The Royal Mail could become incapable of maintaining its commitment to delivering a UK-wide price structure for its letter and parcel service, says a government-commissioned review.

At the same time, competition in postal services has delivered no benefits for domestic consumers and small businesses, according to the review set up to advise John Hutton, the Business Secretary.

Details of severe financial pressure facing the organisation have emerged just a year after it received a £3.9 billion government rescue package. Royal Mail has a £3.4 billion pension deficit and last year its profits fell by a third to £223 million.

The review, which will make final recommendations later in the year, said that Royal Mail’s finances are so precarious that they could derail its obligation to the universal service, which allows stamped mail to go anywhere in the country for the same price.

It said: “There is now a substantial threat to Royal Mail’s financial stability and, therefore, the universal service. We have come to the conclusion, based on evidence submitted so far, that the status quo is not tenable.

There is a strong case for action.”

The review was led by Richard Hooper, a former deputy chairman of Ofcom, the communications industry regulator. It criticises the Royal Mail for being slow to modernise and also cautions that modernisation in the future will be more difficult because of a decline in the letters market.

Domestic consumers and small businesses have failed to win any of the advantages from the liberalisation of the market that have been enjoyed by big business, the review says. While large businesses have secured better rates and service from Royal Mail and rivals, stamp price rises and fewer services have affected households and small companies.

It said: “The abolition of the Sunday collection and the move to a single daily collection have been more visible to small business and domestic consumers. Both changes are perceived as a reduction in service, particularly for small businesses who want earlier and more predictable delivery times.”

Postcomm, the regulator, gave warning that the review that “without extensive change, the Royal Mail’s business model will become unsustainable”. If there are no significant changes at the organisation, the regulator envisaged negative cash flow of £400 million a year by 2012. Mr Hutton said: “New technologies are transforming the way we communicate and this will only intensify in the coming decade. The findings are a wake-up call to anyone who believes it can be business as usual. It can’t. Despite progress in recent years, I am now clear that to be successful the Royal Mail must undergo radical change.”

Mr Hooper would not outline possible action yesterday. But it is thought that the universal service could be modified so that it is less costly to Royal Mail. Previous attempts to bring private capital into Royal Mail have proved politically explosive and the Government may have little appetite to try again as general unrest on the backbenches grows. But the Liberal Democrats said selling a stake in Royal Mail was the best solution.

Sarah Teather, the party’s business spokesman, said: “Royal Mail urgently needs a cash injection to allow it to modernise and compete with the private sector. Selling 49 per cent of the Royal Mail shares would allow major investment without breaking the public purse.”

A spokesman for Royal Mail said: “The report identifies the ways in which the open postal market is clearly not working and Royal Mail looks forward to submitting its further views on the changes that are required in the market, with the way it is regulated and on how the universal service can be sustained and financed.”

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