The European Commission is investigating whether government funding of the Royal Mail breaks European Union rules banning state aid to industry.

The move follows protests from Royal Mail’s rivals over a series of funding arrangements for the state-owned company. Royal Mail’s legal monopoly over basic letter services was removed at the end of 2005.

Neelie Kroes, the EU Competition Commissioner, said that Brussels would examine the funding measures “to determine whether they constitute state subsidies, or whether they meet ’market investor’ conditions".

She added: "I take the complaints received very seriously. The postal sector is increasingly open to competition and it is important to reassure competitors that the advantages of that opening are not neutralised by illegal state subsidies.

“At the same time I want to be clear that the commission will also make sure that any necessary financing intended to compensate the provision of the public service is not called into question.”

The commission said it will examine a £500 million loan granted in 2001, repayable after 2021 and granted at a fixed interest rate, which financed Royal Mail’s overseas acquisitions. It will ask whether the terms of this loan “were commercial in the light of prevailing interest rates”.

A £1 billion loan facility made available to Royal Mail from state sources in 2003, of which £900 million is to be extended after 2007, will also be probed. Although the original loan facilities were not drawn down, their availability may represent an "option value" to the company, the commission said.

The placing of £850 million in an escrow account that will “reduce the pensions contributions which Royal Mail needs to make to address the current deficit in its pension fund”, will also be investigated. The funds come from reserves built up through past profitable performance, which are placed under government control under UK legislation.

A further loan of £300 million, which was announced on February 8, will also fall under the investigation's scope.

The commission added that it had not been notified of any of these measures. Measures that constitute state aid must be notified to and authorised by the commission before they can be put into effect, it said.

Last year, Royal Mail’s group turnover, including Post Office Ltd, was £9 billion, with a profit after tax of £395 million. It employs about 193,000 people.

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