Ofcom delivers relief for Royal Mail at snail’s pace – too late to stop Czech takeover | Nils Pratley

What if Ofcom had cut Royal Mail some slack half a decade ago? What if the universal service obligation (USO), the requirement on the postal operator to deliver nationwide six days a week at a uniform price, had been tweaked before letter volumes fully fell off the cliff?

Would Royal Mail’s finances have been in better shape? Would Daniel Křetínský, AKA the Czech Sphinx, not have had an opening to make his £3.6bn takeover bid while the share price was on the floor? Or, if he had pounced, would the board of the International Distribution Services, the parent, have put up a stiffer fight?

We’ll never know, and it’s too late to revisit the takeover tale because Křetínský’s EP Group will be in charge by the spring once the last regulatory boxes are ticked. But one can still wonder how events might have played out differently if Ofcom had got its act together earlier. That is because two features stand out in Thursday’s final proposal. First, the reforms are modest. Second, they should still make a big difference to Royal Mail’s profitability.

On the former, Royal Mail will be allowed to deliver second-class letters on alternate weekdays and not on Saturdays. First-class letters will continue six days a week, albeit with a minor adjustment (the target for next-day delivery has been downgraded from 93% to 90%, but there’s a new “tail of mail” clause to require 99.5% by the third day). Royal Mail still has to meet the new standards, but the re-jigged USO itself is unlikely to provoke uproar across the nation. As Ofcom says, most customers these days value reliability over speed of delivery.

But then look at the projected annual savings for Royal Mail under the new setup: £250m-£425m, reckons the regulator; or £300m, thinks the company. Either way, we’re not talking loose change. For the first time since 2015/16 Royal Mail should be able to achieve the 5% profit margin in its “reported business” (the one that provides the USO) that Ofcom has always regarded as a fair indication of sustainability.

That is one reason why it was so infuriating that IDS’s board pleaded “significant uncertainty” around reform last May when it rolled over to Křetínský. It was obvious even then that something like Thursday’s proposal was coming – the consultation had opened in January and the winds had shifted.

But one can also sympathise with the IDS board’s own longer-standing fury that it had to wait so long for Ofcom (or the government) to move. The need for some form of regulatory relief should have been obvious as early as 2020. Letter volumes had already halved to 10bn, and the regulator’s formal “users’ needs” survey of that year found that 97% of customers said they’d be happy with a five-day-a-week letter service. Yet nothing happened.

None of which is to deny that Royal Mail’s own actions contributed to its persistently poor financial numbers. But its management’s constant pleas for a helping hand were justified. Other European countries had already watered down their USO equivalents and the UK network was built to handle volumes of 20bn a year. Now we’re down to 6.6bn and going lower.

The net result of the regulatory plodding is that Křetínský will have the chance to chase those annual savings of £300m, or whatever the figure turns out to be. Yes, it was the Labour government that ultimately gave a thumbs up to a leveraged takeover by a foreign bidder, which is a bizarre state of affairs if the postal service is still regarded as a national asset. But let’s not overlook the years of regulatory delay. Ofcom’s snail mail delivery of reform of the USO played into Křetínský’s hands.