Ministers consider postal service split;Consignia
CONSIGNIA, the renamed Post Office and one of Britain's biggest employers, will be split into two companies under a radical proposal being examined by the government.
Ministers are considering a plan to merge Royal Mail and Parcel Force into one company and put Post Office Counters (POC), which runs the network of 17,800 regional post offices, into another. Each company would have a separate board and management structure.
The controversial scheme has been discussed at senior level within both Consignia and the government. It forms part of the Pounds 1.2 billion programme that was announced by the company last week to cut the group's costs by 15% .
POC has become a financial drain for its sister companies. It is currently losing Pounds 120m a year, and the losses will increase after 2003 when the government introduces electronic benefit payments. This will remove an important revenue stream.
POC could become profitable again with the introduction of the government's Universal Bank, but for the next four years losses could total Pounds 500m.
The idea behind the proposed split is that Royal Mail, which accounts for nearly three quarters of Consignia's Pounds 8billion annual sales, and Parcel Force are both distribution businesses. This contrasts sharply with POC, which is in the social and welfare area, and is charged with keeping open a network for the government.
If POC were demerged, it would be run directly for the government, but have a contract with the distribution business.
Neville Bain, Consignia chairman, and John Roberts, chief executive, last week unveiled the biggest shake-up in the postal service's 350-year history. Over the next 18 months, up to 20,000 of Consignia's 200,000 staff could lose their jobs. A high proportion will come from senior and middle management.
There are already plans to outsource its vehicle, building and engineering-maintenance operations. This could be extended even further to embrace IT, administration, sorting offices and the 3,500 cleaners employed by Consignia to look after its portfolio of 3,000 buildings. Bain said: "We want to turn as many fixed costs as we can into variable ones."
To help finance the programme, Consignia may have to dip into the Pounds 1.8 billion of reserves that are held by the Treasury. The company could also ask the government to halt the annual dividend that Consignia pays to the Treasury. Last year it was nearly Pounds 100m.
The company has the potential to leverage its balance sheet to provide up to Pounds 4 billion of capital, but the government would be reluctant to approve such a strategy.
Analysts believe the restructuring could cost as much as Pounds 600m to implement. A large part of this would be in the form of redundancy payments. Bain and his colleagues believe radical action is required if the company is to survive in a deregulated environment where international rivals are making inroads into its core business.
Consignia is to open talks with the Communication Workers Union, which represents the group's 80,000 postmen. The cost cuts have been condemned by the union as "ill-conceived and destructive". It is vigorously opposed to outsourcing and has threatened strike action.
Consignia's finance director, Marisa Cassoni, who joined earlier this year from Britannic Assurance, is spearheading the cost-cutting review. A number of private-sector companies have already made approaches to take over the outsourcing contracts, but so far none has been short listed. If contracts are agreed quickly, this could free up capital to help meet other restructuring costs.
oSir Elton John is to work for the Post Office. He signed a deal last week to star in an advertisement for Consignia that will be screened in the run up to Christmas. Gillian Wilmot, a Royal Mail director, said: "Elton John is a British institution and he loves to shop. The Post Office is a British institution and we deliver more shopping than any other company."
(C) The Sunday Times, 2001
