The European Commission (the "Commission") has recently taken two significant decisions in respect of the UK postal sector.
Firstly, on 21 February 2007, the Commission announced that it was set to initiate in depth state aid proceedings in respect of four particular funding instruments put in place by the UK government to support Royal Mail.

This enquiry follows complaints made to the Commission by ……… in August and October 2006 and it would appear that the Commission's hand was forced when the UK government announced a fresh package of measures on 8 February 2007.

The Commission has announced they will be looking at four particular instruments:

#  A £500 million loan granted in 2001, repayable after 2021 and granted at a fixed interest rate. Royal Mail uses this to finance overseas acquisitions;

#  £1 billion worth of loan facilities being made available to Royal Mail. Even though the first tranche of those facilities was not drawn down, the Commission will look to see whether their availability might still have represented an 'option value' to the company – i.e. whether the pure availability might have given the company an advantage over its competitors;

#  The placing into an escrow account of £850 million to reduce pension contributions required from Royal Mail to reduce its pension fund's current deficit;

#  The new loan of £300 million which was announced on 8 February 2007.

The Commission will examine if these instruments comply with the "market economy investor principle". This looks to see whether the financial instruments can be benchmarked as being comparable to similarly available instruments in the private market place.

The second decision has been a decision taken on 7 March 2007 to approve £313 million of funding from the UK government to provide public services through the nationwide network of post offices. Approving the funding, the EU Competition Commissioner Neelie Kroes remarked "public services are a vital part of the European economy, and the Commission recognises their importance. Aid can therefore be approved where the amount is strictly limited to what is necessary to cover the cost of public service obligations".

So why is the Commission so interested in the postal sector in the UK at the moment? As Neelie Kroes said on 21 February when launching the investigation into governmental funding, "the postal sector is increasingly open to competition and it is important to reassure competitors that the advantages of that opening are not neutralised by illegal state subsidies".