EU probe into Royal Mail funding

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Royal Mail faces an EU investigation into whether funding it received was illegal under laws governing state aid.

Brussels is to examine whether government guaranteed loans granted to Royal Mail between 2001 and 2007 constituted state subsidies.

Commissioners said they viewed the probe, triggered by complaints by rival postal operators, "very seriously".

Royal Mail said its funding was made on commercial terms and it was confident an investigation would validate this.

'Strong case'

"The Royal Mail has put a very strong commercial investment case to our shareholder, the government, and as they have said they only ever provide financing to Royal Mail on a commercial basis," the firm said in a statement.

The investigation will not focus on funding for the UK's Post Office network, which the European Commission approved last year.

However, loans worth Â£1.8bn offered to the Royal Mail and other funding designed to stabilise the firm's pension scheme are under scrutiny.

Brussels said it had received a number of complaints last year from rival firms about Royal Mail's funding in the wake of the liberalisation of the postal market at the start of 2006.

Funding arrangements under scrutiny are:

<li>A Â£500m loan granted in 2001 at a fixed interest rate to fund overseas acquisitions</li> <li>A Â£1bn loan offered in 2003, the bulk of which has been extended beyond 2007</li><li>A payment of Â£850m - drawn from the firm's cash reserves - placed in an "escrow account" to address the firm's pension deficit</li><li>A Â£300m loan announced last month</li></ul>

The inquiry will explore whether the loans were made at commercial rates and if Royal Mail is found to have violated state aid rules, it would have to pay the money back.

"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," said Neelie Kroes, the EU's Competition Commissioner.

"We will look at each of the UK's measures and carefully to see whether what they have done represents state aid and whether they have a lawful or unlawful purpose."

The Royal Mail is wholly government owned.

Last month, ministers agreed Â£1.2bn in debt funding to support the firm's modernisation efforts and approved plans to set aside money for future pension contributions.