Business

The timebomb under Royal Mail

BBC business editor Robert Peston on calls to privatise the Royal Mail

Unsurprisingly, Richard Hooper has renewed his call for the Royal Mail to be privatised - and has therefore underwritten the coalition's plans to do just that.

It would have been extraordinary if the former deputy chairman of Ofcom had said anything else in his update of the review of the postal services sector, which he originally carried out in 2008.

That's not because privatisation is the right answer. Of course my day job requires me to be utterly agnostic about that.

It's just that the conditions that led him to recommend selling off the Royal Mail have not altered in any fundamental way.

For Hooper, privatisation is the logical answer because the letters market is set to shrink for years to come, which makes it increasingly important that Royal Mail becomes more productive and efficient, which requires investment in new kit and the implementation of new working practices, which requires significant investment, which can't come from a cash-strapped public sector.

Hooper is also a fully paid up adherent of the view that modernisation won't happen on an acceptable timetable while politicians have a licence to meddle in Royal Mail's affairs - which for him is another powerful argument for flogging the business.

There are a few numbers in the report that tell quite a tale of the challenges faced by Royal Mail. And for once, I'm going to ignore the de facto debt burden of an £8bn pension fund deficit, since I've banged on enough about that in earlier posts.

Here's the big trend: the average daily mail bag contained 84m letters, packets and parcels in 2005; this year, the national mailbag was 15% lighter, containing just 71m items every day.

And the cause, as if you online readers didn't know, is that e-mails and texts are replacing letters at a far greater rate than the growth of online shopping is expanding the parcels market.

What's more, as Hooper warns in a resonant phrase, the "digitisable mail sector faces a demographic timebomb" - or to put it another way, our kids can't be bothered to send physical thank-you cards and letters, and never will (and if they end up running big companies, they won't bother with mass or bulk communication at a pedestrian's pace).

There's also, he says, an "environmental time bomb", such that growing numbers of companies are embarrassed by the number of trees they're felling for mass mailshots, and are therefore opting for electronic spam over paper junk (which, some would say, sounds like progress).

So Royal Mail expects that the decline in letter traffic to UK addresses will accelerate, predicting a 20% fall over the next five years.

The implication is that this lossmaking business can only return to profit if it improves productivity. And at a time when the construction of many new school buildings (inter alia) is being cancelled and when much of the public sector faces 40% cuts, if the upfront costs of delivering those efficiency gains are not to come from injections of private-sector capital, where will the money come from?

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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