APPENDIX 16
Supplementary memorandum by Postcomm
FURTHER INFORMATION REQUESTED BY THE COMMITTEE
ON 15 NOVEMBER 2005
INTRODUCTION
We welcome the opportunity to provide further
information/clarification to the committee. We have dealt with
each of the questions in your letter of 15 November below. However,
we would initially like to reiterate a number of key points.
Ensuring the continued provision of the universal
postal service across the UK is Postcomm's over-riding statutory
duty. Competition will not be allowed to threaten the universal
service. Postcomm will always ensure that the universal service
can be financed without resort to Government support. In the short
term, this is achieved through the price control. In the longer
term, the threat of competition will make Royal Mail more efficient
and customer focused.
The competition that has developed so far has
led to an improvement in the quality of postal services. Our policies
have given Royal Mail incentives to improve its reliability and
operate more efficiently, and are resulting in new operators offering
customers a variety of new products. However, Royal Mail still
retains a number of significant advantages over its competitors,
such as its huge scale and its VAT exemption.
Further competition will continue to benefit
customers, as has been the case in those countries that have already
opened their postal markets. We think that customers in the UK
will benefit irrespective of the pace at which other European
countries liberalise.
1. We would like to request a summary of the
main findings of [the business customer] survey
The executive summary of the business customer
survey is attached.[10]
2. [A]ny evidence you have on the USO obligations
of the USO providers in the other EU Member States. For example,
number of days post delivered, who delivers through the post box
and who to other locations, etc?
The definition of the universal service in each
EU member state reflects the historical development of postal
services and the level of service that residents have come to
expect in each country. National postal operators in different
member states have evolved differently, with some investing more
heavily than others and developing new markets more proactively.
The European Postal Services Directive leaves
the detailed definition of the universal service in the hands
of member states. In some member states, the universal service
is defined very widely and includes services such as the delivery
of newspapers and periodicals, financial services and the provision
of post offices. In Germany, for example, the universal service
consists of a range of postal services (as in the UK) as well
as the delivery of newspapers and periodicals and the requirement
to provide at least 12,000 post offices at set distances apart.
Deutsche Post gets no explicit subsidy for this.
The number of days that post is delivered and
the time of delivery also vary, and reflect historical differences
(see Table 1). In Finland, for example, where newspapers are also
part of the universal service, Finland Post delivers the paper
by 8 am and the mail during the course of the morning. In Germany,
all mail is currently delivered by 2.30 pm, but Deutsche Post
has just announced that from 1 January all mail will be delivered
by 1 pm in response to competition from market opening.
Table 1
COMPARISON OF CURRENT USO DELIVERY TIMES
IN EUROPE
|
| UK
| Germany | Netherlands
| Sweden | Finland
|
|
| Start of delivery | 9 am
| 9 am | 8 am
| 8 am | 8 am
|
| End of delivery—domestic | 1 pm
| 2.30 pm | 12 noon
| 2 pm | 12 noon
|
| End of delivery—business | 1 pm
| 2.30 pm | 5 pm
| 2.30 pm | 12 noon
|
| Weekend delivery? | Yes
| Yes | Yes
| No | No
|
|
There is a similar range of experience and historical precedent
in respect of whether post is delivered to the door, to post boxes
in an apartment building, to the apartment building superintendent
etc. In some member states, for example Austria, the postman has
to use a key to open the mailbox of each household—only
the postman and the householder has a key to open the mailbox.
3. How does the turnover, costs and profits of the universal
service obligation to national operators in other EU countries
compare to Royal Mail's?
We liaise regularly with other European postal regulators
and national operators, to gain a better understanding of what
drives the national operators' costs of the universal service,
and the approaches to ensuring the universal service adopted by
national regulatory authorities.
However, since the make up of the universal service is very
different in all EU member states, it is not possible to make
genuine like-for-like comparisons. Rather, it is more informative
to make comparisons on broader terms. Therefore we do not hold
highly detailed information such as this on other European operators'
universal service obligations.
4. Exactly what products are in the USO in the UK?
The UK Postal Services Act 2000 describes the universal service
in very general terms, being made up of services which must provide
collection and delivery every (working) day at an affordable and
geographically uniform price. On this basis it was (initially)
simply assumed that everything that Royal Mail did was the universal
service—over 100 products.
In April 2003, Postcomm began a two-year consultation to
reach an informed view of what customers wanted from the universal
service, and which of Royal Mail's products this should cover.
The results of Postcomm's consultation (set out in Table 2) are
due to be implemented alongside Royal Mail's price control in
April 2006—in the meantime, the original assumption remains.
Table 2
ROYAL MAIL'S UNIVERSAL SERVICE REQUIREMENTS
|
| Generic service requirement | Specific product Royal Mail is required to provide
|
|
| A priority mail service for letters and packets up to 2kg
| 1st class mail
Available through a range of payment methods
(eg stamped, franked etc)
|
| A non-priority mail service for letters and packets up to 2kg
| 2nd class mail
Available through a range of payment methods
(eg stamped, franked etc)
|
| Non-priority parcels service up to 20kg |
Standard parcel service |
| A registered and insured service | Special delivery (next day 1 pm) and Recorded delivery (signed for)
|
| Support services | Redirection (up to 12 months)
Keepsafe (where Royal Mail will offer to hold a customer's mail for up to two months)
Post restante (for picking mail up from post offices in the UK and abroad)
Certificate of posting
Business collections (daily or one-off collections)
|
| International outbound service | International public tariff
International Signed-for service
|
| A generic bulk mail service | Mailsort 1400 (first and second class service, sorted 1,400 ways)
Cleanmail (first and second class, for bar-coded mail)
|
|
5. Exactly what products are in the USO in other EU countries?
The best and most up-to-date source of this sort of information
is the European Commission's study on "Development of competition
in the European postal sector" by ECORYS which was published
in July 2005.
The report provides a detailed breakdown on postal services
and development of competition in each Member State. It does not
attempt to translate the generic universal services into "named
products" because of the difficulty of comparing like with
like on this basis. The report can be found on the European Commission's
website at:
http://europa.eu.int/comm/internal_market/post/doc/studies/2005-ecorys-final_en.pdf.
6. Is it required under EU law that the USO must be provided
for by the public postal services operator in each Member State?
The European Postal Services Directive does not specifically
require the universal service to be provided by the "public
postal services operator". The Directive leaves it up to
individual member states to decide how to allocate the requirement.
In most member states the universal service obligation is not
allocated to a named company through primary legislation. In the
UK, for example, the obligation is placed on Royal Mail under
the terms of its licence.
In Sweden, the state has formal responsibility for the universal
service obligation and since March 1994 the government has had
an agreement with the national operator (Posten) to be the designated
universal service provider.
In Germany, the legislation envisages that the universal
service should be maintained by postal service providers generally
and only if this fails to happen should contingency plans be invoked.
7. A note on how Royal Mail will be allowed to fund its
USO obligations
With the notable exception of the growth in the pension fund
deficit, Royal Mail's financial performance has improved considerably
over the past couple of years. Last year, Royal Mail made a profit
from operations of £452 million on its regulated activities
(excluding exceptionals, the share in success scheme and pension
deficit payments). The part of the business that provides the
universal service is also profitable, and has been since 2000.
This profit has been driven by stronger than anticipated growth
in mail volumes during which Royal Mail has managed to keep costs
flat, and the price rises allowed under the current price control.
There are a number of ways in which we fulfil our primary
duty to ensure that Royal Mail is able to continue to provide
the universal service. The primary mechanism is through setting
a price control that provides Royal Mail with sufficient revenue
to provide the universal service products. Royal Mail's current
price control lasts for three years and the next control is proposed
to last for four years from April 2006. Royal Mail has significantly
outperformed the current price control, making profits around
twice as high as originally anticipated, and its universal service
is in a strong position as a result, with quality of service performance
now running at some of the highest levels in recent history.
For the next price control we are actively considering mechanisms
to protect the universal service against potential risks faced
by Royal Mail, including the risk that its pension deficit could
become even bigger and that future mail volumes might fall. We
will shortly be publishing our final proposals for the next price
control, which will explain this in more detail.
Beyond this, if any wholly unexpected circumstances or combination
of circumstances were to threaten the universal service in the
future, we can re-open the price control at any time to deal with
such events. We actively monitor Royal Mail's financial health,
anticipate developments in the market, and are alert to any potential
threats to the universal service.
8. Mr Moriarty agreed to send the Committee a note of "your
view on VAT on stamps and what implications that would have for
the company and the customer." We would like to request that
note
Royal Mail is currently exempt from charging VAT on services
it supplies to customers. In contrast, alternative postal operators
are required to charge their customers VAT at the full rate of
17.5%.
We do not think that VAT exemption is required for the provision
of the universal service, and continues to distort competition
significantly. It continues to be highlighted as one of the main
barriers to entry for alternative providers and one of the main
barriers to switching by business customers that are VAT exempt
(and cannot therefore, recover VAT paid to alternative postal
operators).
Alternative operators need to overcome an approximate 13%
price disadvantage against Royal Mail (not 17.5% as Royal Mail's
prices must cover its VAT on inputs, which it is currently unable
to reclaim) before offering any discount to encourage VAT exempt
customers to switch. Alternative providers are therefore at a
significant disadvantage when targeting VAT exempt companies.
This view is reflected in the results of Postcomm's 2005 business
customer survey.
Some of the largest bulk mail customers are VAT exempt, including
banks and financial institutions, and some charities. A number
of these institutions have told Postcomm that they were discouraged
from switching provider due to the fact that alternative providers
had to charge the full 17.5% VAT rate, which they would not be
able to reclaim.
Using data provided by Royal Mail, Postcomm has estimated
that over 40% of customers (by value) are VAT exempt, including
those in key segments of the market which it would be very advantageous
for alternative providers to serve—in order to build critical
mass and scale. It is clear therefore, that Royal Mail's VAT exemption
is distorting competition.
Stakeholders support a level playing field. The majority
would welcome either the VAT exemption being extended to all operators,
or a reduced VAT rate for postal services.
The need to increase prices that would result from charging
a reduced rate of VAT of 5% is likely to be broadly offset by
the fact that Royal Mail would be able to reclaim VAT on its inputs,
and would therefore see a fall in costs. As a result, applying
VAT of 5% on postal services, including stamps, would be unlikely
to result in prices rises for customers that cannot recover VAT.
Postcomm would support a solution of a reduced rate of 5%
being applied to all postal services. We would also support the
VAT exemption being extended to all operators. Postcomm does not,
however, support the full rate of VAT at 17.5% being applied to
all postal services as the resultant price increases would not
be in customers' interests.
9. It would also be useful for the Committee if the note
could go through the legislative/political process by which VAT
could be added to postage
Policy on VAT is a matter for HM Treasury. Postcomm understands,
however, that under current legislation HM Treasury has broadly
two options: maintain the status quo, or apply the full rate of
VAT of 17.5% to all postal services. Postcomm supports neither
of these options.
There are two other alternatives: extend the exemption, or
apply a reduced rate. Postcomm understands that both of these
options would require amendments to the current European VAT Directive.
10. Could you also tell us what discussions Postcomm have
had with HM Treasury about the removal of Royal Mail's VAT exemption?
We have held a number of meetings over the last few years
with representatives of HM Treasury to explain our position on
this matter. In addition, we have shared some of our analysis,
including financial models that assess the impact of various VAT
scenarios.
We are always willing to meet HM Treasury to discuss the
issue and are also keen to facilitate a meeting between HM Treasury
and the alternative postal operators.
11. Could you provide us with historic figures for market
volumes in the UK: transactional, correspondence, direct mail
and total mail?
The table below shows mail volumes in the UK over the last
three years. The longer-term trend is steady growth of around
1-2% per annum, although there has been a slight dip in volumes
in 2005.
Table 3
TRANSACTION, CORRESPONDENCE AND DIRECT MAIL IN THE UK
(2002-05)
|
| 2002-03
| 2003-04 | 2004-05
|
|
Transaction
(first and second class PPI mail)
| 4,994 m | 5,059 m
| 5,176 m |
Correspondence
(first and second class stamped and metered mail)
| 7,936 m | 7,787 m
| 7,572 m |
Direct mail
(bulk mail) | 7,828 m
| 8,088 m | 8,074 m
|
| Total mail | 20,758 m
| 20,934 m | 20,822 m
|
|
Neither Postcomm nor Royal Mail expects a decline in overall
volumes over the next 3-4 years, although the mix of mail volumes
may change. For example, fulfilment of electronic transactions
is likely to continue growing. Indeed, Royal Mail was quoted in
the Daily Telegraph on 24 November as predicting that online
shopping in the run up to Christmas will increase by 40% this
year compared to last year, resulting in Royal Mail delivering
around 70 million parcels.
12. Royal Mail's competitors already have access, albeit
under licence, to parts of Royal Mail's delivery service. According
to the Royal Mail, the UK is the only Member State of the EU to
allow this. Is this correct and if so why has Postcomm introduced
these arrangements here? What evidence do you have that this will
be happening in other EU countries in the future?
Royal Mail is currently the only national postal operator
in Europe that is required to allow downstream access to its delivery
network.
Postcomm pushed for access (at a fair price that is profitable
for Royal Mail) because of the huge economies of scale that Royal
Mail enjoys in final delivery. These economies of scale mean that
Royal Mail can deliver mail at a very low cost per item, making
it very difficult for other operators to compete in delivery.
Requiring Royal Mail to offer access on fair terms, and share
these benefits, facilitates competition. It allows customers to
benefit from new services offered by consolidators and still allows
Royal Mail to make a profit on the access mail it handles.
There is little evidence of downstream access in Europe so
far. This is because there is little competition. Without a commitment
to competition, there is no call for downstream access.
Downstream access is, however, very well developed in the
US, where mail collected by consolidators and delivered by the
US Postal Service is widespread. A large number of alternative
operators offer consolidation services, and this concept is embraced
and encouraged by the US Postal Service which voluntarily introduced
the arrangements around 25 years ago. Consolidation has since
been largely responsible for strong and consistent growth in mail
volumes in the US (where mail volumes per capita are much higher
than in Europe).
13. Postcomm believes [access] should be brought inside
[the price control]. Is this correct? If so is Postcomm not satisfied
that Royal Mail's charges to its competitors are appropriate?
It is correct that Postcomm has proposed to include access
products in the price control.
So far, almost all competition to Royal Mail has come through
downstream access. Consolidators pay the access price to Royal
Mail and must compete with Royal Mail's retail prices (eg for
its bulk mail products). Therefore, the level of the access price
compared to Royal Mail's retail prices is crucial. If Royal Mail
squeezes the margin between access products and its bulk mail
products, it squeezes the margin in which its competitors operate.
Royal Mail agreed a set of access prices with UK Mail in
2004. In 2005, at the first available opportunity, Royal Mail
increased access prices and reduced many key bulk mail retail
prices, reducing the margin available to competing operators.
If this pattern continues, there may no longer be any commercial
opportunity for the alternative operators. This is why we are
proposing to include access in the price control.
14. The Committee would also like any historical information
you could provide on Royal Mail's "15 quality of service
targets" you have collected
Royal Mail currently has 15 quality of service targets that
are product or postcode area specific. They cover its key products
such as first and second class stamped mail. These targets are
conditions in Royal Mail's licence, and were originally agreed
between Postcomm and Royal Mail in 2001. Until competition provides
sufficient restraint on Royal Mail's behaviour, these targets
are needed to ensure that customers enjoy a good service from
Royal Mail and receive compensation if this does not happen.
Royal Mail's recent quality of service performance is set
out in Table 4 below. The target for first class mail is next
day delivery, for second class the target is within three days,
and for third class (eg Mailsort 3) the aim is delivery within
seven working days.
After a very poor year in 2003-04, Royal Mail improved its
quality of service performance during 2004-05. It has recently
announced further improved figures for the second quarter of 2005-06.
There have, however, been some persistent difficulties in some
individual postcode areas.
Table 4
HISTORICAL QUALITY OF SERVICE PERFORMANCE
|
| 2001-02
| 2002-03
| 2003-04
| 2004-05
|
| Target
| Result | Target
| Result | Target
| Result | Target
| Result |
|
| 1st Class Stamped & Meter All | 92.1%
| 89.9% | 92.5%
| 91.8% | 92.5%
| 90.1% | 92.5% | 91.4%
|
| 2nd Class Stamped & Meter All | 98.5%
| 98.3% | 98.5%
| 98.6% | 98.5%
| 97.8% | 98.5% | 98.5%
|
| 1st Class Postage Paid Impression | 90.0%
| 81.4% | 92.5%
| 83.9% | 90.6%
| 83.5% | 90.6% | 87.5%
|
| 2nd Class Postage Paid Impression | 97.0%
| 94.4% | 98.5%
| 96.9% | 97.4%
| 94.6% | 97.4% | 96.0%
|
| 1st Class Response Services | 90.5%
| 78.1% | 92.5%
| 80.3% | 90.3%
| 81.7% | 90.3% | 80.5%
|
| 2nd Class Response Services | 97.0%
| 93.7% | 98.5%
| 93.7% | 97.5%
| 92.2% | 97.5% | 93.4%
|
| Special Delivery | 99.0%
| 98.5% | 99.0%
| 98.6% | 99.0%
| 97.9% | 99.0% | 98.0%
|
Number of postcodes achieving 90.5% for 1st class stamped and metered posted to UK (out of
total of 121)
| 98 | 71
| 118 | 108
| 118 | 66 | 118
| 80 |
| All PCAs to achieve 92.5% for 1st class stamped and metered intra postcode area (out of total of 121)
| 121 | 87
| 121 | 110
| 121 | 97 | 121
| 107 |
| Mailsort 1 | 92.1%
| 90.0% | 93.0%
| 90.8% | 91.0%
| 89.2% | 91.0% | 91.1%
|
| Mailsort 2 | 97.6%
| 95.5% | 98.5%
| 96.5% | 97.5%
| 95.7% | 97.5% | 97.3%
|
| Mailsort 3 | 98.5%
| 97.9% | 98.5%
| 98.0% | 97.5%
| 97.4% | 97.5% | 98.5%
|
| Presstream 1 | 91.0%
| 89.2% | 92.5%
| 90.8% | 90.5%
| 88.1% | 90.5% | 90.4%
|
| Presstream 2 | 97.6%
| 96.2% | 98.5%
| 96.8% | 97.5%
| 95.1% | 97.5% | 97.5%
|
Standard Retail Parcel
(End to End) |
88.0% | 81.0%
| 90.0% | 88.5%
| 90.0% | 88.9% | 90.0%
| 89.7% |
|
15. In a recent correspondence you very kindly provided
the Committee with two tables. One showed EU comparisons of quality
of service information and the second showed EU price comparisons.
The Committee would be grateful if you could attach these to your
reply
Quality of service comparisons across Europe
Although some of Royal Mail's European equivalents have lower
quality of service targets, many still outperform Royal Mail.
Table 5 compares the UK with a number of other postal operators
in Europe. It is clear that, although the targets in many countries
may be low, their performance (including operators in more liberalised
countries such as the Netherlands and Sweden) is in many cases
superior to that of Royal Mail—though there are some woeful
exceptions!
Table 5
COMPARISON OF FIRST CLASS QUALITY OF SERVICE TARGETS AND
PERFORMANCE IN EUROPE
|
| Target
2003-04
| Performance
2003-04
|
|
| UK | 92.50%
| 90.10% |
| Netherlands | 95.00%
| 96.10% |
| Germany | 80.00%
| 96.00% |
| Sweden | 85.00%
| 95.70% |
| Denmark | 97.00%
| 95.10% |
| Finland | 95.00%
| 95.00% |
| Italy | 87.00%
| 87.00% |
| Ireland | 94.00%
| 71.00% |
| France | 84.00%
| 70.00% |
| Greece | 82.00%
| 62.90% |
|
| Price comparisons with the rest of Europe
|
It is correct that Royal Mail's prices for the lowest weight
step are towards the low end of the spectrum across Europe. We
are proud that UK prices are below the European average, and would
like to keep it that way. However, three points must be noted:
— some countries, such as Sweden, apply VAT to postal
services, which is included in the price;
— postal prices must be seen in the context of a
wider media market, which is more developed and competitive in
the UK than elsewhere in Europe; and
— while the 50g prices may be lower in the UK, the
very lightest and heaviest weight prices are sometimes higher
here.
Table 6
COMPARISON OF BASIC WEIGHT POSTAGE PRICES IN EUROPE
|
| Weight | UK
| Netherlands | Sweden
| Germany | France
| Spain |
|
| 20g (3 sheets + envelope) | £0.30
| £0.27 | £0.42
| £0.38 | £0.34
| £0.20 |
| 50g (9 sheets of paper) | £0.30
| £0.55 | £0.81
| £0.69 | £0.51
| £0.28 |
| 100g | £0.46
| £0.81 | £0.81
| £1.00 | £0.76
| £0.38 |
| 150g | £0.64
| £1.08 | £1.64
| £1.00 | £1.31
| £0.63 |
| 200g | £0.79
| £1.08 | £1.64
| £1.00 | £1.31
| £0.63 |
| 350g (19 sheets of paper) | £1.21
| £1.56 | £2.46
| £1.00 | £1.83
| £1.12 |
|
| Source: National postal regulatory authorities
|
SUMMARY
We are confident that our policies are safeguarding the universal
service and delivering benefits to customers.
Competition will help maintain the universal service by ensuring
mailers do not move away from postal services to other media.
Customers tell us that the threat of competition has already led
to an improvement in the quality of postal services. Our policies
have also encouraged Royal Mail to perform better and operate
more efficiently, with more attention to customer needs. Further
competition will continue to benefit customers.
Until effective sustainable competition arrives, however,
Postcomm will need to regulate Royal Mail's prices and service
quality, to ensure that customers who do not have a choice continue
to receive a good postal service at a reasonable price, and that
the universal service is secure.
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