David Prosser: Time for a postcard from Mandy

Outlook You can understand why Lord Mandelson does not want to intervene in the postal dispute, despite calls yesterday from trade unions for him to do so. The business minister's political stock may be at an all-time high, but his inability to persuade Labour Party colleagues of the merits of a part- privatisation of Royal Mail has been the stand-out failure of his latest term of office.

Still, Lord Mandelson must bear some responsibility for the current impasse. Unfortunately for Royal Mail customers, his decision earlier this summer to kick privatisation into the long grass strengthened the resolve of the unions to take a stand against some of the more unpalatable – to them – elements of the modernisation of the Post Office. It also added to the pressure on Royal Mail to really get on with that modernisation programme.

It's worth a quick history lesson on how we got here. Unlike every other country in Europe, the UK chose to deregulate its postal market before privatising its State-run operator. This left the Royal Mail suddenly facing intense competition in some of the most lucrative segments of the market, particularly for business post, but still saddled with strict pricing controls and demanding regulatory requirements such as the universal delivery service.

Elsewhere on the continent, most governments privatised first, giving the likes of Deutsche Post time to become lean, mean logistics businesses before having to battle other private sector players. It helps that in much of Europe, prices are permitted to be higher too, even for domestic services – posting a letter in Germany costs twice as much as it does here, for example.

This is the root of the problem with which Royal Mail is living today. It faces strong competition in the most profitable parts of the postal industry – which is set to increase as European Union liberalisations continue – but also has a statutory duty to offer a universal service, however uneconomic some of the required deliveries may be. It could become more competitive with a mass modernisation programme, but does not have the capital to finance this. And, just for good measure, it is saddled with a legacy pension liability that costs it some £800m a year.

Against this backdrop – and following the failure of part-privatisation – Royal Mail's £2.1bn modernisation programme is a sticking plaster, not a long-term cure for its ills. And yet it cannot even get agreement from the unions for this relatively limited package of reforms.

No doubt there is wrong on both sides of the argument – intransigence on the part of union leaders, who must recognise that job losses are ultimately unavoidable, but also poor communication from Royal Mail management, who haven't explained exactly what they'd like to do.

The greater failure, however, is a political one. We have repeatedly ducked the difficult decisions that need to be made about the future of this organisation.

None of the choices are especially palatable. Lord Mandelson could, for example, put privatisation back on the table, but this would be politically difficult. He could ask the Treasury for a bigger hand-out with which to subsidise the Royal Mail, but there isn't any money available. He could allow Royal Mail to substantially increase the cost of domestic services, but that would be unpopular. What isn't an acceptable choice, however, is doing nothing.

It's not as if the status quo has protected either Royal Mail customers or staff. The network of rural – and urban for that matter – post offices has been decimated, the universal service is not what it once was and big job cuts are still being threatened.

While the current industrial dispute continues, one thing is for sure. Royal Mail will lose more customers. Its rivals report record levels of business and small-scale operators are setting up every day to reap the rewards of customer frustration. A yes vote in the current ballot for a nationwide strike – and this is not to be unsympathetic to posties facing unquantified job losses – would accelerate that trend.

Over to Lord Mandelson, then. For as long as the business minister cannot deliver some certainty about the Royal Mail's long-term ownership, he must accept that it remains a State-owned organisation. It is currently suffering damage that will make resolving those long-term questions even tougher, and it is high time the Government got involved.