There is no dispute about the challenges facing Royal Mail: a legacy of under-investment, a declining mails market as people switch to digital technology, and a substantial pension fund deficit. At the same time, the universal service obligation – whereby letters are collected and delivered anywhere in the UK, for a single, affordable price – must be maintained.
- The need to address this situation has been clear for many years. However, only recently has Government put forward its proposals:
- That a new regulatory framework be put in place, including abolishing the industry regulator Postcomm and transferring its responsibilities to the communications regulator Ofcom.
- That the Government take over the responsibility for the Royal Mail Pensions Fund's deficit.
That an invitation should be issued to “other postal or network operators to come forward with proposals for developing a strategic partnership with the Royal Mail, including taking a minority stake in the company's letter and parcels business”.
There is no serious concern about the first two proposals. In particular, Royal Mail's pension deficit at the present time is around £9 billion and current measures to reduce this deficit are costing the company £280 million a year, and can be expected to rise. A large part of this problem is due to the contributions holiday introduced by the Tories in the late 1980s. Since taxpayers benefited from this decision, it is only right that taxpayers should now take responsibility for correcting it. The Government is therefore correct to propose that they take responsibility for the historic liabilities.
The row is, of course, about the third proposal: part privatisation. We are told that the main reason for this is that a capital injection is required for modernisation. The situation might have been different if, again thanks to the Tories, Royal Mail had not been required to hand over in excess of £2.3 billion in profits to the Treasury between 1984 and 1998. The company might have been ahead with modernisation instead of lagging behind. But there is no doubt that a significant capital injection is now needed for modernisation.
But how much does Royal Mail need? All we know is that Royal Mail has said ‘hundreds of millions', that dealing with the pension deficit would yield more than £280 million a year and that changes in access pricing might generate another £100 million. How much more of a capital injection the Government has in mind is unknown, because no figure has been given.
Then the Government argues that ‘a strategic partnership between Royal Mail and one or more private sector companies with demonstrable experience of transforming a major business' is required. The problem, again, is that no evidence has been provided to support this assertion.
It might be the case. Post Office Ltd, wholly publicly owned, has developed a very successful joint-venture with the Bank of Ireland, to provide a range of financial services through the extensive Post Office network.
But what is entirely unconvincing is the argument that a ‘partnership' must take the form of part privatisation of Royal Mail and that the three elements of the package - reforming regulation, the Government taking responsibility for the pension deficit and part privatisation – must be taken together as the only alternative to the status quo.
In his evidence to the House of Commons Business and Enterprise Committee, Adam Crozier, the Chief Executive of Royal Mail, called for more equity capital for the company, to avoid the burden of debt repayment. But he did not call for private equity in Royal Mail. He felt that this ‘was a matter for the shareholder', i.e. the Government.
The proposed part privatisation of Royal Mail does not seem to many to make the best of sense at any time. However, when the private sector is seeking unprecedented investment from government because it can't generate the finance itself, it is an odd time to argue that selling minority equity in Royal Mail to a private shareholder is the key to success.
We are told that this is the only way to improve management skills and lever in modernisation expertise from elsewhere in the industry. However, why such expertise cannot be bought in by Royal Mail isn't clear. The use of consultants and partnerships, without a change in equity arrangements, is common in both the private and public sector.
Then, we are told that private equity will change the culture of Royal Mail. I am sure that full privatisation would! But the Government is totally opposed to that (rightly, in my view). What I don't understand is how cultural change, which may well be necessary, can be achieved by a minority private equity stake in the company.
Lastly, we are told that private equity is the best way to finance the necessary capital injection. But, again, no evidence is provided. The fact is that private finance is more expensive than public finance (hardly a novel observation, but just think about the current financial crisis). And where are the companies falling over themselves to buy equity in Royal Mail?
TNT is reported to be interested. But what would it expect to gain from injecting a significant capital investment for a minority shareholding? We do not know.
We do know that TNT spent a year contesting the German government's introduction of a minimum wage for postal workers. And we do know from press reports that TNT has had some difficulty with paying the tax authorities on time. And, despite this, we know that TNT has suffered a massive fall in profits.
The fact of the matter is that there is no business plan on which we can judge the Government's proposal. Or, if there is, it is not in the public domain. Parliament is being asked to agree a pig in a poke. There is no business plan to justify the Government's proposals. They would certainly not make it through Dragon's Den. An investment idea that is business ready, this is not!
Finally there is the politics of this, which defies any rational explanation. Hostility to part privatisation from many Labour MPs, party members, trade unions and the public is not only the result of the absence of any sound economic argument for it. It is because it is contrary to what Labour promised.
The Labour Party manifesto of 2005 said, with reference to the Royal Mail: “we . . . have no plans to privatise it. Our ambition is to see a publicly owned Royal Mail fully restored to good health . . .”
More recently, at Labour's annual conference in September last year - just five months before the Secretary of State for Business and Enterprise announced his part-privatisation plans - delegates endorsed the statement: “We have set out a vision of a wholly publicly owned, integrated Royal Mail Group” .
What happened in just five months? Your guess is as good as mine.