Price rise fears hit privatisation of Parcelforce

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THE PRIVATISATION of Parcelforce, the parcel delivery arm of the Post Office, has run into serious difficulties because of fears of a politically embarrassing rise in charges.

The planned sale of the business, announced by Michael Heseltine, the President of the Board of Trade, in July, had been intended to spearhead the Government's wider plans for the privatisation of other postal services.

But ministers and their advisers, the merchant bank Kleinwort Benson, are now grappling with what some officials apparently regard as an 'insoluble' problem posed by Parcelforce's VAT-exempt status.

In common with other state- owned postal businesses, Parcelforce is exempt from charging its customers VAT at 17.5 per cent. If the Government attempted to sell the business with its VAT-exempt status intact, it would almost certainly be challenged through the European Commission by private parcel operators who are forced to charge VAT.

But abandoning its VAT-exempt status might make Parcelforce much less attractive to private investors, while adding 17.5 per cent to its prices overnight. Although most business customers of Parcelforce would be able to reclaim their VAT, domestic customers, who account for 5 per cent of the company's pounds 500m turnover, would not.

Parcelforce delivers 750,000 parcels a day. While only 5 per cent of its pounds 500m turnover comes from parcels sent from one person to another, a 17.5 per cent price rise for these customers would be politically damaging.

An option thought to be under consideration is to weld a more profitable sector of the Post Office on to Parcelforce and sell it off as a package.

This would sweeten the sale for private investors and enable price rises to be kept down should Parcelforce's VAT-exempt status disappear.

Parcelforce, which delivers 750,000 parcels day with a workforce of 13,500, has lost pounds 155m in the past two years - although it cut its losses sharply in 1991/2, operating profitably in the second half of the year.

One suggestion is to sell off Parcelforce together with the Royal Mail's profitable Streamline division, which handles bulk business customers with mailings of more than 2,000 letters at a time.

But Streamline contributed a large share of the pounds 266m pre-tax profit made last year by the Royal Mail. Hiving it off might force the Royal Mail to increase first and second-class letter charges and could undermine any plans to privatise the remainder of the Royal Mail.

When Mr Heseltine announced the Parcelforce sale, he hinted strongly that he would favour a management and employee-led buyout. The Government has also received expressions of interest from two private operators, one of which is understood to be United Parcel Services, the giant US group.

Mr Heseltine still hopes to make an announcement on the sale of Parcelforce early in the new year, along with the outcome of the Government's overall review of the Post Office's future ownership. But that timetable may be forced back.

In his privatisation announcement, Mr Heseltine said he could see no reason why it should not be privatised since most of its services were targeted at business customers.

The Royal Mail, which already supplies a support service for Parcelforce in many areas of the country, could take over all domestic parcel deliveries.

Post Office sources argue that Parcelforce loses overall from its VAT-exempt status since it is prevented from reclaiming VAT on goods and services it buys.

Private express carriers are understood to be ready to lodge a complaint with the EC's competition directorate in Brussels, DG4, should its status be left unchanged under privatisation.

Bertie Coxall, the president of the Association of International Couriers and Express Services, said: 'We have been involved in a number of negotiations with the Department of Trade and Industry, the Treasury and the Commission because we are concerned to get a level playing field.'