Examination of Witnesses (Questions 80
WEDNESDAY 13 FEBRUARY 2002
80. It is waffle.
(Mr Stanley) It was a short summary of
a 127 page document which is available for everybody to read if
they want to.
81. I read this as a briefing from you and you
have not answered the questions.
(Mr Stanley) We were asked to keep it
quite brief. The reason it will not damage the universal service
is because there are cherries but there are very few. As soon
as you start taking significant volume off the Royal Mail, you
have to deliver to every house. That means delivering to council
flats, farms, congested city centres, posh houses in the suburbs,
everywhere. You cannot cherry pick.
(Mr Corbett) I would re-emphasise the point which
came out of our examination of the cost of a universal service,
that the real cost is concentrated in that part of the mail which
is not capable of being read by machines. That has a far bigger
impact than any other single element of geography or anything
82. As far as I am concerned, I need to be totally
convinced that what you are recommending will not reduce the service
rather than the opposite. Before we can proceed, in my view, we
need to have some sort of confidence. If you look at paragraph
18 on page nine, it says, "If competition is most pronounced
for the most profitable services, Consignia could be left with
insufficient returns to cover its overhead costs, and hence to
finance remaining services without across the board price increases
that might further erode its competitive position . . ."
What do you say to that?
(Mr Stanley) It is basically the same
argument. This was written in advance of our recent proposal document.
We would have the easiest job in the world if we did not have
these concerns. That is why we spent two years and quite a lot
of consultancy money analysing this in great detail. The result
is that we do not believe that this market is susceptible in practice
to the major concerns which the NAO have identified. They are
absolutely things we have to test. You are quite right. We must
worry about the risks. We have assessed them; we have quantified
them and we are avoiding them.
83. In the next box it says: "Consignia
estimates that 40 per cent of its costs are fixed and that it
may in the short term find it difficult to reduce costs in response
to losing some of its market share to competitors. If this proves
to be the case, Consignia would become loss-making and hence unable
to finance its services at current prices . . .". These are
qualified auditors giving us this information. What would you
suggest if this happens?
(Mr Corbett) Consignia were telling us
that their 40 per cent of fixed costs was absolutely unchangeable.
We have been consistently sceptical about that. They suddenly
come up with an answer that they are going to take £1.2 billion
out of their cost base, 15 per cent. There is no such thing, I
would suggest, as a fixed cost over a period of time. Consignia's
own action has demonstrated that
84. The more you speak the more I am convinced
that we have real problems here. In 5(b) in your report you say,
". . . especially in view of the relatively small cost of
a postage stamp." A postage stamp is 27 pence. When was the
last time it was increased?
(Mr Stanley) About a year and a half
85. Consignia tell us that it costs 28 pence
to deliver a letter.
(Mr Corbett) Yes, too much.
86. It is too much and we are the cheapest in
Europe, almost the cheapest in the world.
(Mr Stanley) Two things have happened.
First, their costs rose 12.5 per cent in one year and I understand
another five per cent since then. Consignia have recognised that
problem and are going to take £1.2 billion of the costs out
of the business. When they do that, they will be making profits
and it will be a great company again.
87. In the same report it tells us that Post
Office profits have disappeared in the last two years. 600 million
profit two years ago; 200 million loss this year. Why is that?
(Mr Stanley) The losses, as we understand
itand in a sense you should be asking Consignia
88. You are making these recommendations based
on two years of very bad trading. You should be able to tell us
why they have traded badly over those two years.
(Mr Stanley) We are experts on the mail
part of the business, not necessarily the rest, but let me try
and answer your question. We understand that there are very large
losses in Parcel Force and in particular in the Crown Offices.
They put a lot of money into the Way Forward Project which was
supposed to increase productivity and did not.
89. What about the Horizon Project?
(Mr Stanley) That is not included in
those figures that I mentioned.
90. What do you mean by that?
(Mr Stanley) The cost of Horizon was
written off separately.
91. That is not included in the 600 million?
(Mr Stanley) The running costs of Horizon
92. Say that again?
(Mr Stanley) Horizon cost a huge amount
93. 600 million, approximately.
(Mr Stanley) That has been written off
but that is not included in that 12.5 per cent increase I mentioned.
94. Will it have any bearing on the profit?
(Mr Stanley) No. It did lead to an exceptional
loss but that was a different figure.
95. Let us be pessimistic and realistic. If your
proposals do irreparable damage to Consignia's statutory obligations
to provide a universal service at a uniform tariff, how will you
put the situation right?
(Mr Stanley) They will not. We are absolutely
clear that they will not. If they do run into serious problems
financially, they are under a legal and a licence obligation to
carry on delivering a universal service. The question is who pays
for it. We have to look at the reason why they are running into
96. Absolutely, but at the end of the day it
will be argued that you were the ones who put them in this position.
What will you do about it? You cannot just walk away from it like
Railtrack have done and leave the government to pick up the pieces.
(Mr Stanley) Let us assume that our analysis
is totally wrong and everything we have been told over the last
two years is wrong and, yes, there is a greater cost to the universal
service than we have told the Committee. Then we have to consider
who should pay the cost of the universal service. It will either
have to be the taxpayer or the customer or the industry through
some sort of compensation fund, which European law does allow.
We would have to look at those three options, but it is extremely
97. I get the impression by reading the report
that you seem to think that the Swedish experience supported your
arguments in terms of liberalisation. Presumably you have gone
into the Swedish scheme very deeply?
(Mr Stanley) Quite deeply.
98. What is the current level of profitability
of the Swedish post?
(Mr Stanley) Like Consignia, they have
just dipped into loss recently.
99. What has happened to the prices of Swedish
post since liberalisation?
(Mr Stanley) Business prices fell an
awful lot. The regulator did not have the power to control the
domestic price and that did rise. It is now at 36 pence.