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Semi-private Royal Mail?

• Robert Peston
• 14 May 08, 09:57 PM

The Postal Regulator is calling for to be .

is making the highly contentious proposal - which could lead to Royal Mail being owned in part by a private-equity firm - to an independent review on the future of postal services that has been set up by the government.

It says that Royal Mail's financial difficulties are likely to worsen considerably, without the injection of private-sector capital and management expertise into the state-owned business.

Nigel Stapleton, the chairman of Postcomm, has warned in an interivew with me that in the absence of part-privatisation the government may be required to inject a big new subsidy into Royal Mail, which it won't wish to do.

The risk of not bringing in the private sector or a subsidy would be a significant deterioration in the quality of Royal Mail's service under its obligation to deliver letters to and from anywhere in the UK at a uniform tariff, he said.

Only last week Royal Mail announced that it had made a loss on providing this so-called universal service for the first time. Royal Mail estimated that the loss for the last financial year on this its core activity was £100m.

The government will find it hard to dismiss the suggestion out of hand, especially since analysts believe the independent review led by Richard Hooper is expected to come to the same conclusion.

However the Prime Minister is likely to be irked that such a divisive issue is being forced back on to his agenda.

Privatisation in any form, whole or part, is strongly opposed by the , the main postal workers' union - which is also a leading funder of the Labour Party.

The CWU's opposition is shared by many Labour MPs.

Their consistent opposition has always deterred the government in the past from embracing whole or partial privatisation - even though Gordon Brown has told colleagues that he is sympathetic to the idea that Royal Mail could be sharpened up by private-sector capital and expertise.

However the government only has itself to blame that part-privatisation is back in its in-tray - because when ministers set up the Hooper review of postal services, they were well aware that PostComm was bound to make the recommendation

There are uncanny echoes of the early 1990s in Postcomm's call for part-privatisation.

The then Prime Minister, John Major, was widely seen to be on the ropes, as Gordon Brown is perceived to be today.

And an attempt by his ministerial colleague, Michael Heseltine, to privatise the postal service was ditched after opposition from backbench Tory MPs.

Postcomm is proposing that Post Offices Ltd, which controls the huge network of post offices, should be separated from Royal Mail and kept wholly in public ownership, because it already receives a substantial subsidy and is viewed as a de facto social service.

Its model for what should happen to Royal Mail is the part-privatisation of the Danish postal service, .

In July 2005, the leading UK private-equity firm, CVC, bought a 22% stake in Post Danmark from the Danish state. CVC and Post Danmark then bought a big stake in the Belgian post office in 2006. And this year Post Danmark announced a merger with Posten, the Swedish post office.

Mr Stapleton told me that CVC has played an important role in modernising these postal services. He believes the likes of CVC could play a similar role for the Royal Mail,

However, private-equity firms are mistrusted by many trade unionists and Labour MPs. They see private-equity firms as over-rewarded investors who are excessively ruthless in the way they reduce costs and overheads in the businesses they acquire.

Mr Stapleton tried not to criticise the current management of Royal Mail. He said that it was immensely difficult to run Royal Mail successfully given the pressure on the letters market from emails and digital technology and also the huge financial burden of a multi-billion pound deficit in its pension fund.

But Postcomm's submission does not flatter Royal Mail. It says that in April 2008 Royal Mail provided Postcomm with its projected profits and cash flows for 2006-10. These showed that Royal Mail's cumulative cash flows would be £2.6bn lower than it had expected in late 2005.

Postcomm says that "in part this difference is due to lower than expected mail volumes" but a"greater impact is that of lower efficiency and the payment of significant bonuses to staff".

The regulator says that Royal Mail has failed to make some £1bn of promised efficiency savings, but has still shelled out £600m to staff in productivity bonuses.

A further £300m of savings is failing to materialise because of "compensation for falling short of licenced quality of service standards" and £700m has gone AWOL because of unexpectedly lower volumes of business.

Postcomm believes that part-privatisation would provide the cleanest solution to Royal Mail's pension problems, in that it would allow the government to take over total direct responsibility for the fund without breaching European state-aid rules.

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Inflation's the problem

• Robert Peston
• 14 May 08, 07:59 AM

I am grateful to a former tax inspector, Adrian Huston, for a witty calculation. On the basis that the Tories may be heading for a 1000 vote victory in the , which means that Gordon Brown would need to turn 501 votes his way, the cost-per-key-vote of yesterday's emergency tax measure was £5.4m.

Hmmm.

Actually more worrying for some was what the Chancellor, Alistair Darling, gave as the rationale for the increase in the personal allowance for 22m basic-rate tax payers. Quite apart from providing a degree of compensation to those damaged by the abolition of the 10p tax-rate, he said it would "help all basic rate taxpaying families at a time when oil and food prices have been rising in every part of the world."

On the Today programme this morning he went further, and said he was giving a boost to a British economy that's slowing down.

Many might applaud the government's new-found sensitivity to the squeezed disposable incomes of those on low earnings.

But, under our conventions, there is a time and a place for providing that succour - viz, the Budget and (that Brownian invention) the pre-Budget report.

To provide help in what looks like an emergency Budget smacks of alarmism, and not just about Labour's by-election prospects.

It may undermine all those soothing things chancellor and prime minister have been saying about the robustness of the British economy.

Their putative "steady-as-she-goes" approach to managing the nation's finances meant that the good ship United Kingdom was in fine fettle to withstand the global storms - or so they insisted, time after time.

But there was nothing "steady-as-she-goes" about yesterday's debt-financed tax cut, which takes the Treasury perilously close to breaching the rule on how much it can borrow as a proportion of the national debt. The manoeuvre smacked of an about-turn in a gale.

Which rather implies an absence of faith in the supposedly hard statistics about the state of the economy.

Those statistics say that the UK is a long way from recession.

Those stats say that the big problem in the UK is surging inflation.

But the Treasury appears to be putting more weight on all those trade-association surveys and opinion polls of consumer and business confidence which say that times are tough and may get tougher.

It's not that confidence indices are useless or that data collected by this or that industry are bogus.

It's just that right now they are only telling us the bloomin' obvious.

After all the publicity about the supposed mess we're in, what consumer or shopkeeper is going to tell a collector of survey data that everything's going swimmingly well?

It is difficult for any of us to be cheery amidst all the evidence of a mortgage drought, the rising cost of credit, the surge in power prices and the rampant inflation in food prices.

The amazing thing is that the housing minister or one of her officials bothered to write down that house prices are set to fall at least 5 to 10% this year. You can hear the same thing on any night of the week in any British pub.

The point is not that these negative trends aren't real. It's rather that we can't yet assess the full and proper significance of these trends. And Gordon Brown has said many times that in these circumstances the imperative for government is to be steady, put it all into perspective and not to panic, to be an anchor.

British industry would agree with him.

What business fears is that the prime minister has pulled up the anchor and is trying to tack with the winds, in a risky way.

There is an associated fear in boardrooms, which is that the Bank of England's will feel obliged to increase the size of its own anchor.

The members of the MPC do look at more than official statistics. But, as I've said, the evidence of the hard data is unambiguous - and it's that the bigger problem in Britain right now isn't low growth, it's rising inflation.

Or to put it another way, if the Bank of England sees the government taking risks with fiscal policy, it will want to be even steadier than it would otherwise have been with monetary policy - which means it will be more reluctant than it would have been to cut interest rates.

That will alarm businesses, especially small businesses, and many of the 22m who've just been bunged a few extra quid.

UPDATE 14:16: The Bank of England's inflation report is something of a dirge.

It anticipates a sharp slowdown in growth to less than 1% per annum in early 2009 on the basis of an unchanged base rate. But it expects inflation to overshoot the target two years from now if the base or policy rate falls to the level discounted by the market.

Which puts the Bank of England in a tricky position, to put it mildly. If it keeps rates where they are, the outlook for growth is dismal and we could be tipped into recession.

If it cuts rates, its credibility as crusader against the wickedness of inflation could be severely damaged, especially as it expects inflation to be well above target later this year, whatever it does.

The chances of further interest rate cuts in the near future seem to me to have narrowed to somewhere between slim and zero.

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