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Post Office
3.30 pm
The Secretary of State for Trade and Industry (Mr. Peter Mandelson): I wish to make a statement on the future of the Post Office.
It has long been recognised that the postal sector worldwide has entered a new and turbulent age. Competition for business will be fierce. With greater uncertainty will come opportunities for expansion. Change is absolutely necessary if the Post Office is not to fall behind.
Globalisation of postal services, the growth of electronic mail and the internet, changing customer demands and greater liberalisation of markets are the key drivers of change worldwide. The main uncertainty is not whether markets will become more competitive, but how far and how fast.
Other post offices are gearing up for the revolution, seeking greater commercial freedom to do so. Within Europe, for example, the Dutch and German post offices have been investing in substantial acquisitions, Sweden and Finland are free to acquire and invest in other companies, and Denmark has already entered a number of strategic alliances. France also enjoys considerable commercial freedom, and has a wide spread of joint ventures and acquisitions. In Australia, New Zealand and the Nordic countries, the post offices have become independent plcs. Germany has announced its intention to privatise, and the Netherlands and Singapore have moved to partial privatisation.
Not surprisingly, the British Post Office has been demanding changes to its own organisation for years, but without anyone in government, until now, prepared to act. In the face of market pressures from other public post offices, private postal operators outside the monopoly area, other communications media and distribution organisations, the Post Office wants to be in a position to deliver a wider range of faster, more reliable postal services, differentiated products and prices that meet individual customers' requirements.
Notwithstanding its successful attempts to adapt and its current profitability, the Post Office cannot meet these challenging times in its present condition. It must change or increasingly find its business confined to a diminishing high-volume, low-mark-up sector of the postal market, with all the consequences of falling value and shrinking profits and employment base that that would involve.
The Government are not prepared to sit back and allow that to happen. We have therefore decided to embark on the most radical set of reforms since the modern Post Office was created in 1969. In future, the Post Office will be driven by a combination of effective market disciplines and commercial freedoms, which will transform its performance and its ability to do business.
Our starting point is that the relationship between the Post Office and Government has to change. I should make it clear that we certainly do not rule out the possibility of introducing private shareholding into the Post Office--for example, through the sale of a minority stake in it--at a later stage.
However, at present wholesale privatisation would not be a realistic option. It would take a long time to introduce, cause massive uncertainty, and diminish the
chance of immediate reform now, which would be the worst outcome of all, as the management of the Post Office have made clear to me.
Instead, a radical new form of public sector enterprise, operating at arm's length from Government, needs to be created. That new framework will contain the following features. The Government's role in the Post Office will be restricted to the strategic level, both on matters of commercial direction and on setting social objectives. The Post Office board will become clearly accountable for its success or failure in running the business.
An independent regulator will be established to protect consumer interests including standards of service; to regulate prices; to ensure that the Post Office is able to meet its universal service obligation; and to ensure fair competition. Once adequate regulatory provisions are in place to oversee fair competition, the Post Office will be able to form joint ventures, enter into partnerships and make acquisitions within the United Kingdom beyond the present limit of £20 million per annum.
The regulator will have a duty to promote competition by a careful and phased liberalisation of the monopoly postal area, while maintaining the universal service obligation.
We will require the Post Office to present a rolling five-year strategic plan each year for approval by Government. That is essential to protect taxpayers' interests.
On the basis of that plan, the Government will agree a profit target for the Post Office and the equivalent of a dividend to Government, as shareholder, in line with normal commercial dividend practice. In effect, that will mean more than halving the rate at which profits are removed from the business. The external financing limit--EFL--for the Post Office for the next year, 1999-2000, will immediately be reduced to £207 million from the provisional figure of £335 million. In future years, the EFL will be on a more commercial footing. The Government will expect a dividend of 40 per cent., in contrast to the recent average of 80 per cent.
That increase in retained profits will enable the Post Office to finance an increased level of investment in the maintenance of its existing business. However, the Government recognise that larger growth investment, including acquisitions and joint ventures, may require prudent borrowing if the Post Office is to grow successfully with new products, partners and markets. The Government will approve normal Post Office requests for borrowing for investment cases that are commercially robust. Separate fast-track arrangements will be put in place for considering the largest strategic investments.
It will now be possible for the internal boundaries, for example, between the Royal Mail and Parcelforce to be rationalised, if the Post Office board so decides, while ensuring that there is not undue cross-subsidy from monopoly to non-monopoly areas. Therefore, approved and transparent accounting structures must be put in place.
The Post Office Users National Council will be given a more central role, and its powers increased. A uniform public tariff will be maintained for those activities that fall within the obligation on the Post Office to provide a universal service. However, the Post Office will be given the freedom to price flexibly for volume users, and, within the monopoly area, the regulator will restrict prices to ensure that the Post Office is not making excess monopoly
profits. That will be a real spur to efficiency, and it will ensure that the general public are paying no more than they should for normal postal deliveries.
We intend to provide statutorily for the newly appointed independent regulator to carry out those duties as part of the implementation of the European Union postal office directive next year. Therefore, I will be bringing forward measures under section 2(2) of the European Communities Act 1972 to put that framework in place.
The Government remain firmly committed to a network of post offices throughout the country. The sub-post office in particular plays a valuable role in local communities and offers real service, particularly to the less mobile. We will set a social objective for the Post Office, and for the regulator, of maintaining an effective network.
The individual business men and women who run the post-office-cum-village-shop often have to be very enterprising to keep them afloat. With the best will in the world, the Post Office cannot sustain a network if it is not used, and nor can Government. However, we intend to ensure reasonable access nationwide to those who need post office service, on an electronic basis or face to face with the sub-postmaster or mistress. As the Post Office will be at a strategic arm's length from Government, we will set criteria for public access to the services of Post Office Counters that will be policed by the regulator.
There has been a moratorium on the Crown office conversion programme. I have now agreed with the Post Office a strategy, which reflects proposals put by the Post Office to the trades unions, of retaining a core of directly owned and managed Crown offices that account for a significant value of the business done at post office counters. The strategy also recognises that some further conversions will be beneficial to customers and the business. That is a sensible way forward, and I am therefore lifting the moratorium.
If the Post Office is to operate on a commercial basis, it must be able to reward staff for their efforts, taking account of the success of their business, but cutting the cloth to fit in difficult periods. The Government therefore intend, as part of this staged process of reform, to invite the Post Office board to come forward with proposals that will, within the necessary context of public sector pay policy, allow more flexible means of reflecting performance in the various parts of the business. It is important that, where appropriate, the Post Office should be able to reward success.
Events will no doubt continue to move rapidly in this constantly changing commercial environment, and further structural changes might be required which enable the Post Office to grow and to meet customer needs and which are in the best interests of the Post Office and its staff. As I said, we do not rule out the possibility of making further changes to equip the Post Office for success, such as a minority share sale or an exchange of equity with other businesses. Those options will be kept under review. We will need legislation in due course, in any case, to reflect the long-term nature of the reform package that we are putting in place, including turning the Post Office into a plc to underline the commercialisation of the business.
The reform programme that I have outlined will provide a balanced package of freedoms and disciplines for the Post Office. I believe that it is the best possible package of reforms available to the Post Office, which to date has been left starved of resources to invest in growth and unable to step up to new market challenges in the way that other European postal services have done.
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