Examination of Witnesses (Questions 200
- 219)
MONDAY 7 NOVEMBER 2005
POSTCOMM
Q200 Mark Hunter: Royal Mail and
others have told us that Postcomm's approach to liberalisation
is going to lead to cherry-picking of postal services by Royal
Mail's competitors, obviously leaving the company to cope with
the Universal Service Obligation on a reduced income. We are aware
that this is occurring already, to some extent, in large population
centres and how big a problem do you perceive cherry-picking will
be following the full liberalisation?
Ms Chambers: We do not regard
it necessarily as a problem at all. If you look at the cherries
in this market, the cherries have been open for picking for nearly
three years and three years of cherry-picking has resulted in
a loss of market share of less than 3% for Royal Mail. It is not
the cherries that are being opened on 1 January, it is the bark,
or whatever nasty bit of tree you want to talk about, but I will
not. Cherry-picking has been available to competitors for some
time and so far the inroads that they have made are very, very
small and we do not regard that as being a threat, certainly not
a threat to the universal service and not a threat to the profitability
of Royal Mail's business going forward.
Q201 Mark Hunter: Not at any stage?
You are quite confident of the predictions for the future that
it is not going to impact that at all?
Ms Chambers: We can never afford
to close our eyes and shut up shop, insisting that our job is
done. We are always vigilant to see what is happening and we always
have to look at what is happening on volumes, what is happening
on market share; that is our job. At any stage, if it looked as
if there were any problems, we have the powers and the duty to
intervene to make sure, in particular, that the universal service
is safe, and that is what we will be doing.
Q202 Mark Hunter: The impact of liberalisation
is not going to affect your ability to deliver on the Universal
Service Obligation at all?
Ms Chambers: Absolutely not.
Q203 Mark Hunter: Are you quite sure?
Ms Chambers: Yes.
Q204 Roger Berry: You made the comment
earlier that the universal service essentially is being funded
by economies of scale. Of course, economies of scale are not compatible
with a perfectly competitive market, so there are two kinds of
scenario here. Either it becomes saturated, there are lots of
suppliers in the market, in which case the economies of scale
have gone—I am not even going to talk about the Universal
Service Obligation—or, alternatively, which I suspect is
the case, you are assuming that is not going to happen, which
is why you are not worried about cherry-picking particularly,
and you are assuming there is going to be a Royal Mail that is
sufficiently large to gain those economies of scale in such a
way that it is reasonable to expect them, and them alone, to provide
the universal service. You cannot have both. You cannot have competition
and economies of scale delivering the universal service, can you?
Mr Stapleton: The key thing, Dr
Berry, is a push for still greater efficiencies. Allan Leighton
has done a remarkable job, obviously, with the Royal Mail team
over the last three years, but on his own admission he is at the
foothills of a long climb.
Q205 Roger Berry: I am sorry. I agree
with all of that. What is the answer to my question?
Mr Stapleton: I am answering your
question by saying the issue that really we need to be focusing
on, to make sure that the universal service is safe, is the push
for greater efficiencies, because that is what will make Royal
Mail a competitive player and that is what will keep the universal
service robust and strong. Our major concern at Postcomm is that
the last three years has seen 33,000 people taken out of the business
but costs have not gone down, they have gone up, they have gone
up £300 million between 2001-02 and last year. Productivity
certainly has gone up, it has gone up 8% over that period, but
wages per full-time employee have gone up 19% and so actual unit
costs have gone up 2%. Those sorts of economics are a threat to
the universal service. That is why we have a fundamental difference
between Royal Mail and ourselves in this price control, where
we say, "With three times the amount of investment that you've
made over the last three years you should be able to get at least
a 3% efficiency gain," whereas Royal Mail are saying, "Oh,
no, we've got 2.2% in the last three years but now, after that
big push, we've got to go back to 1.5%." If that is what
happens, that will put the universal service at threat.
Ms Chambers: In an even more direct
answer to you, that is the important point, in terms of the universal
service and how to protect it. In answer to your question about
do we expect there to be a perfectly competitive market in post,
in economic theory, the answer is, of course not, not in the timescale
of our price control. If you look at the projections, if you look
at Royal Mail's projections of how much market share they will
have by the end of our price control, they are looking at somewhere
around 90%. There is no way that can happen in a perfectly competitive
market.
Q206 Roger Berry: I accept it is
clearly what has happened. There is going to be liberalisation.
One concern that some people have, notwithstanding everything
you have said about Royal Mail—and indeed people round this
table have been critical of Royal Mail for a very long time—the
fact of liberalisation is, if that is effective in taking a chunk
of the market away from Royal Mail, that threatens economies of
scale and thereby that threatens the Universal Service Obligation.
That is the concern. Do you not feel, therefore, that needs to
be addressed? There are those who are sort of gung-ho about competition,
who just assume, "Well, let rip and see what happens."
I am glad that you are indicating that is not your view. Good.
Mr Moriarty: Might I try to answer
your question head on. Much depends on what form of competition
you expect to unfold. Do you expect the cream-skimming, end-to-end
competition or do you expect the competition to come in by access
arrangements? In practice, what has happened is that competition
has come in via access arrangements. This is actually a good form
of competition for Royal Mail because it means that customers
can get new services with new operators, they will collect the
mail, they will transfer the mail and then they will hand it over
to the postman for the last mile, at a profit to Royal Mail. If
competition comes along in that form, I think we can have a vibrant
competitive market but also a safe universal service.
Q207 Mr Wright: In your statement
just now about efficiency savings you mentioned the desire to
save 3% on efficiency, and the fact is that under another process
they managed to save only 2.2%. How do you square that, if they
could not achieve it during another plan, how do you expect them
to achieve a 3% saving on efficiency now?
Mr Stapleton: We have looked at
this efficiency from a number of different angles. The Royal Mail
plan clearly is what one would call a high capital investment
automation plan and normally when people are tripling their capital
spend, which is what Royal Mail's plan is advocating, you expect
that to reflect in improved efficiencies. That is one way you
can look at it. We have also looked at it in terms of the tremendous
variability of performance across individual mail centres or delivery
offices and said that, over a five-year period, if you can move
all your offices to today's top 10%, which does not require major
amounts of capital, you can get a 3% efficiency by that route
as well.
Q208 Mr Wright: Ultimately, would
that mean more job losses?
Mr Stapleton: It is up to Royal
Mail to choose between the low capital investment route, which
is the latter of the two options I have just described, or the
high capital investment route, which inevitably would suggest
higher job losses, because it would be substituting machinery
for people.
Q209 Mr Hoyle: The 3% drop, what
is the value of the 3% efficiency, in your terms?
Mr Stapleton: You can crystallise
it, to use a catch-phrase which I think has been used earlier,
it is three-quarters of the difference between a 39 pence first-class
stamp and a 34 pence first-class stamp.
Q210 Mr Hoyle: What is the value
of 3% that you talked about taking out? Do you know, or not?
Mr Moriarty: It is about £180
million.
Mr Hoyle: You think it is £180 million.
What you are saying is, "We'll pick a figure out, let's take
3% out of the business and everything'll be rosy and it's up to
Royal Mail to deliver it." It is absolute nonsense. Either
you do not understand the business or you have no wish to understand
the future of the business, because the one thing that you cannot
do is employ robots to deliver the mail. It is about people and
you said they can make a choice. You cannot make a choice hand-delivering
the universal service through this country, unless you have an
ulterior motive, that the mail does not go through all the letterboxes
and we see people having to collect their own mail. The biggest
problem with Royal Mail, and something I do not want them to get
wrong, is that I believe, and I used the analogy earlier, whether
it is the Prime Minister, whether it is you, Mr Stapleton, or
whether it is my farmer in the remote cottage, the one thing they
all have in common is that they will get the mail hand-delivered
by a postie. That is something we wish to see. You cannot take
costs out of that. You have already taken 33,000 jobs out of the
business, now you are down to core levels.
Rob Marris: Chairman, are we taking evidence
from MPs or from the witnesses; on a point of order?
Mr Hoyle: Can you rule on a point of
order, please.
Chairman: Mr Marris, Mr Hoyle will make
his point briefly, I am sure.
Q211 Mr Hoyle: It is correct, is
it not, that the choice between machinery, the post and people
is not there, if we want to see the USO?
Mr Stapleton: I am sorry but I
disagree with you, Mr Hoyle, for the very reason that there are
different ways of delivering on the last mile. There is no ulterior
motive in what Postcomm is intending. Our vision, as we have said
consistently, is a robust universal service, which means your
postman will come to every door, every day, but he does not need
to spend half his working day sorting the mail into his walk in
his delivery office. In every other country in Europe it is sorted
automatically, usually in one of the big mail centres, and it
is a lot more efficient to deliver the mail in that way. You do
not get any less customer intimacy and actually you get your mail
a lot earlier in the morning than our so-called single delivery
has given us.
Q212 Mr Hoyle: How do you pay for
the investment?
Mr Stapleton: You pay for the
investment by giving Royal Mail an 8%, guaranteed, real return
on their investment and I would like to work in a commercial company
which had that sort of guarantee of return on their investment.
Q213 Miss Kirkbride: A postman still
puts it through your door, does he not?
Mr Stapleton: Yes; as long as
it not too big to get through the letterbox.
Q214 Miss Kirkbride: I suppose it
was what Mr Moriarty said that makes me wonder whether your plans
for liberalising Royal Mail will bear fruit in the way that you
expect. When Royal Mail came to talk to us what they seemed to
be suggesting was that what they would see happen is big, alternative
mail-sort offices springing up and they would be very happy to
deliver in Birmingham, or possibly even Chorley, and certainly
in the major cities, but when it came to the Highlands and Islands
and everything else, where it is expensive to send postmen down
some gateways, then they think it is all the Royal Mail Universal
Service Obligation. Therefore, you will see not just creaming
but really fundamentally much bigger bulk contracts going through
an alternative provider but with the really expensive bit left
to the Royal Mail, also the Royal Mail's particular service, which
is this Mailsort 1400, which you are saying should be done in
the universal service delivery but which they think could be open
very much to that kind of much more fundamental cherry-picking?
Mr Moriarty: On access, what Royal
Mail have developed is a zonally priced access service, so it
is cheaper for operators to use the postman in London than it
is in the Hebrides, say. What this ensures is that Royal Mail
can cover its costs so that in the future there is no suggestion
that, say, TNT will give mail to Royal Mail that it could then
take at a loss, and that is what it has done. We have not ruled
that out as a point of principle, what we have said to Royal Mail
is that it has to demonstrate that it is cost-effective and not
anti-competitive. If it were to have that flexibility then that
problem should not arise.
Q215 Miss Kirkbride: Mailsort 1400,
if this is the one that is going to be subject to the universal
service delivery, that applies to only 2% of their customers,
according to the Royal Mail. Yet you are insisting that this should
be made open to everybody, instead of being able to say to these
companies, "Because we want to go there, we're going to price
relative to where you're sending it and the difficulty of getting
it there." Why does that have to happen?
Mr Moriarty: Let me take the point
about Mailsort 1400. It may be 2% of customers but it is 22% of
volume and it is very important to certain customers out there.
We have been out to consultation over a period of two years—and
no other person has done this, the Government have not done it,
Royal Mail have not done it—to ask customers up and down
the country "What is meant by the universal service to you?"
Clearly stamps are a universal service and we decided that a generic
bulk mail service should be out there, particularly for some small
businesses, where they do not have alternatives, and the one that
they told us to put into the universal service was Mailsort 1400,
so we are reflecting those needs.
Mr Stapleton: Those of you who
come from rural constituencies should be very pleased that we
have taken a different view from that of Royal Mail on this, because
you are trying to promote small businesses, home-workers, to preserve
rural communities. They rely a lot on e-commerce. E-commerce is
delivered by direct mail. If Royal Mail were allowed to zonally
price all their bulk mail product you would find the direct mailers
not willing to go to the Hebrides, because they would not be paying
a uniform price to send their catalogues, they would be paying
a much higher price and probably therefore would not find it economic
to distribute essentials for small businesses in rural communities.
I think you should be very pleased that we have taken a very contrary
view from that of Royal Mail in terms of keeping a bulk mail product
in the universal service. That fact of trying to demean it, that
says it is only 2% of their customers; it is 22% of their volume
and it is going a lot to small businesses in rural areas which
otherwise would not get their direct mail. It is just like your
parcels analogy.
Q216 Chairman: You have said that
Royal Mail still retains a number of significant advantages over
its competitors. Following full liberalisation, which of these
significant advantages do you think Royal Mail should retain and
why?
Ms Chambers: We expect that for
the immediately foreseeable future Royal Mail is likely to retain
most or possibly all of its advantages. The one that probably
is most important to them is their sheer scale and the scope of
their business and even on their projections they will certainly
be retaining enormous scale and scope. They will certainly be
hugely dominant, even by the end of our price control period.
VAT is one of the other advantages that they have over other operators.
It is not our role to determine the future of VAT; that is within
the Treasury's role. So far we have seen no indication from them
that they are about to change their position on that, so I think
we could predict that is likely to remain for a little while at
least.
Q217 Chairman: You would not want
them to change their position on VAT?
Ms Chambers: We would like to
see a change in the position on VAT because we would like to see
a little bit more of a level playing-field on VAT. We would not
like to see a change in VAT which imposed any increase on customers,
but we believe that it would be possible to introduce a low rate
of 5% of VAT without increasing stamp prices.
Q218 Chairman: You could put a 5%
levy on stamps to Gordon Brown, the Chancellor of the Exchequer,
and not increase stamp prices?
Mr Stapleton: The reason for that
being that, clearly, being VAT-exempt at the present moment, Royal
Mail cannot reclaim their advertising.
Q219 Chairman: As far as I recall,
the evidence we have had from the company was that it would not
make a huge difference to them.
Ms Chambers: It would not make
a huge difference, no. The third advantage that Royal Mail has,
which is something which is only ever eroded over a very, very
long timescale, is customer inertia. When you have got a product
like mail, which effectively is quite low-priced, if you give
good service and you keep the price relatively low then there
is considerable inertia among customers and a lack of will for
them to move. So long as Royal Mail remain efficient, become more
efficient, if they become more customer-focused, they can rely
on that customer inertia to give them an advantage for some years
to come. I do not think any of those advantages are likely to
be eroded significantly over the next couple of years.
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