Business View: Why Labour dare not deliver Royal Mail to the posties

Richard Gillingwater is not a well-known figure outside Whitehall and the City. A former merchant banker, he was drafted into the Cabinet Office in 2003 to head what is called the Shareholder Executive.

What, you may ask, does the Shareholder Executive do? The answer is that it is a parking place for the Government's investments in businesses that it hopes to sell at some point.

There is the 56 per cent of QinetiQ it retained, the 49 per cent of National Air Traffic Services that it no doubt wishes it hadn't, the whole of BNFL (more of which later) and the all of Royal Mail.

Labour's manifesto may not have said anything about selling Royal Mail - indeed it may have implied the opposite - but Mr Gillingwater is not paid upwards of £500,000 (making him probably the best-paid Whitehall mandarin) just to keep these investments ticking over. He is there to maximise value for the British taxpayer.

So, when Allan Leighton popped up last week with a plan to part-privatise Royal Mail, Mr Gillingwater's ears must have pricked up. The company's chairman was trumpeting the massive turnaround in fortunes at Royal Mail, where operating profits more than doubled to £537m and the humble posties received bonuses of £1,074 each.

What he proposes is to buy 51 per cent of Royal Mail from the Shareholder Executive and give it to the staff. He will pay for this by borrowing £2bn against the security of Royal Mail's assets and selling the European parcels operation GLS for a few hundred million. But there is a catch: the group has a £4.5bn deficit on its pension fund and Mr Leighton wants the Government to shoulder a large part of the liability.

Alan Johnson, the new Secretary of State for Trade and Industry (and a former postman and general secretary of the Communication Workers Union), is understood to like these ideas. He sees what Mr Leighton calls a "John Lewis-style" employee-ownership scheme as an elegant solution to the Royal Mail conundrum.

But there is a catch: Mr Gillingwater needs to like the plan too. And as an experienced financier, he will be able to see the fatal flaw.

Mr Leighton's scheme will give the Government up to £2bn in cash in exchange for taking on around £2.5bn of pension liabilities. As these can be topped up over 20-odd years, the cash benefit is obvious. But the net effect on public finances would be negative - something that would be as popular at the Treasury as Tony Blair saying he's changed his mind and will fight the next election.

So to summarise, Mr Leighton's plans would involve Labour reversing its manifesto pledge, indulging in some financial jiggery-pokery and harming public finances. Apart from that, it's a great scheme.

Nuclear frisson

If the Post Office can't be flogged off, Mr Gillingwater needs to get some cash from somewhere. And that somewhere looks like being BNFL. Long ago, it was hoped that the state-owned nuclear group could be privatised. But then came the fuel-reprocessing scandal at Sellafield and the near collapse of British Energy. So the Government bowed to reality and put off privatisation.

But now it is hoping to sell off the bits to make a few bob. The fuel-reprocessing side not only loses money, it is suffering from a worrying leak of nasty substances, so even Mr Gillingwater won't be able to sell that. The clean-up business - now called British Nuclear Group - also loses money. But it is hoped that once it gets its teeth into the £40bn of business coming out of the new Nuclear Decommissioning Authority, this will change in the medium term.

For quick cash, the best bet is Westinghouse. Bought by BNFL for $750m in 1999, this is the American business that builds nuclear reactors. The plan was that it would do so in the UK too, but none have been commissioned. Now Mr Gillingwater is hoping to sell it to some American venture capitalists for around $1bn (£550m).

This might seem like a nice profit, but in reality it is reverse insider trading.

In the next few months, the DTI will publish a White Paper proposing building around 10 new nuclear reactors in the UK. Westinghouse will be well placed to get the contracts for these, and its AP-1000 reactors go for around $1bn each. Even winning just one of these deals would give any buyers of Westinghouse a 100 per cent cash back.

Maybe Allan Leighton's plans for Royal Mail aren't that bad after all.

j.nisse@independent.co.uk