The European Commission has launched an in-depth investigation into state aid for UK postaloperator Royal Mail which could hit its planned privatisation next year.
The Brussels-based body said it would examine whether the British government’s plans torestructure the postal incumbent by relieving it of its estimated £8 billion ‘pension deficit’ andby strengthening its balance sheet by a further £1.7 billion are in line with EU state aid rules.
Should the Commission reject the UK’s state aid plan, the government could be forced torevise its plans to sell 90 per cent of Royal Mail shares next year to financial or strategicinvestors since the heavy pensions deficit is seen as the main hurdle to any large-scale investmentin the British postal operator.
Explaining in detail its decision to start a full probe, which will last into next year, theCommission said at present it “has doubts that Royal Mail’s restructuring plan foresees adequatemeasures to mitigate any distortions of competition brought about by the state intervention and toensure a sufficient own contribution to the cost of restructuring”.
The Commission’s Vice President in charge of competition policy, Joaquín Almunia, said: “TheCommission acknowledges the importance of the reform of the postal market in the UK. However, wemust ensure that the state measures do not provide undue advantages to Royal Mail as this woulddistort the conditions of competition among postal operators in the Internal Market.”
In June 2011, in the context of the reform of the postal services sector, the UK notified theCommission of its intention to relieve Royal Mail of its obligation to fund the accrued deficit ofthe pension fund that the UK claims is due to Royal Mail’s status as a public sector monopolybefore 2006. The so-called pension deficit relief is estimated by the UK authorities at up to £8bn(around €9 billion). In addition the UK notified measures to strengthen Royal Mail’s balance sheet,including restructuring of the company’s £1.7 billion debt (around €1.9 billion) and the provisionof a revolving credit facility.
The UK contends that the notified measures are in line with the EU Guidelines on state aidfor rescuing and restructuring firms in difficulty. Alternatively, the pension relief could also befound compatible as legacy costs from the pre-liberalisation period, based on recent Commissionpractice.
However, at this stage, the UK authorities have not convincingly demonstrated that thesubmitted restructuring plan would comply with the guidelines. In particular, the Commission hasdoubts that Royal Mail’s role as the sole universal service provider and the liabilities resultingfrom its public sector monopoly legacy would justify mitigating the guidelines and notably theconditions ensuring that competition distortions are limited and that the cost of restructuring isshared by shareholders. Moreover, the Commission has doubts whether the pension relief could befound compatible as compensation for an exceptional burden resulting from Royal Mail’s past statusas public sector monopoly.
The Commission noted that in 2007 it approved a French reform regarding the financing of thecurrent and future pensions of the employees of La Poste with a civil servant status. However,while the 2007 decision ensured that La Poste’s effective social security costs were comparable tothose of competitors, it seems at this stage that a large share of Royal Mail’s pension deficit isdue to the adverse conditions on the stock markets which have affected all UK undertakings alike,it commented. Furthermore, the Commission already approved measures to address Royal Mail’s pensiondeficit, e.g. the creation of an escrow account which allowed Royal Mail to extend the period overwhich to fund its pension deficit.
The Commission noted that it is currently also examining measures in favour of the Belgianpost incumbent bpost and the German postal incumbent Deutsche Post. The scope of the investigationon Deutsche Post has recently been extended to cover the financing of certain pension costs.
