APPENDIX 3
Supplementary memorandum submitted by
Postcomm
POSTCOMM'S PROPOSALS FOR PROMOTING EFFECTIVE
COMPETITION IN THE UK POSTAL SERVICES
This memorandum summarises the key findings
and proposals in Postcomm's consultation document Postcomm's
Proposals for Promoting Effective Competition in the UK Postal
Services which was published on 31 January 2002 and sent to
Committee members. In April 2002, Postcomm will publish a decision
document which takes account of the responses to the consultation,
which are due in by 15 March. The memorandum also indicates how
Postcomm's proposals address the risks identified in the C&AG's
report "Opening the Post".
1. BACKGROUND
The Government announced, in a White Paper published
in July 1999, that it had decided to introduce competition for
the Royal Mail. This intention was carried forward in section
5 of the Postal Services Act 2000 which charges Postcomm with
furthering "the interests of users of postal services, wherever
appropriate by promoting effective competition between postal
operators" subject only to ensuring "the provision of
a universal postal service".
2. SUMMARY OF
POSTCOMM'S
PROPOSALS
Phase One: From April 2002 to 31 March 2004
An initial stage of market opening involving
issuing Large Mailing Licences and Consolidation Licences and
considering extending the extent of market opening through Defined
Activity Licences. This is expected to open the market 30 per
cent (by value). Consolidators may only feed into Consignia's
delivery at this stage.
Postcomm will review the market at the end of
2003 with a view to making any necessary adjustments at the mid-point
of the transition period, 31 March 2004.
Phase Two: From 1 April 2004 to 31 March 2006
Review of restrictions on Large Mailing Licences
and consideration as to whether to bring forward the "End-date".
This is expected to open up a further 30 per cent of the market
(by value).
Phase Three: On or before 31 March 2006
All restrictions on market entry to be abolished.
This will open up the remaining 40 per cent of the market.
3. POSTCOMM'S
KEY FINDINGS
Postcomm has put considerable effort into developing
its proposals through an extensive programme of consultation,
research and analysis (summarised in Annex A to this memorandum).
Among its findings run four consistent themes:
(a) A changing but growing market
The postal services market is going through
a period of considerable change with customers looking for greater
reliability, choice and innovation and with postal services facing
competition from electronic alternatives. Nevertheless the market
continues to grow (1.9 per cent in 2000-01). Businesses are the
dominant users of postal services sending 86 per cent of mail.
(b) The current monopoly is not working
well
In the face of these changing market conditions,
it is increasingly clear that Royal Mail's monopoly has not responded
well to these changes and is too often failing to meet the needs
of its customers. Consignia's service quality, industrial relations
and profitability are at an all time low. It is also clear that,
if matters continue as they are, the company could face a financial
crisis and serious industrial unrest, offering a deteriorating
service to customers who have no opportunity to switch to an alternative
supplier. As foreseen by Parliament, it appears that a more competitive
market will provide greater growth opportunities for the postal
market by offering customers more choice and innovation.
(c) The universal service is a competitive
advantage—not a burden
It is also clear that Consignia derives great
strengths from its provision of the universal service. In practice
no mail provider offering a national service would wish to reject
mail addressed to remote farmhouses etc, even if they have no
legal obligation to take it. Banks, for instance, are not going
to use a mail service which cannot deliver to all their customers
wherever they may be. So Consignia's unrivalled network gives
it a considerable competitive edge.
(d) Consignia will lose more money from
being inefficient than from competition
International experience and our analysis (based
on Consignia's own figures) show that, if it were reasonably efficient,
(a) its incumbency strengths would enable it to withstand competition
without losing significant market share, and (b) even the loss
of a significant part (20-30 per cent) of the market would not
seriously damage its ability to finance its operations including
the universal service.
4. ASSESSING
THE RISKS
(a) The clear conclusion of this work is that, in today's
marketplace, the lack of competition, and so the absence of any
spur to improve its performance, is the biggest risk to Consignia's
finances and so to its provision of the universal service. Postcomm's
proposals are for the introduction of competition to provide customers
with choice, to incentivise Consignia to become more efficient
and so to safeguard the continued provision of a universal service.
(b) In developing its competition proposals,
Postcomm has recognised the need to manage the risks arising from
the introduction of competition and in particular, to achieve
the right balance between the two key risks that, on the one hand
competitors are not encouraged to enter the market and that the
potential benefits of competition are not realised in practice
and, on the other, that competition could undermine the provision
of the universal service.
(c) Although the evidence and analysis available
to Postcomm suggests that it would be possible to move immediately
to full competition, Postcomm considers that such a step would
constitute an unacceptably high level of risk because of the potential
disruption in the market and the need to give Consignia, as the
UK's sole national postal operator, time to adjust. For this reason,
Postcomm has adopted a phased approach as summarised in section
2 above.
5. C&AG'S
REPORT
The C&AG's Report identified a number of
risks in the task that Postcomm had been set to bring benefits
to customers through the introduction of competition. Postcomm's
proposals document includes an assessment of the risks of our
proposals and how we are managing them (see chapter 8 of the proposals
document). This is summarised below by reference to the five risks
identified in the C&AG's report.
(a) "There may be insufficient competition
to generate an improved service to most customers"
Postcomm's consultation programme and discussions
with operators indicate that the proposed regime will attract
competitors into the market and has real advantages over the gradual
reduction of the weight/price threshold. Postal services requires
investment but is not a capital intensive industry and there is
scope for new entrants to use their existing infrastructure to
provide postal services. Postcomm's proposals are aimed at providing
operators with the certainty of a steady transition to full competition.
It is also important for them that the regulatory regime ensures
that Consignia is not able to take unfair advantage of its size
or position as the dominant player in the market, for example
in respect of ensuring access to Consignia's network at reasonable
rates (as provided for in Consignia's licence). Finally, the proposed
licensing regime—involving licences with a minimum period
of seven years means that operators can make plans for the future.
(b) "The introduction of competition
could result in a breakdown in the delivery of a universal service
at a reasonable uniform price"
Postcomm's research indicates that Consignia's
ability to finance its activities is more in danger from the company's
failure to control its own costs than it is from the introduction
of competition. Competition will provide incentives for Consignia
to become more efficient, and return it to profitability (as it
was until recently) as well as reducing the costs of providing
the universal service. Royal Mail is a leading brand name with
an exceptional customer base and the ability to deliver to every
household in the UK every working day should be a considerable
marketing advantage. Rural and deep rural locations are both contributors
to operating profit. The uniform tariff requirement is one which
also has many practical advantages in terms of convenience and
simplicity, especially in view of the relatively small cost of
a postage stamp.
(c) "Pending effective competition, Consignia's
efficiency may not improve significantly"
The threat of competition is already creating
incentives for Consignia to improve its efficiency and overall
performance. The company has recently been looking at reducing
its cost base and improving its delivery structure in an effort
to provide customers with a better and more cost effective service.
(d) "Postcomm may fail to get Consignia
to meet prescribed standards of service"
Consignia's standards of service continue to
be regulated under Consignia's licence. Competition should also
provide a spur to service quality and innovation. Postcomm expects
the foremost safeguard to the universal service and prescribed
standards of service, in the short to medium term, to be Consignia
becoming more efficient.
(e) "The Department, as the principal
shareholder, may not apply sufficient pressure on Consignia to
improve its performance and respond constructively to competition"
This is a risk which falls to the Department,
but the competition regime which Postcomm is proposing will provide
external incentives for Consignia to become more efficient and
thus able to compete effectively in a competitive market whilst
still providing the universal service.
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