Examination of Witnesses (Questions 164-179)|
TUESDAY 16 APRIL 2002
164. Good afternoon, Mr Corbett. It is your
fault we are all here! It is fair to say that your proposals have
caused a certain rustling in the undergrowth and we are very grateful
that you have been able to come along today. We are conscious
that you were very generous to us with your time at a private
briefing some weeks ago but we are now getting everyone together.
Since we have spoken, other information has emerged. We are conscious
that, much as some people might think that you do, you do not
work in the postal services in Britain. I am not even sure if
you would want to, but I know that you have a view on where the
costs and the inefficiencies in the organisation lie. I wondered
if you could share with us your analysis of where the Royal Mail's
costs mainly arise in areas like collection, sorting, transportation
and delivery? It would be helpful for you to share your thoughts
(Mr Corbett) Thank you. I would like
to ask Martin Stanley if he could come in with some of the more
detailed responses to that question but let me make a couple of
introductory comments. Yes, you are quite right. We have satisfied
ourselves that Consignia is suffering from a high level of inefficiency,
particularly in its management structure and in the way in which
it uses its resources. We believe that nothing will encourage
Consignia management to grasp the need to bring changes to that
structure more effectively than the threat of competition. In
that, we share to quite a large extent the views of Consignia
themselves. I am very much aware that there is a difference over
timing but how those inefficiencies arise and perhaps more particularly
why and how it is reasonable to expect that they can be corrected
is what lies behind your question.
(Mr Stanley) It is a simple question and, like all
simple questions, the answer is probably very complex. One of
the most noticeable things that we hear when we talk to Consignia
at the moment is how they are discovering that much of their costs
are in physical handling. Whenever a person has to handle an envelope,
it costs them money. Things like transport that used traditionally
to be the big driver and weight no longer feature quite so highly
in the calculation and that makes quite a difference in our work.
Lack of investment therefore is a big issue. I saw some figures
recently which interested me. The net book value of their plant
and machinery was 745 million back in 1997. By 2000, it had fallen
quite dramatically to 568 million, which is, over three years,
quite a serious fall. It shows lack of investment and yet investment
is what they probably need to handle mail efficiently.
165. We would like to believe that much of your
analysis has been based on work which Andersen Consulting provided
you with. Am I correct in saying that?
(Mr Corbett) Yes.
166. We have had from Consignia criticism of
that. Postcomm rely heavily on the study by Andersen. Consignia
have grave concerns about the unsubstantiated and simplistic analysis
adopted by them. They say that the work uses assumptions already
seriously questioned by US, German, Dutch and Finnish Post Offices
and the limited experience from a small number of countries where
there has already been postal liberalisation; also, it contradicts
Andersen's assumptions. What would you say to criticisms of this
nature? I trust that they have been put to you already and have
you addressed them in any way?
(Mr Corbett) They have been put to us. They were put
to us last Friday evening. The answer to your question, "have
we addressed them?", is not yet. We have obviously examined
what Consignia have represented to us. We are aware as we go through
that there are a number of approximations which are built into
the Andersen model, of which we were fully familiar and which
we do not believe invalidate the answers. There are other matters
which have been brought to our attention which we will be sitting
down and discussing with both Consignia and Andersen over the
next very few days. We have been impressed by the quality of the
work that Andersens have done for us. We have a high respect for
the individuals who worked on this assignment. I would find it
surprising if we were to find, as a result of these further inquiries,
that there were significant methodological errors in the way in
which the model had been put together, but I do accept that this
was work which was done very largely in December of last year.
A lot of additional information has been forthcoming from Consignia
since then. One of the things we will undoubtedly need to do ourselves
over the next few weeks is to rework the Andersen model with the
additional information Consignia have, and at the same time we
will be inviting Consignia, themselves to run the Andersen model
with their own data and we will see where we get to with that.
We are not ignoring the comments and we will be following them
167. Perhaps at a later stage if it is appropriate
and the respective parties agree, we would be happy to receive
a copy of that. We may have to proceed if it takes rather longer
than we hope but there could be a subsequent publication by us
if we felt it was sufficiently useful. We only got word on Friday
of the Post Office critique of the Andersen work and it was only
in a somewhat superficial form that we got the critique. Therefore,
it would be useful to us if, within a reasonable time frame, you
were able to provide us with your rebuttal, if that is the appropriate
(Mr Stanley) One thing we agree with Consignia on
is you can model to your heart's content but at the end of the
day it is very much a matter of judgment. That is something on
which all our experts very definitely agree.
Sir Robert Smith
168. This morning, the witnesses raised with
us their recognition of an organisation of the size and complexity
of a commercial operation. They have all the data but they do
not have yet the information systems and they reckon it is going
to take them about 12 months to have the kind of robust information
you would want for the operation they have. Is that an analysis
you would share?
(Mr Corbett) I would share it to this extent: that
every organisation is seeking constantly to upgrade the quality
of its information. Consignia probably needed rather more desperately
than most to upgrade the quality of its information. What we would
not be prepared to accept is that it would be appropriate for
us to put market opening proposals on ice in the expectation that
at some future date people would be able to say, "Now we
know what the information is", and we believe we have enough
good understanding of the nature of this business, not only from
Consignia's analysis but also from external sources, that we can
make value judgments on market opening now.
169. Could I ask you about your view on the
costs of mail delivery and how they might vary between rural and
urban areas? Do you believe there are significant differences
in costs there?
(Mr Corbett) Yes. You will recall that in June of
last year we put out a discussion paper on the cost of universal
service provision. For very good reasons which we can discuss
further if you wish, the decision was made there to focus quite
largely on the direct cost contribution to overheads. In other
words, to compare the direct costs attributable to providing the
service with the revenues derived from it, because clearly the
moment we move into the area of overhead allocation it becomes
much more judgmental, much more difficult to get hold of. That
whole exercise was based almost entirely on Consignia's own numbers
which Consignia subsequently verified and confirmed that we had
got correct. It produced a series of results which have been very
influential in the way in which we have judged the effects of
market opening. One way in which it was very influential was in
looking at the effective contribution, the difference between
revenues earned and the direct costs attributable to earning them
for the areas called rural and deep rural. In a nutshell, if you
just take the deep rural, deep rural as a group accounts for four
per cent of the total Consignia volume of letters carried. It
contributes three per cent of the total contribution across the
board. In other words, I think one can draw the conclusion from
that that the contribution that deep rural post makes is (a) positive
and (b) very close to its pro rata share of total revenues.
170. I have spent more years than I care to
recall sticking leaflets through letter boxes. If you were to
ask me do I observe a difference in productivity between urban,
rural and now I hear there is a concept of deep rural, I would
have to say there are dramatic differences in my personal productivity.
Given that the cost of delivering mail is essentially the cost
of the time of the person delivering mail, I would have thought
that the differences would be very significant indeed.
(Mr Corbett) I think the result is quite surprising.
What it demonstrates is, first of all, the amount of cost that
is incurred upstream of the final delivery and, secondly, that
there is no delivery pattern which is free of its own problems.
In deep rural areas, your problems are driving up very bumpy,
rural tracks. In city centre areas, your problem is coping with
the traffic and finding somewhere where you can leave your vehicle
on the kerb side whilst you cope with the service. These are Consignia's
171. They may well be but I am thinking of the
activities involved in the Royal Mail's operation. I have been
in countless sorting offices and productivity is very high. I
know there are costs for delivering the mail but it never occurred
to me that the costs of delivery were somehow an almost insignificant
part of the total. If they are significant, productivity levels
must vary dramatically depending on what the routes are. It seems
counter-intuitive to me or contrary to my own experience to suggest
that there are not some very significant differences in the costs
of delivery between urban, rural and deep rural with obvious implications
(Mr Corbett) Clearly there are going to be particular
delivery routes which involve a very significant cost: taking
mail across rough seas to lonely lighthouses and so on, and we
have had to deal with these problems. The fact of the matter is
that those routes which make spectacular photographs like this
are very, very few. I have no reason to doubt the validity of
the Post Office analysis here, which shows that even if you take
those deep rural and rural areas the proportion which each stream
contributes to the net margin, the difference between revenues
and gross cost, varies very little from the proportion which they
contribute to the total revenues. If I can . . .
(Mr Berry) You have answered my question. I was going
to ask if you had any evidence in addition to that provided by
Consignia. You are saying you rely entirely on Consignia data
for that and maybe we need to pursue it further with them. I would
not want to push it further.
172. Posh people live in big houses at the ends
of long roads in deep country and get more mail. Therefore, economies
of scale come into play. Is that the rationale?
(Mr Corbett) It could well be.
173. I am a little worried. Are you really in
the real world? Quite rightly, I have a constituency that is urban
and rural and I watch the post personnel delivering letters but
they do not park a van in the town centre and go door to door,
so I do not know where you get that idea from in the beginning.
They get dropped off with the mail; they deliver it to almost
every house and that is more efficient than the person that has
the semirural and the farm areas because there is no way there
is a cost. I do not know whether you call it leafy or deep rural
but there is no way that your financial analysis faces the reality
of those deliveries.
(Mr Corbett) I have no evidence upon which to base
any other set of assumptions. This is Consignia's business. I
am not going to embark on a vast costing exercise for the whole
of their operation. This is the only evidence we have.
(Mr Stanley) It is important to remember that the
final delivery from the delivery office to the door is a fairly
small part of the overall transaction which includes the original
collection, the original sorting and even at the delivery stage
quite a lot of time is spent from five or six o'clock in the morning
sorting mail. Although undoubtedly there is a cost in these rural
areas, though higher than elsewhere, it may even be quite a small
proportion of the total cost. In cities you may not be using vans
but the cost of premises tends to be higher and the cost of wages
tends to be higher.
174. What you are telling me is that the postal
service offers different wages for different areas.
(Mr Stanley) London is more expensive.
175. That is not what you said. You said different
areas cost different amounts. Have either of you been into a rural,
semirural, urban city and looked at the whole aspect of how the
Royal Mail is developing?
(Mr Stanley) I have not.
176. And yet you are telling us you are experts.
(Mr Stanley) A lot of people have.
Sir Robert Smith
177. Do you have any breakdown of what percentage
of the operation of getting the mail from someone, posting it
to someone and reading it at the other end is taken up with cost
before they reach the delivery office?
(Mr Stanley) I do not have a figure in my mind but
if you think of posting a letter from here to go to a little village
in your constituency it has to be collected; it has to be taken
to Mount Pleasant or wherever to be sorted; it has to be taken
to Willesden where it has to be resorted; then it has to go on
the train and be resorted. Then it has to be taken to the final
delivery office and resorted and finally you get to the bit which
definitely costs a little bit more. It is the fact that all those
other bits are common. Of course I am over-simplifying but I am
trying to explain in very simple terms why it may be a mistake
just to concentrate on the final mile. The overall cost may not
differ as much as you intuitively would think. Wages do not differ
across the whole country but wages in London are higher and certain
premises costs change an awful lot from city to city.
178. Like my colleagues representing a large
rural area, I do find it very difficult to grasp the fact that
you are telling us that it does not cost more. If I can take what
you refer to as the upstream costs and Postcomm's proposals and
the effect on Consignia, Postwatch provided us with some figures
that said 86 per cent of mail posted is from businesses and 68
per cent is delivered to individual households. You have made
it clear that you do not think competitors coming into the market
are going to want to do that last mile. It will be the upstream
part of the operation that they are looking at. Do you expect
competitors to undercut Consignia on the costs of these services
so that they stay the same or perhaps even less, or would you
expect customers to pay more for competitive services? I say that
in the framework of the earlier evidence that we had from Hays
where they are offering completely different services outside
the ones currently offered by the Royal Mail.
(Mr Corbett) I believe that the description Hays have
given you is more likely to be the one that we would see. In other
words, newcomers to the market will try to differentiate themselves
in terms of the particularity of the service they provide rather
than merely going for a cheaper price. It has been said, and we
certainly recognise, that UK mail is amongst the cheapest, providing
amongst the best value of any mail service, probably worldwide,
certainly within Europe. That is not really the crucial area.
The crucial area is going to be service quality and particularly
the extent to which newcomers into the market can identify the
needs of mail users and find ways of responding to them. Then
they will probably be able to charge a premium.
179. Can you as a regulator guarantee, notwithstanding
the discussion we have just had with the Royal Mail services,
that there will be no drop in service quality, for example to
people living in rural areas, where they have to pick up their
mail from the end of their mile long drive or whatever as a result
of your proposals?
(Mr Corbett) We can certainly guarantee that the universal
service will continue to be provided. That does not mean that
some entrants into the market might see a commercial opportunity
for providing a different sort of service, a two day delivery
a week or whatever, at a significantly cheaper price. The universal
service is built into both the obligation that is placed on us
and the obligation which we, through its licence base, place on
Consignia and we take that extremely seriously. We will make certain
that that continues to be provided.