Few major businesses in Britain can be as beleaguered as Royal Mail. Grappling with a declining market, increasing competition, tight regulation and a sole shareholder in the shape of the government, one of the country's most recognised brands now faces possible strike action by the Communication Workers Union.
Beyond these quotidian travails, however, lies a larger strategic issue: how do you liberalise the postal market while retaining Royal Mail in public ownership? In most other major privatisations, like telecommunications, the state monopoly was privatised first and the market gradually liberalised afterwards. But the postal market is being opened up without Royal Mail being privatised.
Royal Mail is an economically crucial business. It employs around 187,000 people, of whom some 70,000 are the familiar postmen and women who deliver letters to your door. The organisation delivers 82m items a day to 27m addresses, from John o' Groats to Land's End. Its annual turnover is £7.5bn.
Royal Mail is also woven into the social fabric of the nation. Along with the railways, the development of the Royal Mail in the 19th century helped create a sense of national community. Some people will only open their front door to the postman and the post office remains a lifeline in some rural areas which makes the proposed closure of thousands of post offices so sensitive. (Although in some place the post office functions can easily be taken over by the local shop.)
But the postal business is changing. The market is shrinking by about 2 per cent a year, measured by the number of items carried. This is mainly the result of sending emails rather than letters and the falling price of telephone calls.
At the same time, competition is growing. The postal market was fully opened up to competition at the beginning of 2006, and there are now 18 licence-holders. According to Royal Mail, competitors now handle about a fifth of letters, compared with virtually none three years ago. Competition is even stiffer in business mail, which ranges from pizza delivery flyers to credit card solicitations. Royal Mail's two main competitors, TNT and UK Mail, have 40 per cent of this market.
For the regulator, the Postal Services Commission (Postcomm), increased competition is a sign that its policy of improving market access is working. It has recently published proposals to make it easier for companies to enter the market. But there is a risk that the policy framework will increasingly put Royal Mail at a competitive disadvantage, which is perverse. Three problems stand out: the universal service obligation (USO); price regulation; and financing and efficiency.
The USO obliges Royal Mail to deliver each working day to any address in the country. No other company has such an obligation (nor the pressure to keep open rural post offices). Critically, the USO covers some bulk mail as well as all stamped mail. If the USO was restricted to stamped mail, Royal Mail could compete in the more lucrative bulk mail market.
But that requires a more transparent market, and price controls are labyrinthine. Royal Mail loses an average 6p for every 34p first-class stamp—making losses of £200m a year on stamped mail. More broadly, the way price controls are structured makes business mail very attractive to competitors and forces cross-subsidy on Royal Mail: business mail subsidises stamped and urban mail subsidises rural. If prices could be brought more into line with costs, the market would be less opaque—and perhaps the social subsidy for keeping open post offices could be separately accounted for.
Even then, Royal Mail would still face the problem of how to make itself truly competitive. The workforce has been reduced by 30,000—part of the background to the threatened strikes—and Royal Mail claims that efficiency has risen by around 2 per cent a year over the last five years. The treasury has rewarded this effort by making a £1.2bn commercial loan to Royal Mail—although that took two years to negotiate. Royal Mail has also reached agreement on funding its pension deficit.
However, the policy bind persists. The government is the shareholder, but politicians duck difficult questions such as the price of services. Liberalisation is therefore effectively left to Postcomm—which is a regulator, not a policymaker. Until someone is prepared to make awkward decisions, rational liberalisation of mail services will stay lost in the post.
Private equity redux
Just as politicians are falling over themselves to "do something" about private equity, the market seems likely to do it for them. Gordon Brown has hinted that tax rates for millionaire private equity partners that are lower than those for a cleaner might not be quite fair. The treasury select committee is investigating.
It is true that the tax rules on capital gains were intended to encourage small entrepreneurs, not huge buyout houses. But it is actually cheap funding that has been the mainstay of the private equity boom. Although changes to the tax rules are desirable, now that it looks as if interest rates will rise further, private equity will decline for other reasons.
