Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 164-179)




  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 with us.

  (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 through seriously.

  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 expression.
  (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.

Mr Berry

  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 own numbers.

  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 for everybody.
  (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.

Mr Hoyle

  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.

Mrs Lawrence

  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.

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