ROYAL MAIL is “not in a state” fit for a full-scale privatisation, its chairman told MPs yesterday as he confirmed plans for employees to be given a 20 per cent stake in the business.

Allan Leighton said that the postal group’s £4 billion pension deficit and its need for a £2 billion investment made it unsuitable for a sale.

In a submission to the Trade and Industry Select Committee, Royal Mail said that its pensions deficit made it technically insolvent. However, Mr Leighton said that new plans for Royal Mail’s structure would make it into a model that other large public organisations would follow.

His comments come as Sir George Bain is close to completing a report into Royal Mail that is expected to pave the way for a stake in the business to be given to Royal Mail’s 180,000 employees. He said: “This is a commercial entity. Everyone thinks it is a public service, but it is not.”

Mr Leighton is known to want to bring in external finance to Royal Mail. He told the committee: “I think we can get all the benefits of privatisation without going the whole hog.”

The ownership scheme, which was revealed first in The Times, is likely to see workers trading their stakes in the business with a specially created trust. A share in the business could be worth about £5,000, and in addition employees would receive dividend payments.

Mr Leighton outlined the details of the plan in response to concern from MPs that it could be as worthless as the shares given to MG Rover employees, but which involved no money or rights. He said that he had always seen the business “in chunks” and that he had always “felt that our people should have a share in the company”. Royal Mail is being advised on a new ownership structure and on its balance sheet deficit by Morgan Stanley.

The postal group also raised concerns that it will cost more to post letters to rural areas by insisting that its business services must be cost-reflective and not covered by the universal service obligation that requires all post to cost a uniform amount. Sir Robert Smith, Liberal Democrat for West Aberdeenshire and Kincardine, said that cost-reflective pricing in parcels had led to poor or no service in some parts of the Scottish highlands and islands. Mr Leighton conceded that “ could be an issue”.

At present Royal Mail says that social mail is being subsidised by prices for business customers, which are higher than they should be, and that that must stop when there is full competition in the postal market next January.

Adam Crozier, Royal Mail’s chief executive, said that the group was at loggerheads with Postcomm, the industry regulator, over its insistence that one large business service should remain in the universal service obligation.

Royal Mail and the regulator are attempting to agree a new pricing formula before the start of full competition, but the postal group wants a higher price for stamps than Postcomm believes is fair for consumers. Royal Mail wants to raise the price of first-class stamps by 30 per cent to 39p within five years. The regulator has said that the increase should be curbed to 34p within four years. Royal Mail has said that only a price of 45p-47p would reflect the true cost of the service.

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