A wide-ranging review of the effect of competition on Royal Mail is expected to be announced today amid concerns that the group’s ability to provide a core service is being damaged.

John Hutton, the Business and Enterprise Secretary, will announce the review amid pressure from unions and Labour MPs who fear that Royal Mail is suffering because its rivals can take on lucrative business contracts but do not have the same service obligations to the public as it does.

However, the review is also likely to trigger strong pressure for a major revamp of Royal Mail, including splitting it in two.

As part of its licence to operate, Royal Mail must provide a universal service, meaning that post can be sent anywhere at a flat rate.

This is profitable in cities and for short distances but is not economic across long distances and for remote destinations.

The postal group has asked Postcomm, the industry regulator, to modify this obligation to reflect its costs.

It has been unsuccessful in its request, although it has been allowed a series of stamp price rises.

In the review, rival postal operators, such as TNT and Business Post, are likely to be asked to help to fund Royal Mail’s universal service obligation.

John Grogan, the Labour MP for Selby, who has campaigned to keep full public ownership of Royal Mail, said: “If the private sector companies are strong enough, then I think they should make a contribution to the universal service.

"The more successful they are [the more] they should contribute accordingly.”

The rival players are likely to resist such moves because they claim that they are disadvantaged by Royal Mail charging too much for them to use its infrastructure and also that Royal Mail is exempt from VAT while they have to charge it.

Instead they are expected to use the Government’s review to demand that Royal Mail’s operations are split up to promote more competition.

They want to see Royal Mail’s letters division, with which they compete, separated from its network operations, which they have to use for the final-mile delivery.

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