Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



Mr Djanogly

  20. Good afternoon. You are clearly not a new business but you are a new company. You were created by the 2000 Postal Services Act which formed the Government's main attempt to reform UK postal services. Management were to get control over the key commercial decisions and to be able to raise money, if they so wished, on the markets, I think without permission was the original idea. My question is this: has this happened? Has what has been called part privatisation actually worked in practice, so far as you are concerned, to date? Could you explain the reality of the tensions of management working with Government under the new arrangement?
  (Mr Roberts) I do not think the intention was ever to allow us freedom to raise money on the markets. What did happen was that the regime was changed so that we had the ability to borrow money, up to £75 million a year, from the National Loan Fund at commercial rates to use for acquisitions. It was also made clear that if we had bigger acquisitions that we wanted to make for more than that sum then again we could put the case for that to the DTI and the Treasury with the predisposition that if it was a good commercial case, if it was showing the right kinds of returns, then the money would be available for borrowing, again at commercial rates and again from the NLF. So any borrowing that we have done has always come from the NLF and, again, that has come at commercial rates, but not from markets. Unless my colleagues correct me, I do not think it was ever the intention that we would be totally free to go to the markets, it was this kind of arrangement. Obviously at this stage you would have to say looking at the results that is not working, but I do think it is perhaps too early to make that kind of judgment. As you say, we have only been operating in this way for 18 months at the most. I do think that there are doubts. I do have doubts about the kind of model that has been developed. I think it is too soon to say whether those doubts are serious or not, but it is to do with the kind of thing I was mentioning to the Chairman a few minutes ago, which is this combination of how much freedom you have got on the one hand and how hard are you regulated on the other. There is nothing wrong with regulation at all, it has got to go hand-in-hand with freedom, but I wonder whether the balance is right. At this stage I would not want to say it is wrong because I just do not think we have been at it long enough. We have tried very hard, with the Government, to set out a different kind of relationship with ministers. One of the things that was said as part of the White Paper and then the Act was that the new relationship should be built around the five year strategic plan. The plan is updated annually, that is the major document for discussion between the board and the Minister. We have done that now for the last two years and we are about to do it for the third time early in the new year. It gives ministers an opportunity to go through all the key strategic areas with us and to comment on them or to give us views that they want us to take into account. That is working better and better and we do have sensible detailed discussions around the strategies. On a day-to-day basis with the civil servants we have tried to work out reducing the amount of information that used to flow from us to DTI when it was our formal sponsoring Ministry but, again, after 18 months, although I can see some improvements, I think both sides are still working at how this will operate. Certainly I think Members of the Committee will have seen ministers in the House of Commons from time to time saying "This is a commercial matter for Consignia" and those things are developing a little bit with custom and practice. At the moment we still have a sponsoring Ministry, or the shareholder Ministry. We have the regulator. We have the consumer body. We have the board taking the commercial decisions for the business. All of those stakeholders come into play at some time or another.

  21. If you had your time again what would you change? This kind of model is becoming increasingly relevant. We have Railtrack coming up and there are other things. How would you say it could be improved?
  (Mr Roberts) I have always taken a practical approach. There was an attempt by the previous government in the 1990s to privatise the Post Office which failed and it set the Post Office back for some time because we were marched up to the top of the hill and then marched down again. I have taken the view that you have to go with the views of the shareholder and certainly when there was a change of administration it was quite clear that particular way of governing the Post Office, privatisation, was not going to be on the agenda, and what was going to be on the agenda was some kind of freedom which was more limited than that and that is what this particular Government has introduced. I do not think it is a question of trying to do it better, I think you have to work at what is available and in terms of governance, the governance rules are set very clearly by the Government of the day. What we want to try and work with is this model and then try and see if we can improve it but again, let us be clear, we have been running it for 18 months and it is a big change for us and I would like to start disentangling what are things that we have to change internally in our own culture because coming out of 30 years of being a nationalised industry and then being asked to act commercially is not something you can just do overnight, there is an awful lot of people change and attitude change you have to go through. I am not clear how much of it is that as opposed to the relationships. I think for me the jury is still out and maybe at some point I can come back to the Committee and talk a bit further about that. I think it is just too soon to say.

Mr Lansley

  22. I am not entirely clear; perhaps you can help me. The six per cent annual increase in volume that you had previously, for how many years previously had that been your experience?
  (Mr Roberts) Mr Cope will perhaps help me as well. We had seen growth pretty consistently over the last ten years and I think over the last two or three?
  (Mr Cope) Yes, sort of four to eight per cent growth, that sort of range for about the last ten years now.

  23. Were you planning on the basis of four to eight per cent volume growth, within that range?
  (Mr Roberts) Yes. We were planning for about six.

  24. So when it fell to three per cent you had not planned for that?
  (Mr Roberts) Exactly.

  25. There was not a scenario in place for that. Presumably that was with a few months' notice. How can you plan ahead for five years? How can you have a strategic plan if the numbers can go so wrong so quickly in relation to a false assessment of growth and volumes?
  (Mr Roberts) If you take a long period, we had a very close link with GDPL, those are certain elements of the GDP calculations which relate to an industry like ours. We have been able to track pretty clearly the kind of growth patterns that we have had along with the growth in GDP, very, very close correlation. So that becomes the base for the kind of assessments you make. This year that pattern has been broken and it has been broken, I think, for the back end of this year, start of this year, that was the first time that pattern had really been broken. Our volume projections over the last five years have been pretty accurate.

  26. Sorry to interrupt, to what do you attribute that disjuncture?
  (Mr Roberts) Some kinds of changes in the economy, slow down in economic activity.

  27. It cannot be a change in Post Office perceived service levels?
  (Mr Roberts) It could well be, yes. It could well be our internal industrial action at the start of this year where we lost an awful lot of days. It could be e-substitution, greater use of mobile telephones, a change in customer's habits of sending small messages. The thing we have seen quite markedly from about the middle of the year, even before September 11, has been a slowing down in advertising activity, the advertising market as a whole is now pretty flat. What we are seeing is through advertising mail for the first time, that has been double digit growth over the last couple of years, that is coming down to something like a six per cent growth, so we have had a number of factors at play. While our estimates in previous years have been proved good, for example we are now reducing quite substantially our view of what might happen over the next five years. We have seen this year it is very much a turning point from the kind of levels of growth we have had over the previous five years to what we might expect over the next. The biggest issue of all for us is e-substitution, how quickly and how deeply will technological change impact on the historic patterns of mail posting and mail growth. It is very difficult to forecast it. We have probably been going about, in our view, one per cent per annum that we are losing through e-substitution but we think that will increase maybe to one and a half per cent per annum over the next five years.

Sir Robert Smith

  28. You said one of the reasons you thought there was the break with the link between your performance and the GDPL was the change in the economy, presumably GDPL moves with the economy.
  (Mr Roberts) Yes, it does. We have moved lower than that. We have seen the impact of the economy and then there is something else beyond that.

  29. Something more structural?
  (Mr Roberts) Yes.

  30. You are really in quite a dark area of forward planning?
  (Mr Roberts) Yes, we are, but I think the main thing is that we are still growing. We are not, as some of my colleagues in other countries are, into absolute decline in mail, we are still growing at about three per cent in volume terms, that is our best estimate for this year, and that is the kind of trend that we have had over the first six months of the year.


  31. You were talking about culture and the need to change from the cosy world of public enterprise to private enterprise. You were talking about making savings and you have indicated some of them. You are also going to be looking for sizeable redundancies. Where will these be found? What are the numbers we are talking about?
  (Mr Roberts) We have not finalised numbers. If I give you a broad feel, Chairman.

  32. We appreciate there are people who have to be informed and important delicacies.
  (Mr Roberts) If we produce the £1.2 billion, we could be looking at anything up to about 30,000 redundancies. Can I say that in both our mails businesses—parcels and letters—wastage rates in an industry like this are very high. In parcels we have a wastage rate of about 20 per cent per annum and in mails it is running at about eight to ten per cent per annum. So the way we want to approach this is by looking first at wastage rates and contracting in that sense and then looking at voluntary redundancy and redeployment across the whole of the group. The Post Office, as I know you know, employs about 200,000. Consignia employs about 200,000 people.

  33. We would be quite happy for you to call it the Post Office.
  (Mr Roberts) Yes, I know you would. I am trying to change the habit of 30 years, it is very difficult. The issue for us is redeployment within the whole of the group and voluntary redundancy and then, as I said, starting with wastage rates.

  34. This figure of eight to ten per cent, that masks regional variations?
  (Mr Roberts) Of course.

  35. I was in my local sorting office yesterday in Alloa and there the turnover is very low because unemployment is quite high.
  (Mr Roberts) Yes.

  36. I know that 35 miles down the road in Edinburgh the situation is different, it is different in a number of other places. How are you going to handle that side of it? You cannot have a one size fits all redundancy programme when there are a lot of people who are loyally hanging in there? In other areas it is quite easy because you do not recruit for a couple of weeks.
  (Mr Roberts) That is why I think the impact will be different too between the small offices and the bigger ones. In many of the bigger centres, as you quite rightly say, those are the ones that have the highest turnover. We do not yet know how the pattern will flow. The point I want to make though is we are now being asked very clearly to operate as a commercial company. You started your questioning, quite rightly, by commenting on the very poor half year results. Like any company we have got to try and get that right. Mr Hoyle also rightly said to me that surely price is not just the answer, no, it is not, and therefore we have to look at the cost base. Seventy per cent of our costs are labour costs and if we are faced with the kind of decline in mail volumes that we are looking at, one of the key things for us is, compared to many of our competitors, in the short run our variable costs are probably not much more than five per cent, many of our competitors are at 25 per cent because they have different methods of working. What we are trying to do is not only reduce the overall cost base but through different working methods make it more cost variable. Those are the two things that we will have to do if we are seeing over the next five years a much lower level of mail growth than we have had in the past.

  37. How many jobs have you shed this year already?
  (Mr Roberts) In total, and a lot of them are more administrative and management jobs, we must have shed something like 4,000 or 5,000 in the Mails business.
  (Mr Cope) A bit less than that.
  (Mr Roberts) Probably about 2,000 in total.

  38. There is the other problem, is there not, that you start shedding labour to save money but you then undermine the service, so you have got the joint challenge of making the economies but at the same time sustaining the service with fewer people?
  (Mr Roberts) Yes, we are and, of course, that is what we have managed to do during the year. While we started with a low base coming off the back of industrial relations issues in the early part of the year, first class service between the quarter just finished in September and the previous one has gone up by about 4.2 per cent. At the moment we are seeing both of those things happening. I absolutely accept that what we have got to do is manage both the finances of the business and the service of the business. We are, at the end of the day, a service business and if we are not producing the service all that is going to do is create greater pressure on the finances.

  39. And you will not be able to increase the price of stamps either because your service will not be—
  (Mr Roberts) That would be part of the argument, the efficiency and service. Yes, we are very focused at the moment on actually getting that first class quality up to the target levels that we have been set. In second class service it is at those levels and we want to maintain it there and try to improve it. It is the first class service that has given me the continuing problem but it is improving quarter-on-quarter.

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