Government to grant Royal Mail's wish list

Bosses hope to get £2bn for pensions, £2bn for investment and 9p on a first-class stamp

The Government is set to inject around £2bn to help plug the Royal Mail's gaping pension-fund deficit.

Bosses at the state-owned postal service are understood to be confident that the Government has listened to their concerns about the £4bn black hole in the final-salary pension scheme and that it will help out with the cash injection.

In addition, although no final decision has been made, the Government is expected to back Royal Mail chairman Allan Leighton's controversial plan to hand over 20 per cent of the business to its staff, and to green-light an investment programme of nearly £2bn. The Royal Mail wants the money to improve sorting systems.

It is also likely that Postcomm will soften its stance on price controls. The regulator, which published its proposals in May, recommended that Royal Mail be allowed to increase the price of first-class stamps from 30p to 34p by 2010. It also capped the amount of profit Royal Mail can make on its regulated business at around £258m, although this could be improved through higher volumes and greater efficiency.

Royal Mail vowed to fight the proposals. It wants a bigger price hike, claiming that it loses money delivering letters. Sources at the Royal Mail are now hopeful that when the final proposals are published at the end of this month, the regulator will allow an increase from the current 30p to between 37p and 39p. In return, Postcomm will set tougher efficiency targets.

Interim results, due this Thursday, are expected to show that partial competition is affecting the letter business but that other operations, such as the international arm, General Logistics Services, are performing well.

Operating profits are likely to be around 10 to 15 per cent up on the previous year, when they came in at £217m.

The postal market opens up to full competition on 1 January. Ahead of this, the Government has been carrying out its own review. The Secretary of State for Trade and Industry, Alan Johnson, an ex-postman and one-time head of the Communication Workers' Union, has brought in Sir George Bain, former head of the London Business School.

Both the Government's intervention and the raised cost of stamps are likely to cause anger in some camps, however. Postwatch, which represents customers, is opposed to higher prices, claiming that Royal Mail should address its problems without passing the costs on.

The CWU, meanwhile, is opposed to handing over 20 per cent of the business to staff, believing it is the first step towards privatisation. Insiders at the union are confident, however, that the Government has not yet finalised its plans. The CWU will appear before the Trade and Industry Select Committee, which has already heard from Mr Leighton, later this week.