Select Committee on Public Accounts Minutes of Evidence


Supplementary memorandum submitted by Postcomm


  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".


  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".


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.


  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.

  (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.


  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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