APPENDIX 19
Further supplementary memorandum by Postwatch
Postwatch is happy to provide additional evidence
to TISC as requested in your letter of 15 November. Our additional
clarification and evidence is set out below.
UNIVERSAL SERVICE
Evidence for the statement in Q131: "We
have undertaken independent work and we forecast that it [the
universal service] is worth at least £500 million a year
to Royal Mail, so it is not a cost".
In 2002 Postwatch commissioned independent research
company, London Economics, to quantify the benefits of the universal
service to Consignia (as Royal Mail was then known). This found
that the commercial benefits associated with Consignia's universal
service provision ranged from £173-£480 million, including
benefit of the VAT exemption. The benefits clearly outweighed
any universal service costs associated with loss making routes.
The figures above are in 2002 prices but inflation means that
the £480 million figure would equate to over £500 million
in today's prices.
Royal Mail has not challenged these estimates.
Indeed in giving evidence Adam Crozier recognised the benefits
by describing the universal service as a "terrific advantage".
However, when pressed by the Committee Alan Leighton was reluctant
to quantify the extent of the benefit.
The Executive summary of the report prepared
by London Economics is annexed to this letter.
PENSIONS
Evidence for the statement in Q164: "As
from April 2000 there was a penny increase in the first- and second-class
post and the justification which was given by Royal Mail at the
time was that was needed to fill a pension deficit. In fact, no
money was paid to try to fill the pension deficit until 2002-03
at the earliest and even then it is difficult to understand from
Royal Mail accounts how much money they did put in, in that year".
The papers relating to the April 2000 price
increase pre-date the creation of Postwatch and so not all are
available. We do, however, have a letter of 11 February from Jim
Cotton-Betteridge, the then Managing Director of Royal Mail, to
Peter Carr seeking to justify the price increases proposed in
December 1999 (to come into effect from 1 April 2000).
This refers explicitly to the need to increase
prices to pay £500 million into the Royal Mail's two pension
funds. To quote
"the additional figure of £50 million
we have quoted is annual and is recommended by the actuaries following
a review in March 1999. The longer established and larger scheme
has enjoyed a holiday from employer contributions, which is now
coming to an end earlier than expected. The new and smaller scheme
is under funded and requires additional employer contributions
for the next 10 years."
Despite the actuaries identifying a pension
deficit in March 1999, the pension plan had a funding level of
104.5% as at March 2000. In his evidence to the Committee, Alex
Smith said that the plan continued to be in surplus until 2001
"in fact it was 105% funded which means the company could
not put any more money into it." The price increases had
nonetheless been implemented a year earlier.
We have attempted to obtain copies of the accounts
for the pension plan for the years 2000-01, 2001-02, and 2002-03
but have not been able to do so in the time available. Our actuaries
have not been able to establish what payments, if any, were made
to the fund in these years from Royal Mail Group's published accounts.
PRIVATISATION
Our answers to the two additional questions
asked by the Committee are below.
Q. 1 The Government committed itself to not
privatising Royal Mail. Does Postwatch believe that the Royal
Mail can remain a public sector organisation and still compete
effectively against private sector competition in a fully liberalised
UK postal market? What advantages over Royal Mail do you believe
previously state owned national operators elsewhere in the EU
will have after January 2006?
Postwatch is a creature of statute and as such
is tasked with representing customers in line with its remit under
the Postal Services Act. Accordingly, we see privatisation as
an issue for the management of Royal Mail and the shareholder
in the form of the DTI/Treasury to consider. We therefore have
not taken a view on what form of ownership is best for Royal Mail.
Whatever form of ownership is decided should not result in an
erosion of regulatory safeguards for customers and should be geared
towards providing better services for customers.
We do believe that Royal Mail could remain a
public sector organisation and compete effectively. There is nothing
inherent in public ownership that should prevent the company from
competing effectively. Some Treasury controls may inhibit investment
for example but that is a matter for the Treasury. It can also
be said that the form of price regulation adopted by Postcomm
(RPI-X) is not as effective when applied to public sector organisations
as it is when applied to management answerable to private shareholders.
Where the shareholder is the Government management knows that
the Government may bail the company out for political reasons
in circumstances where private shareholders would not. The Committee
may wish to seek further evidence from Postcomm as to how they
intend to manage this issue.
The Committee is right to consider that previously
state owned national operators in other member states will have
advantages over Royal Mail after January 2006. The key advantage
is that they are more efficient operators in their home markets.
However, it must be remembered that these advantages are in their
home markets and do not necessarily translate into advantages
when competing with Royal Mail in the UK. For example, the German
and Dutch operators must build an efficient network in the UK
to compete with Royal Mail which will take considerable investment
and time.
Being early to open up its market will give
Royal Mail an advantage at the European level. The Dutch have
recognised this by tying their full market opening to the UK's.
More generally, in order to compete effectively they must also
overcome a number of barriers to entry which are presently frustrating
competition (discussed below).
LIBERALISATION
Q. 2 Following full liberalisation in 2006,
what advantages over Royal Mail's competitors, which are currently
protected by the regulator and the Government, such as VAT exemption
and the Postcode Address File (PAF), do you believe Royal Mail
should be allowed to retain and why?
There are a number of advantages which are inherent
to Royal Mail because of its size and heritage, such as brand
value, customer inertia and economies and scale and scope. The
Regulator cannot take these away from the company but their effects
can and should be mitigated by the creation of a level playing
field for competitors. Crucial to a level playing field are the
other advantages that Royal Mail enjoys such as special privileges,
the VAT exemption, and ownership of the PAF. VAT is the key one;
the exemption must be removed but in such a way that price increases
for customers are avoided. The Regulator has previously consulted
on which of Royal Mail's special privileges it should be allowed
to retain but has not yet reached a decision. Likewise its deliberations
on the ownership of the PAF have not yet concluded. The Committee
may wish to pursue these questions with Postcomm. Postwatch's
views on PAF and special privileges are outlined in more detail
in consultation responses to Postcomm annexed to this letter.
I hope this answers the Committee's questions.
If you need anything further do not hesitate to get in touch.
23 November 2005
| 
