Examination of Witnesses (Questions 140
- 159)
MONDAY 7 NOVEMBER 2005
POSTWATCH
Q140 Chairman: You are saying that
is just a blip in the long-term trend?
Mr Carr: We are talking about
a price control here for years ahead.
Q141 Chairman: You are saying that
the trend growth rate is up and you do not accept there is a change?
It is very important for setting a price?
Mr Carr: We have not said the
trend growth rate is up. What we have said is that the report
always seems to come out at the appropriate time, and at the moment,
whilst the trend may be down, I believe that the figures I have
seen are for only six months anyway. Do you base a forecast trend
for the future price control over at least the next four years
on a six-month downturn?
Q142 Chairman: What do you, Postwatch,
think is happening with volumes?
Mr Carr: We share the view of
the regulator.
Q143 Chairman: What you have just
said about SMS texting and e-mail is not the case. You said that
the Post Office should have adapted to reduced volumes and now
you are saying the reduced volumes are not happening. I cannot
understand which one you mean?
Mr McGregor: Royal Mail is competing,
and has been competing for the past 30 or 40 years, with a number
of communications media. Over that period you have seen changes
in the other competing media: telephones came in, then fax machines
and mobile 'phones, e-mail has come in, e-substitution is coming
in, and at each stage it has been said that this is going to be
the death of the traditional paper mail. It has not been, because
at each stage Royal Mail and the other mail providers have been
able to compete with those alternative channels. I think what
Peter is saying is that this is another phase of that. Royal Mail
has got to respond not only to the changes in the competitive
mail market but also to competition from other media. If it fails
to do that then, yes, volumes inevitably will start to take a
dip.
Q144 Chairman: An efficient and well-run
company will maintain the trend growth rate in accordance with
Postcomm's recommendations?
Mr McGregor: Absolutely.
Chairman: Thank you very much. I understand
that.
Q145 Mr Wright: Royal Mail has suggested
that what they need to do is increase the price of second- and
first-class stamps to 29 and 39 pence respectively by the year
2009-10. Postcomm suggest that the rise should be limited to 34
pence just for first-class stamps with second-class stamps remaining
as they are at the present time. What is your understanding of
the difference in those two estimates and what they represent?
Mr McGregor: It is back to the
point we were trying to make earlier, that the sole justification
for moving prices as high as Royal Mail were trying to see them—this
is for the public tariff—is on the basis that they are being
cross-subsidised at present and that somehow the universal service
is a burden and a cost. There is no cross-subsidy and, as I was
trying to explain earlier, our analysis, and I think the analysis
is supported by Postcomm, is that the universal service is a commercial
opportunity for Royal Mail. Therefore, price increases of the
kind that Royal Mail would like to see are simply not justified.
There is a separate argument which underpins whether even the
price increases that Postcomm are willing to see should be justified,
because they relate back to the pension deficit and who it is
needs to pay for that deficit.
Q146 Mr Wright: You are falling on
the side of Postcomm in terms of the 34 pence and no increase
in second-class stamps?
Mr McGregor: Indeed, and if anything
our view is that 34 pence is erring on the high side.
Q147 Mr Wright: You would not have
any increase on the second-class postage?
Mr McGregor: There are issues
around the differential between the first-class price and the
second-class price, but I think probably the differential that
Postcomm has got at the moment is about right.
Q148 Mr Wright: You have just touched
on the pension deficit and obviously the Royal Mail submission
was on the basis that they need to close that gap concerning the
£4 billion accounting deficit. What proposal would you put
forward to close that deficit, because quite clearly it is unacceptable
to be in your position?
Mr McGregor: It is very much a
matter of looking at how Royal Mail would be able to respond in
a competitive marketplace, because, as Peter was saying, Postcomm
is simply the surrogate for a competitive marketplace. There are
many FTSE 100 companies which find themselves in a very similar
position to Royal Mail, with major pension deficits. The one thing
they cannot do is simply go to their customers and push up the
prices to pay for the deficit. If they try to do that they will
lose market share and their profitability will fall even further.
Royal Mail, in line with the competitive pressures, should be
looking for a solution with the shareholder, who is after all
one of the prime beneficiaries of the 13-year pension holiday
that they had. Secondly, the management themselves should be looking
to greater efficiencies in order to generate extra surpluses to
put into the deficit.
Q149 Mr Wright: What you are suggesting
is that the Government should plug the deficit of the £4
billion?
Mr McGregor: There are timing
issues around this and it is interesting that Royal Mail, historically,
had looked to put right any deficits over, I think, a 30-year
period. All of a sudden now they are asking to put the deficit
right over a 12- or 17-year period and it is, I think, highly
debatable whether action on that kind of timescale is needed.
Yes, I would think there is plenty of scope as between the shareholder
and a more efficient management to arrive at a solution to the
pension deficit without simply pushing up the prices to monopoly
customers. Customers were not the people who created the pension
deficit, it was management and the shareholder who created the
deficit. Now it is management and the shareholder who are looking
to customers to pay and that simply is not right.
Q150 Mr Wright: In terms of the national
operators in the European Union, is there any other history of
where there has been a pension deficit and where that deficit
has been plugged?
Mr McGregor: We are not aware
that other European postal operators face the same kinds of deficit
problems, probably because they have been more prudent in the
past and did not take a 13-year holiday from making pension contributions.
Q151 Mr Wright: To sum up then, you
are suggesting that you would agree with Postcomm's recommendation
of the 34 pence maximum and you would like to see the pension
deficit being plugged by the Government, as the main shareholder?
Mr McGregor: Yes, I think that
is right, simply because it would be inequitable for customers
to have to bear the full cost of the deficit.
Q152 Chairman: Can I be clear on
a point of fact on one thing. You are saying that the public tariff
items are not subsidised by the business post. You are not saying,
are you, that first- and second-class post will break even, because
the evidence we have from Royal Mail is that each individual item,
everything that bears a first-class stamp, actually is subsidised?
You are saying that the whole basket of public tariff items is
not cross-subsidised by the business post. Is that the point you
are making?
Mr Carr: There are three elements
to the public tariff. There is stamped mail, metered mail and
prepaid indices. That fits in first- and second-class for all
three products. The combined effect in the year gone is a break-even.
Q153 Chairman: As far as I remember,
I think within that, the evidence we have from Royal Mail I think
were these words: "Every time that someone puts a stamp on
an envelope we lose money." Are you challenging that assertion?
Mr Carr: Stamped mail, yes, is
a loser, but metered mail is a profit-maker. They are all part
of the public tariff.
Q154 Chairman: What is sometimes
referred to pejoratively as "granny mail" is a loss-maker?
Mr Carr: That is not bulk mail.
Q155 Chairman: I understand that.
It is subsidised but not necessarily just by business post, there
are other items in that tariff?
Mr Carr: That tariff, that basket
of products, breaks even. It is not receiving any subsidy from
the bulk business mailers.
Q156 Chairman: It is receiving a
subsidy from somewhere. Every stamped envelope is receiving a
subsidy from somewhere else in the Royal Mail, surely? If you
choose to make a division between business and the rest of the
public tariff, yes, of course, that is true, but every stamped
envelope is loss-making?
Mr Carr: We do not make a division;
they did in the way they set up their own companies.
Q157 Chairman: You do not disagree
with the evidence we had, that basic stamped mail, in a letterbox,
from individuals, loses money?
Mr Carr: Yes, you are correct.
Q158 Chairman: I am trying to make
sure, is this fact?
Mr Carr: It is cherry-picking
the evidence that you have received.
Chairman: That is all right. I am just
trying to make sure that is correct.
Q159 Roger Berry: Just briefly on
the point you made about it being a matter for the shareholder
and the improved management efficiencies, I may agree with that
but you almost suggested that if there is a cost increase to do
with pensions in a competitive market consumers do not incur the
cost. The link is with National Insurance contributions, for example,
in a competitive market the burden falls on the consumer, does
it not?
Mr McGregor: Yes, that is correct.
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