A very long post - about the post

Very conscious that I don’t seem to have time these days to blog about the most important, or rather, the most controversial issues of the day.

But seeing as I’ve set myself the task tonight of trying to reach some conclusions on the future of the Royal Mail, in response to the legislation just announced by Peter Mandelson in the Lords and some rather persistent lobbying by the Communication Workers Union, I might as well do it in blog form. Although be warned, this is going to be one of the longest posts in the history of blogging.

Here are just some of the factors that have to be taken into account:

Modernisation. Some would say the postal workers, and the CWU, have resisted modernisation down the years. The union assures me they’re willing to modernise, but then tell me that if the delivery offices are automated, there will be job losses and full-time jobs will become casual, part-time jobs. They don’t want this to happen. The sorting offices – i.e. the main centres where post is first taken and then dispersed around the country - are already mechanised. At the delivery offices, however, postal workers spend the first few hours of their shift sorting out their rounds, by means of popping letters into pigeon holes and then arranging in delivery order. Then they go out and deliver them. They tell me they’re already under pressure to complete their rounds more quickly than they used to, and they don’t have time to stop and have a chat or cup of tea with people like they used to. It was suggested that this was part and parcel (if you excuse the pun) of the Royal Mail service, as sometimes they’re the only point of contact that lonely older people have. If the delivery process was automated, they would only have a few hours work a day. Doing two rounds a day might be an option, but would be too physically demanding, carrying heavy bags around for more than a few hours. The union’s argument is that the Royal Mail provides employment for unskilled workers, who – particularly in the current economic climate – would find it hard to get jobs elsewhere. Protecting these jobs should be a priority. My problem with this is that although the union says it supports modernisation, it actually ends up arguing against modernisation, on the grounds that it’s more important to protect jobs.

The pension deficit. There’s a huge deficit in the Royal Mail pension fund, possibly as high as £8bn. This is partly because the trustees took a pensions holiday for several years; that’s not the postal workers’ fault, but we can’t turn the clock back. It was said at the National Policy Forum that the deficit is 75 times higher than the current small operating profit made by the Royal Mail each year. The Government is prepared to fill this hole, but not to provide any extra investment on top of that sum.

Investment. Apart from the pension deficit, and the need for more money to be spent on modernising the delivery offices, the Royal Mail’s core business is declining by about 7-8% a year, because of the increased use of email, Skype, texting and other forms of new media. It’s highly likely this trend will continue, and possibly even accelerate.

Liberalisation. An EU Directive requires member states to liberalise postal services by 2011. The UK was quick to respond to this, opening up its markets to foreign competitors; other countries have not been so quick to do so. The result: the Royal Mail is besieged by foreign companies trying to take its business, but cannot (yet) do the same in other EU countries. These foreign companies, such as the Dutch-owned TNT, are winning the lucrative business – i.e. collecting bulk mail from big companies – and then using Royal Mail for ‘downstream access’ o i.e. the non-profitable bit at the end, delivering to individual households (what they call ‘the last mile’). There is also something called the ‘access headroom’ rule, which basically means if the Royal Mail offers a customer a certain rate to do its collection, then it has to offer its competitors a 2p lower rate. So if Royal Mail agrees to handle the Home Office’s mail at, say, 13p an item, it would have to offer the likes of TNT its downstream services at 11p an item. In theory this would enable TNT to also charge the Home Office 13p an item, pass on the ‘last mile’ work to the Royal Mail and then somehow make its profit on the 2p differential. This is, I assume, designed to stop the Royal Mail driving out competitors by charging them over the odds for downstream access.

The Universal Service Obligation. So the competitors are basically cherry-picking the lucrative part of the market, and leaving the Royal Mail to cover the USO – i.e. the obligation to ensure that anyone, anywhere in the UK, gets their mail delivered. It’s not profitable, and unless there is significant investment to reduce costs – e.g. by introducing automation at delivery offices and thereby cutting workforce costs – the only way it will survive is for the price of a stamp to increase significantly. In many European countries it’s already much higher than here.

Management. There have also been criticisms of Royal Mail’s management, both from Government and the workforce.

The Government took the view – which I support – that the status quo was not an option. It commissioned the Hooper Review which has made several recommendations, some of which have been welcomed by the CWU (e.g. proposals for regulation by Ofcom). The Government has also announced some measures to create more of a level playing field between the Royal Mail and its competitors, which I welcome.

The most contentious recommendation, however, is that a private partner should be brought in, with possibly a 30% stake in Royal Mail. It’s widely expected that this partner would be TNT.

I should say at this point that I don’t have an ideological problem with an outside partner coming in. I’ve worked in both the public and private sectors. I don’t subscribe to the view, ‘public good, private bad’ – or ‘private good, public bad’. The CWU reps I’ve spoken to over the past fortnight (at some length – a 90 minutes meeting in my office, and then another hour in Parliament, and then another chat at regional conference), do have an ideological take on it. They regard their work as an essential public service (which it is, in part) and want to continue as public servants. They believe that a private sector company would inevitably seek to make its profits by downgrading terms and conditions, and forcing more work to be done by fewer workers. I accept this isn’t entirely an ideological response: it is, to an extent, logical thinking. There seems however, to be a reluctance to accept that there exists a private sector company anywhere that treats its workers well, and isn’t solely obsessed with maximising revenue. I don’t agree.

So then the question becomes, is a private partner really needed? Can the Royal Mail continue as it is? The Government accepts it will have to bail out the pension fund, but simply isn’t prepared to contribute more; there are other, more pressing priorities for public spending.

I’m advised that there is some £600m in the Royal Mail’s reserves which could be used for investment/ modernisation. (Although some would no doubt argue that this should be put towards the pension fund deficit, thus reducing the burden on the British taxpayer.)

Another solution would be to allow the Royal Mail to borrow to invest. This, coupled with measures to level the playing field, could put them on a secure footing. At which point Peter Mandelson might well start to argue – in fact I’ve heard him do so - that bringing in a private partner isn’t just about an injection of cash, but about a change of culture, a harder-headed more commercial approach. And I’m sure the CWU would then point out that the Government already tried this by bringing in Adam Crozier and others to run the service, and it didn’t make much of a difference.

The conclusion I’m edging towards is that the Royal Mail does need both an injection of cash and a shot in the arm. We can’t continue to run the Royal Mail along current lines, where modernisation is resisted so that people can be kept in their jobs; but you can’t run a business or a public service as a job creation scheme. What I’m interested in finding out now is whether we do really need to bring in a private sector partner to achieve this. Can Royal Mail borrow the necessary funds? They’ve been promised a level playing field re downstream access, (although this has only just been announced and I need to look into the details). Will that be enough to halt the slide in their profits? What would be the impact of a private sector partner on the workforce and the business?

That’s enough for now, not least because I’ve got to read up on Fred the Shred for a radio piece I’m doing at 11pm. No doubt there are things I’ve missed out, or points I haven’t covered, particularly as I haven't had a chance yet to study what Peter Mandelson announced in the Lords on Thursday, so feel free to pull me up on them. I’ve agreed to meet the CWU again soon and there will no doubt be more discussions in Westminster this week.

I may also blog at some point about the politics of this. There’s sometimes a tendency amongst MPs to take the easy option when they’re being lobbied hard – to sign the EDM, to do what their party members are saying. Some are arguing that regardless of the merits of part-privatisation, we shouldn’t be doing something so controversial when we’re behind in the polls and only a year away at most from a general election. But – enough for now!

P.S. LabourList is covering this issue in some detail, pulling together various views - which I think will turn out to be one of the strengths of the site, i.e. when it comes to 'hot topics' engaging the party.

Have just remember another key concern of the CWU - that part-privatisation would inexorably lead to full privatisation under a future (hypothetical) Conservative government. But I think full privatisation will be on their agenda anyway. Implementation of the Hooper recommendation could, if it puts Royal Mail on a sounder commercial footing, put a halt to such plans.