Gordon Brown's aides have been in private talks with leaders of the Labour rebellion over the future of Royal Mail in an effort to avert another Commons revolt which could fatally weaken the prime minister's authority.
The aides have been examining proposals to turn Royal Mail into a not-for-profit company on a similar model to Network Rail and the BBC Trust instead of pursuing a plan to sell a 49% stake to the private sector. Details of a possible change of heart came as ministers were told that up to 100 Labour rebels were determined to vote against Brown's original plan.
After a weekend of turbulence surrounding Brown's leadership, in which Harriet Harman and Alan Johnson faced close questioning about their ambitions for the top job, the prime minister will try to right himself tomorrow with a policy speech on education, promising parents fresh powers to drive school improvement.
But questions over Brown's ability to control his party continue to dominate after his first Commons defeat on the Gurkhas vote last week.
The future of Royal Mail is the next combustible problem he faces and Nick Brown, the chief whip, has warned the strength of backbench opposition means it may be impossible to pass legislation through the Commons next month without the support of the Conservatives.
The prospect of another defeat in the Commons weeks after what is expected to be a bad showing in the European elections triggered the search for a compromise.
The private talks have been held between No 10's policy unit and Neal Lawson, the author of a pamphlet published tomorrow by the left-leaning thinktank Compass, calling on all sides of the Labour party to "step back from the brink" and rally behind the idea of keeping Royal Mail in the public sector on the model of Network Rail.
Some of Brown's aides claim the scheme would achieve the government's objective of new management, private finance and modernisation, but without selling a minority stake.
The Blairite moderniser Stephen Byers said tonight: "With goodwill on both sides it should be possible for the government to meet its manifesto commitment [not to privatise the Royal Mail] and to modernise the service." He believes the Network Rail structure should be examined as a possible model. Dan Corry, the head of No 10's policy unit, was Byers's special adviser and helped design the Network Rail model, but there is concern in Downing Street that such a move may not be seen as enough of a fresh start for Royal Mail.
Lord Mandelson, the business secretary currently steering the bill through the Lords, is unimpressed by the Compass proposal. His aides are concerned by the risk-averse mood of the whips following last week's Gurkhas defeat and recognise the issue is now in the balance and a decision lies with the prime minister.
Mandelson is concerned that Royal Mail is losing its business at a rate of 8% a year and needs fresh management expertise to oversee modernisation.
In his Compass pamphlet, Lawson says his solution "would heal wounds and suspicions in the party". He writes: "The alternatives of defeat at the hands of Labour backbenchers, or privatisation, but only with the help of Tory frontbench, are both too awful to contemplate."
The pamphlet concedes that Royal Mail does need new investment, some job losses, and a change in industrial relations. The leadership of the Union of Communication Workers, the main Royal Mail union, recognises the need to change, the pamphlet says.
But it also criticises the government's review of Royal Mail, conducted by Richard Hooper, for considering only a solution involving the sale of a major minority stake to a private sector mail operator such as TNT, the Dutch postal company.
It is claimed there is no need to sell shares in Royal Mail, which would, in any case, have to be sold at a knockdown price. The investment necessary for the service to meet the pressures created largely by competition from the internet can be secured from within the public sector, the pamphlet states. It points to an adapted version of Network Rail – "a not for profit dividend company, operating under a licence, whose sole purpose is to provide a service and not a profit".
It goes on: "Network Rail's financing requirements are principally met by debt raised from the capital markets. In total the government has borrowed close to £20bn which does not count as government borrowing because technically it is deemed by the Office of National Statistics not to be in the public sector".
Network Rail's board's objectives are set by 110 members that act as shareholders, drawn from industry and public.
The Compass pamphlet also challenges the government's view that Royal Mail is a commercial basket case, noting it made a profit of £225m in the first three quarters of this year. "It could be making profit of £600m a year if it did not have to fund the pension deficit and in effect subsidise the private sector competitors through lower than cost access charges," the pamphlet says. Ministers have committed themselves to take on the deficit but only on the condition that shares are sold and private sector expertise introduced.
A Downing Street said: "The government has said its door is open to those with ideas on the future of the Royal Mail and Neal Lawson has taken advantage of the opportunity to present the proposal he is publishing this week to government officials.
"We do not believe his alternative is workable and it is not under consideration."
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