Examination of Witnesses (Questions 340
- 359)
MONDAY 25 MARCH 2002
MR JOHN
ROBERTS CBE, MARISA
CASSONI AND
MR STUART
SWEETMAN
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.
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