Royal Mail and the Post Office are not “separate and distinct businesses”

Our guest writer is Gregg McClymont MP (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Civil servants from the Department of Business, Innovation and Skills sent around copies of a page on the department’s website to all MPs today. Titled ‘mythbusters’, it aims to rebut any of the arguments against the government’s draft Postal Services Bill. I’d like to focus on the accuracy of one of their claims in particular – that privatising Royal Mail will not lead to post office closures.

The government claims that Royal Mail and the Post Office are “separate and distinct businesses”, and that the Post Office is “not for sale”. This is not true. Currently they are part of the same state owned business.

As a result of an Inter Business Agreement (IBA), Royal Mail is required to take all of its Post Office services from Post Office Limited. In principle, it would have applied until 2014. It is unclear whether it applies if Royal Mail and Post Office Limited become fully separate companies as a result of new government legislation. Once the IBA ceases to apply Royal Mail will be free to use any partner to supply post offices.

A third of the Post Office’s revenues come from Royal Mail. Without those revenues, Post Office would be unable to keep many post offices open.

The Post Office includes a large rural network which is currently not duplicated by any other potential provider of post offices. Much of the rural network is unprofitable and cross-subsidised by profitable urban post offices. The way that the Government is structuring privatisation, no one would buy it – as its principal customer (Royal Mail) will not be required to use it in the future.

The Government has instead created the possibility of mutuals taking over a potentially failing Post Office business. However, the very people who would have to take up the mutual option – subpostmasters and mistresses – say the government’s plans don’t make economic sense.

The government claims that there will be ‘no further Post Office closures’ after privatisation. But this is far from clear from the legislation. Currently, the Post Office network has 11,500 post offices. The current statutory rules to maintain that number are weak. The licence conditions regarding the number of post offices had been left to Postcom, with agreement of the relevant minister, to define in the Royal Mail Group’s licence.

These rules can be met by keeping just 4,000 post offices open. The number of post offices required to be kept open above this figure was determined by the previous Labour government acting solely in its capacity as owner. It will not be able to exercise such a role after privatisation.

Going forward, Royal Mail will want to reduce the price it pays for post office services to Post Office Limited. Management bonuses will depend upon it. It will therefore ask all potential bidders to provide the number of post offices consistent with Royal Mail Group meeting its licence obligation. If the privatised Royal Mail license conditions are the same as Royal Mail Group’s (which itself may not be a safe assumption), bidders will have to offer post offices in only the minimum 4,000 locations, not 11,500. Post Office Limited will either have to shut the remainder or make very large losses.

The government claims that separation will give Post Office management greater freedom to focus on growing its revenue and getting the most out of its branch network, and that the two companies have a long term contract in place and will continue to work closely together. This is also misleading. The terms of the separation mean that Post Office management will have to start planning branch closures immediately as the existing Inter Business Agreement, if it even continues to apply post-privatization, will expire in four years time.