Second round for postman: Privatisation could open the lines to a hi-tech reunion of the mail service with British Telecom

A DRAMATIC re-merger of Royal Mail and Parcelforce with British Telecom could be a direct consequence of Post Office privatisation.

Last week, the Cabinet watered down the attempt by Michael Heseltine, President of the Board of Trade, to press the button on the necessary legislation to privatise the Post Office. Instead, it sanctioned a green paper to air the issues first.

But Bill Cockburn, Post Office chief executive, said: 'A merger? Who knows what's possible in the future? The way the technology is moving, the line of demarcation between letters and electronic mail is being blurred all the time. We are each very large customers of the other. There is tremendous scope for joint deals with BT, both domestically and internationally.'

By coincidence KPN, the Dutch combined post and telecommunications group, said last week that it was selling its shares to the public after five, successful years of independence that have rubbed British noses in the advantages of keeping the two sides together.

British Telecom was hived off from the Post Office in 1981 as a prelude to its own privatisation three years later. The split was ordered to make it easier for the two managements to focus on the business strategies of their respective operations, particularly as BT was thought to be the modern, capital-intensive venture that had to be freed to chase the leading edge of communications technology.

The dear old Post Office, meanwhile, was seen as the labour-intensive cart horse that would be best left trundling round the country with a sack of letters and parcels on its back.

However, events have turned out differently. BT has gone rocketing into the intergalactic information superhighway, as intended. But computers and automation have also revolutionised the Post Office.

Its three main strands are Counters, which takes in the 800 main post offices and 19,200 sub-post offices, Royal Mail - the public face of the organisation, delivering letters and packets to households and businesses - and Parcelforce, which competes with the likes of Securicor, TNT and Great Universal Stores in the pounds 2.5bn commercial parcel delivery market.

The main impact of new technology has fallen on Royal Mail. Electronics has paved the way for 'hybrid' communications - letters, messages and other documents that begin on a computer screen and are converted into conventional form.

More than 80 per cent of letters go through this process, which originates in a secretary's desk-top terminal. But conversion into hard copy normally takes place before it leaves the initiator's office. The Post Office can now offer to collect a firm's letters electronically, then print, package and post them centrally.

The technical and strategic options that are being opened up are the reason Mr Cockburn, a tough Scot who joined the organisation as a junior manager in 1961, is virtually biting the carpet in frustration at being delayed yet again on the road to privatisation.

He said: 'If the government were to sell a majority of the shares in Royal Mail and Parcelforce it would guarantee us all the commercial freedom we need. We wouldn't have to keep looking over our shoulder at the Treasury.'

Nearly two years ago, Mr Heseltine announced that he would be considering the future structure and organisation of the Post Office, including privatisation.

But, although he was supported by the House of Commons' Trade and Industry Select Committee in March, Mr Heseltine may have miscalculated the extent to which Tory MPs are frightened by the prospect of anything that might upset already discontented constituents.

Mr Heseltine's retreat in the face of a determined rearguard action from Tories on the back benches and in the Cabinet means that the privatisation of the Post Office has been put back to 1996 and may not happen until after the next general election.

'The election timetable is the real problem,' argued Mr Cockburn. 'If we don't get into the Queen's Speech this year, we might miss the boat, and that would be a great tragedy for all concerned.'

That would also dismay City stockbrokers and corporate financiers, who were looking forward to welcoming the Post Office to the stock market as the last great privatisation in a lucrative series that stretches back to the sale of a slice of British Petroleum by the Labour government in 1977.

The campaign, which really got into its stride under Mrs Thatcher, generated hundreds of millions of pounds in fees and commissions for financial advisers, including lawyers, accountants and public relations consultants.

But despite the unholy alliance of the Union of Communication Workers and Sir Teddy Taylor, the maverick Tory MP for Southend East, and barring an early electoral defeat for the Conservatives, it looks as if the Post Office is no more than a bonanza delayed as far as the City is concerned.

It is not entirely impossible that, by the time Mr Heseltine's green paper on the Post Office has been thoroughly debated, some of the most influential opponents of privatisation will be gracing the red leather benches of the House of Lords.

In contrast, the President of the Board of Trade appears determined to ride the Post Office as one of his last great crusades.

With a combined pre-tax profit of pounds 239m last year, Royal Mail and Parcelforce together would have a stock market value of around pounds 2.5bn, putting the enterprise on a par with British Steel and Standard Chartered Bank. BT is worth pounds 23.6bn.

Royal Mail makes profits of pounds 252m on sales of pounds 4bn. Parcelforce lost pounds 13m last year on pounds 501m. Post Office Counters, which the Government has pledged to withhold from privatisation, makes pounds 25m on turnover of just over pounds 1bn.

Like BT, Royal Mail/Parcelforce would be supervised by a regulator, which would press down on postage prices. That would encourage the management to seek out other sources of profit, as water and electricity companies have.

While Mr Heseltine was regaling the House of Commons with rolling phrases about the Post Office being 'an essential part of our national life', he was less keen to emphasise that his room for manoeuvre is narrowing almost by the month.

In the first place, British Telecom, whether it becomes a rival to or partner of the Post Office, is steadily eating into the postal market. It is spending millions on a new television campaign featuring the actor Bob Hoskins to promote the virtues of chatting on the phone, the attractions of which are beginning to be enhanced by mobile and video phones.

Meanwhile, the creeping plague of fax machines has already colonised virtually every office in the land and is establishing a beach-head in the home and even the car.

That is why our chart shows the volume of letters peaking three years ago. Letter traffic has not been as badly affected by the recession as parcels, partly because many companies have recently opted for direct marketing - junk mail - as better value for money than other forms of advertising. But industry experts believe that junk mail may be close to saturation point, while the fax is only just starting to bite.

Parcelforce's business is much more closely related to the economic cycle, with the sting in the tail that it has so far failed to share in the recovery. Competitors have been more nimble and more ruthless in bidding for contracts, while many would-be customers have found other ways of moving parcels in a market suffering from acute overcapacity. Yet, because it is state-owned, Mr Cockburn cannot kickstart Parcelforce by entering into joint ventures or other forms of alliances - unlike its Dutch counterpart.

As he admitted: 'The Dutch privatisation points the way the rest of the leading European post offices are going.'

The bulk of Counters' business, in terms of transactions, are pensions, national insurance, child benefit allowances and Girobank services such as Department of Social Security orders. Girobank was part of the Post Office, but in 1990 it was sold to Alliance and Leicester Building Society, where it became an arms-length commercial client.

The fresh commercial freedoms that Mr Heseltine hinted at could include insurance, travel agency or being a supplementary chain of branches for a bank such as TSB. There are more post offices than all the country's banks and building societies put together.

Understandably, the National Federation of Sub Postmasters has told the Trade and Industry Select Committee that the commercial prospects of the Post Office network need 'reinforcement'.

Private-sector parcel carriers agree. They would like the same collection facilities as Royal Mail/Parcelforce enjoys.

'We'd certainly like Counters to have the option of using other carriers,' said Pat Howes, chief executive of Securicor's parcels division. 'It would give us 20,000 locations instead of our present 160.'

Whatever happens, the Post Office's days are numbered as the sleepy organisation beloved by cartoonists. Though it may still not win popularity contests, it is hard to remember quite how lowly British Telecom was regarded when it first broke away from its sister organisation. Not any more.

PRIVATE AGENDA FOR POST

THESE ARE the principal points that Michael Heseltine, president of the Board of Trade, put to the House of Commons on Thursday:

Post Office Counters to remain as a nationwide network. The central core will still be owned by the government, with 19,200 sub-post offices run privately under agency agreement.

Post Office Counters will have greater freedom to seek new commercial customers. Many clerical jobs would be automated, including the dispensing of social security payments.

Royal Mail: A commitment to uniform pricing and to universal delivery, six days a week.

Postage stamps to remain exempt from VAT.

But the Government recognises there is a case for change.

There will be a Green Paper to discuss floating off a majority shareholding, with employees and sub-postmasters having preferential entitlements to shares.

Parcelforce: to be tied in with Royal Mail.

If the Royal Mail is privatised, the Queen has already agreed to the continued use of Royal emblems and the depiction of her head on postage stamps.

(Photographs and graphs omitted)