Royal Mail - a privatisation too far?

Did Thatcher try to do so, too?
No, even she balked at the idea of interfering with such an entrenched part of our social infrastructure. In the 19th century, the British postal service - thanks to Sir Roland Hill's invention of the penny post and Anthony Trollope's development of the pillar box - played a historic role in pioneering the concept of a universal postal service. Today the same priced stamp still takes your letter to any address in the country; delivery still takes place six days a week. When John Major did try to privatise Royal Mail, in the early 1990s, he soon ditched the plan after opposition from his MPs.
 
Why is this government risking it?
Because Royal Mail now operates in a quite different world. Email, texting and other forms of social networking have slashed the volume of mail: Royal Mail delivers five million fewer letters a day than it did two years ago, at a cost of £500m a year in lost profits. Today a mere 14 per cent of letters handled each year are sent from households, and a lot of those are Christmas cards. The remaining 86 per cent are sent by businesses, much of it junk mail. So while Royal Mail started out as a public utility, it is now a service primarily for business.

Is that side of its operations also being eroded?
Yes. The EU's postal services directive requires the gradual liberal-isation of those services (with full liberalisation by 2012). Eager to oblige, Britain in 2006 (unlike, say, Holland) gave private-sector companies full rein to compete in the business mail market. Royal Mail thereby lost some of its most profitable work, while retaining its costly statutory obligation to deliver mail anywhere in the British Isles for the price of a single stamp. Even the most astute management would struggle in the face of such changes.
 
So why assume privatising it would make any difference?
Because according to the recently published Hooper Report, aptly entitled Modernise or Decline, Royal Mail is burdened not just by a radically altered business environment, but by huge inefficiencies and by its massive pension fund deficit of £8bn-£9bn. (Between 1990 to 2003, successive governments gave the Royal Mail a holiday from having to make any contributions at all.) True, it still makes a notional profit – £255m in the first nine months of this financial year – but in reality it's insolvent. The Government, following the recommendations of the Hooper Report, is prepared to let the taxpayer bail out the pension fund, but only if Royal Mail agrees that a private company, such as Dutch operator TNT, can take a third of the business and help clean up its act.

Has part-privatisation worked elsewhere?
The model that the regulator, Postcomm, wants to emulate is Denmark's postal service, Post Danmark, 22 per cent of which was bought by the UK private-equity firm CVC in 2005. The part-private company went on to buy a big stake in the Belgian post office and to merge with Sweden’s post office. In each case CVC is said to have played a key role in scrapping the sort of inefficiencies said to plague Royal Mail.

What sort of inefficiencies?
Royal Mail, says the Hooper Report, is hobbled by restrictive practices and the militancy of its workforce, which is often on strike. The report claims that despite a big injection of public money, it is 40 per cent less efficient than its European competitors, yet pays its staff 25 per cent more. In other European postal companies 85 per cent of the mail is sorted by machine in "walk order" – for each postie to deliver on his rounds. Royal Mail still does it entirely by hand. Postcomm says Royal Mail failed to make some £1bn of promised efficiency savings last year, but still paid out £600m to staff in productivity bonuses.

And are these comparisons entirely fair?
No. Royal Mail is overwhelmingly a postal service; a company like the much-praised German operator Deutsche Post (DP) may be more profitable, but that's because it owns lucrative services, such as the courier company DHL; its mail division accounts for only 24 per cent of its revenues. Besides, 88 per cent of Royal Mail's income is price-controlled, while only 37 per cent of DP's is - Germany's mail services are far more expensive than Britain's. Moreover Royal Mail is barred from borrowing more than £25m on capital markets, which severely limits access to private-sector money and expertise. In this and many other ways, say Postcomm's critics, Royal Mail's competitors have been given an unfair advantage.

What are some of those other ways?
In the process of "liberalising" the service, the Government has enabled Royal Mail's 22 licensed competitors to "cherry-pick" the lucrative urban market, allowing them to collect and sort business mail, then hand it over to Royal Mail for the costly "final mile" from delivery office to recipient. Royal Mail’s charge for doing so is capped at 13p per item (as part of its "universal service obligation"), so that, in effect, it is subsidising its competitors. By contrast, the Dutch government insists that 50 per cent of local postal services are kept as a monopoly for its national operator, TNT (the firm keen to buy a stake in Royal Mail), until such a time as Britain and Germany "make their markets more accessible".

How do British and German markets restrict competition?
Unlike its competitors, Britain's Royal Mail is exempt from VAT and from parking restrictions; it can force ships or aircraft to carry its mailbags; it enjoys fast clearance of overseas mail by Customs. As for Germany, TNT has spent a year in Brussels contesting Angela Merkel’s intro-duction of a minimum wage for all postal workers. And that, of course, is partly why the CWU - the main postal workers' union and a leading funder of the Labour Party - is so deeply opposed to the privatisation plan. ·