Examination of Witnesses (Questions 80
- 99)
TUESDAY 18 OCTOBER 2005
ROYAL MAIL
GROUP
Q80 Roger Berry: So employee ownership
would neither directly nor indirectly generate revenue for Royal
Mail?
Mr Leighton: We would absolutely
directly generate revenue for Royal Mail.
Q81 Roger Berry: No financial advantage
whatsoever?
Mr Leighton: The reason that would
drive it is: if your people are involved in owning the company
and have shares in the organisation does that drive the profitability
of the organisation? Absolutely, 1,000 per cent, I think it would
make a huge difference, and I think Share in Success absolutely
demonstrated that.
Q82 Roger Berry: So coming back to
Lindsay's original point, I absolutely understand the argument
you are making. Therefore, why employee ownership rather than
profit-sharing?
Mr Leighton: Because in our judgment
and in the work that you look at, in terms of organisations, when
you get to that stage, ie it is a share, then that has a more
motivating effect. Roger, you have to say the other way round
is that if we did not think that was the case then we would not
be suggesting that that was the way to do it. I genuinely believe
that. From all the evidence in all the organisations I have worked
in that has been the case, and certainly Share in Success
was a great example of that.
Q83 Roger Berry: I would be interested
to see the evidence that you cite, because I know of evidence
that was addressed that employee share-ownership is not preferable
to profit-sharing in terms of motivation of employees. I would
be delighted to know what evidence you have got for that, because
clearly you are saying this is not just a guess, this is actually
based on hard research, and I would very much like to know what
research you are referring to.
Mr Leighton: We can give you that
with pleasure, Roger.
Mr Crozier: Can I come in here,
because I do not want to lose the thought? Again, the danger is
one looks at each little piece in isolation. The start point for
this is the one you have rightly identified, which is that the
trading performance now is very good but we have got some historical
issues there—the negative balance sheet. So there are actually
three conversations that kind of go on, in terms of what needs
to be pursued. One is how do we fund the pension deficit, because
that lies at the heart of a lot of this. The second question that
lies there is how do we fund the modernisation of the business,
and the third is how do we engage with our people for them to
want to make this modernisation happen? Just to go back, what
we did was get much smarter at what we already did. The next stage
is about fundamentally changing what we do. It really is about
automating the pipeline and a lot of capital investment, and that
is going to require a huge amount of change from our people and
they need to be fully engaged in that level of change. That is
why we believe this is the right route to go. Clearly we can provide
the evidence, but it is just important to join up with all the
other bits because they all work together; you cannot just fix
one piece. For instance, if you do not figure out how to sort
the pension deficit and how to fund the modernisation, what exactly
are you going to give people a share in? So they are all linked.
Q84 Mr Hoyle: What percentage, because
it is absolutely critical, are you envisaging? Fifty per cent?
Twenty per cent? One hundred per cent?
Mr Leighton: We think we should
start with 20 per cent.
Q85 Mr Hoyle: So you start with 20
per cent. That is the ownership. Am I right to think that you
have been using Morgan Stanley, and they have been doing some
reports for you? Has that been part of what could be capitalised
on other shares if they were to come to the market? What have
they actually been advising you on? Has it been part of this shareholding
for employees or is it whether to advise you to then say to the
Government: "We have an ownership here by the people within
it but we do believe that you have got a problem with the deficit
in your pension fund"? Are you then going to consider a further
percentage to be opened on to the market?
Mr Leighton: Just so that we are
very, very clear: the only thing we are proposing is that we have
three things to fix: the pension deficit, capital into the business
and we think we should give our people a share, in some way, shape
or form... that is all we are interested in. That sees us through
the next three or four years, which for us is the next three or
four years of our horizon. The shareholder has already made it
very clear that the shareholders will not entertain privatisation
of the company. That is the context of it. Any advice we get from
any advisers is in that piece of context.
Q86 Mr Hoyle: So they are advising
you on employee shareholding and nothing else?
Mr Leighton: They could be advising
us on the balance sheet and all sorts of different things. I do
not want to go into the technicalities, but are they advising
us on full scale privatisation—you know they are not.
Q87 Mr Hoyle: Therefore, which Roger
and I have been chasing, if you give the shares (and I understand
that that is what you wish to do and that is what is in discussion
at the moment) how do you get round the deficit within the pension
fund, if you are not getting a value on the shares, and everything
else? That is not being addressed, is it, through any of this?
Mr Leighton: It goes back to Adam's
point (and, for once, I am not being evasive): the three bits
are really quite important. You have to do, in our view, all three.
This is a hat trick. You cannot have any one of them; any one
of them does not give you what you need. It is a joined-up business
with a joined-up issue that needs those three things being dealt
with.
Q88 Mr Bone: If I was, as I was in
the past, deciding who to use as a postal provider and we have
got full liberalisation, do you think there would be some reliable
measurement of the service management so that I could transparently
see which service provider, yourselves or other licensed providers,
is actually right for me?
Mr Crozier: It is a good question
actually. If you take some of the learning from Sweden earlier,
when it was first introduced, you had literally hundreds of companies
diving in and providing mail services and the vast majority of
those companies disappeared very quickly. I have no doubt a lot
of customers were hurt in the meantime. We have been very clear
with Postcomm that we would like to see everyone operate under
the same rules and regulations. So, for instance, we check all
our employees' records in terms of criminal records and all sorts
of other things to make sure that we have got that integrity there.
We provide independently done quality-of-service research that
tells all our customers how well or not we are doing on their
behalf. As it currently stands, none of our competitors publish
any quality-of-service data. So we would like to see everyone
operate under the same set of rules, so that people genuinely
can make a comparison. Clearly, we say that because we think we
are bloody good; we think we provide a really good quality of
service and we think that should be one of the things that customers
are really interested in. As always, it is very easy to say: "I
will deliver you this" and then not do it, whereas ours is
all independently researched, and I think that is the way everyone
should be.
Q89 Mr Bone: That is clearly a yes
to that. Who should draw this up? Should it be some independent
body? Does it happen on the continent?
Mr Crozier: In fairness, Postcomm
are drawing up a sort of code of conduct, if you like. It does
not cover quality of service, interestingly, as far as I am aware;
it is more around the way that the business is done. I think quality
of service is actually pretty crucial to just about any company
and certainly we have always published that. It has always been
independent, we will continue to do it and we would like to see
other people do the same.
Q90 Mr Bone: Does it happen in the
EU at the moment?
Mr Crozier: I do not think it
does. I am not sure. There are not really any direct comparisons,
to be honest, but I do not think it does.
Q91 Mr Bone: Is this because we are
moving into uncharted waters?
Mr Crozier: We are ahead of the
game, so it is difficult to find out.
Mr Leighton: None of the national
players have to set out quarterly their quality-of service data.
Mr Crozier: If you take Germany,
their first-class target for the next day is 80 per cent; ours
is 93 per cent. So it is a very different regulatory regime. They
do not have compensation payments like we have. When Alex talked
earlier on about our operational window being shorter, there are
all sorts of other things that are different, too. We have got
tougher quality of service targets, we have got compensation and
all sorts of other things, so the regime is very different.
Mr Bone: I want to give you an example,
and this is not flippant but it is one of the problems that a
business would have. During the General Election we employed some
sort of Mailsort and my election address went out in Sherwood,
and I went down very well in Sherwood, but I was standing in Wellingborough.
The election address eventually finished up in Wellingborough
the day after the election. Now, I am not sure whose fault that
was. If you take that into a business, you have got to have clarity
so you can decide: "It is the fault of the Royal Mail because,
actually, they are very poor at doing this" or "It is
actually the fault of—
Mr Hoyle: The agent!
Chairman: That certainly would not be
true.
Q92 Mr Bone: It certainly was not
the fault of the agent then. That was subcontracted to Central
Office.
Mr Crozier: Clearly, I cannot
comment on the specific issue but I am very happy to go away and
look at that. We have independent, incredibly detailed quality
of service analysis, and the other interesting thing about this,
if you just move away from first class and second class, is that
we are hitting pretty much all of our business targets, but the
truth is more and more we will move away from that because if
I am a major customer, actually I am not very interested in the
fact that Mailsort 3 is at 99.6 per cent nationally; what I care
about is what is it on my mail. More and more quality of service
will become part of an individual contract, where I will deal
with you, customer X, and these national things—other than
for things like first class and second class—will go because
everybody wants a different kind of delivery. If I am running
a call centre and I am trying to generate response for that call
centre, actually the worst thing we can do for them is deliver
all their mail the next day because they could not cope with all
the telephone calls. Actually they might want 10 per cent of it
delivered every day for ten days. So, more and more, what people
want is a tailored service, and that is part of our problem with
all the regulatory set-up as it is. We find it almost impossible
to treat customers as individuals, and actually what does everyone
want now—they want to be treated like an individual customer;
they do not want to be given the same as everyone else. So we
are kind of fighting against a natural way of working, but which
customers do not want. They are quite happy if the improvements
come from us rather than from other people.
Q93 Judy Mallaber: The Government
has committed itself to not privatising Royal Mail. How confident
are you that Royal Mail can stay as a public sector organisation
and still compete against private sector competition when the
postal market is fully liberalised?
Mr Crozier: First of all, technically,
we are a stand-alone plc that happens to be 100 per cent owned
by one shareholder (just to be technical for a second). Can we
compete in a competitive market? Yes, if given a reasonable run
at it. We have absolute confidence in our company's ability but
it depends on the regulatory set-up that is concluded sometime
in the next two or three months and it also partly depends on
how we look at these funding issues that we have just discussed
around the pension deficit and around the money to modernise.
It partly depends on our ability to engage with our people. So
the road takes you back to: as long as we have a reasonably level
playing field and we can tackle the things that need to be tackled,
then yes. I know that is a qualified answer but it needs to be
a qualified answer.
Q94 Judy Mallaber: Setting those
aside, because I think we have explored those quite fully, will
previously state-owned national operators elsewhere in the EU
still have advantages over Royal Mail after January 2006? If so,
what are those advantages?
Mr Crozier: They will have huge
advantages because the modernisation that we are talking about
embarking on they did without any competition and over a 10-15
year period. So they have already done what we have not even started,
so clearly there is an advantage there. There is also the advantage
that there is therefore no risk for them. We have got to cope
with competition while we seamlessly transfer from one kind of
operation to another. Operationally, that is a very difficult
thing to do. They do not start with any costs or prices that are
misaligned, they just come in and they charge what they want to
charge. They do not start with any problems around creating new
products; they can do it overnight, we might take 12 months with
Postcomm. So their ability to be agile and compete from day one
is far greater than ours, so, yes, absolutely, they have advantages,
not least of which is they are making enormous profits somewhere
else.
Mr Leighton: This will be an unregulated
business for them. So you go and attack everybody else's markets
and you try and create big business in everybody else's markets
because they are not regulated. That is where you make your money.
Q95 Judy Mallaber: This comes back
to your original pleas for all the flexibility that you are seeking.
Mr Leighton: Absolutely. I always
feel as if we come away sounding as if we are a bunch of wimps,
but the big deal is it goes to the same old thing, which is that
potentially we could still have a very strong Royal Mail in a
very competitive environment. That is what we could play with
here. It gives us the opportunity to go and attack a few people
on their back doorsteps in the same way, but the only point I
think we are trying to make to you—and it does go back to
the same three things—is that there is the pension deficit,
there is where is the capital coming from and what can we do for
our people. They are the only three core issues, and if we get
any one of those three wrong or all three of them wrong then it
is going to be pretty bloody difficult.
Mr Crozier: And the regulation,
secondly, is the absolutely pivotal part of that.
Q96 Miss Kirkbride: I am bemused
by so much of what you have said today because it seems to me
that certainly one of the answers to all of your three problems
would be privatisation. Therefore, I wonder if you could tell
us, in your discussions with the Minister, why it is that he has
set his face so much against it? After all, we have a Government
which is prepared to privatise air traffic control and other things,
so what is the big deal about the Post Office?
Mr Leighton: You will have to
talk to the Minister. The other thing which I have to say (forget
about the Minister) is that actually the only thing on which I
have ever been on the record in relation to privatisation is saying
that we should not privatise it.
Q97 Chairman: Should not?
Mr Leighton: Should not.
Q98 Miss Kirkbride: Why not?
Mr Leighton: My sense is this
is a commercial entity. Everybody keeps thinking it is a public
service, it is not; it is a commercial entity that provides a
public service and only if it is a commercial entity can it provide
the public service without the taxpayer picking up a load of costs
for it. So the idea of the way in which it was set up was actually
quite a clever idea; the problem is the execution all fell to
bits, as is always the case. My view is that if you have got an
entity, which this is, which is primarily a commercial entity
but provides a public service, of which there are two chunks—the
USO and the rural network—which are the things that are
supported by the commercial entity that we have got here, this
business is not in a state where it could be privatised anyway,
and, secondly, I am not sure that that is naturally the next step.
I think the big opportunity of the next launching pad of the business
is to get it to a real commercial entity that provides a public
service that does it extremely well. Therefore, it might well
be a role model for how these businesses, these great national
enterprises, should work going forward. I still think that you
can get all the benefits of privatisation without going the whole
hog and that is why I think it is really important that you get
your people to take a share of ownership in that, in some way,
shape or form.
Q99 Miss Kirkbride: You could raise
capital.
Mr Leighton: We could raise capital
if we wanted to anyway, provided we have got a balance sheet which
is fine, no debt and great assets.
Mr Crozier: That leads straight
back to the need to sort out the pension deficit, because clearly
you cannot go and raise capital while you have got a negative
balance sheet.
Mr Leighton: It is part of our
debt.
| 
