POSTCOMM: OPENING THE POST
16 Postcomm's primary duty is to ensure the continued
provision of the universal service at a uniform price. One of
their further duties is to exercise their functions in a manner
best calculated to further the interests of postal users, wherever
appropriate by promoting effective competition. The Comptroller
and Auditor General's Report set out the risks to Postcomm's ability
to meet these duties. The main risks to the introduction of effective
competition are that there may be insufficient competition to
generate an improved service to most customers, and that the introduction
of competition could result in a breakdown of a universal service
at a reasonable uniform tariff.
In the light of these risks, we considered Postcomm's proposals
for the introduction of competition published on 31 January 2002.
These proposals involved a significant increase in the area of
the postal market open to competition, including a full liberalisation
from April 2002 for bulk mailings of more than 4,000 items. Their
proposals envisage a phased introduction of competition:
from April 2002 to 31 March 2004:
An initial stage of market opening involving issuing Large Mailing
licences (involving bulk mailings of over 4,000 items) and Consolidation
licences (through which competitors would provide mail to Consignia's
from 1 April 2004 to 31 March 2006: A
further liberalisation of bulk mail, involving bulk mailings of
over 1,500 items.
after 31 March 2006, all restrictions
on market entry would be abolished.
17 These proposals differ from the European Commission's
proposals for liberalisation of mail markets within the European
Union. In October 2001, European Union Ministers agreed to start
liberalisation across the European Union from 2003. Under these
proposals, which have now been submitted to the European Parliament,
Member States would have to open up to competition:
from 2003, letters weighing more
than 100 grams or more than three times the price of a standard
from 2006, letters weighing more than
50 grams or costing more than two and a half times the price of
a standard letter.
18 Consignia told us that it was content with the
timetable and type of liberalisation proposed by the European
Union, which in its view had the benefit of being a fairly clear
change, with a fairly clear effect on the company. By contrast
Postcomm's proposals were, in Consignia's view, more difficult
to model, had not been tried elsewhere in the world and would
be difficult to reverse. Furthermore, the company said, they would
lead to greater access to the United Kingdom market for some of
Consignia's key competitors, who include subsidiaries of the privatised
Dutch and German post offices, than Consignia would have to those
competitors' home markets.
19 In Postcomm's view, Consignia's current monopoly
was not working well, a view which the evidence suggests and which
we share. They considered that competition represented the best
tool available for the improving the company's efficiency, and
we agree in principle. In drawing up their proposals for competition,
Postcomm had analysed the risk identified in the Comptroller and
Auditor General's Report that the introduction of competition
could result in a breakdown in the delivery of a universal service
at a reasonable uniform price. They told us that their proposals
successfully avoided this risk for three reasons.
20 Firstly, Postcomm told us that in their view competition
would come in quite slowly. Consignia delivered 80 million items
each night and no competitor could take a significant share of
that volume quickly. They considered that Consignia had significant
advantages over potential competitors, especially its provision
of a universal service, which represented a very significant asset
and benefit. In Postcomm's view, any incoming operator would have
to deliver everywhere in the country to take significant levels
of business from Consignia. This was because, in their view, large
mail users would prefer to avoid having to segregate mail between
that to be delivered by Consignia (who can deliver everywhere)
and that to be delivered by a competitor (who may only deliver
in parts of the country).
21 Postcomm's view that "cherry picking"
- when competitors take only the most profitable business from
an incumbent, leaving the incumbent with low margin and loss-making
business - is unlikely rests on their analysis of the nature of
mail flows in the United Kingdom. The net flow of mail is from
large business users of mail services, who originate 86 per cent
of all mail, to domestic consumers, who receive 67 per cent of
mail (see Figure 3). Postcomm therefore considered that most large
customers - for example banks and utilities - would wish to contract
with a postal operator capable of delivering to all of their customers
throughout the United Kingdom.
Figure 3: Mail flows in the United Kingdom
National Audit Office, Opening the Post: Postcomm
and postal service - the risks and opportunities (HC 521,
Session 2001-02), Figure 4
22 We asked Postcomm whether competitors could simply
put a stamp on mail for more remote addresses or costly types
of mail (such as non-machine readable mail) for Consignia to deliver,
while making lower cost deliveries themselves. They told us that
they did not consider that this would represent an intolerable
burden for Consignia, given the small net cost of providing universal
service at present. On the other hand, Consignia said that it
would be entirely possible for competitors to Consignia to utilise
technology to segregate bulk mailings (from banks, financial institutions,
utilities and so on) into two streams: one which they would deliver
themselves, and the other which they would pass to Consignia to
deliver. Consignia added that competitors would not seek to compete
head on with Consignia, but rather to identify those routes (for
example London to Birmingham) on which they could get the most
traffic for the least cost.
23 Secondly, Postcomm told us that they had concluded
from their examination of international experience that the introduction
of competition did not lead to significant loss of market share
for the incumbent postal operator. Postcomm considered that the
experience in Sweden, which had removed the incumbent's monopoly
entirely, supported their arguments in favour of liberalisation.
But Postcomm acknowledged that the Swedish postal operator had
recently dipped into loss, its prices had risen and a quarter
of its workforce had lost their jobs.
Consignia confirmed that in Sweden, while prices for computer
addressed mail had fallen by 43 per cent, prices for mail posted
by households ("consumer mail") had increased substantially.
Consignia said that those countries where full competition had
been introduced - New Zealand, Finland and Sweden - were small
in postal terms, and were not good examples for a country like
the United Kingdom.
24 Thirdly, Postcomm rejected the view that the provision
of universal service represented a costly burden for Consignia.
Their own analysis showed that the net cost to Consignia of providing
a universal service was £81 million a year,
and that the most significant element within this cost was not
geography (such as deliveries to rural or deep rural areas) but
whether mail was capable of being read by automatic sorting machines,
with non-machine readable mail representing the most significant
element of cost within the provision of universal service.
Consignia subsequently supplied us with figures for the differential
unit costs of rural and urban mail deliveries which stated that
the cost of delivery alone (that is, excluding collection, sorting
and transport costs) is 29 pence in rural areas and 4 pence in
urban areas. Since
86 per cent of mail is sent by businesses, it is clear that they
and not the public are the main beneficiaries of the cross subsidisation
of the rural delivery.
25 Postcomm have supplemented their analysis by commissioning
Andersen to assess the potential impact of competition on Consignia's
financial position. Andersen constructed a Base Case for Consignia's
financial performance for each of four scenarios for market opening,
(no further liberalisation; the European Commission's proposals;
full liberalisation from April 2002; and Postcomm's current proposals)
and also conducted sensitivity analyses for each. Their main conclusions
were that the nature of competitive entry has a material effect
on liberalisation results, but that Consignia could face bigger
challenges than liberalisation if it failed to improve efficiency.
Consignia told us that it had some concerns about the financial
modelling conducted by Andersen. The company said it had adopted
a different approach to the modelling of universal service which
examined the extent to which it would lose the profitable parts
of its business once competition is introduced. This modelling
approach produced an estimated loss in profits of up to £750
million based on a comparison of the company's profits before
and after liberalisation.
26 The differing conclusions drawn by Postcomm and
Consignia arise from very different approaches and assumptions.
For example, Postcomm and Consignia do not agree on the percentage
of Consignia's mail revenues that would be exposed to competition
under the first stage of Postcomm's proposals: Postcomm say 30
per cent and Consignia say 40 per cent. Consignia told us that
Postcomm had arrived at their figure from information supplied
by Consignia for other purposes, but after Consignia published
their proposals Consignia reviewed what the figures should have
been and came up with the higher figure.
Postcomm also told us that they had been consistently sceptical
about Consignia's assumption that the ratio of fixed to variable
costs was 40 per cent, given that facing up to the burden of a
fixed cost base was a crucial part of any competitive organisation.
27 Part of the explanation for these conflicting
estimates and conclusions may be the management information available
to Consignia. For example, Consignia told us that it did not know
the differential unit costs between rural and urban services.
The company told us that its systems were suitable for a state-owned
monopoly, but that Postcomm wanted information in a quite different
way. It was, however, in the process of developing systems to
enable it to estimate the costs of sending specific items of mail
from one location to another. Postcomm agreed, saying that one
of the problems they had faced was that in many areas, Consignia
did not have costing information, in particular on attributing
costs to income streams. We find it alarming that in so many areas
not only is there disagreement on the right way forward between
Consignia and Postcomm, but they do not even agree on the facts
underlying their business assumptions. There is in our view potential
for wrong decisions to be taken, with disastrous results.
28 At the time of the Comptroller and Auditor General's
Report, while Postcomm's staff had considerable experience of
economic regulation, none had direct experience of the postal
business. We asked Postcomm about the level of knowledge of the
postal industry among their staff. They told us that as a result
of visits to postal facilities, and meetings with management,
staff and unions, they had built up a good knowledge of the business.
27 C&AG's Report, para 14 Back
Postcomm, Proposals for Promoting Effective Competition in
UK Postal Services, 31 January 2002 Back
Letter from Consignia to Members of Parliament, 6 February 2002
(not printed here) Back
Qs 183-184, 445, 196-197 Back
Ev 53, Appendix 3, para 3a); Q1 Back
Qs 4, 172, 65, 77, 81 Back
Qs 65, 77 Back
Qs 172-176, 326, 448 Back
Ev, Appendix 3, Annex A; Qs 97-100 Back
Qs 309, 344 Back
C&AG's Report, paras 2.22-2.25 Back
Qs 64, 81 Back
Ev 51, Appendix 2 (ref to Qs 278, 287-288) Back
Andersen, Sensitivity analysis of the impact of liberalisation
on the financial performance of Consignia and its business segments:
a summary report prepared on behalf of Postcomm, 31 January
2002 (not printed here) Back
Qs 238, 576, 571 Back
Ev 53; Qs 260-263 Back
C&AG's Report, para 2.32; Qs 83, 129 Back
Qs 279, 351-352, 26-27 Back
C&AG's Report, para 1.30; Q104 Back