Europe approves £150m subsidy to keep rural post offices open

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In what was the Royal Mail's first victory for weeks in its ongoing tussle with regulators, competition watchdogs approved a £150m-a-year subsidy of the Post Office by its parent company.

The ruling was seen as good news for the elderly and those on social welfare, particularly in remote parts of Britain where the Post Office remains a key public service. Subsidies such as this are contentious because they are often seen as breaking European competition laws.

The Commission said yesterday it had no objections to the deal, noting that the money covers the Post Office's role as a distributor of welfare as well as a provider of postal services. The funding is secure until 2008, after which rural branches will face another struggle for survival.

Sally Hopkins, a Royal Mail spokeswoman, said: "Confirmation of funding for the next 25 months will give some reassurance to the 8,000 rural Post Office branches serving small local communities across the UK. But their future when this funding runs out in March 2008 is unclear."

Neelie Kroes, the Competition commissioner, said: "I am satisfied that the funding is proportionate to the Post Office's public services obligation. I am happy to endorse a measure which will benefit British consumers in rural areas without distorting competition."

Royal Mail has had a rough few weeks, twice running into trouble with Postcomm, the UK postal regulator. It has been fined for security breaches that led to lost mail and for failing to open itself up to competition. Last week a £2m fine was levied for its supposed failure to give competitors proper access to the so-called "last mile" delivery market. Allan Leighton, Royal Mail's chairman, described the fine as "Pythonesque". It is protesting against both fines and could take the battle to the High Court.

The company lost its monopoly on post deliveries at the start of this year as part of the biggest shake up of the UK post in its 350-year history. Post Office revenues have fallen since the Government introduced direct payments of state pensions.