Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 180 - 199)



  180. The criticism levelled against you is you spent so much time trying to resist competition you have not really got to grips with the shortcomings inside your company, which you alone are responsible for?
  (Mr Roberts) I do not accept that, Chairman. Since the mid-90s we have been going through various proposals for the future of the organisation, ranging from full privatisation through to what we now have, which is commercial freedom in the public sector model, the White Paper setting out those proposals only two years ago. We became a company a year ago. Throughout that changes were going on within the organisation. A lot of them were against the background that we realised that competition was coming. Some of them have then created some of the difficulties that we have had internally, because we were pushing hard to make changes to working practice and make changes to our organisation. We turned the whole place upside down in some ways in terms of structure since the time you would have known us in more detail. All of those things were done because we knew the regime was going to change.

  181. The fact remains that Consignia has moved from being a very profitable company to making loses of £1.5 million a day. There has also been problems with Consignia's quality of service, industrial relations, what are the reasons for this deterioration?
  (Mr Roberts) First of all, I think the level of profit that everyone goes back to was the level of profit in the mid to late 90s when under the previous administration we were being asked to produce something like £1 million every working day in terms of the external financial limit, basically we were paying a dividend back to the Government which amounted to about £1 billion over three years. When that changed we were trying to catch up on investments, which we have done, to a certain extent, we were then trying to make the changes that I just described to you, and some of those changes have been extremely difficult, they have taken longer than we expected, they have certainly created industrial relation problems and in the last 18 months we have seen a drop in the growth of mail traffic to an extent we have not seen before. For many years there has been a close relationship between the growth in mail traffic and the growth in one part of GDP. Since 18 months ago we have seen something like a 50 per cent drop in the growth of bulk advertising mail, which has been the main revenue generator for the Royal Mail, and as a result of that this year we have seen our overall revenue reduced by £300 million—£350 million on where we expected to be. That is a big fundamental change. In the past Royal Mail's profits have enabled us to get through while Parcelforce were making losses and since the decision on Horizon, Post Office Counters Limited were also making losses. The Royal Mail has been a driver of profit and growth and that is where we have seen the fundamental change in the market over the last 12 months or so.

  182. Having set the scene, as it were, let us look in more detail at Postcomm's proposals because this is what we are here today for and we are seeking to help you because we want to hear from you as well as Postcomm. The basic thesis of Postcomm seems to be that the only way to improve your efficiency is to have substantially increased competition. What they have told us is it is possible for you to achieve substantial efficiency gains and meet competition without damaging the universal service. Do you agree with that?
  (Mr Roberts) On the basis of the proposals they put forward so far we have some doubts about that. We have certainly put in ourselves something like a 15 per cent reduction in our costs, because that is what we are trying to do and that is what some of today's announcements have been about. We believe that the Postcomm proposals when added to the proposals that we also expect to receive from the European Commission—both of these are going to hit us over the next few years—could have an impact of anything up to £750 million. Against that kind of background we think it would be very difficult go see how we can sustain a universal service obligation. Our debate is round the level of scale and speed of introduction of the proposals, not about the introduction of competition or any kind of proposals themselves. That is where our main discussions are with Postcomm.

  183. Let us press you further on that, what you are saying is in regard to these proposals by Postcomm that we should have immediate liberalisation, you may want to comment about that. Full liberalisation by 2006. You are saying, as I understand your argument, we do not quarrel with the competition, we are quarrelling with the timetable. What timetable would safeguard Consignia's ability to deliver the universal service?
  (Mr Roberts) We have been arguing for some time now that the European discussion that has gone on for some long time is the right way to go. In other words, if we were going to reduce the monopoly by weight and price in 2003, reduce it further in 2006 then as far as we can see we can cope with that kind of change. It has the benefit of being a fairly clear change, everyone in the market will know what is happening and we can probably get a better handle on the impact on us from that kind of change. The bulk mail changes of over 4,000 items, which is one of the proposals so far, there has already been discussion between us about what exactly would be included in those changes and how many companies will take part in that, it is much more difficult to try and model and get a judgment. Our view is, why are we not like the rest of Europe introducing liberalisation and competition to the same speed and level as Europe and then introducing it in a way that all of us would be working to a level playing field.

  184. I must put it to you that if we proceed down the European route would that be a sufficient spur to you? Surely the point of what Postcomm were trying to achieve is they are trying to put instant and immediate pressure on the ordinary letters going out. If we talk about the European proposals, as I understand it, going down this weight route you are going to meet increased competition in an area where there is already more competition on attacking your core business. I think if Postcomm were sitting here they would say—and I must put their arguments back to you, otherwise we will not get a real debate—that is not going to achieve a great deal, you have to attack their core business.
  (Mr Roberts) I understand that. It is this business of attacking their core business which I find slightly difficult, given the speed in which they intend to do it. As I understand it, they intend to introduce this relatively rapidly after they conclude their deliberations sometime in May. One of the things we are trying to do is get ourselves ready to deal with this. In every other case of the introduction of regulation that I have looked at there has normally been a slightly longer period while the industry is being privatised, it is getting its act together to cope with what you call an attack on its core business. My concern is that once you let the genie out of this particular bottle you cannot get it back in again. If in fact the judgment of how hard and how fast to attack our core business is wrong then we could be in severe difficulties as an organisation. That is where I do think there is much more judgment involved in the proposal that Postcomm are making than say the proposal to the European Commission, that has been deliberated for some time. Admittedly, yes, the European proposal would be easier for us but then the issue is what do we want out of this? Do we want a Consignia which is heavily damaged, which it might be, it is a judgment, it might be, or do we have something which is introducing competition and liberalisation into the market in a way which enables us to be reasonably healthy and for competition to come in.

  185. We are all "might be", you cannot give us any further details, facts or figures to help us make this very difficult judgment between what you are saying, what you are hinting to us is that we might be destroying the universal services, that is what you are saying to us but you cannot really amplify that?
  (Mr Roberts) The issue for me was well summed up by the final paragraph in Professor Cave's study, where he said you can model to your heart's content but at the end of the day this is a judgment. We have models where we think the impact of the European proposal, which is something like over five years, and an impact of about £500 million on us. We think that the Postcomm proposal adds about £250 million more to that. That is based on modelling, obviously it is as good as the assumption we have put in. Postcomm have said they do not believe those figures, they think it is something different. That is the nub of all of this. It is a judgment and the judgment will be made by Postcomm. My only argument is that if they get it wrong we as a company will be stuck with it.

  186. Postcomm told us, do not worry what these people want, banks and the others, is an operator who can deliver to every address in the country. We are delighted they will no longer be called Consignia, they will be called the Royal Mail, that is a step forward. It is only the Royal Mail that deliver to every house in the country. One of our colleagues, either myself or one of the others, said surely your competitors could take the easy stuff through their bulk service but for the more difficult stuff in the more remote areas in constituencies like mine they could put a stamp on it. Is that a fear that you have as well? I put it to you because it worried the Committee.
  (Mr Roberts) We have already had an approach from the German post office, Deutsche Post World Net as they call themselves, to discuss with us the price that we would charge for access to our delivery services. I think that what will happen is that under the terms of the licence we have to have those discussions, Postcomm have a right to make a determination of the price and if we are not able to agree with whoever it is who wants to have access. They can collect the mail and transport it to say Lincolnshire and then say to us, will you please now deliver it throughout Lincolnshire and the price we will expect to pay for this is so much. That is where we get into a price for access to our network, a lot of that could go on. If the access price is then not set at the right kind of level we will find that not only are we losing the revenue for two-thirds of the journey but we may find we are having to price very much in line with our costs without any kind of margin for access and we lose out there. There are two methods by which we could find a competitor tackling us, one is head-on competition and the other is effectively doing what you describe, effectively sticking a stamp on it and asking us to do part of the work.

  187. Can you say a bit more about the second delivery or relaxing your target delivery by 9.30? What assurances can you give us this will not inconvenience your customers and small businesses?
  (Mr Roberts) One of the things we are trying to do is find out just that, what is the impact. We are probably now the only country, certainly in Europe, and probably amongst the developed postal countries, who have two deliveries a day. There is no doubt that the most effective operational way is to do one delivery spread across the whole of the morning. We are piloting this over the next three months, between now and the end of May. We are working very closely with the Federation of Small Businesses and one of the reasons for the pilots, Chairman, is to get at your question, can we do this in a way that we can still meet the needs of the majority of customers, particularly business customers, with the big volume customers being served early in the morning, but the key issue is, how do we tackle the small business customers and people that work from home. That is what the pilots aim to get at. From our point of view it is certainly the most effective and cost efficient way to do a delivery. We do understand fully the concerns of people, what would that mean if we were no longer delivering by 9.30. We will know in three months' time.

  188. The Comptroller's Report shows your consistent failure over the last five years to meet your own target of delivering the 92.5 per cent of first class mail the next day. What effect will these proposals by Postcomm to increase competition have on your effort to improve competition?
  (Mr Roberts) As part of the proposals for Postcomm we have to agree targets with the consumer body Postwatch, and we have done that. That is 92.1 per cent by the end of this year and 92.5 per cent by the end of next. If we cannot show a clear endeavour to get to those targets and meet them we will be exposed to fines. The fines, of course, cut two ways, on the one hand you can stimulate people to do better, on the other hand if you get hit with fines and you are in financial difficulty all it does is add to the difficulty. There is an enormous amount of effort going into improving the mail service. There is no doubt that the fact that we have now had stable industrial relations for six or eight months, we have effectively had a no strike agreement for the best part of six months. We have seen a first class quality of service climb to 91.6 per cent, which is still not good enough but the trend has been upwards over the whole of that period. I think that there is an enormous amount of pressure already from Postcomm and Postwatch to do better and they know what work we are doing to try and get it right. That pressure helps. At the end of the day it is a manpower intensive business, you are dependent on people and it is round us motivating all the people, both managers and staff, to get it done, not to make mistakes, not to put the bags in the wrong place or letters in the wrong tray. The trend is much better and we have to sustain that.

Geraint Davies

  189. May I ask, first of all, is it reasonable to assume that your views reflect Alan Leighton's?
  (Mr Roberts) Yes, they do. We have discussed all of the issues that are to do with regulation.

  190. Fine. There has been talk of some 40,000 possible job cuts, from something like 30,000, what proportion of these job cuts do you feel are due to the premature liberalisation of the British postal market a year ahead of our European partners?
  (Mr Roberts) First of all, 40,000 is not a number that has come from us. We have continued to talk about up to 30,000 redundancies, which is something I said in November.

  191. How many mere people do you think are going to lose their jobs if the Regulator goes ahead and deregulates the market this year instead of next year, as would be the case elsewhere in Europe?
  (Mr Roberts) That is almost impossible to say because it depends entirely on how much competition comes into the market place. What we are doing at the moment is trying to take 15 per cent of our cost base out, which basically gets you up to 30,000?

  192. It has risen from 15 per cent, 30,000, to 20 per cent, which is 40,000.
  (Mr Roberts) No.

  193. These are the number that seem to thrown round. So I am clear, 30,000 is still the figure we should be looking at.
  (Mr Roberts) We said all the way through we want to take £1.2 billion out of our cost base, that is about 15 per cent, and we believe the impact of that would be up to 30,000. Those are figures Mr Leighton and I have used.

  194. You said that the cost of market liberalisation is something like the £500 million and the additional cost of premature liberalisation is £250 million. Can you not put a job number on that?
  (Mr Roberts) If you did a very simple calculation it is about half of what we have already looked for, so you can assume the same number of jobs again. That is not what we are saying.

  195. What does that mean?
  (Mr Roberts) If we were assuming that we stayed static we are talking about £500 to £750 million of our profit if all of these proposals came in based on the modelling. The best calculation I can do for you is if we were taking £1.2 billion out of our cost base and the impact is about 30,000, up to 30,000 redundancy, if you take another £750 million of profit, and you have to equalise that by taking the cost out, you would be looking at about half as much again.

  196. Another 15,000. Of that extra 15,000, 10,000 was the EU proposals and 5,000 would be the early liberalisation. In ball park it could be—I know this is modelling up to an extra 5,000 jobs because the Regulator is jumping the gun. Can I ask you, the Secretary of State said today that our European counterparts had been allowed commercial freedom ahead of Consignia. Does that not imply that if they are more competitive and have more experience and you have to allow competition against yourself in the United Kingdom market without reciprocal opportunities that is another reason in the interests of the British public to at least delay liberalisation of our market place at least until the rest of EU does so?
  (Mr Roberts) There are two issues there. First of all, some of our competitors in Europe are totally privatised, both the Dutch and Germans, the Germans about two years ago and the Dutch about six or seven years ago, it is a completely different company set up. Certainly we believe that the half a dozen foreign post offices who currently work or own companies in the United Kingdom and operate quite legally outside the current monopoly will be well poised to get into the market here if the market here is opened up more widely and in advance of what is happening in Europe.

  197. In other words, if all opened up equally at the same time in any case they would be better positioned to get direct access into our market place than you find yourself in getting your act into theirs, even if they open up the market.
  (Mr Roberts) Certainly in the case of the Dutch and German companies, yes.

  198. Would you agree that fair trade demands a harmonised, single market place in the postal market and the Regulator should think again and perhaps as a single shareholder the government should encourage the Regulator?
  (Mr Roberts) The view we were putting to the Regulator when we finalise our proposals within ten days and our response to his consultative document is that we believe that following the European model is the right way to go.

  199. What you seem to be saying is that if the Regulator is allowed to crash ahead with his insistence that we want deregulation now, that the entry of Dutch and Germans in particular in cherry picking could cost up to 5,000 jobs?
  (Mr Roberts) I do not think I am taking it all of the way through. There was no doubt at all, as I said the Germans have already been in touch us with, we know the Dutch are poised and they believe this is one of their target markets to come into. There is no doubt at all that opening it up in the way proposed will give those countries and probably also the French, who already own parcel companies here, a much greater opportunity to get in and cherry pick. Is it the assumption that you then make about the impact of that that could have an impact on jobs.

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