Examination of Witnesses (Questions 1-19)
ROYAL MAIL
GROUP PLC
18 JULY 2006
Q1 Chairman: Gentlemen, can I welcome
you to this evidence session on `you', the Royal Mail Group. As
always, can I begin by asking you to identify yourselves for the
record?
Mr Leighton: Allan Leighton, Chairman
of Royal Mail Group.
Mr Crozier: Adam Crozier, Group
Chief Executive of the Royal Mail Group.
Mr Cook: Alan Cook, Managing Director,
Post Office Limited.
Chairman: We do have quite a tight timetable
this morning—we could have done this over more sessions,
but the imminence of the recess meant we wanted to get this done
and dusted—and so I am encouraging everybody to be as economical
as they can with their words. Lindsay Hoyle.
Q2 Mr Hoyle: Thank you, Chairman.
Obviously the big issue is about not being able to borrow money.
The Government has set up some kind of rules and we believe, or
I believe, they have even given you some money as well. Can you
enlighten us on the position, your borrowing and what monies you
have got or have not got?
Mr Crozier: As you know, when
we met last time we went through the challenges that the business
faced in terms of modernisation, the pension issue and some of
the issues within Post Office Ltd itself. We were asked by the
Government to put together an investment case which would cover
how we would develop the businesses over the next five years and
beyond, and as part of that investment case what modernisation
money we needed, how we would try and solve the pensions issue
that we faced and how we try to resolve the transformation of
the Post Office. That investment case has been through a number
of banks on our side, a number of banks on the Government side.
It has been, in principle, accepted by the Government, just in
principle. A key and integral part of that investment case is
employee shares and, following that `in principle' agreement,
we spent the last few weeks, and no doubt the next few weeks,
trying to agree with the Government how that will be taken forward
but, as yet, that is not resolved and it is still outstanding.
Q3 Mr Hoyle: When do you expect to
have it resolved?
Mr Crozier: That genuinely is
difficult to say. I hope in the next few weeks, but, as always,
there are issues on both sides.
Q4 Mr Hoyle: So presumably it is
holding back the business plan?
Mr Crozier: It is, in the sense
that we have spent nine months putting that together. Clearly,
at a time when competition is rushing into the marketplace, this
is precisely the time our foot should be firmly on the accelerator,
and to certain extent we are on hold while we agree what funding
there is there to take the business forward.
Q5 Mr Hoyle: Obviously that is key,
but there is press speculation this week, and I do not know what
the situation is, that Post Office managers are due on strike
any day, in sunshine like this! Is there any truth in what the
press are telling us?
Mr Crozier: I do not believe that
is the case. We are still fully in talks with Amicus who represent
our managers. Those talks are ongoing and I do not see any reason
why they would not come to a satisfactory conclusion.
Q6 Mr Hoyle: What about CWU? Are
they happy with you at the moment?
Mr Crozier: Allan and I met with
the CWU, Dave Ward and Billy Hayes, two and a half weeks ago.
We agreed an outline deal, in principle, and I believe, having
worked on some of the details of how that will work, that goes
before the union executive any time now.
Q7 Mr Hoyle: So you expect to be
strike-free and there to be an amiable agreement between the unions
and your good selves?
Mr Crozier: That is not to for
me to say, but certainly I would hope so. For the good of our
customers and for the good of all of our people, I would hope
that would be the case, yes.
Q8 Mr Wright: You just mentioned
the question of the pension deficit and obviously the modernisation.
In your previous submission to us you did mention the fact that
what you were seeking was an increase in the price of postage.
This was to "ensure Royal Mail is in a position to fund its
pension deficit". Postcomm has obviously agreed to allow
that increase in their postal prices to invest over £1billion
(I think was the figure that was quoted) in modernisation and
also an average of £320 million a year towards the pension
deficit. Given this, why has the Government also had to step in
and act as guarantor for the monies for you?
Mr Crozier: As part of the package
the Government would not be acting as guarantor. The Government
would not do that. The whole funding package is, indeed, a package.
It comes from some of the things that Postcomm are allowing us
to do, the Government funding itself, our improvements in efficiency
and some of the Government money there is to go into an escrow
account to give the pension trustees some comfort that, were anything
to ever go wrong with the company, they have some money to call
on. What that allows us to do is to then, instead of, as is more
normal, paying off the pension deficit over ten years, which we
could not afford, we are able to potentially spread the payments
over 17 years, but, clearly, our ability to do that deal with
the pension trustees is dependent on the Government funding as
a whole as an integral part of the package that will take the
Royal Mail forward.
Q9 Mr Wright: So you are quite happy
and content that the pension deficit will not be increased any
more but will actually decrease year on year?
Mr Crozier: That is clearly something
we are not entirely in control of because, like every company,
we are dependent on what bond rates are, what happens with the
stock market, all of those things. We have a pension deficit,
as you know, as it currently stands of £5.6 billion. Unlike
many companies who have yet to do it, we have done a review of
mortality rates, which, as you will know from other companies,
have gone up, and therefore that has added to the pension deficit,
but at least we know where we are now, as of today. Clearly our
intention is to clear that pension deficit over 17 years. We have
come to, again, an `in principle' agreement with our trustees
to do that, but that in itself is on hold whilst we see if we
can finalise the Government funding.
Q10 Mr Wright: Are you quite happy
that you will not have to return to the Government or to Postcomm
to ask for an increase in prices to cover the deficit? Are you
quite happy with your strategy?
Mr Crozier: I am happy. If every
single part of the package comes off, then we are comfortable
that that is the right place for us to be to deal with the pension
deficit and to modernise the business. Clearly, what we can predict
is some of the things that are outside of our control, but obviously
we will deal with them as they arise.
Mr Leighton: I think it is very
important. I have heard all this stuff about government hand-outs
and everything else. We never take hand-outs from anybody and
we do not intend to. We have always run the company and taken
it from a pretty perilous state to where it has been self-sufficient.
We are like everybody else. We have made an investment case. The
investment case is very straightforward: This is what we need
to do with the company. You are the shareholder, you just have
to deal with the Government not Schroders, and, therefore, if
you want to support this we can give you a great return for it.
It is an integral part; there are no separate bits. Like any investment
case there is, you cannot take a bit and put that bit and invest
behind that, it is an entity. Our view is that it is necessary
for the company, it will enable us to grow the value of the organisation,
it will enable us eventually to pay a dividend to a shareholder,
which is what a shareholder would expect, but this whole fact
that everybody thinks you are going to have to go and ask people
for money, whether it is Postcomm or the Government, is incorrect
and does not do justice to the people in the organisation who
work as a commercial entity.
Mr Crozier: Clearly what we want
is a modern Royal Mail that can compete in an open competitive
marketplace. To go back to Lindsay's point, the competition are
not sitting around waiting for us to finish this discussion, they
are off, they are buying other companies, setting up operations
all over the country, and the one thing that we lack at the minute
is an agility and pace to get on with things and be competitive,
and that is why we are so anxious to get on with this.
Q11 Chairman: If you were fully privatised
in a fully competitive market, you would not be here today, of
course.
Mr Leighton: Yes, but we are not.
Somebody made the point yesterday, which is a very interesting
way of thinking about it, that you can argue the Government privatised
the mail industry and we are a public entity competing in what
is now a completely privatised industry and did it in a completely
different way to the way it has been done historically, i.e. market
opened up, regulator put in place and off you go. But, as I say,
we do not complain about it because there is no point complaining
about it. We are as we are, so far so good, we have been able
to compete, that is our intention.
Q12 Mr Bone: Your investment really
breaks down into modernising your operation and the pension deficit.
I would quite like to know what proportion of your investment
to do those two things comes from hiking up the price of postage
stamps, or income generated by the pension fund, or from the shareholders,
or from efficiency savings. What are the proportions in relation
to that investment?
Mr Crozier: There is certainly
no income from the pension fund. We face 17 years of paying into
the pension fund around £735 million a year.
Q13 Mr Bone: Can I just stop you,
because there is something I do not quite understand on this.
The pension funds have sometimes been in huge surplus, depending
on the stock market. So, how can you say for certain what is going
to happen over the next 17 years on the stock market? It could
boom and you would no longer have a problem?
Mr Crozier: I think that would
be terrific if that were to happen.
Q14 Mr Bone: So there is a possibility
of money from the pension fund, but you put that in as zero?
Mr Leighton: When you say "money
from the pension fund", what do you mean?
Q15 Mr Bone: From your investments.
You are saying there is no growth there?
Mr Leighton: No growth in what?
Mr Bone: The pension fund.
Q16 Chairman: I think the suggestion
was that if the pension fund might become fully funded at some
stage in the next 17 years, you would get another pensions holiday
again?
Mr Leighton: That is a possibility.
There is nobody, I think, in the pensions world who is predicting
that.
Q17 Mr Bone: So, it is zero at the
moment?
Mr Crozier: Let us try and remember
we have a company that has an asset base of £2.3 billion
and a pension deficit of £5.6 billion, so we have negative
equity, so we are not in a position to think about income from
the pension fund at all. In terms of efficiency, to go back to
your question, as part of the Postcomm price settlement we are
charged with improving efficiency by 3% per annum after we have
paid for any wage inflation. So, that is a 3% net improvement
after any improvement in pay or anything else, and so that is
a huge task for us going forward. In terms of price rises, again,
although we have had a two pence price rise, let us not forget,
we lose five pence on every first-class letter and eight pence
on every second-class letter, so we are still not covering our
costs on stamped mail. We have still got a long way to go on that.
Q18 Mr Bone: I do not think you attempted
to answer the question that I asked. What proportion of that investment
would come from each of the categories I asked you about?
Mr Crozier: I do not have that
information to hand, but we can certainly send you that.
Q19 Mr Bone: You did not comment
on the shareholder result, whether there will be any money from
the shareholder. Your answer indicated to me that the monies would
basically come from efficiency savings and increasing the price
of a stamp?
Mr Crozier: No. You have got three
main segments, if you like, of funding. It is assigning the Mail's
reserve of about £850 million over to the company, there
is a borrowing and credit facility of up to £900 million,
which was sort of there before, and then there is the fully funding
of whatever the solution that people agree to is on the Post Office
itself. Those are the three main elements, if you like, of the
funding package. Certainly percentage-wise, I am very happy to
go away and break that down for you and send you that through.
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