APPENDIX 6
Memorandum by the Department of Trade
and Industry
INTRODUCTION
1. The Department welcomes this inquiry
that comes during a significant period in the development of the
postal services market in the UK.
2. This Memorandum is intended to provide
the newly constituted Committee with some helpful background on
the current postal services regime and to set out the Government's
policy and objectives for Royal Mail and the postal services market.
It also explains our role as shareholder in the Royal Mail.
GOVERNMENT'S
POLICY
The White Paper "Post Office Reform: A
World Class Service for the 21st Century" published in 1999
set out the Government's policy for the reform of the Post Office
corporation and the postal services market. The White Paper recognised
the vital part that the Post Office corporation played in the
UK's economic and social life. The policies set out in the White
Paper were implemented with the passing of the Postal Services
Act (see below). A foundation of the Government's policy was to
give the Post Office corporation greater commercial freedom in
the public sector. The Government also enshrined the universal
service at a uniform tariff in legislation for the first time.
4. The Government's ambition is to see a
publicly-owned Royal Mail fully restored to good health, providing
customers with an excellent service and employees with rewarding
employment. The Government's paramount policy interest remains
the sustainability of the provision of a universal postal service
at uniform affordable prices.
POSTAL SERVICES
ACT 2000
5. Under the Postal Services Act 2000 the
property rights and liabilities of the Post Office corporation
were transferred to a public limited company, whose issued share
capital is wholly owned by the Government. The Secretary of State
for Trade and Industry holds 49,999 ordinary shares with one share
held by the Treasury Solicitors. The Secretary of State also holds
one special share. The company, now Royal Mail Holdings plc, has
to seek the consent of the Secretary of State for Trade and Industry
(in his capacity as special shareholder) for a number of activities
eg issuing of further shares, major transactions, Board appointments
and remuneration.
6. The Act also established an independent
regulator, the Postal Services Commission (Postcomm), and set
out its functions. It also established a licensing regime for
the postal services market. Postcomm was given a primary duty
to ensure the provision of the universal postal service. Subject
to this Postcomm must seek to benefit users of postal services,
where possible by promoting effective competition between postal
service operators Postcomm is required to have special regard
to the interests of:
— disabled people or those who are
chronically sick;
— individuals of pensionable age;
— people on low incomes; and
— those living in rural areas.
7. Postcomm is also required to exercise
its functions to promote the efficiency and economy of postal
operators and to ensure that licence holders are able to finance
the activities set out in their licence.
GOVERNMENT'S
ROLE AS
SHAREHOLDER
8. The Shareholder Executive, located in
the Department of Trade and Industry, has responsibility for the
Government's shareholding in Royal Mail. The Executive was created
in September 2003 with the overarching objective of making Government
an effective and well-informed shareholder. Its remit extends
to around 25 Government-owned businesses with a combined turnover
of around £20 billion. Its role is to advise Ministers and
officials on a wide range of shareholder issues including objectives,
governance, strategy, performance monitoring, Board appointments
and remuneration. The Executive draws on the skills of both the
private and public sectors to meet its objective.
9. The Shareholder Executive directly manages
the Government's financial interests in Royal Mail. It takes full
account of Government policy (which, of course, includes non-commercial
objectives), but within this context, it seeks to use its discretion
to act as a commercial shareholder. As set out in the White Paper,
this is an arm's length relationship to ensure that the management
has the commercial freedom to run the business and the Executive
does not seek to micro-manage it. The Executive has sought to
increase Royal Mail's accountability to its owner and to ensure
that the company delivers the shareholder's objectives. These
objectives are:
— Royal Mail to be a best-in-class,
publicly owned postal service provider with robust, long-term,
sustainable business health; and
— the delivery of government and other
services effectively through an efficient and fit for purpose
Post Office branch network which offers maximum access to those
who need it.
PRICE CONTROL
10. Under the regime established by the
Act, the setting of the price control is a matter for Postcomm.
In reaching its decision on the next price control, the Regulator
has to be mindful to fulfil all of its duties and functions as
set out in the Act—but needs to give priority to its principal
duty which is to ensure the continuing availability of a universal
service at a uniform tariff. The Government, in its role as shareholder,
has responded to Postcomm's price control document setting out
the key principles that we consider ought to be respected and
reflected in the final regulatory settlement. These cover the
following points:
— the taxpayer, through Government
on behalf of taxpayers, is entitled to a reasonable rate of return
on existing capital assets;
— the balance between the interests
of customers and taxpayers needs to be struck through attributing
a "fair" regulatory value for existing assets;
— efficiency targets must reflect what
it is practical for a publicly owned Royal Mail to achieve, by
way of speed of change, in a single price control period—with
full regard given to legacy problems that the company is starting
to address;
— the unavoidable costs of servicing
the pension fund deficit are inherited costs of the business and
as such should be borne over a suitable period by postal service
customers, not by taxpayers;
— the regulatory risks to Royal Mail
should be kept at a minimum otherwise Royal Mail may be at a disadvantage
to other operators; and
— the Government should not be expected
to provide support to Royal Mail's regulated business on a non-commercial
basis.
11. A copy of the full response will be
published along with other responses to the consultation on Postcomm's
website in due course.
MARKET OPENING
12. The Government maintains the view that
greater competition in postal markets will bring benefits to users
of postal services in terms of better quality, greater choice
and lower prices. Greater competition will also help to change
the business culture at Royal Mail, challenging it to become more
efficient and competitive.
13. In its Twelfth Report of session 1998-99,
the Committee recommended that, given that the Postal Services
Commission was soon to be established, in relation to liberalisation
of the market, the Government should not substitute its judgement
for that of the prospective regulator, and that it was more appropriate
for the Regulator to consider the question of the appropriate
measure of liberalisation. The Government accepted this recommendation
and left to the regulator the decision on how the UK postal services
market should be opened to the regulator.
14. The decision to open the market from
1 January 2006 was taken by Postcomm after a full public consultation
and has been supported by Royal Mail management. The decision
is consistent with the provisions of the EU Postal Services Directives,
which allow Member States to fully open their postal markets provided
that a universal postal service is maintained—something
that PostComm remains committed to ensuring as its primary duty.
15. In reaching its decision to fully open
the UK market from 1 January 2006, Postcomm considered that it
would contribute positively towards sharpening the incentives
on Royal Mail to improve its quality of service and customer focus.
It also believed that the stimulus of full market opening should
help Royal Mail better face some of the longer-term challenges
from a rapidly evolving market place.
16. In Europe, the indicative timetable
is to achieve full liberalisation across the EU by 2009 and the
European Postal Directive requires all Member States to reduce
their reserved areas to 50 grams from 1 January 2006. Sweden and
Finland have had fully liberalised postal markets for over a decade
and the national postal operators in these countries have adapted
successfully. Estonia also has no reserved area. There are also
an increasing number of Member States who are committing to full
liberalisation before 2009. The Government continues to press
for full liberalisation across Europe to happen as soon as possible.
7 October 2005
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