Long-awaited postal package unwrapped

Why does Royal Mail want government finance?
To cope with competition in postal services where it lost its monopoly in January. It needs to invest up to Pounds 2bn in modern sorting equipment and needs government help to avoid closing loss-making post offices. On top of that, it has to pay off its Pounds 5.6bn pension deficit without putting up prices so much that it loses business to competitors.
Aren't stamp prices rising to provide the cash?
Yes. Postcomm, the regulator, has agreed to higher stamp prices over the next four years that should provide enough to invest in new equipment. The rises should also allow the pension deficit to be paid off over 17 years. But a lot could happen in 17 years – especially if Royal Mail loses a lot of business. Both Postcomm and Royal Mail think the cost of keeping post offices open should not be paid for by mail users but by the government, which wants the network for social reasons.
So how does yesterday's deal help?
It allows Royal Mail to put Pounds 850m of reserves in a special account that can be used to shore up the pension scheme if Royal Mail goes bust. This should encourage the pension trustees (and the pension regulator) not to demand a faster reduction plan that would raise stamp prices further. It also renews a Pounds 900m loan facility which could be used if things go wrong. And the government has promised cash to back whatever post office network a current review decides is right when the present payments end in 2008.
Isn't this unfair government subsidy?
Royal Mail's competitors think it could be and are consulting their advisers on a possible appeal to the European Commission which bars state aid in such circumstances. But only the unspecified support for post offices would mean handing over cash – and that may be justifiable if it keeps offices open in rural areas and disadvantaged communities. The rest is in the form of a pension guarantee and loan facility – which may never be used.
Will staff get shares?
The government has yet to make up its mind. Royal Mail believes giving staff shares held in an employee trust would give them a stake in its revival and encourage their co-operation in painful change. The CWU union opposes the share scheme – and has the backing of almost 200 Labour backbenchers who have signed a Commons motion urging government to retain all the shares. But Royal Mail has written to staff asking if they want shares and says only three out of more than 80,000 replies said they did not.
Is this the first step towards privatisation?
That is what the unions and rebel MPs fear. But Royal Mail says it has no plans to privatise the company. More to the point, the 2005 Labour general election manifesto ruled out privatisation.
Can Royal Mail survive competition?
As incumbent, it has lots of advantages – a recognised brand, more than 16,000 post offices and the only network that reaches every home and workplace in the country. But competitors with no pension deficits and modern equipment are winning business from the organisations that send out the bulk of the mail that provides most of Royal Mail's profits.

Royal Mail chairman gives pledge over state funding
Daily Telegraph (UK), Sec. City, p 003 05-19-2006

Leighton, chairman of Royal Mail, promised yesterday that the Government would gain back "one pound in five'' for the funds it was making available to shore up the postal service, which has a pounds 5.5bn pension deficit.

The money, which Mr Leighton claims amounts to pounds 3bn, will come as a package, including a pounds 900m loan facility and access to pounds 850m of previously restricted funds.

The remaining part of the package is a commitment to pay for the continuing restructuring of the Post Office . The announcement came as it announced a profit of pounds 312m, up 87pc on last year.

Elsewhere, it emerged that Royal Mail's plans to hand a stake in the business to its thousands of employees could be shelved, with ministers unlikely to make any changes in the postal operator's ownership structure for at least two years.