Not much of a privatisation

Royal Mail will be floated on the Stock Exchange before the end of this financial year - but will the "universal service obligation" still be viable?

Margaret Thatcher did not dare, famously remarking that she was “not prepared to have the Queen’s head privatised”.

Successive governments, Tory and Labour, tried and failed. The Coalition, however, is going ahead. Royal Mail – or a chunk of it, at least – will be floated on the Stock Exchange before the end of this financial year, Vince Cable told Parliament yesterday.

Taken in isolation, the case for privatisation is convincing enough. Email has decimated the business model of an organisation set up to deliver letters and, with internet shopping on the rise, its parcels arm needs to fill the gap. The process had already begun. Under the stewardship of Moya Greene, Royal Mail returned to profit last year, after four years in the red, despite still-dizzying drops in the volume of letters. To complete the transformation – the Business Secretary argues – the company needs both access to private capital and freedom from Treasury investment restrictions.

So far, so good. The problem is the “universal service obligation” requiring Royal Mail to deliver post nationwide for a single price. The hope is that better margins and a booming parcel business will enable the newly listed group to cross-subsidise. Indeed, Mr Cable says that funding the USO is the plan’s raison d’être. But what if the numbers do not, after all, add up?

There are four options. The Government can junk the USO, leaving post to remote areas costing more. It can let stamp prices rise as necessary, perhaps beyond what letter-writers will bear. It can let the company go bankrupt. Or it can make a mockery of privatisation by providing some kind of subsidy or bailout.

The Independent is instinctively pro-market. But there is an inconsistency here that has not been satisfactorily addressed. Royal Mail is henceforth to be a commercial operation, yet it will be required to discharge a wholly uncommercial task – with no mention of what happens if the circle cannot be squared. The cluster of “private” train contracts returned to the state in recent years hardly inspires confidence.