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State Aid: Commission opens in-depth investigation into state aid to UK postal operator Royal Mail

The European Commission has opened an in-depth investigation to ascertain whether UK plans to restructure the postal incumbent Royal Mail, by relieving it of its 'pension deficit' and strengthening its balance sheet, are in line with EU state aid rules. At this stage, the Commission has doubts that Royal Mail's restructuring plan foresees adequate measures to mitigate any distortions of competition brought about by the state intervention and to ensure a sufficient own contribution to the cost of restructuring. The opening of an in-depth investigation gives interested third parties the possibility to comment on the measures under examination. It does not prejudge the outcome of the investigation.

Commission Vice President in charge of competition policy Joaquín Almunia said: "The Commission acknowledges the importance of the reform of the postal market in the UK. However, we must ensure that the state measures do not provide undue advantages to Royal Mail as this would distort the conditions of competition among postal operators in the Internal Market."

In June 2011, in the context of the reform of the postal services sector, the UK notified the Commission of its intention to relieve Royal Mail of its obligation to fund the accrued deficit of the pension fund that the UK claims is due to Royal Mail's status as public sector monopoly before 2006. The so-called pension deficit relief is estimated by the UK authorities at up to £8bn (around €9 billion). In addition the UK notified measures to strengthen Royal Mail’s balance sheet, including restructuring of the company’s ₤1.7 billion debt (around €1.9 billion) and the provision of a revolving credit facility.

The UK contends that the notified measures are in line with the EU Guidelines on state aid for rescuing and restructuring firms in difficulty (see MEMO/04/172). Alternatively, the pension relief could also be found compatible as legacy costs from the pre-liberalisation period, based on recent Commission practice.

However, at this stage, the UK authorities have not convincingly demonstrated that the submitted restructuring plan would comply with the guidelines. In particular, the Commission has doubts that Royal Mail’s role as the sole universal service provider and the liabilities resulting from its public sector monopoly legacy would justify mitigating the guidelines and notably the conditions ensuring that competition distortions are limited and that the cost of restructuring is shared by shareholders.

Moreover, the Commission has doubts whether the pension relief could be found compatible as compensation for an exceptional burden resulting from Royal Mail's past status as public sector monopoly. In 2007, the Commission indeed approved a French reform regarding the financing of the current and future pensions of the employees of La Poste with a civil servant status (see IP/07/1465). However, while the 2007 decision ensured that La Poste's effective social security costs were comparable to those of competitors, it seems at this stage that a large share of Royal Mail's pension deficit is due to the adverse conditions on the stock markets which have affected all UK undertakings alike. Furthermore, the Commission already approved measures to address Royal Mail's pension deficit, e.g. the creation of an escrow account which allowed Royal Mail to extend the period over which to fund its pension deficit (see IP/09/556).

The Commission is currently also examining measures in favour of the Belgian post incumbent bpost (see IP/09/1133) and the German postal incumbent Deutsche Post (see IP/07/1312). The scope of the investigation on Deutsche Post has recently been extended to cover the financing of certain pension costs (see IP/11/554).

The non-confidential version of the decision will be made available under the case number SA.31479 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

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