indicated they would consider a business case for investment.

As well as the rights issue transaction, the government has been looking at the possibility of a commercial loan.

There will, however, be little indication with next Thursday’s results of whether government support for the share ownership scheme will be forthcoming.

Alistair Darling, trade and industry secretary, denied a report in The Times that he and Gordon Brown, the chancellor, had decided to back the proposals, which have been opposed by the postal workers’ union and a number of Labour MPs.

“I’ve made no decision on whether or not employee shares are the right thing to do,” he said. But he praised Mr Leighton for the turnround in Royal Mail’s fortunes, saying the company had been “through a very difficult time”.

“The government will help the company in whatever way is proper,” he added. “I think we need to discuss that, decide what the next step is, decide how much we can support.”

Mr Leighton has written to staff asking them to indicate their support for his share scheme. This has provoked fury at the CWU, the union representing most Royal Mail staff over what it describes as an attempt “to effectively privatise this public service”.

Additional reporting by John Willman