What will happen to the Royal Mail? No one knows for sure, a curious state of affairs given that yesterday the government published a bill on its future.

Of course the reason for the uncertainty is the explosive political dynamics. Perhaps the Government will blur its identity further by getting its proposals through the Commons with the mischievously sincere support of the Conservatives, an echo of the earlier alliance over Tony Blair's proposals for schools. Privately Gordon Brown and his close allies viewed that example of inter-party co-operation with despairing disdain. Will Brown now dance with the Conservatives to get his own proposals through? As matters stand, the Labour rebellion threatens to break all recent records.

MPs are due to vote on the future of the Royal Mail in June, around the time Labour will have been slaughtered in the European elections. It will be quite a dance.

I do not see events moving to such a denouement or, rather, how events will be allowed to do so. They would take the level of Labour's internal turmoil to almost unsustainable heights. And yet I do not see either how the climactic is avoided.

Something has to be done about the Royal Mail. There is agreement on that. Gordon Brown and Peter Mandelson have laid out their plans. An army of Labour MPs disagrees with them, and the room for compromise is limited. Yesterday Mandelson outlined significant concessions in relation to the regulatory framework. It is a move that may appease some rebels, but not many of them.

While I am not sure how this will be resolved, how they move on, I have a clearer idea how they got here in the first place. There is something outdated about the entire choreography – a Labour leadership taking on its own party, the prospect of another part-privatisation, seemingly unavoidable burdens of pension funds making massive losses, and unions resistant to change. Each issue is based on outdated assumptions gathered from previous decades, in particular the 1970s and 1980s.

The first is the Brown/Mandelson assumption that the private sector will be more efficient, innovative and successful in delivering funds and a better service. Their unquestioning faith has survived the traumas of Railtrack, Metronet, the company that was supposedly renovating the London Underground, and of course the banks. The assumption that the private sector delivers when it has a virtual monopoly or functions in an erratically regulated market place is exposed as one of the great myths of our times. Yet here we have another private company being invited to buy the best bits of the Royal Mail while the government – or the taxpayer – takes the hit on the pension fund.

Mandelson is almost certainly right to assume that the Royal Mail would benefit from outside expertise, probably from other countries where they know how to run public services better than we do. But that does not necessarily mean that the services need to be sold off.

When he was Mayor of London, Ken Livingstone adopted a different solution, a third way. He shared Mandelson's view that few in the UK know how to modernise big projects. Livingstone concluded that the lack of major infrastructure initiatives in the 1980s and 1990s meant there was little British expertise available to address the problems of the London Underground. With some success he bought in the best talent from the United States. He did not sell the whole thing off to them. Admittedly the Underground is also massively in debt, but that is not because of the visiting Americans and is connected to the original, calamitous partial privatisation.

The immediate cause of the current crisis is also looking increasingly anomalous. The generous Royal Mail pension scheme is in about the same amount of debt as the entire London Underground. Public-sector pensions are becoming an unsustainable burden. Only the other day local government chief executives were warning almost as a matter of casual explanation that they would have to cut services in order to pay final-salary pension schemes. What do they expect the rest of us to conclude? "Oh that's fine, go ahead and cut the services then."

Postal workers are poorly paid and so are some local government workers, but there is no cash around for generous pension schemes, and fragile public services cannot be jettisoned to keep them going. The generous arrangements will have to go. Once the election is safely out of the way the next government must act quickly to end final-salary schemes, as the deified and prophetic Vince Cable has dared to argue. The money is not there to pay for them. This should be the last dispute in which massive pension liabilities threaten to bankrupt a service that we all rely on.

Regulation is the other source of contention in the Royal Mail dispute. But poor regulation is an issue on its own, an alarmingly common theme, and one that does not necessarily mean an industry should be partially privatised as part of a fairer regulatory regime. The two are not automatically connected.

Their opposition to the government does not mean that leading figures in Communication Workers' Union are noble crusaders leading us into a new era. They have been part of the problem, resisting changes to work practices and exploiting a romanticised attachment to local post offices and the local postman to challenge reforms. Mandelson has been restrained about this, the inefficiencies and low productivity. They need to be addressed. Again, I do not see why a partial sell off would necessarily do so.

Echoes from the past come to shape a political crisis. This government is quite capable of postponing awkward choices if it wishes to do so. On local government finance it has held reviews of reviews of reviews in order to postpone important but tricky decisions. At the end of last year Brown must have wanted to stride on with the Royal Mail proposals, perhaps to prove wrong those proclaiming the death of New Labour. The row could become a contributory factor in the death of the whole government if he does not do something about it, although I am not sure how he gets out of this one now.

s.richards@independent.co.uk