Royal Mail Group needs clarity on funding

[TrueBlueTerrier]

http://business.timesonline.co.uk/tol/b ... 433712.ece" onclick="window.open(this.href);return false;

The Royal Mail, the sole provider of the one-price-goes-anywhere postal service, sits at the centre of communications

Donald Brydon: Viewpoint

When it was announced that I was to become chairman of Royal Mail Group, friends reacted in one of two ways: either they thought I was completely mad or, like my grandson, thought I would be delivering the mail. Neither, of course, is true.

The Royal Mail, the sole provider of the one-price-goes-anywhere postal service, sits at the centre of communications in the UK and, as communications markets extend electronically, it is no longer relevant to consider a uniquely postal market on its own. Volumes in Royal Mail’s letters business are about 10 per cent less than last year, with every 1 per cent decline costing £70 million in lost revenue. The trend is accelerating, no doubt exacerbated by present economic conditions. However, mail lost to electronic communication is, in my judgment, unlikely to be recovered. All this is happening in a business with large fixed costs.

Meanwhile, Royal Mail has a legal obligation to deliver to every one of 28 million addresses in the UK six days a week for a uniform price and this it achieves while meeting its regulatory obligations. This is no mean feat. Management of the Royal Mail letters business is faced with a logistical challenge. They make more than 300,000 collections a day and, through the night, sort and distribute and, next morning, deliver 75 million items of mail. This activity is carried on by a workforce that shows extraordinary dedication and a real desire to serve its customers and which has seen a shrinkage of 50,000 jobs in the past few years.

That the business as a whole has been transformed from an operational disaster to one that is, however modestly, profitable is a remarkable achievement, but this does not leave the organisation in a strong, sustainable position. It must accelerate its drive for modernisation if it is to continue to provide the high-quality, innovative services that its customers deserve.

The regulatory environment needs to change. It is common ground among political parties that a system that requires Royal Mail to accept mail from other mail companies and distribute it at a loss makes no long-term sense. The Postal Services Bill makes clear that a change of the regulatory environment is required and I find the case for this overwhelming.

Before operational challenges are addressed, the business is effectively crippled by historic liabilities of its pension fund. There are many estimates of the current actuarial deficit, ranging from £8.5 billion to £10.5 billion. Already the company is spending an additional £1 million for each working day to eliminate the deficit identified three years ago and this process will continue for 17 years. The additional deficit now evident is unfinanceable through normal commercial activity. That is why, in its imaginative way, the Bill offers to take this deficit from the company and have it funded effectively by a combination of a portion of the fund’s assets and the taxpayer. The taxpayer should accept this only if the beneficiaries stop opposing change. This will free the company to control its destiny and make necessary operational improvements, with benefits flowing to customers.

These improvements do not come cheap. Management have embarked on a £2 billion transformation that would see fewer mail centres and an automation of sorting mail into the postman’s route. This has been funded by a loan from government, which is soon to begin to be repaid. The group is under-capitalised to undertake the investment necessary and to cope with the changing business environment. For that reason the Bill’s intention to introduce a new equity owner into part of the capital of Royal Mail is also welcome. I understand fully the emotional opposition to the introduction of private capital. However, all who oppose this need a clear alternative. The business has dedicated management, but even these will tire of endless uncertainty over funding. I have no ideological preference for who the owners of the business are, but we require certainty of funding and clarity of direction. Parliament, too, needs to face brutal realities and not treat Royal Mail as a political football.

Additionally, there needs to be clarity over funding and objectives of the Post Office itself. That the Post Office should remain 100 per cent in public ownership is wholly appropriate, but there needs to be a clear funding arrangement that recognises the cost of maintaining an uneconomic network for social purposes while management should seize the opportunity for commercial development in the rest of the network. A People’s Bank is just one proposition.

All of this is difficult enough without the extra complication of the involvement of Brussels in relation to state aid.

I admire the management for the way they keep their eyes on the horizon on one hand . . . and on the daily delivery of mail on the other.

Donald Brydon is Royal Mail chairman

[TrueBlueTerrier]

Comments are welcome apparently.

[DGP1]

Comments are welcome apparently.

[Ahebban]

... It must accelerate its drive for modernisation if it is to continue to provide the high-quality, innovative services that its customers deserve.

Surely this sentence should read thus:

It (RM) must accelerate its drive for profit by its continued regime of job losses using any innovative means available, because it is what the over-paid and under-worked staff of RM deserve.

[andy2007]

They don't give you many characters for your comments do they?
I had trouble getting my point across. Still, they probably won't accept it anyway.