George Kerevan: Ailing Royal Mail can’t hide

Royal Mail has its work cut out. Picture: Malcolm McCurrach

Royal Mail has its work cut out. Picture: Malcolm McCurrach

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I’VE just had a fun experience watching – on my laptop – the progress of my wife’s Christmas present being delivered to our front door (and no, she doesn’t know what it is).

It arrived thanks to Interlink, a commercial parcel delivery company that is actually owned by La Poste, the state-owned French equivalent of the Royal Mail. Log on to its website and you can follow the progress of your delivery van on a moving Google map.

I learned that my driver was called Stewart and watched him doing each drop-off across Edinburgh, complete with an estimate (constantly updated) of when he would arrive. The only hiccup was when Stewart phoned, a few minutes from the house, to make sure he was where he needed to be, and my wife answered. We enjoyed not telling her what was in the parcel.

With nifty competitors like these, the newly privatised Royal Mail definitely has its work cut out. This is clear in its latest financial results. The company reported a rise in parcel volumes but the division’s revenues actually fell as competition bit. That competition now includes Amazon who, having created the modern demand for parcel deliveries, have decided they can boost profit margins by doing the delivery themselves.

If its business model is in danger of imploding, what will happen to Royal Mail? More to the point, what will happen to the Universal Service Obligation (USO) under which a privatised Royal Mail is legally obliged to deliver post and packages anywhere in the UK for the same price? It’s an obligation not imposed on competitors, as Canadian chief executive Moya Greene was quick to point out.

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The present set-up is clearly unsustainable. That is not necessarily an objection to the principle of a universal postal obligation. In the wake of the independence referendum, the need for institutions that promote national cohesion is hardly obsolete. We should remember that a USO is the norm in Europe and North America. Often, the USO rules are more onerous than in the UK. In France, La Poste is required to ensure that no more than 10 per cent of the population of a municipality is more than five kilometres away from a post office.

It may come as a surprise to discover that the introduction of the USO and the penny post in 1839 was not designed as some wicked interference with the free market. Leading advocates such as the Scottish economist James Ramsey McCulloch were supporters of free trade, and attacked the then Tory government for tolerating an existing postal system based on private monopoly. In 1833, McCulloch argued that “nothing contributes more to facilitate commerce than the safe, speedy and cheap conveyance of letters.”

Nostalgia or identity politics aside, should we be worried by the possible end of the USO? With the ubiquitous smartphone and Skype, personal communication has never been easier or cheaper. And competition in the parcel service has surely delivered the “safe, speedy and cheap conveyance” that McCulloch demanded. The counter argument is that governments are happy to fund massive infrastructure projects in urban areas – witness the £15bn London Crossrail project. By that yardstick, the postal USO is a modest loss-leader to integrate rural and island populations until technological advance eliminates the need.

That said, we must recognise the impossibility of imposing the USO on one private delivery organisation. The inevitable result can only be that the commercial rivals cherry-pick the more profitable parts of the delivery trade, forcing Royal Mail into a financial black hole. This is already ­happening. Last week, Royal Mail claimed that a concerted move by Whistl (formerly TNT) could wipe £200m off its sales. On the other hand, we should be wise to Royal Mail using the USO issue for ulterior motives. By making such a self-­harming statement, Royal Mail knocked nearly 10 per cent of its share price. I can only imagine the management is trying to blackmail the government.

Reference to ditching the USO is usually code for other things. The City types that successive governments appointed to the board of Royal Mail and its previous incarnations always focused on ditching USO to make the company easier to float. Few bothered to think longer term about a sustainable business model.

Which brings us back to Interlink, and more particularly its French parent, La Poste. The French have always had a more entrepreneurial approach to public corporations. The highly successful strategy pursued by La Poste is focused on becoming a multinational communications operation, which includes its own e-mail service. Result: La Poste is the second biggest employer in France. Ms Greene should be looking over the Channel for ideas rather than hiding behind the USO.

The immediate solution to combining the postal USO with economic efficiency is simple. Let competition take its course, cutting the cost of delivery for the bulk of the urban population. The government or local authorities could then subsidise legitimate “social” mail services in rural and island areas, as is the case with bus travel. The cost would come out of a levy on all operators. An efficient postal service, as James Ramsey McCulloch told us a nearly two centuries ago, is a basic requirement for economic prosperity. «

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