Secret signals that point to Royal Mail plc

Those unfamiliar with this Government's penchant for saying one thing in public then doing exactly the opposite behind closed doors might start to wonder what on earth the Department of Trade and Industry is playing at over the future structure of Royal Mail.

Leaders of Royal Mail's still powerful unions think the answer is already clear. They believe the Government has given them cast-iron guarantees that it will remain in public ownership in return for a £1 million bung into the Labour Party's coffers and support at the next election.

But now I learn that the DTI, the department responsible for this huge national asset, has officials deployed full-time looking at alternative forms of ownership.

Regular talks have been held with investment bankers, Royal Mail executives and Richard Gillingwater, head of the Shareholder Executive, which looks after the state's business interests.

If that were not enough to raise doubts about the public protestations, I gather that officials from the DTI have also held deeply hush-hush meetings with Royal Mail executives that have reached the point of discussing the detail of potential changes in ownership, not just the theory.

The DTI, of course, refuses to comment on any of this. Its stock answer is: 'We have no plans to privatise the postal service.'

But we have heard that type of talk before. In fact a virtually identical form of words was used by the Conservative government before it privatised British Telecom in the Eighties.

Royal Mail's fortunes have been transformed under the leadership of chairman Allan Leighton and his executive team. Over the past two years, the organisation has been hauled from a strike-ridden behemoth chalking up losses at a rate of £1 million a day into a much slimmed down operation that is expected to throw off £400 million in profits this year - a sum that will entitle each member of the workforce to a bonus of £800.

Employees now earn a minimum of £300 a week and the pension fund crisis has been ameliorated by an extra contribution of £270 million a year.

The price has, of course, been high. The second postal delivery has been abandoned and there has been a painful rise in the level of complaints about service quality, though Leighton will claim that these are now diminishing. And 30,000 jobs have disappeared, leaving 200,000.

So why, when things appear to be going so well, would - or should - the Government be prepared to risk the political furore that would undoubtedly greet any U-turn in its publicly stated posture?

First, a partial flotation of Royal Mail would raise anything between £4 billion and £6 billion under plans now being considered. Gordon Brown and the Treasury would not sniff at that.

Second, Royal Mail in its current incarnation is a sitting duck for competitors able to start gunning for its business by 2007.

Though the overall business is enormous, a mere 100 customers account for 50% of its revenues and offset losses elsewhere in the business. These lucrative contracts would not be difficult for rivals to pick off.

The figures make grim reading. If the competition grabs 10% of revenues in the next three years and a further 20% over the following five, Royal Mail reckons that it will end up losing £1 billion a year of its potential income.

Quite simply, it will go bust unless the Government is willing to subsidise the deficit or halt the competitive incursions, which is inconceivable.

The third option, to give Leighton his head and allow him to lead a partial flotation and buyout by employees, would be politically painful.

The proposals now being looked at call for employees to end up with 20% of the business, for another 31% to be floated in the open market, and the remaining minority shareholding to stay with Government.

This alone will not answer any of Royal Mail's business challenges. But Leighton - who I am sure will leave at the end of his contract term next spring if he doesn't get the green light - clearly hopes it will mean that employees gain a real stake in ensuring the operation is in the right shape to try to fight off some of those challenges.

That means accepting probably another 30,000 job cuts, possibly even more.

Royal Mail is arguably one of the nation's most important assets. With the stakes so high, it is time that the Government came clean about its intentions.