Postcomm, which lodged the controversial set of recommendations today, argues Royal Mail needs access to private capital and a stronger set of incentives in order to enable it to restructure and become more profitable.

Chairman of Postcomm Nigel Stapleton said the regulator would do everything it could to ensure the maintenance of a high-quality universal service.

"The company also needs access to private capital to fund and incentivise a radical transformation of the business," he said.

"Royal Mail can only provide an internally funded universal service if it has the funding to restructure and become the best-in-class operator that it aspires to be and if it is no longer saddled with having to pay down an enormous pensions deficit."

He added: "None of us want to see either of the two other possible outcomes: a universal service that becomes an ever greater burden on the taxpayer, or one where there is a substantial threat to its specification."

The regulator recommends a partnership with the private sector to encourage more rapid transformation and greater efficiency from the universal service provider.

Public-private partnerships for postal services are already used in some parts of Europe, and is currently being adopted for a merged postal service in Denmark and Sweden.

Although Postcomm notes that the printed mail market is under increasing pressure from electronic media, its core philosophy is that competition can replace regulation to protect consumers' interests in some parts of the market.

The regulator is urging greater liberalisation, including removing the VAT disadvantage of new entrants, since currently only Royal Mail has VAT exemption.

Postcomm's previous submission to the review said Royal Mail's current business model "is unsustainable and unless some bold actions are taken very quickly, it is highly likely that its letters business will move to a position of managed – but accelerating – decline".