Postal Services Bill report

01 April 2009

A report today from the Business and Enterprise Committee raises a series of questions about the Government’s proposals regarding the part-privatisation of Royal Mail

The Chairman of the Committee Peter Luff MP said:

"This is not a report about whether Royal Mail should be part-privatised or not. It is a report that looks at the particular proposals the Government is putting forward and examines whether or not they are a coherent package.

"The Committee does not think the Government has yet made its case. We agree that the pensions deficit needs to be removed and the regulatory system needs to be reformed as a matter of urgency. However, it does not follow that a part-sale is also necessary. To sustain its argument, the Government needs to answer a number of important questions. These include whether Royal Mail will need more money for investment than it will get from regulatory and pension change and planned cost savings and if so how much. It must tell us whether the proceeds from any share sales go to Royal Mail Group, or straight to the Treasury to help fund the pension arrangements.

"There is a worrying lack of transparency in the Government’s proposals. We do not believe a 30% stake from a private sector investor is an end-game. The Government must therefore give as much detail as possible about the detailed agreement with any investor before Parliament can approve the Postal Services Bill.

"Parliament is being asked to swap an existing system where it approves every share sale in Royal Mail, for one where it gives up these powers in return for a guarantee that the public’s shareholding will always be over 50 per cent. Our report questions whether this is a good bargain."

The report follows evidence taken by the Committee on the Independent Review of the UK Postal Service and is intended to inform the House about the Postal Services Bill.

The Committee agrees with two key aspects of the Government proposals: first, that the Government should take responsibility for the historic pensions deficit; second, that a new regulatory framework, in which postal services are viewed as part of a wider communications market, is entirely appropriate.

However, it does not consider either the Independent Review or the Government has made the case that these two reforms can only be made as part of a package which includes the involvement of a private sector equity partner in Royal Mail. The Committee is not persuaded that the provisions contained in the Bill allowing such a partnership are necessary or desirable. The Government already has powers to sell shares to enable Royal Mail to participate in a joint-venture, provided that each disposal is authorised by Parliament. There is no upper limit on such sales. The proposals in the Postal Services Bill would indeed make new provision to ensure that the Government retains a majority stake in Royal Mail, but Parliamentary control of each disposal would be lost.

The involvement of the private sector as an integral part of the package would be defensible if the sale of a stake in Royal Mail was necessary to raise further money for modernisation. However though it is being implied this is the case, Government documents do not support this assertion. Indeed, the Command Paper accompanying the Bill gives no guarantee - it says that the proceeds from the sale may be used "to partially offset the cost to the Government of taking on the pension deficit." Furthermore, there is no clarity as to how the proceeds of any sale of a stake in Royal Mail would be used.

Both Government and Royal Mail are frustratingly coy about the amount of extra investment needed, refusing to be drawn beyond "hundreds of millions of pounds". Yet Royal Mail will gain significant extra revenue from the removal of the pension deficit, and from its own efficiency programme as well as, in all probability, from the new regulatory arrangements.

It is entirely unacceptable that Parliament is being asked to approve such fundamental changes to Royal Mail Group when there is no indication of exactly how much money Royal Mail Group needs for investment and the Government is prevaricating about the use to which any private sector cash would be put.

If there is no certainty that there will be a cash injection from a private sector partnership, then the case must rest on its non-financial benefits. Some people consider these are considerable, and that a private sector partner is the best way to inject management expertise; improve "commercial confidence", primarily in labour relations, reduce EU state aid constraints, and commit the Treasury to a long-term approach to the company’s financial requirements. Others dispute this. These are questions only the House as whole can resolve.

The Committee does however raise several questions about the proposed partnership

  • What is the justification for the size of the partnership? Thirty per cent was the figure cited by Lord Mandelson at second reading, but why?
  • How much openness there will be about the partnership agreement which will set out the partner’s rights and any arrangements between the parties about sale of the partner's stake? Under the current scheme, Parliament will not have any right to see that agreement before the Government enters into it (or indeed, afterward). Is the Government prepared to make such details public before a partnership is agreed?
  • What will be the effect on competition if, as seems very likely, the chosen partner is already active in the UK mail market?
  • What will happen if Royal Mail needs further capital injections? The natural assumption is that investors would fund this in proportion to their stake in the company. But such an injection from the Treasury would expose the company to all the state aid rules which we are told this scheme is intended to avoid.

The Committee is left with the conclusion that either the Government has not fully thought through its position about future share sales, or that it has done so and is refusing to reveal its hand.

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