Royal Mail’s need for cash back on agenda

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Royal Mail’s urgent need for new investment is firmly on the agenda following the regulator’s demand on Thursday that the postal operator should be freed to raise capital from the private sector.

Postcomm’s blast produced a predictable response from the Communication Workers’ Union, which said it had overstepped its remit by calling for privatisation.

Nor was there a clamour from private equity groups desperate to take a stake in the state-owned former monopoly. However, a partnership with the private sector would not only bring in funds, it would encourage the greater efficiency, innovation and flexibility needed to sustain the one-price-goes-everywhere delivery.

The possible role of private capital has already been raised by the independent review set up by the government to look at the future of the universal service.

Richard Hooper, the former telecom regulator who is chairing the review, was in Copenhagen this week to meet Post Danmark, which sold a 22 per cent stake to CVC Capital Partners, a private equity firm, in 2005. Since then, it has acquired a stake in De Post/La Poste of Belgium and announced a merger with Sweden’s Posten by the end of the year.

Finding a similar investor for Royal Mail is likely to prove much harder. Its yawning pension deficit was £3.4bn at the last actuarial valuation in March 2006 and it is expected to rise sharply when the valuation is published next year.

“No private equity firm will be interested in taking a stake as long as it has the pension deficit,” said John Ralfe, an independent pensions consultant. “It would only work if the UK taxpayer takes on the deficit.”

This will not surprise Nigel Stapleton, the Postcomm chairman, who has worked with the private equity industry since leaving Reed Elsevier in 1999. The regulator’s submission to the review says the introduction of private capital would require the government to “consider more radical options for addressing Royal Mail’s pension deficit”.

When BT was privatised in 1984, the government took on responsibilities for the pensions of staff employed while it was state-owned, leaving taxpayers on the hook for billions if the scheme became insolvent.

However, ministers are unlikely to find the idea of taking on the pension liabilities of present and former postal employees attractive at a time when the public finances are under pressure. And the alternatives are hardly more attractive.

One is to reduce the universal service obligation – for example by ending Saturday deliveries or relaxing the overnight delivery deadline for first-class mail. Postcomm has denied any intention of ending the Saturday service, but has costed the savings from such options.

Another alternative is to subsidise the universal service, allowed under the European Union postal services rules and likely to be adopted in some EU countries through a levy on competitors. Postcomm says this would hit competition, however, while easing pressure on Royal Mail to raise its efficiency, which is far below its competitors’.

Further direct government support to the state-owned operator could fall foul of the EU’s state aid rules. It would also be costly: Royal Mail has said its cash flow between 2006 and 2010 is £2.6bn less than predicted when Postcomm last set postal prices.

Yet if the pensions deficit does grow substantially, the pensions regulator is likely to demand higher contributions to clear it within a reasonable time. This would force its managers and the government, to consider all the options – including bringing in private capital, however unpalatable that may look politically.

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