Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  60. I noticed in a newspaper report that industrial action and disruption to the rail network post Hatfield has cost the Post Office £88 million in profits. Is there any truth in that?
  (Mr Roberts) The figure of £88 million does not ring a bell with me at all. There is no doubt that the performance of the rail after Hatfield has had a major impact on our quality of service. Normally on the trains that we run—and we run something like 40 trains every night which are mail trains - the time performance is very important to us, obviously, because if the mail train arrives late it gives us much less time to get mail sorted and delivered the next day. Instead of running at about 95 per cent of trains arriving within ten minutes of the scheduled time, for something like three months after Hatfield it was down in the 50s and 60s per cent. Of course we are still looking in certain of the lines, mainly the West Coast line, at another few years before Railtrack believe that the system will be up to the kind of standard that we would like it to be. That has led us to think about the whole question of how we would handle mail in the future. I think £88 million is well over the top. Certainly we lost money as a result of that. Certainly we have the ability under the terms of the commercial contract to claim that back from the railway company and we have been doing that whenever we have been able to justify it.

  61. How much is that?
  (Mr Roberts) I would rather not say that, if I may, it is a commercial contract between us. I am happy, if you really want to know, to give you a note but I would prefer not to say it publicly.


  62. On the issue of competition, you have been losing business on that one as well. Hays have taken up contracts in London, Manchester and Edinburgh, as I understand. Has there been a sizeable loss of business or are they merely picking up the low hanging fruit?
  (Mr Roberts) There are six licences so far issued by the regulator of which, Chairman, as you rightly say, Hays is one. I think in the case of the first three that he has issued—TNT and Hays being the major ones—it more regularises things and services that have been done in the past rather than creating major new elements of competition. The latest one, UK Mail Limited, I think is more designed to look at certain areas of business, perhaps cream skim as I would have put it to you years before, but again it is very early days and I would not want to sit here and claim that we have lost vast amounts of business because of the small amounts of competition in the UK from these licences. Where we are far more under pressure, and I think this is important for the future, is there is no doubt that in international mail, which is much freer and has never been part of the monopoly, we are seeing, particularly with contract mail, much greater pressure on competition in price from people like Deutschepost, TPG, the Dutch Post Office, and even some of the others, La Poste, the French Post Office. People are coming into the UK. The UK is a net exporter of international mail. We are sending more mail out to those countries than they send in to us and, therefore, we are very good market for them to get into. I think it is in that area that we have seen the greatest competition and the greatest pressure on price. Our international service is certainly under pressure this year and was last year.
  (Mr Cope) Yes, it was last year. There is going to be some change. The licences have been put in place only for a very short period of time. In the last few weeks our sales forces have been feeling a bit more pressure from the Hayses of this world in terms of the cream skimming that John was talking about.

  63. Are you getting up a bit earlier in the morning then? What are you doing to counteract that?
  (Mr Roberts) In terms of our sales force we have obviously given them clear guidance about focusing, not entirely because it is still small, on the areas where we know we are going to be attacked by these companies and we have got to sell it on the back of the service we give. What it has done in a strange way is added even greater impetus to the fact that we have to get ourselves right because we are selling a service and if the service is not right—

  64. That is a justification of competition, of course, is it not, it spurs you into greater action?
  (Mr Roberts) Absolutely. And that is putting the kind of pressure on the organisation that it quite rightly should have on it.

  65. So are we seeing in the short period since this has happened improvements in the service of a kind that would make people think twice about going to an international competitor of yours?
  (Mr Roberts) These licences were issued in June and September and you are certainly seeing improvements in service. We were doing that anyway but this gives it added point. You have heard me say here before, and I have said it consistently internally, that the only way in which this organisation will survive and prosper over the next few years is if it is able to compete and, therefore, we have got to get our act right, and I say this to the unions. The kind of internal wrangling that we have had that you were talking about over the past 12 months, if we want to compete that has got no place in the organisation because it is like shooting yourself in the foot. Nobody is interested in our internal problems, they are interested in whether their mail is delivered reliably, predictably and at a price that they think is good value.

Mr Djanogly

  66. Just on that specific point. You have spoken about the advantages of competition, my understanding is that these licences are being done for a maximum 12 month period, is that correct?
  (Mr Roberts) Yes.

  67. That being the case, if people like Hays were given licences for, say, ten years where they could put in place a competitive cost base, in other words invest in the service, do you think you would have any chance of competing against them at all?
  (Mr Roberts) Yes, I think we would. It depends on how competition is introduced and we do not yet know that because the regulator is due to bring forward his proposals for much more open competition in the first quarter of next year. I have always said to this Committee and to other people that it is very important that we are able to compete on a level playing field. One of the things we have to do at the moment—

  68. It is not a level playing field, you have a big advantage.
  (Mr Roberts) We have a big advantage and we have a big disadvantage. At the moment we have the Universal Service Obligation, which is an advantage, but we also have the uniform price. We have to deliver at one single price throughout the whole of the country, our competitors do not necessarily have to do that, they can undercut our prices, and as far as I can see at the moment—and this is an issue we have to debate with the regulator—if somebody comes into a particular area and says "I can actually do this service for 25p as opposed to 27p", even if I wanted to reduce the price from 27 to 25 I am not sure that I can do that because I am supposed to be maintaining a uniform price across the whole of the country. The theory is that the uniform price enables us to make money on those routes, say London to London, where the actual cost is lower and the price margin is higher and not make money on those routes, say London to Scotland, where if we were charging the cost of delivering that letter it might be £1.50. We have got a number of things which the regulator has to take into account when he is looking at the way he wants to introduce competition. Of course, the length of the licence, the way in which the licences are issued, to whom the licences are issued and the way in which competition is introduced are all matters for the regulator and totally outside our control.

Mr Lansley

  69. You are free to make representations to the regulator about what you would wish to see happen?
  (Mr Roberts) Yes.

  70. Does it, therefore, follow from what my colleagues have been asking that you are seeking from the regulator an extension of competition, that you want to be able to demonstrate that you can compete, but on an obligation placed upon others, not simply to try and compete on price alone? If they are willing to compete on service then that is fine, why should they not be able to compete in any area of your activity?
  (Mr Roberts) We certainly make representations to the regulator. We are not making any representations about anything until we understand exactly how he wants to introduce competition. At the moment he is due to produce his consultative paper just after Christmas, that will give us a better idea of how he wants to introduce it. There have been all sorts of things talked about in the press from geographic competition to total competition. Once we understand the way in which that might come in then I think we can take a better view on our representations.

  71. You have made no representations to him yet?
  (Mr Roberts) He has had one consultative paper which came which said please would people like to tell him how they think competition should be introduced. That is now being looked at, he will then produce some proposals and we will make representations on those. On the first paper we made it clear, as we have consistently, that we think the best way to introduce competition is the way that the European Union is looking at it, which is reducing the monopoly by either price or weight, so you bring the whole lot down and open up the market. At the moment the monopoly is at 350 grams, so anything below that is in the monopoly. What we have said in the European discussions recently is if that came down to 100 we think that would be a sensible first step. In Europe the suggestion is then it would come down at a later stage to something like 50. We believe that enables people to look at what the impact of competition is on the market and in particular whether it impacts on our ability to deliver the Universal Service Obligation, because in the Act both we and the regulator have a duty to make sure that we are in a financial position always to be able to maintain that Universal Service Obligation. That is the way we have been putting forward our views on introducing competition and, of course, all our competitors will be making their points and we will wait to see what they have come up with.


  72. This is a rather leisurely process, is it not?
  (Mr Roberts) It is not my process, Chairman.

  73. I know, but it does seem that the speed is somewhat of a glacial kind as far as the regulator is concerned. You would think he would maybe take his job a bit more seriously and try to move more quickly. This idea of asking, he has got to show a bit of leadership surely. You are going to ask for the one that inflicts the least amount of pain for the longest period and has the longest lead-in time, surely.
  (Mr Roberts) I am not in the turkeys voting for Christmas category.

  Chairman: Especially when you have a chance of delivering them.

Mr Berry

  74. When you were talking about possible sources of savings, you referred to outsourcing of activities. Can I ask you what the implications of that are for Crown post offices?
  (Mr Roberts) I was not thinking of Crown post offices when I was talking about outsourcing but we certainly are franchising Crown post offices, so you could say there are similarities. We had a long period when we were discussing with the Government whether we should continue with the programme of franchising Crown post offices that started some long time ago. In the end, after the Performance and Innovation Unit Report on the whole Post Office network, we made it clear that we certainly saw something like 15 per cent of all volume continuing to go through Crown post offices. There are currently something like 590—
  (Mr Rich) 595.
  (Mr Roberts) 595 Crown post offices. That means you might be looking over time at something like a hundred of those perhaps being franchised. We only do it if we believe that we have a good franchise partner and a good opportunity to make the change. Where we have done it, we have normally done it by increasing opening hours, maintaining all the services that people get at that office but, as you probably know, putting them into supermarkets or putting them into convenience stores, and that we are continuing. I think in the last year or so we have probably done no more than a couple. I think it depends entirely on finding the right partner in the right place.

  75. If, for example, there was a proposal to close down a Crown post office and for the local Co-op to take over the service, would you expect that to be initiated by the local Co-op or Consignia? Would you advertise? Would you put out advertisements inviting people to take over the service?
  (Mr Roberts) Perhaps I can start and then ask Paul Rich to add. Over the years we have advertised for companies, individuals who might wish to take on post offices. So, we then have a fairly good database of those people who might be interested. Sometimes the process is initiated by us, sometimes it is initiated by them. If the Co-op or whoever is coming in to a new area they may say to us "Look, we are going to build a new store, we would quite like to build a post office into that store". If we have got a post office in the area, a Crown post office, maybe it is an old building, maybe it is in rented accommodation, maybe it is not now in the right place, we would certainly consider whether we would put those two things together. We do not have a process where we say "Oh, we want to get that one converted, franchised, well let us just advertise it". There are a series of discussions which go on. Over the years we have built up a lot of contacts with various companies, some of whom operate more than one Crown post office. We have been quite careful to make sure that when people do come to us and they have expressed an interest in taking this on, that they are reputable companies, they are financially solid companies, they are the kinds of companies which will maintain the service that we want to have in Crown post offices. They have to go through certain checks and tests before we even consider them, whether there was a specific case that we had in our hands at that time or not. Paul, is there anything you want to add?
  (Mr Rich) I think, as John says, we can either franchise with existing company partners that we already have, and that can be both a proactive and reactive process, or franchise with a new company partner which we may approach, say on a once a year basis, or franchise with an independent or even an existing sub postmaster. As John rightly says, we do not advertise in advance of the business case being done on a specific site before we enter into the consultation process.

  76. How do you ensure the widest possible publicity if a proposal like this is being considered so local consumers know what is going on?
  (Mr Roberts) There is a formal consultation process that we have to go through, something which we have agreed with Postwatch. That normally starts after we have a specific proposition that we know we want to make a change from here to put it into company X. At that point, the code of practice that we have agreed comes into operation and we follow that through. That is the point at which local consumers would be consulted or would get to know.

  77. Could you just remind me how long that consultation process takes? How many days, weeks, months?
  (Mr Rich) It will take at least a month for that consultation to happen and then consideration will be taken and once that decision has been taken the result is posted for at least one month in the existing branch.
  (Mr Roberts) We are probably looking at about three months.

  78. Three months?
  (Mr Roberts) About that, yes.
  (Mr Rich) From beginning to end.

  79. Are you aware there is a feeling in certain quarters that this consultation exercise is not taken seriously as a consultation exercise?
  (Mr Roberts) Yes.

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