Royal Mail in landmark deal to deliver rival's post

Royal Mail signed a historic agreement yesterday, allowing a rival operator to use its postal delivery network for the first time to send letters to every address in the country.

Under the groundbreaking deal, UK Mail, a division of Business Post, will pay Royal Mail between 13p and 14p a letter for access to its "final mile" network of 1,450 local delivery offices and 80,000 postmen and women. However, it will be prevented from "cream-skimming" Royal Mail's most profitable business.

The agreement will open up the Royal Mail to competition for the first time in 300 years and is expected to pave the way for bigger operators such as the Dutch and German post offices to enter the UK market.

UK Mail plans to use the Royal Mail network to deliver business mail such as utility bills and direct mail advertising to home addresses. It is aiming for 3 per cent of the business mail market, worth £150m in three years. The 13p-14p that Royal Mail will receive compares with the 20p it initially demanded from UK Mail, and the 11p-12p the regulator Postcomm proposed last May after being called in to arbitrate.

Allan Leighton, the chairman, said at the time that Postcomm's proposals amounted to "wreckulation" and accused it of "throwing a huge spanner in the works", which could destroy the one-price-goes-anywhere universal service.

Yesterday, however, Royal Mail's chief executive, Adam Crozier, described the agreement struck with UK Mail as a "landmark deal" that would benefit Royal Mail and its workforce. Mr Crozier said that although the final "access" price was not hugely different from that initially suggested by Postcomm, the details of the agreement would prevent UK Mail from "cherry-picking" its most profitable business mail and leaving Royal Mail to handle the rest.

Royal Mail currently charges business customers such as banks and utilities between 16p and 18p a letter. UK Mail intends to undercut Royal Mail, and is expected to charge customers about 15p a letter when it begins its service in April.

UK Mail will collect and sort mail from big business users - classed as those sending out more than 4,000 letters at a time - and will transport them to one of Royal Mail's 73 inward mail centres for final delivery. The amount it pays will depend on whether the mail has been sorted down to postcode areas or to delivery office level.

Private postal operators have to charge VAT at 17.5 per cent whereas Royal Mail does not. This means that they are effectively excluded from handling mail for financial institutions, government departments and charities, which are VAT-exempt and therefore cannot claim back the tax. These customers account for about half the £5bn-a-year business mail market.

Postcomm has called on the Treasury to end this anomaly so that private postal companies are treated in the same way as Royal Mail. Paul Carvell, the chief executive of Business Post, said he expected Royal Mail to control 90 per cent of the UK market in 10 years. He predicted its share of the business market would fall 10 percentage points but it would retain nearly all the consumer market, which accounts for about14 per cent of the 88 million items handled by Royal Mail each day.