Conclusion
145. There are a variety of reasons why private
sector partnership could be promoted. It could be argued that
it would:
a) Inject cash into the company;
b) Inject management expertise;
c) Improve "commercial confidence",
primarily in labour relations,[128]
and
d) commit the Treasury to a long-term
approach to the company's financial requirements.
146. The first issue is whether these are really
all part of the same package. Mr Hooper and Lord Mandelson assured
us that they were:
You are asking the taxpayer to take on a great deal
now in underwriting that pension fund deficit. If, in addition,
you are asking the taxpayer alone to foot the bill for the investment
in the modernisation and at the same time losing Royal Mail's
access to that much needed, in my view, management expertise and
experience of turning round the postal operator that a minority
stakeholder would bring, I think that is asking too much and I
do not think the public would stomach our cherry-picking the Hooper
Review recommendations and saying, "We will take on the pension
deficit, we will fix the regulator, but broadly speaking leave
the Royal Mail operation as it is". I do not think that
is an acceptable deal or an acceptable bargain for the taxpayer.[129]
147. We are unconvinced by the
argument Lord Mandelson put forward for seeing the proposals of
the Postal Services Bill [Lords] as a package.
The regulatory framework needs to be changed as a matter of urgency
and in its own right. Similarly, the problem of the pensions deficit
needs to be addressed. However the Government already has powers
to dispose of shares in Royal Mail, and would have those powers
even without the Postal Services Bill.
148. There might be a case for
seeing the deal as a package if it were clear that Royal Mail
would need more funding even after reform of the regulatory system
and removal of responsibility for the pensions deficit. However,
there are grounds for believing that the reforms in Part 2 (Royal
Mail Pension Plan) and Part 3 (Regulation of Postal Services)
of the Bill, particularly the potential elimination of access
headroom, would release enough cash to fund Royal Mail's modernisation,
and that the proceeds from any sale are very likely to go straight
to the Treasury. It would be helpful to know if any prospective
partner shared that view.
149. Whatever other arguments
there might or might not be for private equity stake in Royal
Mail Group, a capital injection cannot be relied upon. The
question the House must then address is whether the partnership
with the private sector is still worth it because of the non financial
benefits it will bring. There is a consensus on the need to protect
the universal service obligation: the question is how to fit Royal
Mail for this obligation. There are underlying differing political
and commercial perspectives which inevitably shape reactions to
the government's proposals for a strategic partner for the company.
Some will say that Royal Mail, while being a vital public service,
is in competition with a host of privately provided services,
whether postal or electronic, and should therefore be given the
full freedom that they believe only the private sector can offer.
Others will say, with equal conviction, that precisely because
it is such a public service it should be owned by the public sector.
150. It is also true that even advocates of a
private stake in Royal Mail may have doubts about the timing of
this particular move in the depths of a recession, when other
European mail services are losing significant amounts of money,
and before other regulatory and structural changes - especially
addressing the historic pension deficit - have had a chance to
work through. It is unlikely
that the best price for any shares in Royal Mail would be obtained
now, although we acknowledge that the deal could be structured
over several years and payments could reflect current market conditions
as those payments were made.
151. We therefore believe that the following
questions need to be addressed before any further action is taken
in relation to the involvement of a strategic partner in Royal
Mail.
152. Whatever one thinks of
a private sector partnership, is the Government's position, which
is to say that there will be no removal of the pensions deficit
until such a partnership is concluded, justified? Is it in fact
more rational to remove the deficit as quickly as possible and
revisit the question of whether a private sector partnership is
desirable when there has been time to see if Royal Mail (and its
workforce) can continue to improve their performance?
153. The next question is 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? It may be that it is linked to the provisions requiring
companies with shares to offer to buy out other shareholders;
but that would not apply in this case. Although Mr Hooper cited
a case where a minority shareholder had produced beneficial effect,
in many cases minority shareholders find themselves in the frustrating
position of providing cash without effective control. Interestingly,
no one appears to be putting the case for a sale of a majority
stake in Royal Mail.
154. The third question is how
much openness there will be about the partnership agreement which
will set out such controls as the minority partner will have.
This is likely to include the right to appoint a certain number
of directors. However, the influence available by this route will
presumably be limited by Lord Mandelson's undertaking to the House
of Lords that "public ownership carries with it the voting
rights and economic benefits appropriate to a majority shareholder."[130]
The agreement will also, we presume, set out arrangements for
the partnership to be dissolved if the minority partner wishes.
Normally this would be done either by selling shares on the open
market, or by a firm undertaking that the majority stakeholder
would buy out the minority partner if that was desired. Such agreements
can also include clear statements as to whether and how the minority
partner can increase its stake in the future. What will be the
arrangements here? What will be the arrangements for GLS, the
most profitable part of Royal Mail's business? Under the current
scheme, 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? Why does it feel it needs to change
the law so that specific Parliamentary approval for each disposal
is no longer needed?
155. In the proposals to separate
Royal Mail and Post Office Ltd, account must be taken of the operational
independence between Post Office Ltd, Royal Mail and individual
postmasters. At the moment the Post Office provides access and
delivery points to Royal Mail Group letters and parcels. Will
this continue if the proposal to separate them takes place?
156. When the Government announced
its acceptance of the proposals in the Independent Review on 16
December, it also made it clear that TNT, a major competitor to
Royal Mail, had expressed an interest in entering a strategic
partnership with the company. The fifth question is whether if
the recommended partner turns out to be an existing major competitor
of Royal Mail the loss of competition that would inevitably result
is a price worth paying for the equity stake?
157. Finally, the challenges
faced by Royal Mail are huge — the decline in the letters
market is enormous. That is why the Government is inserting a
provision for a possible future levy to fund the USO. It is an
heroic assumption to imagine that cash generation or debt finance
will be attractive routes for securing the additional investment
that will be needed in the medium term to open up new markets
and diversify, even with a profitable letters and parcels business.
The House should not make that assumption without firm evidence.
158. More money may well be
required. This can really only come from three routes —
cash generation within the business, debt finance or new equity
injections from the public or private sector. But if additional
equity investment is needed, with a 30% partner, either the Treasury
will still provide 70% of that investment — which will then
be subject to all the same state aid rules which we are told the
company is seeking to escape — or it will come entirely
from the private sector partner, who will expect an increased
stake in the business as a reward for the extra risk capital supplied
to the business. We note that the definition of "publicly
owned" in the Bill would apply even where the private sector
held a 49.9 % stake. Some will have no problem with this steady
increase in the privately owned proportion of the company —
but others will.
159. 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.
108 
