From pillar to post

11 Jun 09
The government is forging ahead with part-privatisation of Royal Mail, despite bitter opposition from MPs and the public.
By Tash Shifrin

3 April 2009

The government is forging ahead with part-privatisation of Royal Mail, despite bitter opposition from MPs and the public. But why now, when faith in private sector solutions is at a low ebb — and with a general election around the corner?

The state has bailed out and bought up the banks, the car industry is begging for a rescue package and even the Private Finance Initiative is being propped up with public funds from the Treasury. Nationalisation – barely whispered for 30 years – is back on the agenda.

It seems a strange time, then, to contemplate selling off a chunk of what could be considered Britain’s oldest public service: Royal Mail. It is a move in the face of the prevailing wind, an odd one out that seems an anachronism. But the government is not just thinking of this; it is legislating too. The Postal Services Bill, introduced by Business Secretary Lord Mandelson in the Lords, is now in its committee stages.

The part-privatisation has stirred up a political storm. The government is battling a sizable backbench rebellion. More than 40% of Labour MPs – 147 – have signed an early day motion urging that full public ownership be retained. Another 30 MPs of other parties have also signed up. The move received an unhappy response from the public too: a February poll by PoliticsHome.com found that 65% opposed the plans, with only 24% in support, across voters of all political parties.

The Communication Workers Union, which represents Royal Mail staff and is closely entwined with the Labour Party, was particularly riled. Last year the CWU donated £434,000 to the party, whose MPs and peers include a roster of former postal workers. They have made their presence felt, by signing the EDM or speaking against the government in the Lords. If Royal Mail is privatised, the CWU says it will ballot to cut off party funding for the next general election. The union is lobbying hard, and claims supporters at the highest level. ‘We think there are four in the Cabinet,’ general secretary Billy Hayes says. There is speculation that one might be former postal worker and one of Hayes’ predecessors at the CWU, Alan Johnson – but the health secretary has remained tight-lipped in public.

Meanwhile, the Conservatives are enjoying Labour’s infighting immensely. They support the part-privatisation in principle and have voted with the government in the Lords.

It all begs a question: why would the government make such an unpopular move, revealing Labour’s deepest divisions, when a general election is due within 13 months?

Postal affairs minister Pat McFadden makes no apology. He tells Public Finance: ‘To govern is to choose.’ And the government had to make a choice because the company is in a dire state, he argues. Without action, the universal postal service – which guarantees six day-a-week deliveries, for the same price to and from anywhere in the UK – is under threat and Royal Mail is unlikely to have enough cash to meet its pension obligations, he adds.

‘The choice for Royal Mail is not change or no change. It is whether Royal Mail reforms in a structured way or whether its finances are simply eaten away by the sharp fall in mail volumes. Each 1% fall in mail volume results in a reduction in revenue of £70m.’

McFadden is keen to avoid the ‘p’ word, however. ‘The government is not proposing privatisation,’ he says. It will just have a ‘strategic partner’ from the private sector.

The denial cut little ice with the minister’s own former parliamentary private secretary, Jim McGovern, who resigned the post in protest in December to sign up with the rebel MPs. ‘I do not support what looks to me like partial privatisation,’ he declared.

McFadden’s analysis – and the government’s proposals – are based on the review by Richard Hooper, which reported on the future of Royal Mail’s letters and packages business in December. Hooper’s report did not examine the other three subsidiaries of Royal Mail Group: the Post Office, and the Parcelforce and General Logistics Systems parcel services.

The report, Modernise or decline, painted a picture of crisis: the ‘explosion of digital media’ had prompted a huge decline in the letters delivery market, while the pension fund was £3.4bn in deficit at the last valuation. The most recent estimate put the deficit at £5.9bn.

Hooper recommended ‘a strategic partnership between Royal Mail and one or more private sector companies’. The precise nature of the partnership was up to ministers.

The government should take on responsibility for the pension liabilities, and regulation should be switched from Postcomm to Ofcom. The historically loss-making Post Office, which runs the national network of local post offices, should ‘remain wholly within public sector ownership’, the report said.

In response, Mandelson announced the government’s plan to sell a 30% equity stake in Royal Mail. Netherlands-based private operator TNT had already expressed an interest, he added.

The Conservatives also backed the Hooper recommendations. Jonathan Djanogly, McFadden’s opposite number, denies allegations that the Tories would go for 100% privatisation. ‘That’s not our policy,’ he says, although he adds: ‘We’re not giving the government carte blanche in terms of what goes into the Bill.’

Hooper himself notes that much of his report was uncontroversial: the need for modernisation is one that the government, the Conservatives, Royal Mail, the CWU and the Labour rebels agree on.

The part-privatisation is ‘the critical question’, he tells PF. But the recommendations on the pension deficit, changing the regulatory framework and the introduction of a private firm were a package, ‘not pick and mix’, he stresses.

The private element is crucial, he argues, because only this can bring ‘the level of modernisation’ needed. State ownership has meant the ‘spectre of political interference’ has obstructed change, he says. The private sector input is also essential to bring in the requisite investment capital and commercial expertise.

But Hooper argues: ‘If the modernisation of Royal Mail can happen in 100% public ownership, why has it not already happened?’

He acknowledges that wholly public postal services in the US and parts of Europe have modernised. Surely this means that the private sector stake itself is not the crucial factor? But Hooper sweeps the objection aside. ‘In the UK, we came to the conclusion that this could not happen under 100% public ownership,’ he says.

Former postal worker Geraldine Smith, who is leading the rebel Labour MPs, thinks Hooper’s argument does not hold water. ‘What you really need is a fair pricing policy and genuine commercial freedom,’ she says.

Royal Mail has ‘had one hand tied behind its back’ because the regulator has imposed fixed postage prices. It has also been obliged to give commercial competitors in the partly liberalised market access to ‘downstream’ parts of its distribution network, also for a fixed price. ‘The taxpayer is subsidising private companies,’ she says.

Indeed, Royal Mail’s own annual report for 2006/07 notes declining mail volumes as competitors using this ‘downstream access’ picked up 2.4 billion letters, far more than the 1.9 billion forecast by Postcomm. The company noted further losses to competition in 2008.

Smith says the pension deficit should be seen in the context of the current difficult economic times – the state of the pension fund would improve with a rise in share prices. But she argues that a 13-year pension contributions holiday – begun in 1990 under the Conservative government (when the fund was in surplus) and continued under Labour – is at the root of the deficit.

‘I find it a bit rich of this government that they’ve allowed this to continue,’ she says.

Smith also points out that Royal Mail has made ‘massive profits’ in the past. During the 1990s, it returned some £2.5bn to the Treasury – money that she says ‘should have been reinvested’ in the business.

Her opposition is echoed by Billy Hayes at the CWU. The privatisation plan will lead to ‘the disaster of Railtrack, only with pillar boxes’, he says, citing the rail firm that Labour was forced to renationalise in 2002. ‘It’s bad for the public, it’s bad for the sector, it’s bad for the workforce and it’s unnecessary.’

The CWU points out that the Royal Mail Group’s half-year results published in September show that all four of its businesses were in profit for the first time in almost 20 years and it was on course to almost double its 2007/08 profits of £162m. In contrast, potential partner TNT’s quarterly results, posted in February, showed operating profits down by over one-third. An entirely publicly owned Royal Mail has a future, Hayes argues, adding: ‘There’s a conundrum. If it’s in such a parlous state, why do people want to buy it?’

Hayes says the decline in mail volumes is partly a result of the gloomy economy, but he adds that in the US, where the state-owned postal service has ‘embraced new technology thoroughly’, volumes have fallen less. He wants similar innovations – a same day delivery service or computerised tracking of ‘intelligent mail’, for example – to be introduced in the UK.

‘It’s a myth that one technology replaces another,’ Hayes says. People who order CDs online still receive them through the post. ‘The sector is part of the communications revolution. Some of the biggest users of Royal Mail are internet-based companies.’ And he is scathing about the idea of the government pumping money into the pension fund while selling off part of the company. ‘They’ll be nationalising the debt and privatising the profits,’ he says.

Hooper, by contrast, says the pensions rescue and the equity sell-off must go together. ‘You wouldn’t get a private sector strategic partner with a pension deficit that size,’ he argues. McFadden says the government ‘cannot ask the taxpayer to assume responsibility’ for the pension deficit unless the future of Royal Mail is secured ‘on a sustainable basis’ – with a private partner. ‘Only a partner with real experience and a real stake in making a success of Royal Mail will help transform it,’ he says.

If the two sides are at loggerheads over Royal Mail, they are doing a more complicated dance around the future of the regularly loss-making Post Office Ltd. A certain amount of unity exists over the wish to keep it public and sustain it by developing its services. Last month, McFadden spoke in favour of a ‘people’s post bank’, backing a campaign by a CWU-led coalition – although he is less keen on the coalition’s call for the government to fund its development.

The Conservatives offered support too, adding that it was ‘about time’ that the government moved to diversify post office services in such a way. The happy consensus was not without a layer of irony, however. The Post Office once had a bank – Girobank. But this was privatised by the Tories in 1990, a fact about which both Conservatives and Labour have remained silent.

But those who oppose the partial Royal Mail sell-off argue that it makes no sense to split it from the Post Office through privatisation. There is ‘synergy’ between the two, Hayes says, particularly in rural areas, where the local post office doubles as a small delivery office.

The point was taken up in the Lords debate on the Bill, where peers pointed out that the Post Office receives £356m a year from Royal Mail for handling its letters. An amendment seeking to stall a separation of the two bodies was lost – but the Lords are expected to raise the matter again at report stage.

Unless pressure from outside Parliament mounts to a degree that might change ministerial minds, however, the government seems likely to ram through its plans – albeit with its majority secured by Conservative votes. The rebel Labour MPs do not have the numbers to stop this. The question of whether postal workers’ undoubted anger might solidify into anything more forceful hovers over the political debate, though. They accounted for around 600,000 of working days lost to strike action in 2007 – 60% of the total for the whole economy, with civil servants accounting for most of the rest. Mandelson has hinted that the union’s militancy could deter buyers. ‘We should be under no illusion that attracting the right partner – or indeed any partner – will be easy,’ he told peers.

Hayes says the union is barred by law from striking over a political issue. He refuses to be drawn on whether a legal industrial basis for action could be found. Shadow minister Djanogly does not mention strikes either. But he does warn darkly: ‘If the government doesn’t move forward on the basis of taking the workforce with them, this is not going to succeed.’ And Hayes says: ‘It’ll be a stain on the Labour government if they get the privatisation of Royal Mail through – a stain that won’t go away.’

In the run-up to an election, such a warning cannot be discounted. The government can enforce its will within Westminster, but it might yet find it cannot get the electorate onside – nor control the prevailing winds that have so recently blown holes in the idea that the private sector necessarily knows best. Those are the risks underlying McFadden’s choice.


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