APPENDIX 1
Memorandum by the Association of International
Courier and Express Services
INTRODUCTION
1. The Association of International Couriers
and Express Services (AICES) is pleased to make a response to
the Trade and Industry Select Committee's inquiry into the Royal
Mail.
2. AICES is the trade organisation in the
United Kingdom for companies handling international express documents
and package shipments. Our membership—which includes household
names such as DHL, FedEx, TNT and UPS—employs over 29,000
people directly, supports a further 68,000 jobs indirectly, and
is responsible for over 95% of the international courier and express
shipments moved through the UK every day.
3. The express industry plays a key role
in facilitating the competitiveness of British business—and
making the UK an attractive location for inward investment. Express
services are used by UK business to achieve the next day delivery
of goods and documents to customers throughout Europe and North
America.
RELEVANCE OF
THIS INQUIRY
TO AICES
4. AICES supports the initiative of liberalisation
of the letter mail market as it will provide for a more level
playing field in the express delivery market. As Royal Mail adapts
to the fully liberalised environment we expect them, quite rightly,
to act as a fully fledged commercial competitor to our services.
Therefore we believe that it is imperative that we be allowed
to compete with Royal Mail on an even footing in the area of express
delivery services.
KEY ISSUES
VAT Exemption
5. The postal market is being opened up
to competition in a phased programme of liberalisation. AICES
believes that competition will facilitate the creation of new
services, introduce price competition and ensure improved service
levels. However, for the benefits of competition to be realised,
a level playing field between Royal Mail and potential market
entrants must be created.
6. Where a universal service provider can
provide services that are VAT exempt in competition with services
that are not VAT exempt, the universal service provider has a
significant advantage. This advantage has a detrimental effect
on competition and, in the long term, customers.
7. The 6th VAT Directive of 1977 sought
to harmonise the existing VAT exemption rules in the Member States
of the Common Market and confirmed that services provided by the
"public postal services" must be VAT exempt.
8. AICES would recommend that the phrase
public postal services should be interpreted (as has been done
elsewhere in the EU) as referring only to those services that
Royal Mail is obliged to provide as part of its universal service
obligation. All other services, broadly—business mail services,
parcel and special express delivery services offered by Royal
Mail, should therefore be subject to VAT.
9. If all other things are equal, a UK Customer
who is VAT exempt will probably elect for the goods or services
which are also VAT exempt as it will make an immediate saving
of 17.5%. VAT exempt Customers (eg banks, building societies,
government departments, charities etc) are estimated to represent
45% of all mail volumes in the United Kingdom. (Source: Postcomm.)
10. This means that, for Royal Mail's competitors,
they will need to offer prices which are at least 17.5% cheaper
than those charged by Royal Mail if they are to be able to start
to compete on price, when targeting VAT exempt Customers.
11. For so long as a "mixed" VAT
regime applies to express services, there will be a strong preference
for customers to continue using the services of Royal Mail.
12. AICES recommends that VAT should be
charged on all services outside the USO, which should in particular
mean express services.
USO—cross subsidy
13. Royal Mail's Universal Service Obligation
(USO) ensures that people across the UK can receive postal services
at the same cost and quality. AICES supports the existence of
the USO where it relates to core standard postal services, which
people have a right to access.
14. However, currently it is expanded to
cover additional premium services which would not fit with any
definition of a core postal service. Specifically, the Royal Mail's
"Special Delivery Next Day" (SDND) is included in the
USO.
15. The SDND service is a direct commercial
competitor to the service provided by the express delivery industry.
In advertising for the service, Royal Mail specifically benchmark
it against services provided by the likes of UPS and DHL. This
is not a public interest service but a highly competitive commercial
operation.
16. The key features of the service as advertised
by Royal Mail are:
— "Guaranteed delivery before
12 noon the next working day—or your money back".
— "Prices start at just £3.75—great
value compared to the charges of other next-day express carriers".
— "And don't forget we'll collect
your item for delivery from your business for just £5.50
extra" (ie door-to-door service starting from £9.25).
— An account can be set up for this
service, collections can be booked online and on delivery, the
recipient will have to sign for the package and there will be
an online confirmation of delivery.
17. We questioned the rationale for including
the "Special Delivery Next Day" service in the USO on
the basis that Royal Mail currently provides a non-USO domestic
express service starting at £6.95 for packages weighing up
to 100g with compensation up to £50. For £7.40 insurance
will cover for compensation up to £1,000 and for £8.30
packages are covered for compensation up to £2,500.
18. In paragraph 4.33 on page 28 of "Review
of the universal postal service: Postcomm's proposals", the
regulator notes: "Postcomm takes the view that there is no
need for a priority (or faster) parcels service as part of the
universal service."
19. Given the fact that Royal Mail's "Special
Delivery Next Day" service has features identical to that
of express services, and following Postcomm's own views outlined
above, it would appear that there is no basis for including this
service in the Universal Service Obligation.
20. The issue of the SDND being included
in the USO is important as, unlike with strictly commercial operations,
Royal Mail is allowed to cross subsidise the service from other
operations. This means in practice that Royal Mail could use funds
from their national standard postal services, which individuals
across the country rely on, to subsidise their express service
so as to unfairly undercut those of its commercial rivals.
21. Including express delivery services
in Royal Mail's USO effectively discourages other operators from
being active in the express delivery market. This goes against
the objectives of market liberalisation and fostering competition
in the postal and express delivery sector.
22. The reason the Royal Mail's express
service has been included is that under EU regulations the Royal
Mail has to provide a registered and insured service as part of
the USO. However, we believe that such features could be incorporated
into other registered services also within the USO that are not
directly aimed at competing in an already highly competitive market.
23. Many European countries have found alternative
solutions to the requirement to include registered/insured mail
in their USO, which do not involve express services. Belgium,
the Netherlands and Denmark are three such examples where the
incumbents provide a registered/insured service, without express
features, within the scope of the Universal Service. A fourth
example is the Swedish post office, which offers an insured and
registered service, despite the fact that these services are not
included in the Universal Service Obligation.
CONCLUSION
24. AICES appreciates the Committee's interest
in this topic and believes that the Committee can play a crucial
role in developing a more level playing field in the post liberalisation
postal industry. We would be more than happy to provide any further
information the Committee might find useful, or to appear before
the Committee in the course of the inquiry.
25. AICES members support the need for a
socially inclusive UK postal service, and believes that this service
should not be used by the Royal Mail to subsidise commercial operations
in the highly competitive corporate market.
October 2005
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