Government Response to CWU lobby on Private involvment in the Royal Mail:
4. CWU questions answered
Below we provide the Government’s response to the Question and Answer document currently being distributed by the Communication Workers Union.
Why is the Government proposing to sell up to one third of the Royal Mail?
It is because of our commitment to a publicly owned Royal Mail that we are proposing changes to turn round the Royal Mail from an organisation in decline to one that thrives and prospers.
This is a package of changes that says:
- No to privatisation. Royal Mail will remain in public ownership.
- No to downgrading the universal service now or in the future.
- Yes to greater security on Royal Mail pensions. Sorting out the spiralling pension fund deficit so that the benefits of changes the Royal Mail makes go back into improving the business, not used to fund the pensions deficit.
- Yes to outside investment and management expertise in Royal Mail.
- Yes to a partnership with another major postal company so that the Royal Mail is able to compete and lead internationally as European postal markets liberalise.
- Yes to a new system of regulation that works with the company and workforce, and that puts maintenance of the universal service as the top priority.
- Yes to expanding the role of the subsidised Post Office network into financial services.
No change is not an option because it would leave Royal Mail in a weak position. Our postal service faces huge challenges:
- New technology like email, the internet and social networking sites mean the volume of post we send is dropping year by year;
- Royal Mail faces a pensions crisis. Its huge and growing pension deficit is a drain on its finances;
- Profits are lower than in other countries and some parts of the service are now running at a loss. The Royal Mail lags behind international counterparts who have modernised earlier, some adopting a partnership approach.
- Relations between the unions and management are too often confrontational. The regulatory system isn’t working as well as it should.
In the face of these challenges we cannot let the Royal Mail drift and do nothing. That would leave the universal service under threat and the pension deficit growing. It would leave the Royal Mail lagging behind its international counterparts. That is no future for Royal Mail. We need to save the Royal Mail by investing in its future and secure its future in public ownership.
Why is a private company needed for a financial injection?
The CWU Q&A document says “It isn’t! Currently over £600 million is available to Royal Mail under a commercial agreement it already has with the Government – this money can be used to ‘modernise’ the Royal Mail.”
However, this refers to £1.2 billion in debt facilities offered by the Government in 2007 to assist Royal Mail’s modernisation plans. i.e. it is a commercial loan that needs to be paid back on commercial terms.
As the Hooper Review into Royal Mail points out the process of modernisation has been too slow, which is why the full £1.2 billion has not been drawn down.
But even setting aside the fact that this is a commercial loan that needs to be paid back, it does not address the scale of the fundamental structural problems the Royal Mail urgently faces – crucially its ballooning pensions deficit and the decline in the letters market.
The pensions deficit at last valuation stood at £3.4 billion in 2006 and it is projected that it will have more than doubled by the time of its next valuation due later this year.
This is combining with a structural change in the postal market which is seeing the volumes of letters being sent falling year on year. Since 2005, volumes carried by Royal Mail have decreased by 7%. Royal Mail used to handle 84 million items a day, it now carries 78 million.
If a private operator buys up a third of Royal Mail how much will that cost and how much will they get back?
The Government is looking for an experienced postal operator as a minority partner that has experience of successfully transforming a network business comparable to Royal Mail’s. We have not yet chosen a partner and out intention is to explore a partnership with interested parties.
The need for ‘modernisation’ seems crucial for the future – why is it only a private company can bring in the expertise?
What is needed, and what the Government is proposing, is a strategic minority partnership with an experienced postal operator that has practical experience of transforming a postal network.
This means that Royal Mail will be able to benefit from outside investment, real management experience of the postal business, and is able compete and lead internationally. That is what we are looking for in any prospective partnership and these benefits could only be conferred on Royal Mail by a strategic minority partnership with a major postal operator.
What managerial expertise is out there – who has done this before?
The Netherlands, Germany and Denmark among others have all modernised their postal services. And all of these countries meet the requirements of the European directive: a collection and delivery every working day.
Royal Mail is currently lagging behind its international counterparts:
• Royal Mail is less efficient and less profitable than its main European peers and operators who modernised earlier.
• In 2007/8, Royal Mail’s letters business was the least profitable postal company amongst its Western European peers, and the only one to make an operating loss.
• Companies such as Deutsche Post (Germany) and TNT (Netherlands) achieved profit margins of between 13% and 15% from their mail operations, even though they faced greater end-to-end competition than Royal Mail does in the UK.
• There has not been enough automation leaving Royal Mail doing a lot of jobs by hand which are done by machine in other countries.
• Other European operators, notably in Germany, France and the Netherlands have significantly restructured their networks in the last 10 years. While significant changes were made to Royal Mail’s operations between 2002-2005, these were just the first step in a process of change. Royal Mail has to bring in new technology. Compared to its European competitors, Royal Mail is far behind in employing modern, efficient sorting techniques.
• The Government believes that it is unacceptable for the UK to lag behind Europe.
By the sounds of it the Royal Mail is at breaking point and only the private sector can save it?
The Royal Mail at the moment is currently being hit with a triple whammy.
Firstly, its pensions deficit. The pensions deficit is to be revalued this year and it will have more than doubled from its last valuation which stood at £3.4 billion. On an accounting basis, Royal Mail had a pension deficit larger than any FTSE 100 company at the start of 2008.
Royal Mail is balance sheet insolvent because of the pension deficit. It cannot afford its growing deficit payments.
Secondly, the volumes of letters being sent are falling year on year. Since 2005, volumes carried by Royal Mail have decreased by 7%. Royal Mail used to handle 84 million items a day, it now carries 78 million.
The Hooper Report estimates that, last year, the shift of mail to new technologies cost the company £500 million in lost profits – five times more than the loss of revenue due to competition from other mail companies.
And thirdly, these two structural problems have been exacerbated by the overall position of the economy.
These three factors are contributing to a significant deterioration of the financial position of Royal Mail. The scale of these challenges mean that the status quo is not an option.
After so many years opposing the privatisation of Royal Mail what is the Labour Party policy now?
The Government remains explicitly opposed to the privatisation of Royal Mail. In considering changes to Royal Mail we have rejected privatisation of the Royal Mail – in line with the manifesto - and fully agree that the Royal Mail should be kept in public ownership
Labour’s recent NPF document said that:
“Households and businesses in Britain should have access to reliable and high quality postal services underpinned by a strong universal service. We have set out a vision of a wholly publicly-owned, integrated Royal Mail Group in good health, providing customers with an excellent service and its employees with rewarding employment. The Government has established the Hooper Review to look at how the Royal Mail can succeed in a world where electronic and other forms of communication provide increasingly attractive alternatives to the mail and where there is more competition in postal markets.”
The Hooper Review has now made its recommendations to secure the future of the Royal Mail.
The package of changes being proposed are designed to save the Royal Mail and secure its future in public ownership. These changes are in line with our manifesto commitment to “a publicly owned Royal Mail fully restored to good health, providing customers with an excellent service and its employees with rewarding employment”. Bringing in a partner through a minority stake in the Royal Mail’s postal business will help us deliver that goal. It will bring the Royal Mail more flexible access to capital, new opportunities to grow in Europe and internationally and to offer new services. It will provide a fresh new impetus to modernising the Royal Mail and securing the universal service.
So the money they claim is needed is already available as part of its commercial agreement with the Government, with the managerial ‘expertise’ available in any case, with the Royal Mail making nearly £1 million profit per day and every part of the group in profit for the first time in 20 years and with the Labour Party and the public opposed to the idea, is there any need to part-privatise the Royal Mail?
The Government remains explicitly opposed to the privatisation of Royal Mail. In considering changes to Royal Mail we have rejected privatisation of the Royal Mail and fully agree that the Royal Mail should be kept in public ownership
But no change is not an option because it would leave Royal Mail in a weak position. Our postal service faces huge challenges:
- New technology like email, the internet and social networking sites mean the volume of post we send is dropping year by year;
- Royal Mail faces a pensions crisis. Its huge and growing pension deficit is a drain on its finances;
- Profits are lower than in other countries and some parts of the service are now running at a loss. The Royal Mail lags behind international counterparts who have modernised earlier, some adopting a partnership approach.
- Relations between the unions and management are too often confrontational. The regulatory system isn’t working as well as it should.
In the face of these challenges we cannot let the Royal Mail drift and do nothing. That would leave the universal service under threat and the pension deficit growing. It would leave the Royal Mail lagging behind its international counterparts. That is no future for Royal Mail. We need to save the Royal Mail by investing in its future and secure its future in public ownership.