EC To Probe Royal Mail Funding

by Ulrika Lomas, for LawAndTax-News.com, Brussels

23 February 2007

The European Commission announced on Wednesday that it has launched an in-depth investigation under the EC Treaty’s rules on state aid into a series of funding measures taken by the United Kingdom in favour of Royal Mail.

The investigation follows complaints from Royal Mail's competitors in the newly liberalised UK postal market.

The Commission will be examining the terms of each of the funding measures to determine whether they constitute state subsidies, or whether they meet 'market investor' conditions.

Royal Mail is the main provider of postal services in the UK, and is a 100% state-owned company. Its legal monopoly over basic letter services was removed at the end of 2005.

The post office network is operated by Post Office Limited, which is a subsidiary of Royal Mail. In 2005-2006 Royal Mail's group turnover (including Post Office Limited) was GBP9,056m (EUR13.5 billion), with a profit after tax of GBP395m (EUR570 million).

The Commission will be examining four different measures, namely:

• A GBP500m (EUR740 million) loan granted in 2001, repayable after 2021 and granted at a fixed interest rate, which financed Royal Mail's overseas acquisitions. The Commission will investigate whether the terms of this loan were commercial in the light of prevailing interest rates and the state of the company at that time.
• GBP1bn (EUR1.48 billion) of loan facilities made available to Royal Mail from state sources in 2003, of which GBP900m (EUR1.34 billion) is to be extended after 2007. Although the original loan facilities were not drawn down, their availability may represent an 'option value' to the company.
• Placing of GBP850m (EUR1.26 billion) in an "escrow account" which will reduce the pensions contributions which Royal Mail needs to make to address the current deficit in its pension fund. The funds come from reserves built up through past profitable performance which are placed under Government control under UK legislation.
• A further loan of GBP300m (EUR450 million), which was announced on 8 February 2007.

The complaints against Royal Mail upon which the Commission is acting date from August and October 2006, and the Commission has been following developments and studying the complaints since then. On 8 February 2007, the UK authorities announced that they had reached agreement with Royal Mail on the terms of the latest package of measures.

Commenting on the matter, the European Commission explained that:

"Broadly speaking, provision of funding on terms which would be acceptable to a private investor operating in a market economy are not considered to be state aid. According to the UK authorities, all these measures in favour of Royal Mail are on such commercial terms."

"None of these measures have been notified to the Commission. Measures which constitute state aid must be notified to and authorised by the Commission before they can be put into effect. If put into effect without Commission authorisation and found incompatible with the Single Market, they would need to be recovered."

The opening of an in-depth investigation gives interested parties the possibility to comment on the proposed measures but it does not prejudge the outcome of the investigation. Furthermore, the measures subject to this investigation do not concern the subsidies given to maintain the network of post offices.

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