Free-up Royal Mail – don’t sell it

Free-up Royal Mail – don’t sell it
ROYAL Mail has big problems. It has been struggling to make a profit for years and is now burdened by a huge £6bn pension deficit.

ROYAL Mail has big problems. It has been struggling to make a profit for years and is now burdened by a huge £6bn pension deficit.

And this is after the service has benefited from the expertise of Allan Leighton, the former Asda chief executive brought in in 2002 by Tony Blair to work some private sector magic.

Leighton – due to leave in March – and his right-hand man, former Football Association boss Adam Crozier, have overseen huge changes at the state-owned postal service, including closing 2,500 post offices and cutting 30,000 jobs.

Losses have narrowed and Royal Mail said operating profit doubled to £177m in the six months to September 28 on group revenue of £4.6bn. In 2007 it made a pre-exceptional pre-tax profit of £135m on revenue of £9.3bn.

But this low profit margin has left the government keen to push ahead with a plan to part-privatise the group in exchange for taking on the pension burden. It is looking to European postal operators who have turned in much better results – profit margins as high as 13% and 15%.

However, Royal Mail isn’t as much of a basket case as it’s often made out to be. European players will surely be attracted by its profit making business-to-business service GLS and Parcel Force. These divisions contributed 17% of group revenue in 2007 and made a decent return (GLS’ profit margin was 9.3% in 2007 on sales of £1.2bn).

The overall group performance is undermined by the Royal Mail postal service (73% of revenue) which is struggling with the loss-making one-price-goes-anywhere universal service which Royal Mail says “underpins the social fabric of the country”.

It’s difficult to understand why private ownership, albeit a 30% stake, is still considered to be the panacea for all public sector woe.

This attitude has surely been discredited by the performance of the banking sector and the conduct of several foreign-owned businesses in recent months.

The Indian conglomerate Tata was demanding government help for Jaguar rather than dig into its own deep pockets and van maker LDV’s Russian owner, the oligarch Oleg Deripaska, took the same line.

What makes the government think a foreign investor in Royal Mail will behave any differently if things went wrong?

Surely it’s best bet for a stable future is to remain under state control without the pension burden and with a greater ability to raise capital. At present a statutory bar prevents it borrowing more than £25m on the capital markets.

If this barrier was lifted, as some MPs are demanding, the company could then gain access to private sector money and expertise while remaining state-controlled.

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