1 Postal services are a key part of the United Kingdom's
economic infrastructure, providing a vital means of communication
between citizens, business and government. The main characteristics
of the postal services market in the United Kingdom have been
a statutory monopoly and a universal service at a uniform tariff.
The statutory monopoly comprised an area of the market of mail
costing less than £1 and weighing less 350 grams reserved
for the Post Office (now called Consignia).
The universal service consists of daily collections and deliveries
everywhere in the country at the same price regardless of distance.
2 The postal service is facing a period of significant
change, for statutory and external reasons. The Postal Services
Act 2000 created a regulator, the Postal Services Commission (Postcomm),
whose primary statutory duty is ensuring the provision of a universal
service at a uniform tariff. Their other duties include the promotion
of effective competition and the protection of customer interests.
The Act replaced Consignia's monopoly with the issuing of licences
to postal operators within the reserved area. Consignia received
its licence in March 2001 and several other companies have since
been licensed for tightly defined services. External challenges
include more international competition, for example from the requirements
of EU legislation and increasing competition from the use of e-mail.
3 On 24 January 2002, the Comptroller and Auditor
General reported on the risks and opportunities facing Postcomm
(Opening the Post: Postcomm and postal services - the risks
and opportunities, HC 521 2001-02). Subsequently, Postcomm
published their proposals for opening up the market, which they
believed would introduce competition for around 30 per cent by
value of the previously reserved area from April 2002.
We took evidence from Postcomm on 13 February on the Comptroller
and Auditor General's Report and on their proposals, but this
left some unanswered questions about the practicality of their
proposals and the analysis that supported them. We therefore took
evidence from Consignia on 25 March, shortly after the company
announced a substantial re-structuring of its business including
the loss of 15,000 jobs with the prospect of further reductions
of a similar magnitude.
4 As a result of our consideration of this evidence,
we make eight main points:
- Consignia's problems have impacted on the
quality of the universal postal service.
The UK benefits from daily deliveries to all properties and relatively
low prices. Consignia has, however, failed in recent years to
meet its own standards of service and has suffered from a series
of problems, including poor labour relations, inefficiency in
some parts of its operations, constraints on investment and steeply
rising costs. Revenues have risen from £6bn in 1995 to £8bn
in 2001, although postage charges in the UK are relatively low
and have fallen in real terms. In spite of these increased revenues,
the company has become unprofitable and is cutting jobs and changing
services to safeguard the future of the universal service.
- Postcomm intend to encourage improvement by
Consignia by rapidly opening the market to competition, but need
to be cautious about the potential consequences of their proposals
on the universal service. Increasing competition
is a lever for improving efficiency and services, but Postcomm
need to be aware of the risk of duplication in postal teams and
of reductions in low profit services, and to demonstrate that
rapid market opening would not damage Consignia's ability to deliver
the universal service at a uniform tariff. With a lack of reliable
management information from Consignia and uncertainties about
the robustness of Postcomm's analysis, they should err on the
side of caution.
- Postcomm's proposals for the introduction
of competition differ markedly from those of the European Commission.
While Postcomm's proposals focus on the liberalisation of bulk
mail, with full opening of the market by 2006, the European Commission
expect to reduce the weight and price thresholds above which competition
is permitted, with no date for full market opening. Postcomm's
approach would mean that most European postal companies would
have greater access to the UK postal market than Consignia does
to their markets. It is important to ensure that the nature and
pace of liberalisation in Britain versus the rest of Europe does
not give rise to an uneven playing field and unfair competition.
Postcomm should set out clearly why they consider that they should
go further than the European Commission, and what extra benefits
and risks arise from their own proposals.
- It is not clear that Postcomm can assess the
effect of competition until they have decided on the prices Consignia
may charge in future. Consignia's ability
to respond to competition, especially with the speed envisaged
by Postcomm, depends on its ability to adjust its prices to cover
its costs and match the prices charged by its competitors in the
most profitable parts of the market. Uncertainty about how Consignia
might be allowed by Postcomm to respond is also potentially damaging
to potential competitors as well, who will also need a clearer
view of the prices Consignia would be allowed to charge them for
access to its network.
- Consignia told us that it had already had a price
freeze for a considerable period of time and that it might put
a proposal forward to Postcomm for a price rise. Postcomm have
not given any clear indication of what level of price limits they
will set after March 2003, nor what form the price limit will
take. In our view, it may prove necessary for Postcomm to allow
prices to rise, given that post is a labour-intensive business,
that wage rates tend to rise at least in line with inflation,
and that the price of stamps in the United Kingdom is lower than
that elsewhere in Europe.
- Postcomm need to develop a greater understanding
of how changes to the levels and types of service Consignia provides
will affect its customers. They need to
develop a greater understanding of changes in the level of service
such as the loss of the second delivery or a delay in the first
delivery. Consignia has been piloting changes to the service it
provides with a view to improving its efficiency and ability to
meet service standards. These changes, which would mean most customers
receiving their mail after 9.30 AM, could prove damaging to some
small businesses if the changes are insufficiently responsive
to the needs of individual customers.
- Postcomm have a very difficult task to perform.
They have to increase competition, set the price for stamps and
ensure the universal service. This task involves delicate management
of a conflict of priorities that may be beyond them and which
could even result in Consignia going out of business. They are
operating in an institutional context quite different from that
of other economic regulators. Consignia remains in the public
sector and is owned by the same government department that appoints
the members of Postcomm. Unlike other regulators, Postcomm have
had discretion to introduce competition as they see fit. And Postcomm
have had to address difficult issues surrounding the balance between
social objectives such as protecting universal service, and economic
objectives such as increasing competition.
- For this unusual institutional framework to work
well, or indeed at all, it is necessary for the parties involved
to work together. On the evidence we have taken from both Consignia
and Postcomm, however, they are at present locked into an adversarial
and unconstructive relationship from which neither party can gain
much. We look to both of them, as public sector bodies, to move
away from this strained relationship and seek to work more cooperatively
from now on.
5 Our more specific conclusions and recommendations
are as follows:
Consignia's provision of a universal service and
(i) Consignia's prices for standard
mail are cheaper than postal services in most other large economies,
and surveys reveal a high level of satisfaction with Consignia.
The company has some inherent strengths, including a committed
workforce, loyal customers and an extensive retail network. Consignia
also delivers universal service at a geographically uniform rate.
Postcomm need to ensure that these benefits are not sacrificed
in opening up the market. There is evidence that these need not
be sacrificed if competition is opened up in the right way.
(ii) Consignia has, in recent years, experienced
a number of problems including poor labour relations, difficulties
in meeting its quality standards and rapidly rising costs. Some
of these can be attributed to constraints placed on its retention
of funds for investment and on its ability to increase pay rates
for its postmen and postwomen and to increase prices significantly.
But there are also doubts about Consignia's efficiency, and, in
opening up the market, Postcomm can reasonably look for improvement
in Consignia's performance.
(iii) Consignia's profitability has fallen
rapidly and the company is currently losing around £1.5 million
a day, which if sustained would put the universal service at risk.
Consignia said that it had been unable quickly to adjust its costs
when the growth in bulk and advertising mail volumes slowed from
12 per cent to 5 per cent a year. A well run business should have
recognised the risk of such events. This Committee has been critical
before of Government-owned bodies placing too much reliance on
ambitious targets, for instance in connection with the assumptions
made on the number of visitors to the Millennium Dome.
The Department of Trade and Industry, as the Government's principal
shareholder, approve Consignia's business plans and should seek
to ensure that such plans apply risk management disciplines including
the full range of possible scenarios for mail volumes.
(iv) Consignia has responded to its recent
losses by announcing up to 15,000 job-losses, with possibly a
further 15,000 depending on whether other financial savings can
be made. The lack of clarity about future employment prospects
in the industry does not inspire confidence in Consignia's planning
arrangements and must be unsettling for the whole of Consignia's
workforce. Consignia estimate that an additional 10 - 15,000 more
jobs might be lost as a result of proposed increases in competition.
In opening up the market Postcomm will need to be sensitive to
the impact of uncertainty on the jobs of postal workers.
Postcomm's proposals for the introduction of competition
(v) Postcomm expect competition to develop
slowly under their proposals, because competitors would not have
Consignia's ability to deliver to every address in the country,
which business mailers such as banks would require. But this analysis
appears to overlook the possibility that new entrants would just
deliver the low-cost mail, while transferring the most difficult
and expensive mail to Consignia for delivery. Such an erosion
of Consignia's most profitable business could have a major effect
on its ability to sustain the universal service at uniform price.
(vi) In expecting competition to grow slowly,
Postcomm also cite the international experience that incumbent
postal companies have lost only small amounts of market share
where competition has been introduced. The international precedents
differ substantially from the UK market or Postcomm's proposals
for opening up the market. In Sweden, where the market has been
completely opened, prices for domestic users and small businesses
have risen, and the incumbent company is now making losses. Postcomm
need to be more explicit about the inferences they draw from overseas
experience, and how they distinguish the wider lessons from market-specific
factors in the countries concerned.
(vii) The Comptroller and Auditor General's
Report emphasised the importance of robust analysis for managing
the risks that Postcomm face in introducing competition. But while
Postcomm estimate the net cost of providing universal service
to be £81 million a year, Consignia's modelling, using a
different approach, suggests that it could lose up to £750
million in profitable business from the current proposals for
competition. And Postcomm and Consignia do not agree on the volume
of business exposed to competition in the first stage of Postcomm's
proposals for market opening. Greater effort needs to be applied
on both sides to reaching a shared analysis of the impact of market
opening on Consignia's ability to sustain the universal service.
(viii) Postcomm's ability to discharge their
duties credibly depends on having a thorough knowledge and understanding
of the industry. Postcomm have made use of expert consultants,
but these are not a substitute for in-house expertise. Postcomm
had no staff with direct experience of the postal industry when
the Comptroller and Auditor General reported, and should seek
to recruit such staff.
Postcomm's decisions on the prices Consignia may
(ix) The most significant form of competition
is likely to be from firms entering the market to provide specific
services, which would use Consignia to deliver mail to the addresses
they cannot profitably serve themselves. The success of this form
of competition depends on the price and terms set for access to
Consignia's network. Too high a price for access to Consignia's
network would deter potential competitors, while if the price
is too low Consignia's viability may be threatened. Postcomm therefore
need to obtain a better understanding of what would be a reasonable
price for access to Consignia's operations and make clear how
such access will be facilitated and on what kind of terms.
(x) Consignia's ability to respond to competition
depends on whether it can re-balance its tariffs. In particular,
Consignia argues that it could only compete in some markets by
reducing the tariffs it charges and increasing other charges,
such as to domestic customers, to compensate. It is unclear, however,
whether Postcomm would allow such re-balancing within the requirement
to provide a universal service at a uniform price, and within
what timescale. The resulting uncertainty over Consignia's permitted
responses to competition is damaging both to Consignia and potential
entrants, and Postcomm should give clear guidance to the postal
industry on this issue in advance of further market opening.
(xi) In the longer term, Consignia's financial
performance and hence its viability as competition grows depends
on the price controls applied by Postcomm. The price control regime
may act as a further constraint on Consignia's ability to respond
to competition, particularly if prices are set lower than necessary
to finance the services its customers want. The fact that Postcomm
have not yet made any final decisions on Consignia's future price
controls is a further source of regulatory uncertainty.
Quality of Service
(xii) Consignia is considering abandoning
its target of delivering mail to domestic customers before 9.30
AM, and under the oversight of Postwatch,
it is piloting different standards in a few areas. Consignia think
this would help to achieve the efficiency gains it believes it
needs. There is a risk that unless implemented sensitively, however,
small businesses and people working from home could be disadvantaged.
Before agreeing to changes of this nature, Postcomm, with Postwatch,
should define and implement reasonably consistent standards of
universal service across the range of postal customers.
(xiii) Consignia has failed over the last
five years to meet its own target of delivering 92.5 per cent
of 1st Class mail the next day, although its performance
has been closer to this level in recent months and performance
has varied substantially across the country. Postcomm, with Postwatch,
should require Consignia to explain how and when it plans to eliminate
areas of particularly poor performance. It should use the performance
of successful universal service providers in overseas postal markets
as a benchmark in determining what higher standard postal customers
in the UK can reasonably expect.
(xiv) Postcomm recognise that to fine Consignia
when it fails to meet its service targets would simply represent
a transfer from one public sector body to another. They prefer
the introduction of a compensation scheme, through which users
of postal services who suffer from poor service, such as late
or failed delivery of mail, receive payment from Consignia. Such
a scheme has been under negotiation since March 2001, but Postcomm
have not yet reached agreement with Consignia on the details of
such a scheme. They should do so without further delay.