Examination of Witnesses (Questions 320
MONDAY 25 MARCH 2002
ROBERTS CBE, MARISA
320. Do you think the National Audit Office
is correct when they say in paragraph 23 of their conclusion of
this report, which is on page eight, "The incentive on Consignia's
management to secure efficiencies is relatively weak in the absence
of pressure from private sector shareholders and the stock market,
and is further weakened by the knowledge that efficiency gains
would give Postcomm room to introduce more competition and to
set tougher price controls."
(Mr Roberts) I think it is weaker.
321. Weaker than?
(Mr Roberts) Weaker than the example of if you were
subject to normal shareholders and everything else. There is no
doubt that the situation in a nationalised industry is inevitably
different when you have a political shareholder than if you have
private shareholders. I think the more we do, the great danger
is that the regulator might say "right, we will take all
these efficiencies but we are still going to set the sort of targets
that we have got in mind" and you sort of press it maybe
too far. Yes, I do think in general that that conclusion is fair.
322. If you do not like the Postcomm proposal,
how would you go about addressing the problem? Would you think
that the EU Directive would more than adequately address that
(Mr Roberts) I think that the new Directive would
go some way to that. I want to stress what I have said throughout,
that we are in any case trying to drive efficiency within the
organisation even without Postcomm. I think the impact of liberalisation
is something that we have said right from the beginning of competition
and liberalisation will act as a spur for the organisation to
change. I think the argument then becomes how much do you do and
how quickly do you do it. Do you get diminishing returns if you
actually put that in too fast or too heavily?
323. One of the things that Postcomm say is
a problem is the structure and the way you are owned and regulated
in that all roads lead to the Government in the sense that the
Government appoints your directors, sets your financial targets
and so on, and it also appoints the members of Postcomm. Is that
a problem, do you think?
(Mr Roberts) I have not seen it as a problem. If you
look at some of the debates that we have been talking about this
afternoon between ourselves and Postcomm, I do not think that
we perceive that as a difficulty. We have tended to deal with
Postcomm, and they are set up and appointed as with Postwatch,
and there are some fairly vigorous debates going on between us.
I do not think we are conscious that both of us have been appointed
by the same master, as it were. No, I do not think that is right.
Chairman: That is really a policy issue, that
is the structure that we have got and this Committee will not
get involved in debates as to whether the structure as set down
by the Government is right.
324. I take my warning from the Chairman. The
Universal Service Obligation, Postcomm suggests it is possibly
a competitive advantage rather than a burden. Would you accept
(Mr Roberts) Yes, I think it can be.
(Mr Sweetman) I suppose one of the important things
in any commercial business is the value of your brand, the image
in the eyes of your customers, the degree to which you can extend
it. If at the heart of a business there is a genuine warmth towards
the organisation, which I think there is, notwithstanding some
of our performance, then we should harness that and if that is
supported by other organisations seeking corporate social responsibility
we have a starter pack. I think we should exploit it and it should
add to our brand values that we can then commercially exploit.
In that respect I think it is an advantage. I think the speculation
earlier about what the financial cost is is a balance against
that but I think it is our commercial responsibility to exploit
every asset we have got. On the whole, if we can get the 50-odd
million people in this country feeling warmly towards us and our
brands, and that is because we are knocking on their door every
day, then that is good news.
325. I would have thought if you were talking
to a business who wants to do bulk mailing, it is a huge advantage
to be able to say "I can deliver to all the people you want
to send this letter to".
(Mr Sweetman) Yes, I think that is absolutely right.
If you take our largest posters, the big banks, financial institutions,
the big consumer organisations like Centrica as well, they absolutely
need to be able to reach every one of their millions of customers
and we can do that. With the use of technology our competitors
will be able to come along and say "we will apply this technology"
and it is rather like you see in the telecom industry where you
can switch between providers based on the nature of your call,
there is technology in the postal world where you can switch mail,
"we will give you that, you take that". That is very,
very easy to do. If it is chasing the odd million pound extra
margin these big customers will seek ways of doing that and the
new entrants into the market will seek ways of providing that
and that is the new reality ahead of us if Postcomm get their
326. Is it not a bit of an Aunt Sally to say
that all this threatening competition is going to endanger your
service customer, which is the postman coming down your path delivering
your letter, when in fact actually that is the great advantage
that you have?
(Mr Roberts) I think it is both. Yes, it is a great
advantage and, as Stuart has just said, it is something that we
want to try and develop. Again, we are back to the way in which
regulation, liberalisation is introduced. If it is introduced
in a way where there was a great deal of cream skimming, if our
finances were put at risk, then at that point you do endanger,
no matter how good you might be at all the brand values that we
have talked about, the ability to fund the USO. I think that has
been central not only to the argument here with Postcomm but certainly
central to all the European arguments as people have gone through
how do you introduce liberalisation throughout Europe. It is interesting
that the European arguments have gone through, for example, this
idea of liberalising bulk mail and have then decided in the end
to go down the route that is liberalising by price and weight.
327. Can I talk to you about new technology.
One of the things that you pray in aid and this report comments
on is the arrival of things like the Internet, e-mail and so on.
Can I ask you, why did you not as a company get involved in the
Internet? Why did you not set yourself up rather like British
Telecom, who is a major provider of Internet services? If you
had distributed a few million CDs a couple of years ago you would
have sewn up the entire e-mail market.
(Mr Roberts) First of all, we got involved in what
was called hybrid mail, which was printed mail, electronic at
one end and physical at the other. We took a view at that time
that it was going to be very difficult for us as a non-technology,
non-capital intensive business to (a) have the funds or (b) probably
have the capability to take on people like British Telecom and
computer companies who were getting into this area. It was very
much about trying to stick to the thing that was core to your
business and not being able to make that shift which, of course,
cost an enormous amount of money for many people. You still wonder
about the amount of money and returns being generated in some
of the areas, even though e-mail has grown enormously. A lot of
the e-mail is inter company, or intra company e-mail, although
it is growing enormously now between customers who compete with
328. If your business is written communication
from one person to another, which is your core business, do you
not think it was a great mistake not to jump on the biggest change
in communication since the development of the printing press?
(Mr Roberts) I think you can say now maybe it was,
but remember in the same period our physical mail has also been
growing and it is only in the last 18 months that we have seen
that growth tail off. The sheer volume of expenditure, and remember
it was probably in a period when we were constrained from investment
anyway, that you would have had to put into that to get anywhere
near getting off the ground would have probably been beyond us
as a company.
Mr Osborne: My time is up.
Chairman: I have got to remind colleagues that
questions of policy, the structure of Consignia and questions
like that are really matters for our sister Committee, the Trade
and Industry Select Committee. This afternoon we are trying to
probe ever deeper into Postcomm's proposals, that is what the
National Audit Office Report is about. We will continue on that
basis. Mr Brian Jenkins.
329. It would help if I ask one or two questions
which sound particularly naive but I am trying to put this structure
into context. I understand in America, the USA, they have a system
which is cheaper to use than our system, is that true?
(Mr Roberts) Yes.
330. They send letters across America and their
wage rates are a lot higher than ours so I assume their costs
are a lot higher but they send a lot more mail than we do.
(Mr Roberts) Yes and they have also a rather different
three year pricing structure with the rate commission which means
that they cannot increase their prices more than once every three
years. You tend to get a curve of year one they make a profit,
year two they just about breakeven, year three they make a larger
loss. The American system of dealing with their post office always
strikes me as very different from ours and not relating price
to cost other than every three years.
331. They seem to manage to deliver letters
and they deliver letters at a lower cost and they seem to deliver
a lot more mail. Our mail has gone up, has it not? In fact, last
year I think I got figures the mail went up by 1.9 per cent.
(Mr Roberts) Yes.
332. Which was very, very good. The operating
income rose by 7.9 per cent which was excellent. Your operating
costs rose by 12.4, why?
(Mr Roberts) In that particular year there were a
number of factors. One was that there was a new international
agreement for international mail which cost us about another £137
million in that year which was a new cost. It was the year in
which we put in the agreement with the union which had up front
costs of just over £100 million which was designed to give
us productivity and working practice change as we went through
the succeeding years. There were a number of changes, Mr Jenkins,
of that type which were adding to our costs in that one year.
That was a step change of cost in that year.
333. So when Postcomm says effectively they
could not find out, the reason they could not find out why it
went up by 12.4 is quite simple, they did not ask you?
(Mr Roberts) As far as I am aware.
(Ms Cassoni) I think they did ask us and I think we
did provide them with the information.
(Mr Roberts) The information has been readily available
ever since we completed the report and accounts for that year.
334. Postcomm were misleading us then when they
gave us the facts and said "We do not know why it went up
to 12.4 per cent"?
(Ms Cassoni) We have provided them with an analysis
of the difference between our costs over that 12 to 18 month period.
335. I find that very interesting because according
to the minutes of the meeting they did state they did not know
so they were misleading this Committee?
(Ms Cassoni) All we can say is we gave them to them.
How they interpreted them or whether they understood them is a
matter for them.
336. One of the answers Mr Sweetman gave was
with regard to the universal postal system and he said the regulator's
duty is to protect the system which I find amazing. I am not sure
how they can do that. Is it possible for the regulator to protect
the system because surely you can make or break the system as
a company? It is in your hands, is it not?
(Mr Roberts) I think the regulator is supposed to
undertake financial calculations to enable the Commission to come
to a judgment about whether we are in a financial position to
maintain the Universal Service Obligation. I believe that is the
way it is supposed to work.
337. As far as I understand, you cannot do that
(Mr Roberts) Our view and the whole history of the
way we have done it is to cross-subsidise those routes on which
we make money with those where we do not make money in order to
have a uniform price right across the whole network.
338. To maintain the universal system you must
be prepared to ward off competitors, if necessary putting barriers
to entry in by reducing pricing to specific clients so you can
maintain the business even operating on a marginal cost system?
(Mr Roberts) Barriers to entry? If we are to maintain
a uniform price, which is what we are asked to do in the Postal
Service Act, then if we stay with that price and we are attacked
by competitors and as a result of that we are not able to finance
that uniform price or whatever, then in certain routes the only
way we can compete is by actually reducing the price. The moment
you reduce the price you do not have a uniform price.
339. We have got a problem, have we not? It
is a bit of a nonsense, you cannot win.
(Mr Roberts) I do have days when I think that, yes.