Business Analysis: Postal firms warn of risk in rushing to open up the mail

Royal Mail letters monopoly to end early but will the result be a cowboys' charter?

Postal operators warned yesterday that the decision to end Royal Mail's letters monopoly 15 months earlier than planned could result in a "cowboys' charter" and damage attempts to introduce more competition into the market.

Postal operators warned yesterday that the decision to end Royal Mail's letters monopoly 15 months earlier than planned could result in a "cowboys' charter" and damage attempts to introduce more competition into the market.

The postal regulator Postcomm confirmed yesterday that the date for full liberalisation of the £5bn UK mail market is being brought forward from April 2007 to January 2006. From then on, anyone will be able to use a rival operator to deliver a letter anywhere.

At the same time, plans to phase in more competition gradually have been dropped. Postcomm has already opened up 30 per cent of the market to competition by allowing rival firms to handle bulk mailings of more than 4,000 items. It had planned to open a further 30 per cent of the market next April but this has been abandoned in favour of the "Big Bang" liberalisation in January 2006.

Postcomm also announced proposals to stimulate competition by introducing a reduced rate of value-added tax on all postal operators, including Royal Mail, set at 5 per cent, penalising the monopoly operator more heavily for poor performance and guaranteeing new entrants a "light touch" regulatory regime.

The decision to end Royal Mail's monopoly early was prompted by its continued failure to meet delivery targets and concern that its market share still stands at 99 per cent nearly two years after competition was first introduced.

Royal Mail said it welcomed the earlier opening of the market provided the "handcuffs" which prevent it from making an acceptable return on revenues came off. Adam Crozier, its chief executive, also said there had to be careful licensing of new entrants to avoid a "free-for-all with customers left to find their way among potentially dozens of rivals with varying quality of service".

Existing private mail businesses gave the proposals a guarded welcome but also warned that the liberalisation of the market needed to be handled carefully or it could damage consumer confidence and ultimately strengthen Royal Mail's stranglehold. Britain's longest-established private mail business, DX Network Services, which is about to demerged from the Hays group, was one of those to express reservations. David Sibbick, its director of regulatory affairs, said: "What worries me a little is that opening the market in one go after 350 years of monopoly operation could mean all sorts of competitors setting up with operations that are unsustainable."

Guy Buswell, the managing director of UK Mail, the first private operator to sign a deal giving it access to Royal Mail's "final mile" delivery network, was also apprehensive. "Our biggest concern is that everybody piles in, has a go and fails and then customers all rush back into the arms of Royal Mail." He said that any new operators allowed to enter the market from 2006 should have to lodge sizeable performance bonds up front to protect the consumer.

Nigel Stapleton, the chairman of Postcomm, stressed that while regulation would be "light touch", there would be a "heavy emphasis" on ensuring the reliability of mail services. "We are very conscious that nothing could destroy confidence more than stories about mail being dumped. We have 15 months before full liberalisation and we believe that is enough time to put together a licensing system which ensures that cowboys are not allowed to deliver the mail."

The slow burn of postal competition means that only a small number of companies are providing an alternative to Royal Mail. DX Network Services handles about 1.5 million letters a night through its document exchange system, but business to business mail only. It has no interest in entering the market to deliver direct to households nor has it any present plants to start using the Royal Mail's local network to deliver mail which it has collected and sorted.

So far three of these so-called "access agreements" have been signed. Apart from UK Mail, the two others are with TPG, the Dutch national postal service, and Deutsche Post, its German counterpart. UK Mail, which began operations in May, is handling an average of 250,000 items a night compared with Royal Mail's 82 million.

UK Mail originally forecast that its turnover would reach £150m by year three, giving it 3 per cent of the market. It is now more circumspect, mainly because it has discovered how big a competitive disadvantage it is to have to charge VAT at 17.5 per cent. Because financial institutions such as banks and building societies, charities and public bodies such as the BBC, which together make up nearly half the mail market, cannot claim back VAT, they are effectively beyond the reach of UK Mail and other private mail operators.

Royal Mail, on the other hand, does not charge VAT but nor is it able to reclaim the VAT it pays for goods and services.

Imposing a flat rate of VAT on everybody would be fraught with political difficulties, which is why the Chancellor Gordon Brown has shied away from it. Postcomm calculates, however, that it would be revenue neutral because Royal Mail would be able to offset the increase in its prices against the VAT it was able to claim on its costs. So, for example, imposing a flat rate of VAT at 5 per cent would not mean the price of a second class stamp rising from 20p to 21p but becoming 19p plus 1p VAT.

It is not hard to see why private postal operators are so keen on the VAT playing field being levelled. Mr Buswell says: "It puts a huge block in the way of us getting new customers."

Postcomm and Postwatch, the consumer body, cautioned that introducing competition earlier was not a universal panacea to Royal Mail's ills. But Mr Stapleton said it would send an important signal. "We don't think for one minute we have dismantled the last barrier to competition but for new entrants there is now clarity on which they can base solid investment decisions."