House of Commons - Public Accounts

Select Committee on Public Accounts Thirty-First Report

POSTCOMM: OPENING THE POST

CONSIGNIA'S PROVISION OF A UNIVERSAL SERVICE AND CURRENT PERFORMANCE

6 Postcomm's primary statutory duty is to ensure the continued provision of a universal service at a uniform tariff. Consignia is required to provide such a universal service under the licence issued to the company by Postcomm[5] and it is at present the only postal operator which faces this universal service requirement. The provision of a universal postal service at a geographically uniform tariff has been included in both statute and Consignia's licence because it makes an important contribution to the United Kingdom economy. It means that individuals and businesses can communicate relatively easily and cheaply, ensuring a flow of information, payment and, in many cases goods, around the economy. Postcomm's memorandum to the Committee emphasised the benefits to customers of the uniform tariff requirement in terms of convenience and simplicity.[6]

7 As Postcomm confirmed to us, the cost of posting a standard letter in the UK is relatively low. The cheapest 1^st Class tariff applies to items weighing up to 60 grams, whereas in many other countries, such as the United States, the cheapest rate applies only to items weighing up to 20 grams. Up to 60 grams, the UK is cheaper than Germany, Italy, France and the Netherlands, and between 20 and 60 grams the UK is also cheaper than the United States.[7] Surveys of users of postal services commissioned by the National Audit Office show that over 60 per cent of large business users are either satisfied or very satisfied with Consignia's services, and more than 75 per cent of domestic customers consider that 1^st Class mail offers good or very good value for money. Postcomm acknowledged that there was some evidence that customers were prepared to pay more to have a better quality of service. In our view, these are high satisfaction levels for a major service provider.[8]

8 Consignia is a company with significant commercial advantages, including an extremely well-known brand in The Royal Mail, and exemptions from VAT and parking restrictions.[9] Postcomm described it as a company with inherent strengths, having an unrivalled knowledge of its industry, an immense degree of customer loyalty, a largely committed workforce and an extensive retail network. Postcomm added that until recently the company had been amongst the best, if not the best, postal operator in the world.[10]

9 Consignia has, however, suffered from a series of problems in recent years. It faces difficulties in recruiting and retaining staff, especially around London and seasonally in other parts of the country, such as coastal resorts.[11] It has suffered from deteriorating industrial relations, with 60,000 days lost to industrial action in 2000-01,[12] and has failed to meet its own quality of service targets.[13] The disruption in the rail network has added to problems although these should not be permanent. Postcomm said that Consignia appeared also to be suffering from inefficiency in that many of its postal vans were running around half empty and that the major sorting centres were probably only operating at 65 to 70 per cent efficiency.[14] Consignia agreed that the company had probably been overmanned in the past and added that monopoly inevitably produced less pressure for improved efficiency than competition, and that its analysis of privatised postal operators in Germany and Holland had led the company to seek reductions of 15 per cent in its cost base.[15]

10 Postcomm have analysed Consignia's efficiency and concluded that there is substantial scope for efficiency gains. Postcomm commissioned advice from two firms of consultants, Frontier Economics, who estimated potential efficiencies on the basis of international experience of market liberalisation in the postal and other industries, and WS Atkins, who estimated the potential for efficiencies from a detailed analysis of the nature of Consignia's mail operations. Both sets of consultants concluded that there was considerable scope for ongoing efficiency improvements.[16] Their findings are set out in Figure 1.

Figure 1: Advice to Postcomm on potential efficiencies that Consignia could achieve

Consultants	2002-03	2003-04	2004-05	2006-06	2006-07	Assumed annual rate thereafter
	%	%	%	%	%	%
Frontier Economics	10	7	4	4	4	5.8
WS Atkins	4	7.5	10	7.5	4	6.6

Postcomm: Proposals for Promoting Effective Competition in UK Postal Services (31 January 2002), Table A1-4, Efficiency profiles

Note: The differences in the estimates produced by Frontier Economics and WS Atkins are a result of the different sources of evidence they considered, and their focus on slightly different elements of Consignia's business.

11 Consignia gave some reasons which it believed had constrained the company in improving its financial and operational performance:

— Consignia's ability to deliver the mail effectively depended on motivating a very large workforce, but many of these were on low wages. As an example, the starting pay for a postman or postwoman in London was £12,500 per annum. Its pay rates had had to reflect public sector pay constraints even though the company had been profitable and could have afforded to increase pay.[18]

— Consignia had had only one increase in the price of 1^st Class postage in the last five years representing a fall in real terms of about 8 per cent, coupled with a slight reduction in the price of 2^nd Class post. In effect, therefore, while salary costs rose broadly in line with inflation, prices had not, and as a result, its profits had been £400 to £500 million lower than they would otherwise have been.[19]

12 The company also faces external challenges. In Postcomm's view, customers were looking for greater reliability, choice and innovation, and postal services were facing competition from electronic alternatives. At the same time, the overall volume of mail produced by the economy had increased significantly, reflecting a close relationship between the growth in mail traffic and the growth in Gross Domestic Product. For example, some local delivery offices, which ten to fifteen years ago might have received six or seven sacks per day, now received forty. As a result, it now took longer to sort the mail.[20]

13 The composition of the growing volume of mail has been changing, with very rapid growth in bulk and advertising mail (almost 12 per cent per annum) and much slower growth in mail originated by households. As a result, Consignia has relied increasingly on the growing segment of the market for its revenue. The company told us that it had established the revenue forecasts in its budgets a year in advance on the assumption of continued growth of 12 per cent a year. Over the last 18 months, the growth in these markets has started to fall off, to only 5 per cent a year, in a way that Consignia considered to be unprecedented, resulting in revenues £320 million less than budgeted. The company told us that it had not been able to reduce its cost levels as fast as the revenue levels had fallen short and that, in essence, it had taken on too many staff because of its assumptions on mail growth.[21]

14 These changes have contributed to a rise in operating expenditure of over 12 per cent, or just under £1 billion, in the last financial year.[22] Consignia mentioned a series of other factors contributing to the increase in costs, including a new agreement between European postal operators on the pricing of international mail (which added £137 million), a new productivity agreement with its main trade union (around £100 million) and the ongoing costs of the Horizon IT project for the Post Office Counters business (around £100 million).[23] A full breakdown of the increase in costs is given in Figure 2. Consequently, Consignia lost £403 million in its last financial year and by March 2002 was losing around £1.5 million a day. These losses have arisen in spite of steady growth in operating income, which rose by 7.9 per cent in 2000-01.[24]

Figure 2: Increases in Consignia's costs between 1999-2000 and 2000-01

	£m	£m
1999-00 Net Operating Costs (before exceptional items)	7,141
Pay increases		110
Inflation on non-staff costs		75
Costs associated with growth in mail volumes of 2.7 per cent overall		50
Investment in mails staff efficiency initiatives		108
Investment in technology infrastructure		41
Transport costs		53
Horizon costs		75
International conveyance increases		137
Other changes		149
2000-01 Net Operating Costs on a like-for-like basis (before exceptional items)	7,939
New costs from acquisitions		167
2000-01 Total Net Operating Costs (before exceptional items)	8,106
Increase 1999-00 to 2000-01	965

Supplementary memorandum from Consignia plc (Ev 51, Appendix 2)

15 Consignia has reacted to its financial position by announcing, in March 2002, the first stage of a significant restructuring of its businesses which is ultimately intended to reduce its cost base by £1.2 billion. The first stage involves a restructuring of the loss-making parcels division and a rationalisation of transport operations. Consignia told us that it expected the first stage to produce a reduction in its workforce (totalling over 200,000) of around 15,000, and it estimated that the whole restructuring programme would cut around 30,000 jobs.[25] Consignia acknowledged, however, that, beyond the expected impact of their current restructuring proposals, the introduction of competition could lead to up to 15,000 additional job losses, making a possible 45,000 in total. Consignia noted that this was a rough estimate based on its modelling of the impact of competition and it assumed that the estimated loss of profits from competition would have a similar impact on jobs as the already announced programme of cost reductions. The additional 15,000 comprised two elements: 10,000 job losses, which it estimated as resulting from the European Union's proposals for competition, and a further 5,000 job losses as a result of the additional liberalisation proposed by Postcomm. Consignia added, however, that these figures would apply only if the company was not able to reduce its costs in any other way, or increase its revenue, and that the losses would therefore be unlikely to be that high.[26]

5 Licence issued to Consignia, 23 March 2001 Back

6 Ev 54, Appendix 3, para 5b) Back

7 C&AG's Report, para 1.11 and Figure 6; Q47 Back

8 C&AG's Report, para 1.10; Qs 18, 68-69 Back

9 C&AG's Report, paras 2.10, 2.17; Q25 Back

10 Qs 1, 3 Back

11 Qs 29-31 Back

12 C&AG's Report, paras 1.16; Qs 535-536 Back

13 C&AG's Report, para 9 Back

14 Qs 125, 130 Back

15 Qs 218-219 Back

16 Postcomm, Proposals for Promoting Effective Competition in UK Postal Services, 31 January 2002 Back