Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 340 - 359)



  340. You cannot win and no company can win if it is allowed to see a section of its customer base being taken away by a competitor who can marginally shave the price if it is locked into a system where it cannot offer competition.
  (Mr Roberts) That is our biggest concern.

  341. It becomes an uncompetitive situation.
  (Mr Roberts) Yes.

  342. You are fighting with one arm tied behind your back.
  (Mr Roberts) Yes.

  343. Since by its very nature you have got that arm there already, you have got extreme difficulties. I think we need to get that clear. Postcomm said that in effect you will have 90 per cent of the market share. I do not know where they get this from but they come up with some marvellous figures because apparently whenever people have been deregulated they have maintained 90 per cent of the market share so they have used this as a yardstick. There is only 10 per cent we are discussing, is it worth it?
  (Mr Roberts) If it was only 10 per cent you would have to ask the question, as I think one of your colleagues did, are you really getting effective competition? As I said earlier on, I am not sure that the examples that we have got - in fact there are no examples anywhere in the world where a postal market has been deregulated in the way that has been proposed here—in those countries where there has been deregulation, the three I mentioned earlier—Finland, Sweden and New Zealand—they are very different and I am not sure how much we can assume from those and just translate it straight into here.
  (Mr Sweetman) If we can just explore the Swedish example because they were liberalised almost ten years ago. They were permitted to move away from uniform pricing. What has happened over the period since has been they have been able to chase down the prices, as new entrants came in they were able to chase down the prices. I think the computer addressed mail pricing went down 43 per cent after liberalisation. To balance that, social mail, consumer mail price including a VAT imposition went up 70 per cent. Even with that rebalancing, the Swedish Post Office have in the last year gone into a loss making position. Now they have retained their market share at over 90 per cent because they have chased down the prices on the commercial ones and put up the prices on the consumers. Therefore, if we are allowed to do that we could perhaps—perhaps—maintain a market share in excess of 90 per cent but until we know what the price control regime will be, and we will not know that until later on this year, it remains an uncertainty. As you move to a fully liberalised market, you would expect the hand of regulation to be lightened. There will be less and less price control, less and less imposition of service standards because the market looks after those things.

  344. I will see if I can give you a clue then as to what the pricing regime is going to be because I have down here that it costs 28 pence to deliver a letter, is that true?
  (Mr Roberts) Yes, roughly.
  (Ms Cassoni) On average.

  345. On average?
  (Mr Roberts) Yes.

  346. What is the price of a stamp?
  (Mr Roberts) 27 pence for first class.

  347. So you are losing on every letter?
  (Mr Roberts) At the moment, yes.

  348. It does not seem a good way to run a business to me.
  (Mr Roberts) It is not and I think one of the key things, Mr Jenkins, gets us back to price again. One of the things that sustained us during the 1990s when we had high levels of profit was that we were, rightly or wrongly, having fairly regular price increases, roughly in line with inflation. For the last five years, as I said earlier, we have had one price increase on first class and the second class price has gone down and over that five year period our prices are something like eight per cent below RPI. If, in fact, we had had price increases in line with RPI over that period we would be about £400 million to £500 million per annum better off than we are now.

  349. The obvious answer, of course, is to stick the price up. Your problems with your company are fundamentally cultural.
  (Mr Roberts) There is a high element of that and it is to do with this change from a long term monopoly into an organisation which is now going to have to compete and it is changing that monopoly culture into one that has got to be much more competitive.

  350. In fact, your information systems in the company are not geared to give the management the information that they need to run the company even.
  (Mr Roberts) That is not true. I will bring Marisa in in a second. The management systems that we have had, certainly for the last ten years, have been absolutely fine for running the company. What we have found, and I think we are exactly the same as every industry that has gone through regulation, is that the regulator then wants management information in a quite different way from, say, the way the accountants want it for the publication of report and accounts. Management information and everything else is there.

  351. We would like to see what the actual cost is and if your systems do not tell us that then how can you tell me that it costs 28 pence to deliver a letter?
  (Ms Cassoni) Our systems are suitable for a state owned company as a monopoly, so we work out our costs for our products, we do it by sampling techniques, we look at the number of products we process and the average price. If we then want to look at segments of products, which I think was a question over here, and if we look at a particular location, sending mail from A to B, so when competition comes in, how you price it and how much it costs, we have to develop those systems and we are in the process of developing those systems. They need investment and they need to work out the cost base differently and they will be delivered over the next year.

  352. Hopefully we will be able to determine the price of delivering a letter next year more accurately in accountancy terms?
  (Ms Cassoni) Yes, in geographical terms.

  353. Fine. We have got this attitude, this mentality, and I would like to give you two examples where I think pricing and maintenance of the pricing system was used in this country. One was Blue Circle Cement, which went through the Monopolies Commission many years ago, and had a uniform price throughout the country, so if you bought it in the home counties, if you bought it in Scotland, it was the same price for a pack and it served the industry very well. Then we had the deregulation of buses and we all know what happened to that. Because of the lack of cross-subsidy it decimated our public service in buses in many rural areas and we are suffering even today from that introduction. If that is the risk we are going to take with the post office and the universal system, I want someone to mark up a warning sign that if it does happen someone should pay for it, so let us make sure that we get it right this time around. Although we were reading competition is a spur to drive you on, the reports we have had and the reports I have seen do not lead me to believe that no matter how many times you beat the management with a stick, if they do not have the skills, if they do not have the information systems, if they do not have the expertise to improve, the system will suffer. Is that right?
  (Mr Roberts) I agree with that.

  354. So what are you doing to make sure that management have got the management systems, the skills and the expertise?
  (Ms Cassoni) We are investing substantial amounts of money in a new information system so that we can actually tell our products by all classifications and by customers. As I said, we will have that information available starting from April onwards over the coming 12 months.
  (Mr Roberts) In terms of management, Mr Jenkins, we change management, we change senior management, we bring senior management in from outside the organisation, we promote from inside and there is an enormous amount of training going on, not just of front line staff but of senior managers because, you are quite right, it is a culture shift and you do not just drift into that, you have got to train people for it and bring in different levels of expertise.

  355. My time is unfortunately almost up. I am sure that watch goes faster when it gets to me. Public complaints are going up, and I get a number of complaints, which was unheard of a few years ago, about letters not getting through. How many letters or items of post do you lose a week?
  (Mr Roberts) We have done a lot of work with Postwatch and we think there may be a figure like 300,000 letters that are not delivered. I am just going to play semantics around the word "lose". Some of them are not properly addressed and are mis-delivered. Some of them have an address where we cannot deliver it and we have a big operation in Belfast which deals with what we call "undeliverable mail". Some of them inevitably will disappear in some way or another and we have these sad cases occasionally where we find a postman has got a loft full of letters.

  We think from the work we are doing, and we are doing it jointly with the consumer body, that there are letters that do not get there. Normally we only know that when the recipient says "I was expecting something and I did not get it".

  356. Time is moving on. Staff, this is the problem you have got seriously with staff. I do not think you have identified staff morale is plummeting. I think you have undermined a lot of the staff in the way you have criticised the staff. What is the turnover?
  (Mr Roberts) What is the turnover?

  357. Staff turnover, yes?
  (Mr Roberts) About eight per cent in Royal Mail.

  358. I am surprised it is not higher.
  (Mr Roberts) It is higher in Parcelforce.

  359. Is it true that Postcomm made you look at your management and your service and found you wanting and what you are doing now, by cutting away this large swathe, is to redeem yourself in the eyes of the Government?
  (Mr Roberts) No, I do not accept that. Certainly they have forced us to look at all sorts of things. We were looking at things like that before Postcomm were even on the scene. What we are doing now is trying to get particularly Parcelforce right over a large number of years, helpfully with the unions. There has been more change in Parcelforce than probably any other part of the Post Office. If the market is going away from you, and the part of the market we have had to get out of has declined by 50 per cent in the last five years, then it is a fundamental change to the business structure. I do not fancy, any more than anybody else, the kind of announcements that we have had to make today but it had to be done if Parcelforce as a business was going to survive at all, it was nothing to do with Postcomm.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 1 May 2002