EU backs £450m government lifeline for rural post offices

More than 8,000 rural post offices appeared to have a brighter future yesterday when the European Commission approved a £450m package of government subsidies to help keep the branches open.

The Department of Trade and Industry announced its intention to hand over the cash over three years in December, but said the money would have to be given the go-ahead by Europe's regulators for state aid. The subsidy had to be referred because it could give Post Office Limited an unfair advantage over other companies battling to break into the postal delivery market.

The Commission ruled that the grant should be allowed because the Post Office is obliged by the Government to provide country-wide over-the-counter access to state benefits and other services.

Under the terms of the subsidy, sub-post masters in Britain's 8,345 rural post offices are entitled to grants from three funds. One pot will hand out money on the basis of branch size and opening hours, one is to help fund infrastructure costs such as IT and one to help sub-post masters develop innovative ways to provide services.

The Commission said: "The three new measures constitute a transfer of state resources, grant an advantage to Post Office Limited in the form of a loan and payments and potentially distort competition and intra-community trade." But as long as state support was used to fund the Post Office's public duties, it would not gain an unfair advantage over competitors, it added.

Patricia Hewitt, the trade and industry secretary, said: "This is great news for our rural post offices and the wider post office network. The cash will provide a vital lifeline to rural communities."

The grant is a major boost for the Post Office, which has been forced to close branches and slash costs in an effort to cut its unwieldy overheads. But many of its loss-making smaller branches still face an uncertain future.

A Post Office spokesperson said: "The network still faces huge challenges, and, ultimately, if local people want their branch to stay open they need to use them, as do government departments, local authorities, banks and utility companies."

One of the Post Office's main livelihoods - providing benefits - is already under threat thanks to the Government's decision to migrate Britain's 13 million benefit recipients from over-the-counter payments to receiving them electronically into a bank account. The Post Office would lose £400m if all benefits recipients chose to receive their money through a bank branch by 2005, the Government's deadline for scrapping benefits books.

However, the Government has persuaded a consortium of high street banks to provide £180m in funding over the next five years towards the so-called Universal Bank, under which individuals can take out an account with the Post Office itself to receive their benefit. The Government has also said it would provide about £1bn over the next 10 years to fund the new Post Office accounts, known as card accounts.