Will the postman still ring twice?

What would happen if Royal Mail lost its monopoly on letter delivery? The Government has lifted it for a month, says it will lift it for a further three months if the Post Office strikes continue, and is holding out the prospect that the monopoly might then be abolished.

If that happens, there has been intense speculation about who might step into the breach.Suggestions have ranged from the courier giants, such as DHL or TNT, to milkmen or newsagents, though the reaction from the couriers has been less than euphoric.

There is good reason for this, for the only experience of rapid postal deregulation has been unhappy. In the 1980s Sweden Post was "corporatised" (or told to behave like a private company, while staying in state ownership) and was allowed to set its own prices. Then in 1993 its monopoly on letter delivery - which, as elsewhere, was designed to allow it to subsidise rural deliveries with the profits from urban ones - was abolished. The government encouraged a new company, CityMail, to set up in competition in Stockholm.

But in April last year CityMail came close to collapse, complaining that Sweden Post's pricing meant it could not make money. In a bizarre twist, the government instructed Sweden Post to take a 75 per cent stake in its rival. CityMail still exists, but its biggest shareholder is also its biggest competitor.

Gene Del Polito, who monitors postal services for a Washington-based lobby group, the Advertising Mail Marketing Association, is not surprised. "That's what happens if you precipitately deregulate a market," he said. This, he believes, is why so few companies have said they want to jump into competition with Royal Mail.

Theoretically Sweden is still a competitive postal market, though Sweden Post's two independent competitors do not offer a full service. One delivers unaddressed printed matter, such as brochures, while the other delivers only "computer-produced letters" in Stockholm.

Finland may go down a similar route, and two companies have applied to operate postal services. Even if they are given the go-ahead, the market will not be fully deregulated. The government is suggesting that a sliding tax should be charged to encourage rural deliveries. In cities operators would have to pay 20 per cent, while companies delivering in the least populated areas would be exempt.

If the British government is seeking examples of successful postal reform, it might look at countries that have moved more gradually. New Zealand Post has been swept up in Wellington's aggressive deregulation drive. It was corporatised in 1987 and has slashed its workforce from 12,000 to 8,000.

Last year it increased profits slightly despite having cut the standard letter rate from 45c to 40c (20p to 18p). New Zealand Post believes its price cuts, which have reduced the price of a stamp by 30 per cent in real terms since 1987, have stimulated volume by about 2 per cent a year for the past four years.

Australia Post has been walking down the same path. In the middle of the 1980s, its chief executive, Graeme John, says "labour relations were at breaking point and customers had no confidence in the service". In 1989, the government instructed it to operate commercially as far as it could: new businesses would have to stand on their own feet, while prices in the monopoly letter-delivery business were capped. Management and unions were forced to get their act together and a new set of working practices was agreed. According to Mr John, workers are now "proud to work for one of the most successful Australian enterprises".

Other governments are contemplating similar deregulation. The pressure is particularly strong in the US because Internet-based electronic mail is already cutting into physical deliveries. But even in the bastion of the free market, there has been little reform. The US Postal Service employs 730,000 people and attempts to cut the workforce have failed, even though labour accounts for 80 per cent of its costs.

USPS's monopoly is well protected by the law and couriers are allowed to operate only because there is a hole in the monopoly laws for urgent mail. Royal Mail has little to learn from the Americans. For all its troubles, it provides one of the best postal services in the world: it is almost unique in making two deliveries every weekday. It has also behaved commercially for more than a decade despite Treasury demands for ever-higher "dividends". But industrial relations remain a thorny issue.

As for sudden deregulation and the introduction of competition, Sweden provides a clear lesson to the British government - that it should think twice or three times before abolishing the Post Office's monopoly.

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