We need a People’s Bank, Vince, not a private postal service that won’t deliver

By Sebastian Michnowicz

Today sees the second reading of Vince Cable’s Postal Service’s Bill which seeks to privatise 90% of Royal Mail and put Post Office branches into mutual ownership. After years of chronic mismanagement at the hands of successive governments, Royal Mail was in a very bad way until a few years ago when drastic changes began to turn the company’s fortunes around. It is, however, not out of the woods just yet and privatisation could, by Vince’s own admission, cause it to go bankrupt. If mutualisation of the Post Office results in withdrawal of existing government subsidy, then branches around the country could be faced with closure. Yet arguments that persuaded Lord Mandelson, an infamously fierce proponent of privatisation, not to sell the firm off, apply more now than they did then.

The biggest problem facing Royal Mail is the pension deficit. The rot set in during the 1980s, when it was generally considered that companies were paying more than was necessary into their already very healthy pension funds. Margaret Thatcher suggested companies take ‘pension holidays’ and keep the money that would be set aside for the pension fund as profit. Royal Mail was one such company to take a holiday – one that lasted thirteen years. With people living longer than had been expected when the funds were set up and the stock market not performing as well as was hoped in the interim, the effect of Royal Mail’s pension holiday was to create a huge shortfall in the fund. Currently, it stands at £10 billion. Short of a bank or private equity firm, it’s hard to imagine who would take Royal Mail on with such a massive deficit. It is, therefore, heartening that Vince’s bill proposes that the government maintains responsibility for clearing the deficit; not because it makes it easier for a privateer to take over Royal Mail, but because it is an admission of and an acceptance of responsibility for the mistakes of previous governments and that is not something that happens very often.

The arrival of the internet in people’s homes and the convenience of sending e-mails has caused a heavy decline in the number of letters Royal Mail handles and this has caused a significant reduction in revenue. That said, items such as books, DVDs and clothes that, previously, were bought in shops are being bought increasingly over the internet and this has boosted Royal Mail’s packets and parcels operation, so a comprehensive re-structuring of the business is, perhaps, more important than the relentless pursuit of finding efficiencies. Royal Mail’s other problems are manifold, but they all stem from one thing: the liberalisation of the postal service market.

In an age where we are able to choose which company we would like to provide us with a particular service, be it our telephone, gas or water, it is only fair this concept extends to choosing who we use to deliver goods we buy or send. It was obvious that as new postal companies entered the market, Royal Mail’s market share would decrease. Despite this, Royal Mail has been making a profit in the last few years albeit soaked up by the pension deficit. What has caused Royal Mail significant difficulties is the conditions placed upon it by the postal services regulator, Postcomm, which, in the governments ‘cull’ of the quangos, is to be subsumed by Ofcom.

Royal Mail is obliged to provide a universal service: it delivers letters to every address in the UK for one price. As a result of having an operation spanning the entire country, which new competitors do not have, Royal Mail is obliged to take competitors’ mail through its own network at a fixed rate – a process called ‘downstream access’. In doing so, Royal Mail loses 2 pence on every letter handled on behalf of a competitor. In the year to March 2007, it handled 2.4 billion items in this way, double that of the previous twelve months. To make matters worse, Royal Mail loses 6 pence on every ordinary stamped letter but Postcomm prevents it from raising stamp prices to the extent that this trend is reversed. An increase on the price of a stamp required to reverse this trend could be huge and might turn further people away from sending letters, but it would still be lower than competitors’ prices.

On top of all of this, a surcharge is placed on paying utility bills or council tax at Post Office branches, with customers being encouraged to use their bank or nearest ‘PayPoint’ to avoid said surcharge. In the name of giving competitors an easy ride, it seems everything is being done to prevent the one company capable of providing a universal service from thriving and generating the necessary revenue it needs, after years of neglect, to adapt for the needs of tomorrow.

Post Office branches, particularly in rural areas, could face closure under plans set out in the bill. Currently, the government subsidises Post Office branches that do not run at a profit to the tune of £150 million a year, for the sake of the people who rely on them for their pensions and such like. Cable proposes to put the branches in the ownership of the people who work in them, in the style of the John Lewis Partnership, on the logic that the people who work in Post Office branches know how best to run them. It is a flawed logic, however, as subpostmasters cannot stand outside their rural Post Office branches with a baseball bat and force people to go in and buy stamps, especially if the branch remains open for the benefit of a number of pensioners who may not regularly use profit-making services, yet could find it difficult and expensive to commute to a larger town with a bank.

An idea floated the last time privatisation of Royal Mail reared its ugly head was the concept of a People’s Bank: just like a real bank, but one that operates through branches of the Post Office and is government-owned so it doesn’t lose everybody’s money necessitating a colossal bail-out while causing the worst economic recession in living memory. Post Offices exist in many places around the UK that are miles away from a bank and with the Post Office Card Account, a lot of the infrastructure is already in place. By providing bank services, people can be encouraged back into Post Office branches and the some of the profit generated from this can be used to subsidise the services that not even the most frugal or wily of privateers can generate a profit out of.

When a company is publicly owned, its focus is on providing a good service. When that company is privatised, that concern becomes secondary to the creation of profit. That’s not to say that it is acceptable for state-run firms to run with unsustainable losses, but the whole concept of providing a universal service is at odds with profit generation. It stands to reason that if I send a letter with a first class stamp to an address at the end of my road, Royal Mail will make a profit on it. Send that same letter, at the same rate of postage, to a village in the Scottish Highlands and it will create a loss.

Privatisation, therefore, is not able to solve this problem without rolling-back the universal service, either by refusing to deliver to locations that do not generate a profit, or by considerably jacking-up the prices on loss-making services. A People’s Bank could be used to maintain the one-price-every-address universal service and generate the profit needed to allow the company to develop for the needs of tomorrow and rejuvenate under-used Post Office branches in the countryside.

Casting aside fears of a double-dip recession, it was announced yesterday that the UK economy grew by 0.8%. Research conducted by Royal Mail itself shows that business start-ups are at an eighteen-month high and it is precisely these businesses that could benefit from having postal and banking services in one location. While privatisation of Royal Mail could be the road to ruin, there has never been a better time for a People’s Bank.