The coalition government’s Postal Services Bill cannot be criticised for lacking innovation. While Royal Mail remains state-owned it cannot really go bankrupt, but selling it brings the risk of bankruptcy. A universal service still has to be provided so the innovations of privatisation include provision for taxpayers to bail out in the event of such a failure.
This amply demonstrates the huge risks that the coalition is taking with Royal Mail (RM). It has decided to take the gamble despite the fact that every opinion poll for the past 20 years has registered a large majority against. Even among its own voters, it’s going against public opinion. If its own supporters think privatisation will worsen services and increase prices, what’s the rationale for privatisation?
Business Secretary Vince Cable has said that only through privatisation will RM be able to compete. Yet this is not demonstrated either on an international or national level. Internationally, RM has weathered the recession better than its key privatised rivals, TNT and Deutsche Post. RM’s profit rose to £321 million in 2008-9 then by 26 per cent to £404min 2009-10. In comparison, in 2009, TNT’s profits were down by 25.4 per cent, Deutsche Post’s down by 36.5 per cent. Yet both companies experienced far smaller decreases in mail volumes and shorter recessions in their home markets. In addition, RM delivers letters at approximately half the stamp price of these two firms.
On the national level, the postal market has been completely liberalised – any firm can enter. Yet RM continues to deliver over 99 per cent of previously reserved mail. Its efficiencies of scale and scope simply cannot be matched. The area where competition has made inroads is in the so-called “access” work, where bulk mail from businesses is driven to RM sorting offices for final delivery. The regulator has imposed constraints on pricing which mean the market has been rigged for competitors.
Royal Mail has not won a contested contract for this work. Indeed, for delivering this work, it is losing 2p per item – amounting to a £100m subsidy to the competitors. Even the coalition government has accepted that something must be done, confirming that regulation is the problem, not that Royal Mail cannot compete.
Employment Relations Minister Ed Davey and others have suggested that privatisation is the only way that Royal Mail can obtain investment capital despite the fact that the current three-year modernisation programme is fully funded. But even if we overlook Davey’s oversight and look to future funding three years hence, it is clear that there are other options for Royal Mail investment.
To start with, RM could retain its profits for future investment. Second, if competition were equalised, Royal Mail would have an additional £100m a year in income. Third, the government has accepted that it must take responsibility for the pension deficit as governments had failed to contribute to the pension fund for 13 years. This will reduce RM’s pension expenditure by a further £280m a year.
Of course, additional investment could be financed through loans, like any normal company without having to be privatised. But the truth is that RM is up for sale because that’s the political prejudice of the Tories and their Lib Dem accolytes. Cable denounces the City spivs at Lib Dem conference – and offers them Royal Mail in Parliament.
The threat to universal service
The Postal Services Bill has been drafted so as to assuage concerns among coalition supporters. It reasserts the universal service of six-day deliveries and affordable and uniform tariffs for stamps. This is in one sense an immediate concession to the anti-privatisation campaign, as we know from a leaked letter from Cable to George Osborne that six-day delivery was under threat.
But the Bill also concedes that a privatised RM will want to reduce the universal service obligation (USO) and authorises the regulator Ofcom to review it. More disturbing again, is the fact that for the first time in legislative proposals there is the prospect of more than a single provider, and for partial provision of service by a provider.
At present, only Royal Mail provides a universal service. A universal service is very expensive to maintain, requiring a huge amount of equipment, vehicles and employed workers, but also creates economies of scale and scope which are lost if the universal service is broken up.
Also, Ofcom could simply designate a universal service provider or providers. In a strike situation, Ofcom would be able to designate some other company to provide the service instead of a strike-bound RM. If it isn’t the main point of this element of the legislation, some of the Bill’s backers will see it as a bonus.
Obviously the government knows that competitors would be anxious to take on the USO if it only covered restricted, urban and profitable areas. The Bill’s proposal would create a huge downward pressure on the USO service standard and threaten its very coherence.
Post office network jeopardised
A major issue is the proposal to separate Royal Mail from Post Office Limited (POL), the counter network. The government is playing this up as a progressive move, insisting that it would keep POL in the public sector. Indeed, it is preparing to turn POL into a “mutual” suggesting this demonstrates the government’s radical spirit.
None of this covers up that POL is facing imminent decline outside of Royal Mail. The simple fact is that a privatised RM will have no obligation, beyond the existing contract, to use POL.
Any retail network would do, in which case we can expect a wave of closures among local Post Office branches. Such an analysis is regarded as alarmist by the coalition, but RM has become increasingly reliant as government business has declined.
In 2003-4 revenue from Royal Mail was 27.5 per cent of POL’s income. By 2009-10 this had risen to 35 per cent. In the same period revenue from government services fell from 43.1 per cent to 24 per cent. POL is already dependent upon the government for a direct subsidy to maintain its network of post offices, currently running at £150m a year, and rising to £180m from 2011-12. After the subsidy, POL still had a total recognised loss of £130m in 2010.
There is also a long-running dispute between POL and RM management concerning the correct pricing of services used. On central services provided to POL by RM there is an assumption of around £150m subsidy to POL.
The dynamic of separation is then clear. POL will be dramatically weakened. Talk about innovative staff involvement in a mutual is then just whistling at a hurricane.
For these, and many other reasons, the CWU is committed to a campaign against the Bill. We know that the shadow cabinet and the Parliamentary Labour Party will oppose it. But the support is much broader.
Recently the Women’s Institute pledged its support for the campaign to Keep the Post Public. It is vital that everyone who values the public postal service lends their support to the campaign.
This will be a tough fight – but it is one we can win.
The second reading of the Bill takes place on October 27, when the CWU will be organising a parliamentary lobby. Contact your local CWU branch to get involved, addresses can be found at www.cwu.org
(This is a shortened version of an article which appeared in the Morning Star)
