Government to privatise 'declining' Royal Mail

Vince Cable says public group faces 'potentially lethal challenges'

Royal Mail is an unsustainable business that will struggle to survive in its current form unless it gets an injection of private capital, a report into the group's future said yesterday.

Richard Hooper, the former deputy chairman of Ofcom, who was asked by the former Labour government to review Royal Mail's position in the industry, said yesterday that parts of the business should be sold to trade buyers, or floated.

His latest recommendations were immediately accepted by the Business Secretary Vince Cable, who said that without the reforms, Royal Mail faced some "potentially lethal challenges".

A new Postal Services Bill will be introduced in the House of Commons by the end of the year, although Mr Hooper and a spokesman for the Department for Business refused to comment on how much of Royal Mail would be sold. A slice of the company is likely to be offered to employees.

Yesterday's findings, which update an initial report published in December 2008, make grim reading on the situation facing Royal Mail. The decline in the number of letters being sent is greater than previously forecast, Mr Hooper said, with worldwide falls of between 25 per cent and 40 per cent expected in the next five years. The decline is unlikely to be offset by the continued growth in parcels – a result of internet shopping, he added.

"If all the recommendations in my updated report are implemented without further delay, and Royal Mail modernises to best-in-class with management, workforce and unions working together, then despite the very real market difficulties the company has a healthy future," he said.

Mr Hooper added that one of Royal Mail's biggest problems, its burgeoning pension fund deficit, has also deteriorated, and that the £8bn hole that was identified earlier this year "is even more unsustainable than 18 months ago". As a sweetener to potential trade buyers, the report recommended that the pension deficit should be taken over by the Government, a proposal that was also accepted by the Business Department yesterday.

Since full deregulation of the UK postal industry in 2006, the private sector has been allowed to compete with Royal Mail in areas such as parcel delivery and courier services – the so-called upstream part of the industry. In that time, companies such as TNT, UK Mail and Home Delivery Network have thrived, in many cases by offering a more efficient and cheaper service. According to Mr Hooper, Royal Mail has lost 60 per cent of the upstream sector in the last four years.

However, Royal Mail maintains a monopoly in the unprofitable downstream sector; the delivery of letters and parcels.

All post, regardless of whether it is collected and processed by the public or private sector, is ultimately delivered by Royal Mail, which is paid by companies for putting it through letter boxes – the so-called "final mile". Private companies argue that they do not have the infrastructure to compete, although TNT UK has started a limited delivery service after trials last year

The private-sector mail groups were guarded in their reaction yesterday, saying that they would need to digest the details of any legislation before they decided whether or not to bid for Royal Mail businesses.

UK Mail, the biggest private sector group, declined to comment, while Nick Wells, the chief executive of TNT Post UK, said that his company was unlikely to take part in any auction.

As part of yesterday's report, Mr Hooper recommended "a new less burdensome regulatory framework ... with responsibility for regulation moving from [the current regulator] Postcom to Ofcom."

Mr Wells argued that the most important issue facing the industry was ensuring that Royal Mail loses what he described as its dominant position in the market. "A strong postal regulator is essential to counter the monopolistic strength of Royal Mail," he said. "Postcom has done a reasonable job so far, but it has not been tough enough on Royal Mail on some issues that will enable true competition to take place in the UK. It is important that the proposed new regulator, Ofcom, is firm and fair and has the detailed market knowledge and expertise necessary to supervise the currently monopolistic postal market."