Friday, March 13, 2009

The details of Royal Mail plan - not so good after all

I have had a chance to look at some of the details of the Royal Mail plans of the government. I am on record as being a supporter of bringing private finance into RM but the details of what is proposed are nowhere near as attractive as was first claimed.

The basic case for a change in ownership of RM is the freedom it gives to the company to raise the badly needed capital required to modernise what is an antiquated set up. Without that investment, the company will be unable to compete with the new arrivals in the market place. The government is currently the only shareholder in the company and therefore is the only body that can agree to new investment. This has not been forthcoming either under the Conservatives or Labour. Both governments have been prepared to take out the dividend, but not put in the investment. In effect, Royal Mail has been used as a cashcow but is now overmilked and underfed. Had this been a real cow, the owner would be in court for neglect and cruelty. No wonder RM is in such a mess

My hope was that the new ownership model proposed by Mandelson following the Hooper review would change all that. Sadly, having considered the details, it does nothing of the sort. Two crucial areas will leave the company hamstrung. Firstly, it will not be able to go to the financial markets to borrow or raise new share capital. The company will therefore still be dependent on the government for additional investment. Okay, so the new minority private sector shareholder will be putting in the region of £800 million into the company in the form of new share capital. But that money only goes so far and assuming it modernises the business, where then for RM. It needs to be dynamic and look to grow into new areas. But the model as proposed by Labour will leave the company to stagnate yet again once the initial investment has been completed. In effect, after the initial investment, RM will be left with the disadvantages of state ownership without any of the advantages.

The second worrying point is the Royal Mail will be restricted to business activities in the UK. This is all the more ironic given that the new investors in RM are foreign mail providers who do have the option to branch out into foreign markets and earn valuable profits to send back home. Royal Mail won't be allowed to branch out abroad and earn euros and dollars.

The Lib Dems have a proposal on the table for a shared ownership scheme which gives the companies the freedoms it needs to be a success. Okay, I am biased. I was very closely involved with writng the policy. Our model would have created a Royal Mail that was free to borrow and raise capital, had a significant minority stake for the state and another significant minority stake for the staff which would have been held in trust for their benefit. As with the John Lewis model, staff would have been partners in the business. The shareholding of he staff and the state together would have been just over 50%, the rest would have been sold.

A further significant difference is that under our model, Post Office Ltd would have been split off from RM and remain wholly in the public sector. This would free branches to develop new business, especially with other parcel amd mail delivery companies. At the moment they are barred from doing that. Under Labour's proposal, Post Office Ltd remains a full part of RM. And that means in effect Labour are part privatising the Post Office but not giving the branches the freedom they need to develop new business income.

So, having given some consideration to the proposals, I have come to the conclusion that they are timid step that fails to address the long term issues and leaves the company without the freedoms it needs to be a successful national and international competitor.

And let me just correct anyone who thinks I'm jumping into bed with all those rotten Old Labour dinosaurs on this issue. I'm not. I think they are even worse than their own government. At least ministers have proposed a way forward, even though it is very far from perfect. The dinosaurs on the other had have made a few Jurrasic roars about how dreadful they think it all is, but they have not put forward a single, workable alternative suggestion. It seems they are happy to leave RM as it is and let it whither on the vine and eventually die. That is certainly not something I would support.

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