Claims that post offices must close because they are losing money were thrown into doubt today after a Commons committee revealed they were actually subsidising other services.
Post Office Ltd is axing 2,500 branches across the country, including 26 in Birmingham, because the network is unprofitable.
But the Commons Business and Enterprise Committee has found that the network is actually subsiding the Royal Mail, which is responsible for delivering letters and is run as a separate business.
Post offices are paid £358 million for services they provide to the Royal Mail, such as weighing parcels, but this is less than it costs to carry out the work.
A standard business would simply raise its prices or turn down the contract, but Post Office Ltd is unable to negotiate a better deal.
It is a wholly-owned subsidiary of the Royal Mail – one of its biggest customers – even though it is run as an independent business.
The Committee, which is holding an inquiry into post offices, heard evidence from Alan Cook, managing director of Post Office Ltd.
He told them that the Royal Mail paid Post Office Ltd for the work it did, which then paid sub-postmasters.
He revealed that the payments were less than the cost of doing the work, but insisted that the network also needed to become more efficient.
In a report published today [FRI], the Committee demanded clear information on “what services Royal Mail Group expects Post Office Ltd to deliver for it; how Royal Mail Group determines the price it pays for these services, and how much it actually currently costs Post Office Ltd to deliver them.”
Peter Luff (Con Mid Worcestershire), the Committee’s chairman, said: “In 2007-08 Post Office Ltd received £358 million for providing mail services to the Royal Mail Group. We heard from the managing director of Post Office Ltd that this was not enough cover the cost of those services.
“It is possible that this is down to inefficiency at Post Office Ltd, but it is also possible that it is because Royal Mail Group is inappropriately using Post Office Ltd, which receives some state support, to cross-subsidise its mail services.”
He said there was a case for considering whether post offices should become fully independent of the Royal Mail.
The inquiry also expressed concern about planned “outreach” services, which are designed to replace branches earmarked for closure.
Services might be offered two or three days a week from a counter in a pub or from a temporary stand, for example.
Post Office Ltd is planning to replace five branches in Stratford, Warwickshire, with outreach services.
But the report said: “We remain concerned the funding for outreach services may be inadequate.
“If this is the case, outreach services will fail, and the network be diminished.
“However, we are not the appropriate body to look at the detailed financial arrangements for outreach, which will involve many different contracts.
"A significant amount of public funding is going to sustain the network; we need to be confident the public receives the services this is meant to secure.
“We recommend that the National Audit Office investigate the financial arrangements for outreach services.”
Post offices have lost four million customers over the past two years and the network makes a loss of £3.5 million a week, making change inevitable according to Post Office Ltd.
The closures have become a major political issue, with Conservatives and Liberal Democrats claiming the Government could do more to keep post offices open if it chose.
The Government is already providing subsides of £1.7 billion over the next few years, and ministers say there is a limit to how taxpayers should be asked to pay.