News & insights
Date: November 2015 | Client: Ofcom | Sector: Communications, media & payment systems | Post | Expertise: Finance
Financing the Universal Postal Service
Managing structural decline
The volume of letters delivered under the Universal Postal Service is declining from year to year. This poses a challenge to efficient cost recovery. We have assessed different options for the regulation of the Universal Service, from 'traditional' utility regulation models to lighter touch monitoring regimes.
Asset light companies
An added complication is the 'asset light' nature of Royal Mail's Universal Service business. In contrast to many regulated sectors (such as energy networks) the scale of fixed, tangible assets required is low. Many of Royal Mail's assets are intangible and hard to value: for example its brand and operational and logistic expertise. This means calculating and benchmarking a return on capital is particularly challenging.
Our advice helped Ofcom develop its current approach to monitoring the profitability of the Universal Service. We recommended referring to a return on sales - benchmarked to comparable companies - as a core measure of profitability. We also proposed a wider range of financial sustainability metrics based on a review of credit rating agency approaches to assessing financial health.
The report can be viewed here.
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