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A universal postal service, reaching every corner of the country every working day is essential. Royal Mail is charged with such a service in the United Kingdom. For 350 years it was a monopoly, but the postal market has now been opened to competition. Royal Mail's pension deficit is so large that the company is technically insolvent. Competitors are taking a greater share of a declining letters market. The company's relations with both its regulator and its workforce can be difficult.
Last year the then Secretary of State set up an independent review to examine the future of the universal postal service in the United Kingdom, under the chairmanship of Richard Hooper CBE. That review confirmed that Royal Mail Group was the only company capable of delivering the service and proposed a package to deal with the Group's problems. The state should take responsibility for the historic pension deficit; there should be a new regulatory regime, in which mail services would be regulated as part of wider communications services, and, most controversially, there should be a private sector equity partner in Royal Mail.
The Government accepted these proposals on 16 December, and on 25 February introduced the Postal Services Bill [Lords]. This Report looks at the principle of the Government's proposals, and also looks at some of the detailed provisions of the Bill, identifying questions which the House should pursue when the legislation comes before it. Apart from the ownership issues, one of the most prominent of these is whether the case has been made for complete separation of Post Office Ltd from Royal Mail Group, and how this separation would work in practice.
There is a consensus on the need to protect the universal service, but the Government has yet to make the case that its proposals are the best way to do this. Decisions on this will ultimately be made by Parliament as a whole.
We agree with two key aspects of the proposals. First, that the Government should take responsibility for the historic pensions deficit. Most of its liabilities stem from Royal Mail's time as a monopoly provider. It needs to be freed from them, as many of its European counterparts have already been freed. Moreover, pension fund members deserve to know that their pensions are secure. Second, we also agree that a new regulatory framework, in which postal services are viewed as part of a wider communications market, is entirely appropriate.
However, we do not consider either the Independent Review or the Government has properly made the case that these two reforms, about which there is a broad consensus, can only be made as part of a package which includes the third reform - the involvement of a private sector equity partner in Royal Mail. Similarly, we are not persuaded that the provisions contained in the Bill allowing such a partnership are necessary or desirable. The Government already has powers to sell shares to enable Royal Mail to participate in a joint-venture, provided that each disposal is authorised by Parliament. There is no upper limit on such sales. The proposals in the Postal Services Bill [Lords] would indeed make new provision to ensure that the Government retains a majority stake in Royal Mail, but Parliamentary control of each disposal would be lost.
The involvement of a private sector equity partner as an integral part of the package might be defensible if the sale of a stake in Royal Mail was necessary to raise further money for modernisation It is being implied this is the case, but the Command Paper accompanying the Bill gives no guarantee - indeed, it says that the proceeds from the sale may be used "to partially offset the cost to the Government of taking on the pension deficit." There is no clarity as to how the proceeds of any sale of a stake in Royal Mail would be used.
Both Government and Royal Mail are frustratingly coy about the amount of extra investment needed, refusing to be drawn beyond "hundreds of millions of pounds". Yet Royal Mail will gain significant extra funds from the removal of the pension deficit, and from its own efficiency programme as well as, in all probability, from the new regulatory arrangements.
It is entirely unacceptable for Parliament to be asked to approve such fundamental changes to Royal Mail Group when there is no indication of how much money Royal Mail Group needs for investment while the Government appears to have no business plan and has not indicated the use to which any private sector capital would be put.
Given there is no certainty that there will be a cash injection into Royal Mail Group from a private sector partnership, then the case must rest on its non-financial benefits. There are several questions about the proposed partnership which must be addressed:
- What is the justification for the size of the partnership? Thirty per cent was the figure cited by Lord Mandelson at second reading, but why?
- How much openness there will be about the partnership agreement which will set out the partner's rights and any arrangements between the parties about sale of the partner's stake? As the Bill is currently drafted, Parliament will not have any right to see that agreement before the Government enters into it (or indeed, afterward). Is the Government prepared to make such details public before a partnership is agreed?
- What is the detailed rationale for dividing Post Office Ltd from Royal Mail Group?
- What will be the effect on competition if, as seems very likely, the chosen partner is already active in the UK mail market?
- What will happen if Royal Mail needs further capital injections? The natural assumption is that investors would fund this in proportion to their stake in the company. But such an injection from the Treasury would expose the company to all the state aid rules which we are told this scheme is intended to avoid.
We are left with the conclusion that either the Government has not fully thought through its position about future share sales, or that it has done so and is refusing to reveal its hand. Either case is worrying. In any event, if shares are sold to a new strategic partner, a stake of 30% does not look like an end game to us.
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