Passing the postal parcel

Vince Cable wants to put the Royal Mail and the Post Office on a stable footing. Easier said than done, says Mark Leftly

Business Secretary Vince Cable has sent George Osborne a surprise gift as the Chancellor prepares for the toughest week of his political career. The Royal Mail will deliver £20bn to the Treasury coffers as Osborne tackles the huge deficit in Wednesday's Comprehensive Spending Review, with government departments bracing themselves for financial cuts of up to 40 per cent.

Cable's predecessor, Lord Mandelson, had offended plenty of militant unionists with plans to part-privatise the Royal Mail. Yet the public sector would have remained in control, the government keeping a 51 per cent stake. Cable's proposals, revealed last week, go much further, selling up to 90 per cent of the business with the remainder dished out to employees.

The coalition has promised not to sell two key parts of the existing business: the 11,500 branches of the Post Office and the pension scheme, which, as it stands, would have to pay out £34bn to retirees from just £26bn of assets, such as property investments. Despite the £8bn deficit, it is the pension scheme that will artificially inflate the Government's balance sheet by at least £20bn.

The structure of the sale, the viability of the Post Office network and the use of the pension scheme are set to become battlegrounds in this most politically charged of privatisations.

Politics of history

John Denham is careful to point out that he is new to his brief as shadow Business Secretary, a role he took up earlier this month following Ed Miliband's narrow Labour leadership victory.

But Denham sounds pretty up-to-speed on the Royal Mail. Despite Labour's perceived lean to the left under Miliband's leadership, the party has "no great differences [with the coalition] on bringing in private capital", but he does challenge the share structure.

"The real problem with this plan is that by getting rid of public ownership you're clearly moving from public service to private monopoly," he argues. "With a 51 per cent [stake in government hands], you wouldn't be running it day to day but it would still be in the interests of the state."

With the benefit of hindsight, such a dramatic extension of the Mandelson plans should have been obvious the moment Moya Greene was appointed to succeed Adam Crozier as Royal Mail's chief executive in May. Greene joined from Canada Post, where she had been in charge for five years. She was tough there, cutting costs by C$500m (£310m) during her tenure. The Royal Mail, often to the chagrin of the unions, became leaner and meaner under Crozier, but it still made a £262m pre-tax loss in the last financial year.

When Mr Crozier, a former Football Association boss, decided to join his mentor, Archie Norman, at ITV, the Royal Mail decided that it needed Greene to plot the organisation's escape from the taxpayer.

It will be tough. The Communication Workers Union (CWU) has thwarted privatisation at least three times, stretching back to the John Major government in 1994. During the Tony Blair years, a Liverpudlian postman called Billy Hayes became the CWU's general secretary and stopped the-then Royal Mail chairman, Neville Bain, from selling a stake to Dutch mail group TPG Post, today known as TNT.

"Tony Blair vetoed the plan because he felt that he didn't have enough political support," sighs one witness to the negotiations. "Royal Mail is not a clever model; it needs some outside influence."

The source disagreed with Hayes, but was impressed with how he took and beat the prime minister. Hayes remains outspoken, arguing that Richard Hooper's updated report last month, which argued that the Royal Mail's universal service would die without private cash, represented the "failed politics of history".

Upon publishing the Postal Services Bill last week, Cable declared that that Royal Mail and the Post Office are "cornerstones of our society", and that he intended to put them on "a stable footing for the future".

To placate the unions, he insisted that there would be no post office closures and claimed that employees, postmasters and even local communities would ultimately run and own the branches. This would happen through mutualisation, a partnership structure loosely based on successful retailer John Lewis. "We will break the cycle of declining visitor numbers through new ideas and new services to win back customers," pledged Mr Cable.

Battle for survival

However, in private hands there is little reason why Royal Mail should not terminate any agreement with the Post Office. Those counter services could just as easily be undertaken by supermarkets or major high street chains, which would all be able to keep costs low because of their existing financial strengths.

Labour's Mr Denham says that village post offices, often considered to be at the heart of small communities, will suffer: "I can see a situation where, in urban centres, private companies do some sophisticated deal to undercut rural post offices. That's the main question with this sort of [full-scale] privatisation."

The unions are sure to fight any end of this link between Royal Mail and the Post Office, but the likes of TNT, Deutsche Post and the major American firms will only try to buy the former if they have the freedom to make the drastic changes necessary to make the service profitable. "Without those companies getting involved, you're not going to drive economies of scale out of the Royal Mail," says one industry source.

Sleight of hand

The Government has been clever in promising to take over the pension scheme, the source adds. Natural bidders would not enter the Royal Mail auction, scared off by the prospect of adding £34bn of liabilities to their balance sheets.

The government uses a different, less conservative accounting method that means only a small proportion of the pension payouts are included on the balance sheet. Rather than an £8bn deficit, the government appears to have gained £20bn-plus of assets due to an accounting quirk

"This is exactly the same as the last government's accounting," protests a Business Department spokesman, fairly. But this will not stop people attacking the accounting used – one pro-privatisation source argues that this is "a sleight of hand that dresses up the balance sheet of UK Plc".

Even scarier for the unions is that the Government plans to sell the pension fund assets and use them to pay down the deficit. Future generations will have to fund Royal Mail pensions through taxation. A CWU source fears that the union's members will no longer have guaranteed pensions. Instead, union members believe that the pension pots postal workers have accumulated are about to be raided by the Government to put right a deficit that they did not cause. And if attempts to fix the public finances fail, they fear that future tax revenues might not cover those pensions. Hard-working posties could see out their twilight years in relative poverty.

Osborne might well thank Cable for this £20bn-plus gift. But he might find that his coalition partner has sent him one of the most ideologically divisive proposals imaginable.

Royal Mail through the centuries: Key figures in postal service history

Charles I

Opens up his royal mail service to the public in 1635

Oliver Cromwell

Sets up the General Post Office in 1657

Sergeant Alfred Knight

The only member of the Post Office Rifles to be awarded a Victoria Cross for heroism in the First World War

Tony Benn

Was Postmaster General from 1964 to '66, following in the footsteps of the likes of Clement Attlee and Neville Chamberlain

Violette Szabo

The Second World War secret agent was a telegraphist before she became a spy

Michael Heseltine

In 1994, the Conservative government was too weak to push through Hezza's privatisation plan

Adam Crozier

The former Football Association boss became the Royal Mail's chief executive in 2003. He was both praised and criticised for laying off swathes of staff

Lord Mandelson

Proposed a part-sale of the Royal Mail in 2009, promising that the state would maintain a majority stake

Moya Greene

The former Canada Post boss was hired this summer to modernise the service

Vince Cable

The Liberal Democrat is the latest politician to try to privatise the Royal Mail

Source: The British Postal Museum & Archive

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