The mail market: Is competition delivering?

Two years after liberalisation, a review will assess the new regime's effect on Royal Mail and its rivals

The Government is launching a comprehensive review of developments in the postal market since Royal Mail, Santa's sole helper for almost 350 years, lost its monopoly two years ago.

The review, which will report back next summer, will assess changes in the UK mail market since it was liberalised on 1 January 2006; study the impact of competition on Royal Mail, which remains the largest player in the industry; and look at the way future trends may affect stakeholders such as customers and alternative carriers. The maintenance of a universal postal service, which allows an individual to post a letter to any destination in the country, will underpin the inquiry as it also looks at ways of sustaining the provision.

"We are committed to maintaining a universal postal service... We believe that opening the market has brought considerable benefits for users of postal service," said John Hutton, the Secretary of State for Business, Enterprise and Regulatory Reform. "But there can be no doubt that the market has evolved, with new technologies such as email and text messaging having a huge effect on the way we communicate."

The initiative, which will be headed by Richard Hopper, the former deputy chairman of the communications regulator Ofcom, was welcomed in all quarters as key players lined up to make their arguments for changes in the market. Deirdre Hutton, the chair of the Food Standards Agency, and Ian Smith, the former chief executive of Taylor Woodrow, will sit on the review panel with Mr Hopper.

Royal Mail, which made a 12m loss this year, is believed to want a change in the way it is regulated. The company is expected to argue that the obligation to run and maintain the universal postal service is a drag on its other businesses, where unencumbered private operators are seizing the market and where it is also hampered by Postcomm, the state regulator, and its price control policies, which outline product margins. To remedy the situation, Royal Mail is believed to want the Government to pull back the leash and temper Postcomm's influence on the way it operates in sectors with private competition, particularly in business mail, which accounts for 87 per cent of all mail in the UK.

CWU, the mail workers' union, agrees that the current system puts disproportionate pressure on the company.

Bill Hayes, the general secretary of the CWU, said: "This is a crucial review... High on our list of issues are the effect of downstream access, the universal service obligation which currently disproportionately burdens Royal Mail, and the role of Postcomm which has proved disappointing. The future of the postal service is fundamental to the British public and economy and this review is an opportunity that cannot be missed." The CWU, which maintains that Royal Mail should remain in the public sector, is expected to follow a different tack and argue that the private sector should share the cost of a universal postal service.

Phil Burns, of Frontier Economics, a consultancy which has advised Postcomm since 2000, disagreed and said that Royal Mail was not being held back.

"Royal Mail is the company that delivers the post," he said. "It takes it down the final mile, both for its own customers and for the private companies such as TNT, with whom it has service agreements. So, it makes money from the private sector and that is probably enough to counteract the effect of the universal service obligation.

"The tension will become apparent when private companies begin to operate in the end-to-end market and start covering the final mile. But there is no indication that it will happen any time soon."

Mr Burns also defended the role of Postcomm. "They have had a difficult job but the important thing is that they have remained credible. They wanted competition and then they had to manage the task of regulating Royal Mail, which they have done quite effectively," he said.

The regulator welcomed the review and said the panel should examine ways of bringing Royal Mail, which is exempt from VAT, under the same regime as its newer, private operators. Postcomm also said it was in favour of lighter regulation, saying that the review should consider ways of allowing it to "step back wherever the market is effective in ensuring value for money and choice for customers".

Its chairman Nigel Stapleton said: "This review is timely... We are pleased the Government's review will cover all aspects of the market and of Royal Mail's structure and performance."

TNT Post, a private business mail service provider, agreed. A spokesman for the company said: "Real competition within the UK postal market is still at an embryonic stage, with Royal Mail continuing to deliver over 99 per cent of UK addressed items. We hope that the review panel will consider the impact of barriers to entry that still exist within the UK such as an unfair VAT regime".

News of the review, which came on the day the Government decided to extend Royal Mail chairman Allan Leighton's term to March 2009, also aroused the interest of the Liberal Democrats, who want to separate the Post Office from Royal Mail. Lembit Opik, the Liberal Democrat spokesman on business affairs, said the review should consider the viability of the combined business.

"This welcome review must address the issue of how Royal Mail can prosper against its competitors on a level playing field," he said. "Any comprehensive review, however, must look at whether Royal Mail and the Post Office should be split up into separate businesses to safeguard both their futures."