Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 60-79)



  60. Where are you at in terms of convincing the regulator on these figures? Are you in any kind of dialogue with the regulator?
  (Mr Sweetman) On Friday we submitted our formal response to their competition proposals and we are commencing a dialogue with Postwatch and Postcomm to come out with, hopefully, an agreed way forward. The commissioners of Postcomm at their main meeting are taking our evidence and all the other evidence which has been submitted to them. Separate from that we are in weekly dialogue with them on many issues on a one-to-one basis and on a formal and informal basis, so there are many avenues where we can provide them with much more detailed information that they want for their proper consideration and facts.

  61. It seems crucial to a lot of us in rural constituencies to get this right because, unless you have the money to pay for the rural service, the rural service is going to suffer?
  (Mr Sweetman) One of the key issues which is very difficult is that within our universal service we have uniform pricing and within that there are cross subsidies, customers, regions—many ways where segments cross-subsidise each other—and one of our concerns is that, with the introduction of competition, competitors will come in and seek out the higher margin, the geographic areas, the products, the customers—however they see market opportunity—and, using our phrase, "cream skim", "cherrypick". That is what commercial people do: they look for the high margin. If that high margin is extracted within the context of the liberalised market then that margin, penny-for-penny, moves from us to them. When it moves from us to them, our source of cross-subsidy of the more expensive routes, more expensive customers and destinations, is removed and what we have seen in other markets is a move to a more cost-reflective pricing. We are not proposing that yet but it is one of the consequences of liberalisation that we have to get to a working arrangement with.

  62. Do you think that the European way of legislation allows cross subsidies from those who have cherrypicked, and do you think the Government ought to look at this in terms of legislation in this country for that?
  (Mr Sweetman) The way it has been agreed across Europe is our preferred way. Any introduction of competition is a step into the unknown and nobody knows. We have vastly detailed models which predict; Postcomm have produced their own; but nobody knows. So I think the pace at which European proposals have been put forward and the reviews which are scheduled to take place to measure the impact on the Universal Service is a safer way forward and removes uncertainty and risk. If things happen too fast and the genie is let out of the bottle, you cannot put the genie back in the bottle and I think that is our concern.

Mr Hoyle

  63. Have you done any cost analysis between delivery in urban and rural to show that there really is a cost because somehow, when we have met with Postcomm, they believe it is all profitable, and I do not think they take into account the fact that they have to collect from rural areas as well as deliver with the add-on of providing bus services and all the other things you are involved with in rural areas. Could you let us have that information?
  (Mr Roberts) Yes.

Mr Lansley

  64. You responded, you say, last week to Postcomm in terms of their proposals for the introduction of competition. Would it be true to characterise your attitude to competition as being a little like Saint Augustine's to virtue—that is, "Make me virtuous but not yet, oh Lord"?
  (Mr Leighton) Simply put, there are three issues—pace, price and performance. To take the pace point, which is the speed of introduction, my whole background is competitive markets, so am I particularly worried about competition? No, because that is what makes businesses thrive and prosper and it tests that they are any good or not. Should we, with the business we have, with three great brands, a pretty good infrastructure, some pretty competent people and 200 or 300 years of advantage be able to compete in a market where we still have the dominant share? Yes. That is where we should be. The issue for us is it has come at the wrong time and that is always the case, and the reason is that the business is financially not in a very strong position. Our own view is that, for competition to work, it requires a strong Consignia—that is a big part of making competition work. The issue we have in the pace sense is that, if it comes at the pace which is the European pace, it puts us under some pressure and to do it any faster would put us under even more pressure at a time when we are not in a great position to manage that. So are we worried about competition? No, it would be good for us, and we have all said from the outset that, if competition is going to come, the one thing about it is certainty. So it is here and we have to fight with it, but the issue for us is one of timing.

  65. But, as somebody who has worked in competitive markets, is it not your experience that it is under competition that efficiencies and change can be effected rather than in advance of it and in the absence of it, and is it not better for you to have competition and responses in those circumstances rather than have a further delay? Is it not true to say, and here it is in a sense for your colleagues more than you, that in 1999 when the White Paper was published it was perfectly clear there would be competition and that some of these information deficiencies and cost changes had to occur, yet 2000-01 was a year when costs rose way in excess of volumes and revenues? In July 2000 it was perfectly clear that one of the options the regulator was going to look at was opening up the market by category of bulk mailings and so on, rather than simply on the European pattern. Why was the action not taken then? Why should you get another year now?
  (Mr Leighton) John will talk on the second piece because, to a degree, how we have got here is not an issue for me. The issue for me is how we will survive through it and how we come out at the end. The ambition is to restore ourselves to being the best postal service in the world, which we were, so you can argue this either way. Clearly you would expect us to argue at a stage and say is this the best time for competition to be opened up at a greater rate than it is in the rest of Europe for us as a business now? No, it is not. Secondly, do I think that where we are is to do with our cost base? Yes, it is. Is the cost basis too large for the business we have? Yes. But at the same time do I think, going back to value, that the First Class stamp at the price it is today and the Second Class stamp at the price it is today is fantastic value? Yes, I do. It is one of the best value items that anybody can buy in this country. You can buy that, put it on a letter, and it arrives the next day before midday in 90 plus percent of the cases. That is incredible value. So that is why I am saying, Okay, if it is going to open up at a pace, then allow us to play with our marketing mix, of which price has to be one. There has been one price increase on First Class in the last five years and the Second Class stamp has gone down. So on the one hand we are being hit for our costs, and I absolutely understand that and we have a programme that at least people give us some credit for now which we started, which is to start to take costs out of this business, but at the same time we need to be able to play with little bits of our marketing mix, and price is part of that. So we cannot be hit by everything. We cannot let people come in at twice the pace and say, "By the way, you can't go into their markets and cherrypick their business in the same way"—not that we could anyway because we are not up for it—and the second thing is, "By the way, we will let you know about price down the track". Well, the only two things I know you can compete with are cost and price, and that is the simplicity of where we are.

  66. Do you not think it is rather emblematic of what your response should be that some of your most important customers, the Mail Users' Association, have reached the view that there is a greater danger even to the Universal Service Obligation in due course from the absence of introduction of competition to the Post Office at the earliest moment rather than a danger to that Service from it being introduced quickly? Should not you go with your customers? Is not that the essence of what you should be doing; listening to your customers and responding—and your customers are saying, "Let us have competition and let us have it quickly"?
  (Mr Leighton) It depends on which side of the fence you are. Any customers are clearly going to argue that competition is going to be good for them because they think in the end it makes everybody sharper and makes their prices go lower, in essence. That is always the way it has been driven. Our debate is not with competition—the only thing about it is its certainty. Our debate and our proposal, which was pretty straightforward, says why do we not just go at the same pace as everybody else? Why should we be different in terms of the pace of entry because that has an impact on us? Secondly, can we adjust our prices accordingly? Thirdly, on our network access, which is quite important for us, why not use this as an opportunity for us to generate some revenue and profit and open up that last mile, which in many ways is the most difficult thing to do, which nobody else has been able to do from the outset in terms of businesses that become regulated, and fourthly, which everybody forgets, we are going to improve our service levels, because this is not all one way. This is not "Hang off us, give us a price increase and the service will go down"; it is, "Stay with us, give us some opportunity with the rest of Europe, let us do some pricing and we will improve our service levels". My point is you cannot do just one of the things; you have to do all of them. In many ways, the reason we put the proposal in is common sense. It has not put its hands up and said, "Not at any cost": it has tried to put forward some proposals which incorporate speed, price, network access and improvement in service levels.

  67. Do not you think your response to Postcomm should not be to say, "Go back to the EU approach", but to say, "You are right: for our customers we want to have competition opened: we want to have it opened in a way that is relevant to customers: the categories mailed to and supplied to us", and so on and engage Postcomm in a more productive discussion about things like network and access charges. There is no basis really for most of the negative answers you have given to Postcomm, because the information simply is not there. You cannot say that competition is a threat to the Universal Service Obligation unless you know whether the Universal Service Obligation is a benefit or a cost in the first place, and unless you know what sort of revenues are generated from given types of mail and the volumes which they represent, which clearly there was a debate about, and unless you know what the network access charges are going to be so that, if other competitors are increasing volumes, you get a share of that as well. All of this is not determined yet. Should you not be saying to Postcomm not, "You have come up with something we do not like, go away" and trying to manage a reaction to Postcomm, but "We agree with you, we want to get there"?
  (Mr Leighton) What I would slightly disagree on is the way we went back to Postcomm is to try and do it in a positive way. We have said on network access, "Here is our proposal and this is what we think the price should be". We have said on service levels, "This is what we will do with service levels". We have said on price why we think we should adjust our prices, and we have said on speed of entry certain things. So it was very important for me to try and take this back in more of a positive than antagonistic way because that does not help anybody any of the way round. I hope that when Postcomm colleagues come on they will say in terms of our response that we are trying to do it in a way which is positive in terms of its recommendation rather than just "Give us a break", which is often the way it is defined.
  (Mr Roberts) Adding to that, you have been talking about business customers. There are two types of customers—there is the business customer and there is the individual residential customer. One of the things that concerns us, certainly me, is that everybody always quotes Sweden as the best example—and I normally say it is not but this morning I am going to say it is because it helps my argument—and in Sweden prices went up 72 per cent in about the last six or seven years. Business prices went down 20 per cent, and the issue was this rebalancing of price between the two main constituent customer bodies. So to a certain extent, if I can match your quote with another one, "They would say that, wouldn't they" in terms of wanting to open this up and I quite understand why. Our view is, and I think this came out of the work that was done for the Public Accounts Committee, that you can model till the cows come home but nobody actually knows what the impact of this regulatory regime will be because nobody else in the world is introducing regulation in this way into the postal market. Therefore the argument for us, coming back to the pace point, is that one of the things that is attractive about the European model is to open the market up to a certain extent, do the studies which have been standard European practice in the past to make sure the USO is still covered and everything else. If it is—fine, we would have very few arguments about why do you not go to the next stage and open it up much more widely? Our concern about the way Postcomm are proposing it is that it is not competition itself. I agree, coming from my background, it is about the speed with which it will be done, and in our view the whole market will be opened up within two years because of the way not only bulk mail will then reduce from 4,000 items at the first level down to between 500 to 1,000 but, more importantly, any of us could become a consolidator. In other words, you just say, "Right, any mail you want to send to Manchester, bring it to me; I will take it and inject it into the Consignia system", and do the delivery bit which is very expensive. By doing that you give everybody choice in the market place, and it is around the pace of the next two years—because that is what in our view it would mean—rather than competition itself and that is why we are saying because nobody knows, at least let us do this in a couple of stages and understand what the impact is if, as a number of you have been saying, we do want to maintain a Universal Service Obligation and continue to do the one price and deliver anywhere throughout the UK, which has been the fundamental plank of the postal service in this country for ever.

Mr Berry

  68. Would it be reasonable to assume that your response to the Postcomm proposals reflects the view of your shareholder?
  (Mr Leighton) No.

  69. Gosh!
  (Mr Leighton) One of the things we have agreed with our shareholder is the way in which we work and clearly the commercialness of this enterprise means that it has to be much more arm's length from Government in detail than in the past. Frankly, one of the problems is there are too many people involved in this particular pie and, therefore, I think our recommendation to the regulator was very much driven by the views of the management within the business and it might well be that that is not the view of the shareholder.

  70. Would you think it reasonable, therefore, that your shareholder would wish to offer its own view independently of Consignia's view?
  (Mr Leighton) It might well do, yes. The great thing about shareholders is they can do what they want when they want, and say what they want—and very often do.

  71. Indeed, and I support such pluralism, but it seems a little odd to some of us, I think, that given you only have one shareholder and there are substantial sums of money at stake in this business apart from the public interest, which is extremely important as we all know, are you saying that Consignia's submission to Postcomm was made without discussion with your shareholder?
  (Mr Leighton) I think it would be true to say that we gave our shareholder a copy of our submission to Postcomm on Thursday of last week.

  72. Finally, on this, because I am quite bemused: if your shareholder were to make a separate submission to Postcomm, what on earth would the world make of it? Consignia has one response to the regulator; you have one shareholder and that shareholder has a different response to the regulator. What sense can there be in this system? I am not asking for your shareholder, who happens to be the Government, to seek to nobble the regulator. Clearly the regulator is independent; there is no question about that. The issue is this bizarre prospect of a wholly-owned Government company making a submission that could be different from the Government's own views. Is that seriously possible?
  (Mr Leighton) I quite applaud it actually, because I think that is how it should be. We have one shareholder at the moment who has a view and the shareholder's views—

Mr Hoyle

  73. At the moment?
  (Mr Leighton) There is one shareholder and the shareholder has the ultimate vote which replaces the management, as all shareholders do—

Mr Berry

  74. That is the reason for checking their view before you put the submission to Postcomm. Excuse me for interrupting, but I think that illustrates the point.
  (Mr Leighton) This is a big point because it is fundamentally where things have been in issue in the past: you cannot say, "Well, this is a commercial entity and it is at arm's length and, by the way, can you check everything with us before we do it because we want to make sure you are doing it in the right way", because in my view, and it might be simplistic and I might be new to all this and naive, Government is quite good at governing; business is quite good at running business—that is probably the best way to keep the two—and there are other stakeholders. The regulator is very independent which is very important; it is fundamental. It is terrific that, as you rightly say, nobody can nobble the regulator because, net net, if we do what we think is right for our business and therefore our customers and for our people, and the regulator does the right thing for what he presumes to be the right way to regulate the market, Postwatch do what they believe is the right thing in terms of the consumer and the shareholder does the right thing for the shareholder, then we might stand a chance of going forward. I think it is very acceptable the way it is.

Mr Burden

  75. Given that one of the things you said about the pace of change, Mr Roberts, was that nobody really knows exactly what is going to happen, and that is one of the worries about going too fast, assuming your representations are not accepted by Postcomm and the pace stays as is proposed, what services do you think your competitors would offer in that speeded up way?
  (Mr Roberts) I think the best example I can give you is that we have already had the German Post Office wanting to talk to us about access to services, probably at the delivery end, and I think what will happen is that competitors will come in who will not want to deliver a Universal Service, obviously, but they will want to go either for niche markets which will look at maybe bulk mail on the way it is being proposed or, if they have major operations over here already and the German Post Office, for example, owns the distribution arm of Securicor and also owns DHL, they will piggyback on those services some kind of mail service, and they will do that on the most profitable routes which will tend to be the urban-to-urban routes. They may or may not then decide to deliver to the door: if they do not, because that is probably the most costly part of the whole process, then they will seek to have access to our delivery system at a price which we will then have to negotiate and, if we are unable to reach an agreed conclusion to those negotiations, the regulator has the power to determine what the price should be. So some of the earlier discussions that we have at the moment, and we are in a number of negotiations, are all around what we should charge for that access and one of the things we have said in our submission to Postcomm is that we believe that if there is to be access, as Allan has already said, we are quite happy to encourage that but it should be at a price which is basically a retail price less the costs that we would avoid on the upstream part of that activity, and that becomes the price just for that bit.

  76. That sounds to me like a description of what would happen as competition impacts. My question was really what would be different in terms of the faster pace?
  (Mr Roberts) What would happen in terms of the faster pace is that that would become immediately available, in other words, within the next two months we could have people then saying, "We want to talk to you about operating those services". For example, I know from all my colleagues in other Post Offices that they are watching the scene here with great interest, and for people like the Dutch and the Germans who have privatised post offices, it would not surprise me if they already have a plan about how to enter the UK market. All they are waiting for now is to see precisely when and to what extent the regulator is going to open that market up. So pace is around. If we went down the European model, changes would take place from January of next year; and it would be a reduction by weight down to ten0 grams, and that would be right across the whole of Europe, and we would have the option, if we wanted to, to try competing in other people's backyards in the same way as they did here. If we open up the UK market faster than Europe, which is what is being proposed and in a different way and expand and open up the market to a greater extent, then I think we become a very attractive proposition for those people to come in here without really being affected back home. So I think the incentive for people to be here and to set up various kinds of operations under the Postcomm faster model just becomes much earlier competition with people wanting to get in much quicker, because the more they can do it abroad without any risk at home the greater the advantage to the person coming in, the competitor.

Mrs Lawrence

  77. On that point, Mr Roberts has probably answered what was going to be the first part of my question which was whether or not you prefer the European directive rather than Postcomm's proposals, but there has been some public spat over the Postcomm proposals and the proportion of your business that is involved there. Can you give us some idea under the European directive what percentage of Royal Mail's business would be involved over the staged period?
  (Mr Roberts) Yes. The move to 100 grams is roughly equivalent to reducing the monopoly from its current just under a pound down to 41p. If that happens you open up the market by about another 15 per cent which is just under three billion items a year and you open up about 26 per cent of the revenue. That is at the first stage.

  78. The percentage of volume?
  (Mr Roberts) Our first percentage is 15 per cent more volume. About 26 per cent more revenue then becomes competitive.

  79. What is your response to the argument that because most mail falls within a lower category, which is the later stage of the European proposals, effectively it would involve very little competition for many years and then Consignia could be in a worse position as competition is opened up completely?
  (Mr Roberts) You are certainly right—more mail falls in the lower weight steps—but if we are opening up 26 per cent more revenue, that is quite a big slice. A quarter of our revenue is being opened up to competition next January if the European model comes in. Of course, we are talking about either/or. If Postcomm's proposals come in we will have both, so of course we will have Postcomm's proposals in two months' time, and then the European model will come in in January anyway. We have always argued, coming back to pace again, that to open up the market by 26 per cent of revenue is quite a big change for an organisation like ours—like any organisation—and we are going to have to fight pretty hard to try and retain that or a proportion of it, and that is really the whole thrust of our argument. That is quite a big step anyway—most of the other European countries think it is a big step—and it will certainly bring competition in but it will bring it in and give us the opportunity to get ourselves sorted out in the way we described earlier on.

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