Threat to Royal Mail universal service revealed as profits jump

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  By Chris Rumbles
 
The Royal Mail’s obligation to deliver to every home in the UK is under threat after it claimed competition is hampering its Universal Service Obligation (USO).
 
Under the terms of the USO, Royal Mail is legally bound to deliver letters to every part of the UK but the release of the business’s first financial results saw Chief Executive Moya Greene warn of competitors’ ability to “cherry-pick” to “no defined quality standard”.

The announcement, on the back of news the company made a £671m profit last year, will come as a major blow to the Coalition Government who repeatedly pledged that the universal service would be safeguarded through privatisation.

Speaking in the House of Commons in July of last year, Minister of State for Business and Enterprise Michael Fallon MP said the government’s “overarching objective” was to maintain Royal Mail’s universal service and that its enshrining in legislation meant this protection would “continue to apply following any sale of shares”.

In her review of the past financial year’s results, Ms Green wrote: “Royal Mail is required to deliver six-days-a-week, overnight, throughout the whole country, to stringent quality standards and at a uniform, affordable tariff. Moreover, we are also required to deliver any items TNT Post UK does not consider economic to deliver itself.

“If TNT Post UK is successful in delivering its stated objectives, this could threaten the fundamental economics of the Universal Service”.

Royal Mail was privatised in October 2013 by the UK government who said the move was necessary for the group to compete with private mailing companies.

The initial share price set by the government was 330p a share but the market price immediately rose and has remained high since, though dropping today in the aftermath of Ms Greene’s forecast to stand at 531.9p.

Ofcom is investigating Royal Mail’s Access contracts after the group’s changes to direct delivery resulted in TNT lodging a complaint with the regulator. Planned Royal Mail price changes have been suspended pending the outcome of the investigation.

SNP postal affairs spokesperson Mike Weir, who is the MP for Angus, said the news compounded the undervaluing of Royal Mail shares:

“It is absolutely no surprise to anyone following this botched sell off that this new threat to the USO has emerged  – but it is shocking that it has come quite so soon after privatisation. As soon as the Westminster coalition decided to sell off the Royal Mail in their rushed – bargain basement sale – we predicted that the USO, which is so vital to Scotland and to rural businesses and communities in particular, would be threatened.

“This privatisation has been a disgraceful shambles since day one and it is absolutely no surprise whatsoever the USO is now in the sights of the privately owned Royal Mail – they have got their hedge fund masters to keep happy now.

“We have always believed that a privatised postal service in a competitive market will undoubtedly be under pressure as its competitors ‘cherry pick’ the profitable urban routes leading to a reduced service in rural and less affluent areas.”

A report from the Scottish Affairs Committee at Westminster in 2010 raised concerns at the prospect of “large areas of Scotland” being treated as ‘exceptional’ by Ofcom under the USO on grounds of “geographical conditions or other circumstances”.

The final Postal Services Act 2011 passed with clause 33 (2) (b) intact meaning that Ofcom can allow for derogations from the USO in such “exceptional” circumstances.