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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 570-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE TRADE AND INDUSTRY COMMITTEE
ROYAL MAIL AFTER LIBERALISATION
Tuesday 18 October 2005 MR ALLAN LEIGHTON, MR ADAM CROZIER and MR ALEX SMITH Evidence heard in Public Questions 1 - 116
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Trade and Industry Committee on Tuesday 18 October 2005 Members present: Peter Luff, in the Chair Roger Berry Mr Peter Bone Mr Michael Clapham Mr Lindsay Hoyle Miss Julie Kirkbride Judy Mallaber Anne Moffat Sir Robert Smith Mr Mike Weir Mr Anthony Wright
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Witnesses: Mr Allan Leighton, Chairman, Mr Adam Crozier, Chief Executive, and Mr Alex Smith, Director of Strategy, Royal Mail Group, examined Q1 Chairman: Gentlemen, welcome to this first evidence session and first meeting of the Trade and Industry Committee of this parliamentary session. Can I begin by welcoming you very much personally and asking you to introduce yourselves and tell us what you do? Mr Leighton: I am Allan Leighton. I am the Chairman of the Royal Mail. Mr Crozier: I am Adam Crozier, the Chief Executive. Mr Smith: I am Alex Smith. I am the Director of Strategy. Q2 Chairman: Can I begin by making a comment, if I may? We got some excellent evidence from the unions, some excellent evidence from Postcomm too. Your evidence to us was a photocopy of your submission to Postcomm. It is a very interesting document, which I have actually read, but I was a bit surprised that you did not target it to us. Were there any particular issues you think the Committee should be focusing on that are distinct from your evidence to Postcomm? Mr Leighton: Probably not. The thing is, there is so much stuff floating around at any one time, as you can imagine, about this particular issue. We are very consistent, and I think it is often more important to be consistent than tailored, so we try and provide the same information for everybody so that everybody is looking at the same interpretation of the same things, and so this was done by design. Q3 Chairman: That is looking at the past. Let us look at the future, shall we? The new access regime has been going for some time now; I have been to see its operation locally in my own constituency. Do you feel your charges to competitors are about right for the access regime? Mr Crozier: Yes, I think they are. As it currently stands, we have lost around one billion items annually to access, which is actually about the level that Postcomm in their predictions are suggesting we might lose by 2009/2010; so that would suggest that clearly the market has opened up a great deal further than the regulator expected and has been very successful both for end customers, competitors entering and, indeed, the Royal Mail as it stands today, so I think so far so good. Q4 Chairman: You have not lost those items; you are still actually delivering them, are you not? You are actually taking them and putting them through the letterbox at the end of the day? Mr Crozier: We are still doing the final mile. Q5 Chairman: I find lot of resentment among the unions at the level of work they were having to do compared with the work your competitors were doing in delivering into the sorting office. They felt they were doing all the hard work and their competitors were doing all the easy work. Is that not fair? Mr Crozier: I can understand the point of view, but the fact is that the issue we have with access business, as we have with a lot of the ways in which competition is coming in, is that clearly the competition do not look to target social mail, clearly the competition do not to look target unprofitable mail, what they look to target is the mail that makes money and leave the Royal Mail with the mail that does not make money. The thing about access arrangements is that they can make money on those. It is very difficult for us to take that cost out of the business once we have lost that business, and therefore it really does hit our bottom line. So I can understand why people feel like that, but it is a fact and it is here to stay, and obviously part of our job is to try and combat that. Q6 Chairman: Of course, if you put the prices up too much, if you were able to put the prices up too much for that part of the work, it would encourage your competitors to develop their own distribution networks sooner as well? Mr Crozier: Indeed; I think it is a fallacy that people seem to have that somehow we will lose just upstream business and that the Royal Mail will always do the final mile for everyone everywhere, because our belief is that that is not what will happen, that in fact competitors will actually set up delivery forces, for instance, in major city centres, which is where there is a lot of money to be made, and simply put the rest of the mail, the more unprofitable mail, into the Royal Mail for it to deliver, and that is what we call "cream skimming", and that is one of our biggest fears on the regulatory side, that that will happen. Q7 Chairman: Despite the fact that all the people who provide the access mail to you do is basically print it, put into envelopes and deliver it to your post office, sorting office, where it is then sorted by machines, hand sorted and taken out in vans and bicycles and delivered, and then, of course, all the undeliverable mail that comes back, which is quite a bone of contention - a lot of it is inappropriately addressed, the mail is out of date - there is quite a burden of undeliverable mail - despite all that, you are happy about the balance of the pricing structure at present for that mail? Mr Crozier: I am not sure "happy" would be the right word. These are deals that we did with those people as our customers, because, as has happened in other industries, we have to view a number of these people as competitors and customers. They are competitors when we are competing for that business upstream; once they have won it they are customers, and we have to treat them like every customer and give them a proper and good professional service; so we have to think of them in both ways. I think it is a reasonably fair deal. We should remind ourselves that access only works in this country. I believe we are the only country that has an access regime, and the other countries do not do it simply because they view it as too much profitable mail going into the competition. We are quite unique in that sense. Q8 Chairman: The German post office is a major beneficiary of the regime here in this country as well? Mr Crozier: There is no doubt that the major competitors, like TPG and Deutsche Post, do not have to carry that regime in their own countries, and clearly that gives them an advantage, yes. Mr Leighton: And it gives them an entry point. There is no point complaining about it, it is a fact of life, and the fact of life is that the way it has been set up is that we have to give access to our network, and therefore we have to find a way in which to give access to our network to make money out of it, because we are not into doing things other than making money. That is why we felt the best way of doing this was for us to do our own commercial negotiating round this, not to have it regulated. The other point in all of this as to access is that it gives the competition a start, it is the easy place to start, and if you are smart what you do is you start on the easy bit; so you go to the customer and you say, "We will do this bit for you", but in the end it is just the beginning, it is the way they get in, and when they get in then they start to get some of the bits and pieces. So this is a big a deal; it is a fact of life; we have to manage it; we have to do it commercially; but it is giving our competitors an edge. Chairman: Can we move on to the future of the universal service obligation, which I will ask Sir Robert Smith to deal with. Q9 Sir Robert Smith: Obviously of great concern to the whole Committee but especially those representing large rural areas, remote areas and deprived urban areas is the maintenance of a universal service and that everyone in the country gets access to the same service at the same price from Royal Mail. You mentioned "cream-skimming" in answer to the Chairman's question. Others have called it "cherry-picking". There is a real concern that the rivals will take all the easy profitable business, leaving you to carry on this universal service obligation on a reduced income. We are aware of these concerns about cherry-picking in the large population centres, but how big a problem do you see this to be following full liberalisation? Mr Crozier: It is clearly not a problem for next year or the year after. Nobody is trying to exaggerate it. First, we are absolutely committed to the USO. We do not see the USO as a problem. Actually, we see it a terrific advantage for us. We are proud of the fact that we deliver everywhere every day to every home and every business - that is a huge part of who we are - and clearly we want to protect that; but there is no doubt that in the sort of monopoly market we had a very clear subsidisation goes on within that, which is that by and large business customers have over paid and by and large social customers have under paid, and everyone accepts that that is part of the market that existed. The problem with that when competition comes in is that competition only targets the business mail, and that gives them a lot of headroom to steal that business and, unless we have the ability to rebalance those prices, clearly we have got a problem. They will only target the profitable mail - by and large that is in city centres - and if that carries on, and certainly we believe that, were we to implement our modernisation strategy under Postcomm's proposals, we believe that they would result in negative cash flow, and over time that really puts pressure on the USO. Either the USO would have to go, which I do not think anyone would agree with, or stamp prices would have to go up at that point to compensate for the loss in business mail. It is like a set of scales that go up and down. What we are trying to do is to make everyone aware of that fact. We need sensible stamp price rises over a period of time. We need to go into a competitive market where the cost of providing a service and the price we charge for it are in some way related. You cannot be in a competitive market if those two things are not somehow in synch, and that is the problem we have at the moment. So there will be have to be a rebalancing. I do not think it is true to say that in the initial few years competition is not good for everyone - I know that is what people always say - because actually what you get is the rebalancing where the business prices relatively need to come down and the social prices need to go up. Q10 Sir Robert Smith: We will be coming on to prices with some of the other questions as well, but would it be fair to say that in terms of making sure we get the surest foundation for the future of the USO which way the regulator tips in terms of pushing the competition quickly or letting you adapt in a more measured way is not evenly balanced. If they push it too quickly and you cannot adapt, then our constituents suffer in terms of their universal service obligation. If they do not push it quite quickly enough, then the market does not open up as sufficiently as it should do, but there is still the universal service there protected in terms of that sort of balance of erring on something. Mr Crozier: I think this is a really important point, because it is a question of balance and it is a question of risk. At the moment we believe the balance is wrong between protecting the USO and driving through competition because of the sheer amount of risk involved. Can I just explain what we mean by "risk"? First of all, the current projections are of a market that is growing by two per cent per annum. Since January we have seen almost a one per cent decline in the market, which is what has happened in every other country in Europe. This is us finally coming into line with what is happening everywhere else. We have got a four billion pound pension deficit. That is not just big but it is also very volatile. I mean mortality rates and things are going to change, so that is going to move around and is obviously a huge payment. We have got efficiency targets with the regulators asking us to achieve three per cent net (in other words after wage inflation and everything else), and yet even during the renewal plan, with lot of one-offs, what we achieved was 2.2 per cent net. Again, that is a huge risk. All their proposals assume that competition comes in equally nationally, and what you have seen in any other country where this happens is that they only come in the city centres and they steal all the disproportionately profitable mail. That is a risk. On top of that you have got the fact that we are only going to be allowed to make around £185 million profit, but they want to put in place a potential up to over £250 million of fines on quality of service; so they could fine us 160 per cent of what we are allowed to make, and in other regulated industries it is probably around 15 and 20 per cent. What we do not see, and this is where it really affects us, is any analysis of the cumulative risk that that represents if this goes wrong on the USO, and that is why it relates to the USO, because it is that cumulative risk that impacts on a day-to-day basis. Sir Robert Smith: That lays the foundations for quite a few more questions I think. Q11 Mr Hoyle: Obviously it is critical, especially for those of us who represent remote areas, and my farmers expect their milk to be delivered and the USO is the protection that they look for. Have you got an agreement for the cross-subsidy to remain? Have you got an agreement that will allow the price increase that you can put into the cross-subsidy? Otherwise it will not be sustainable unless you are allowed to do so. What agreements have you got on that, if any? We see the nice calendar with the Royal Mail, with the rowing boat. That will not exist unless you are allowed to fund it. Mr Crozier: We have no agreements. Alex heads our regulation areas and world strategy. That is precisely what we are negotiating at the moment in the price control, so we have no agreements in place from April onwards next year. Q12 Mr Hoyle: So you could be shafted? Mr Crozier: That is the technical --- Q13 Mr Hoyle: That is the word that sums it up in one go: you could be "shafted"? Mr Crozier: Yes. Mr Leighton: There is this issue all the time, which is we are like every other business, it is not a load of single things that all happen, it is a network and everything is connected, and that is why Adam's answer to Robert is, "All those things impact". You cannot talk about the USO without talking about the other pieces of the business, because basically the rest of the business is as good as the US0. That is life. We believe very strongly, we always have done, we said it from day one: we actually think the USO should be a great advantage to us. It is our USP. It is what we do that nobody else can do. We do go everywhere every day and we will deliver. That is something we should build on, but actually the funding of it gives us a big problem in the rest of the business which pays for it. The other interesting thing, you will remember, is that all the business we have lost so far has been our bigger customers. We have not lost any of our little customers yet or any of our social mail; all the mail we have lost so far, all the business we have lost is our bigger customers. We are not inventing this, that is how it works, and if I was in competition that is exactly how I would do it. It has been cross-subsidised for a period of time. That is fine. The whole scheme of things is that we have been able to do it so far and make the business profitable and drive the quality up. This time we get penalised for it. Q14 Mr Wright: This is a question that has been asked before another inquiry regarding the costs and profits. Are you in a position now to tell us what the turnover costs and profits are to Royal Mail in terms of performing its universal service obligations under the current licence agreement? Mr Crozier: At the moment every time someone sends a first-class stamped letter we lose five pence; every time they send a second‑class stamped letter we lose eight pence. One of the questions the regulator asked us was, looking on the very negative side, if you lost a lot of business mail what is the true economic cost of a first-class letter? Because we would still have to provide - to answer Alan's question - the USO even if we lost lots of mail over here. The true economic cost we reckon to be around 45 to 47 pence. The price of a first-class stamp at the moment is 30 pence. It is not difficult to see the cross-subsidisation that Alan mentioned actually taking place, and, of course, the problem is that if we are not able to hold or reduce business prices, then we will lose more market share which will put pressure on our ability to perform the USO, and that is where - again, I am sorry to be boring everyone, but it does keep inter-linking back in - these things are all connected together. Q15 Mr Wright: Even the regulator is very nervous about the effect that the full liberalisation is going to have by saying that if the universal service obligation were to fail, then there would be compensation payable from the private sector. Is there not a danger that all of this comes into effect? Mr Crozier: Yes, I worry about any solution that involves fixing something after the problem has occurred, because it is too late. People talk about reopeners, "We can account for that afterwards." You cannot, because once you have lost business by and large you do not ever get it back. I think that is why we are concerned to get this price control right from day one, to get a balance on the risk. I accept the regulator has got a difficult job to do. They do want to bring in competition. We have no problem with that. We have always said from day one we are happy with competition but that we want a relatively level playing field; and they are quite clear, and they have said it publicly, that they are actively trying to tilt the playing field in favour of the competition. Of course, if they do that to too great a degree, then it has a massive knock-on into the USO. It is all about balance, it is about trying to get people to understand the sheer scale of all the risks that are involved there and also, a slightly bigger message, and we are kind of getting into debate here with the regulator, what do you want in the future? Do you want a modern Royal Mail that can compete in an open competitive market place with people like TPG and Deutsche Post, so you have modernised over a period of 20 years, or do you want to kind of run it for cash and run it down and allow other people to provide that service? We are getting to the nub of that argument now, where people are going to have to make some choices: because not only do we have a four billion pound pension deficit, but we need about two billion to modernise and automate the business going forward. That is something that the others have done over 15 and 20 years. We are a long way behind because there has been no investment in the business. Q16 Mr Wright: It is also fair to say that even in terms of the business sector, although, as you say, the balance has been that the business process has subsidised the local post, even some of the businesses are very nervous about what may well happen to the universal service obligation if it was to collapse; so it not just one-sided? Mr Crozier: It is true, because what I think sometimes people miss in the argument is that it is in everyone's interest for the Royal Mail to succeed. It is clearly in our social customers' interest, it is in our business customers' interest, because we are the link with their customer so they absolutely need us to be working; it is in our competitors' interests because a lot of them will use us for the final mile, not everywhere but certainly in all the out-lying regions, so they need us to be successful, and clearly the country needs us to be successful. It is not in anyone's interest to get the balance on this wrong and for the Royal Mail to fail, and that is why it is so important to get it right. Q17 Chairman: I can understand it is difficult to aggregate these figures, but can you give us detailed turnover costs and profits for the universal service obligation under the current agreement, and can it be broken down through the political chain or is that not possible? Mr Crozier: I think we can do a reasonable job of breaking it down. Q18 Chairman: Perhaps we can have a discussion after the meeting and get some of those figures from you. Mr Leighton: It will not be perfect, Peter. Chairman: No, ball-park. Q19 Mr Bone: Some of the things you said I would ask you to expand on. You said that your competitors were stealing the profitable mail. Perhaps the response of some businesses would have been, "We ought to be competing with them and seeing how we can stop them stealing the mail." What did you mean by "stealing the mail"? Mr Crozier: First of all, we are obviously trying to compete with them and we pitch against them on clients' business every single day. We are currently involved in literally changing the make-up of all our products and services outside of first and second-class mail, because our products and services are really 15 years old and were invented around what operation we could do then rather than what customers want today. We are involved in all of that. A key part of it, because this market is incredibly price-led, is about getting the pricing right, and, therefore, if we are not able to pull that lever of getting the pricing right, then with certain customers, particularly the biggest ones, we will always fail. The other thing is to be fleet of foot, which you have to be in a competitive market. A competitor will be able to invent or change a product over night to meet the customer's needs. Under the current proposals of Postcomm we would have to go into a 12-month consultation process, and I know what the answer will be from the customer at the end of that 12 months: "You are about 12 months too late." So we have always said that a level playing field is allowing us to be able to pull exactly the same levers as our competitors; and let us not forget that these are not small firms that need protection. People like TPG and Deutsche Post are far bigger than the Royal Mail. Their regulators allow them to make something like 16 per cent in the case of TPG and 22 per cent in the case of Deutsche Post profit margins, which means that Deutsche Post gets nearly three times what we are allowed to make. So they are able to use that base to attack this market place; so it is not a level playing field in any shape or form. Q20 Judy Mallaber: Can I follow on with precisely these comparisons? How does the cost of the universal service obligation to national operators and other EU countries compare to your costs? Mr Smith: Other countries face the same universal service obligations as we face in the sense that they have to deliver to every door every day at a uniform price. The difference is that their stamp prices are much higher than ours, so effectively their costs are more in line with the prices for universal service products than ours are. A classic example, Spain is next to this country in Europe, and that is at 44p for a first-class stamp, whereas we are at 30p. Mr Leighton: May I mention two things which are quite important. In a strange way what they charge, whether it is a comparison is irrelevant because it is what we charge here - we are only interested in this market - and there are two things that are very important. Everybody talks about, "What is going to happen to your business, what is going to happen to your volumes and what are you doing about it?" We can take a stab. Everybody talks about Finland, Albania, Sweden; no market of this scale has been opened up. This is a big market with volumes, with big cash, with a big operator in it, and, therefore, if you are another multinational player, if you are TPG or Deutsche Post, are you interested in being in a big market taking a share? Yes, you are. In fact TPG, Bacher, will say he thinks we will lose 30 per cent of our market. This has not happened before, and the reason why we get as we do about it is that this piece of regulation for us is a key piece of regulation because it is at the tipping point, and nobody, whether they are us, the regulator, you or somebody who works for Sporting Bet, has the foggiest idea about what is actually going to happen - all you can do is make some educated guesses - and our whole point is, having sat on this for three years and got it to some degree of stability, we would like to make sure that all the risk is not passed on to us, because we do not fancy the idea of everybody coming back to us afterwards saying: can we fix it? To your point, Peter, we are aggressively attacking in terms of our competition. Outside of the UK we have created fantastic abilities in GLS which we have created from nothing in three years. It is going to do over a billion of sales, it is going to make over 100 million of e-bit. Q21 Chairman: GLS is? Mr Leighton: General Logistics Systems. It is our parcels business in Europe. It is the most profitable parcels business in the world and it is the second player in Europe. It will do a billion of sales and 100 million of e-bit, and so we are attacking in some other markets as well. The issue we get all the time is that we come in front of these groups and everybody else and everybody thinks we are being very defensive and we are trying to protect our corner and everything else, because that is where we get to, but the fact of the matter is we have created a platform; we do not want to let it go. We think this piece of regulation is pivotal, and do we compete? We complete like hell, and one day we are going to go into Deutsche's back garden and the Dutch's back garden and everybody else's and try and do the same thing to them, but we will only be able to do that if we can afford to do it. What has happened in those markets? Take the big ones, which are really the Dutch and the Germans. They have allowed their organisation in the regulated market to be hugely profitable: high stamp prices, not the same level of requirement of service, hugely profitable. What do they do with the profit? They go outside and they buy non-regulated businesses, so when the day comes when they get the same regulation as we do more than half of their business will be non-regulated. Q22 Judy Mallaber: Can I ask you to clarify the point you made about them not having the same level of requirements on the service. You have said that their cost structure is different, they are allowed to charge what you would say is an economic cost, but what are the differences in terms of the universal service obligation that they have to operate? We will be going on to question you about the changes that you are proposing, but can you explain what will be the differences in what they are required to do compared with what you are required to do? Mr Smith: A very specific difference - they face the same obligations, collect and deliver from every collection point and to every address every day, but the time of day is different. In Germany I believe you can deliver a letter up to 5.00 p.m. under their licence, whereas we have to deliver by 2.00 p.m. When you are talking about a first-class product in a big country, those three errors make a huge difference to your cost structure. Mr Leighton: I do not think they deliver on Saturdays. Mr Smith: They do not deliver on Saturdays, yes. Mr Leighton: So there is a universal service but it is a five-day universal service, and you have got all day; you do not have a Saturday delivery on the back of it. Q23 Judy Mallaber: Do they have other products they have to deliver as well as that universal postal service? Mr Smith: They choose to deliver business products, as we do, yes. Q24 Judy Mallaber: Is there a requirement on them to do it under the universal service obligation? Mr Smith: The definition of "universal service" is unclear in their licences, so single piece stamped mail is part of the universal service. For example, in the Netherlands direct mail is not. In our market Mail Sort 3, until very recently, is part of the universal service. Q25 Judy Mallaber: We are going to go on to explore that a bit further, but can I follow up? I appreciate what you say about them being very small compared to the service that you are providing. Can you tell us what has been the impact of full liberalisation in countries like Sweden and Finland. Mr Smith: In Sweden there is obviously no competition in rural areas at all, but in the three major cities in Sweden about 25 per cent of business mail has been lost to competition, and that is despite the fact that Sweden Post has introduced its own low prices; so its prices in cities are less than half of its prices in rural areas, but it has still lost 25 per cent of business in the three major centres. There is no competition in rural areas. In Finland there has been no competition whatsoever, and that is basically because the Finish authorities decided to put up a levy on all new entrants - I cannot remember the percentage, but a percentage of the revenues - and that has basically stopped competition coming into the market. Mr Crozier: Which was to pay for their share of the universal service. Q26 Judy Mallaber: Are Sweden in difficulties, and, if not, how have they made managed to overcome that competition? Mr Smith: Sweden has raised its prices outside of cities dramatically. When competition came in they cut its city centre prices by about 30 per cent and it almost doubled its rural prices. Mr Crozier: Which comes back to Lindsay's question about what is the ultimate effect on the USO? Unless the company goes on, somebody has to pay for that. Q27 Judy Mallaber: You are basically saying in those other countries, both the ones where they are big markets and there is a danger to us and in the smaller one, that they have been given more flexibility over a whole range of areas? Mr Leighton: Absolutely. Mr Crozier: We should not forget that Germany and Holland would fight the idea of access in their own markets tooth and nail, in fact they do fight the idea of access in their own markets tooth and nail, but they are very happy to see it in someone else's market. If you view the market as Europe, which in many ways it is, this is absolutely not a level playing field. The chances of most other countries even bringing any kind of competition in are very slim, and we are at least three years ahead of anyone, probably a great deal more. Q28 Chairman: Can I be clear, the city pricing in Sweden, is that inside one city or is it city to city as well? Mr Smith: Delivery in any city. Q29 Chairman: The city you are posting. Mr Smith: Yes. Chairman: You say it is a higher rate to go anywhere else outside the city. Q30 Sir Robert Smith: You mentioned that some of your competitors in their regulated area are allowed to operate so profitably they can use that to subsidise their non-regulated business. In a sense it is the reverse here, where the non-regulated business is keeping the universal service going. What is your view on going down the levy route of rivals to maintain that? Mr Leighton: We do not like it. In the mix of this, I do not mind competition because, as I say, I think it sharpens us all up, and I think you have got to try and make it as simple as you can. Basically the thrust of everything we have said is: allow us to make a return - forget about anything else, we have been pretty good at managing everything within all of that and we look at it as an entity and some of the cross-subsidised database - it is very simple - allow us to make a return and, if you allow us to make a return close to what are competitors make, then the probability is we will be able to manage everything in such a way because it is quite complex. It enables the USO to stay as it is and for us to be as competitive as we need to be. The more complicated it gets with levies over here, it just clouds the issue. I have always said from day one, if you want to regulate a market and you want to make it competitive, say anybody can come in and everybody can be the same, just tell the incumbent - that is us at the moment how much money we can make and just allow us to make sufficient money (a) to enable us to invest in our business, (b) to do the automation and (c) in our case now to deal with our pension deficit. It is as simple as that. When you read 596 pages of regulation and everybody's inputs to it you do not believe that is the case, but that is the nub of this. Q31 Mr Weir: I want to pick up a point that Mr Crozier made about the Swedish example that prices were higher in rural areas. I notice in your own submission on page 35, paragraph 4.34 it states: "Royal Mail's product strategy will be underpinned by a much more granular and cost reflective 'Pricing Roadmap' that includes, among others, pricing by size, delivery density, payment channel, speed and mailing volume." Does that mean, when you are talking about "delivery density", that you also see higher prices in rural areas following liberalisation? Mr Crozier: First of all that is for business mail, not USO covered mail. With regard to USO the whole principle for us is the one price goes anywhere service, so that does not change. In order for our products to be cost reflective, which they need to be if they are going to be competitive, we believe we need zonal pricing. By and large that is about putting prices down. Clearly the cost of delivering a piece of mail within London is a lot less than the cost of delivering a piece of mail from London to Aberdeen, so it is just for business products. Mr Leighton: Adam's is a very good point - I do not want to lose it - which is that we understand to be competitive like everybody else sometimes you have to bring prices down. To compete in business mail that is what we will have to do. That is what that is all about. It is not that we would put prices up; we have to be competitive, and it is not a one-way street. One thing I will tell you. If we put all our prices up by 10, 15 per cent, I will tell you exactly how much market share we are going to lose. It is a very important point. Mr Crozier: I offer it as a small point. Q32 Anne Moffat: It is a small point. I am just intrigued by the possibility of you being able to introduce all-day mailing and stopping deliveries on Saturday. Would that be a ripple in the ocean for you or would it be a great help if you were to introduce such a thing? Mr Crozier: I think the problem with all those things is the classic thing that you start from where you start from. The service we provide is a six-day service, that is what people are used to, that is what they want, and we have never tried to challenge that and we work around that. I do not see that changing for us in the short-term, or even in the long-term frankly. It is not something we have really considered. Q33 Mr Clapham: Getting the balance right is obviously extremely important. Definitions can play a very important role, and what we have been told by Postcomm is that you have not yet agreed the modification of the licence that will allow for the change in the definition of the USO. Could you tell us how the definition that is being proposed by Postcomm differs to the definition in your licence and how it compares, for example, with the definition in the European directive? Mr Smith: Our licence defines the set of products which should be considered to be universal service products. At the moment the current licence is pretty much all of them. Pretty much everything we do, with a few exceptions, is considered universal service. Mr Crozier: About 90 per cent? Mr Smith: What Postcomm is proposing is to allow us to take several business products out of the USO; and if you want to get into detail it is Mail Sort 2/1/2700. The crucial thing is they want to keep our biggest bulk product in the USO. Our biggest bulk product is called Mail Sort 1400. That they want to keep in the USO. That means that that big bulk product would have to be priced uniformly in the UK. Mr Crozier: Which is the main area our competitors will attack us on. We have a very simple view of the USO, which is that the USO should be about all of those products which are for everyone everywhere every day, and mail sort 1400 - less than two per cent of our customers could ever use that product, because you have to post a minimum of 4,000 items a day; so that is not a USO product because it is for a very, very small piece of the market place and the USO products are about everyone, everywhere, every day and we think that very clean definition is the right one. Q34 Mr Clapham: It is crucial to getting that balance? Mr Crozier: Absolutely. Mr Leighton: Let me be very clear on the USO again. We think it is fundamental to what we do and we have every intention of keeping it. That is what we want to do, but we think the USO should be about all the products that Adam determines and we should not get business products put into the USO where only two per cent of the customers use them, where we therefore have to keep the price and we will lose a load of volume; but as far as what I describe as social mail, that should be protected and we should go any time, any place, anywhere every day. That is what we want to do. Q35 Mr Clapham: What is the indication? Has Postcomm got their head around this? Mr Leighton: No. Q36 Mr Clapham: If so, are you likely to be able to agree a definition? Mr Crozier: No, I think we have a disagreement. Q37 Chairman: What is mail sort 1400 and why do Postcomm think it should be part of the universal service obligation? Mr Smith: Mail Sort 1400 is mail that is pre-sorted by customers to 1400 destinations, namely to each of our delivery offices; so they sort the mail down to the delivery office. That it what it is. Postcomm has always, for some reason, said that they want one bulk mail product to be in the universal service. They have never explained why. Chairman: I think we will be asking them when they come before us. Q38 Sir Robert Smith: Would it not be that businesses, wherever they are in the UK, should have a level playing field for some of the products? Mr Crozier: I could understand it if what they wanted was one business product in the USO that was particularly available for all businesses, small businesses particularly, so there was some element of protection, but the point is this product is only available for very large businesses because less than two per cent of them ever post that number of items; so you have to disconnect. I could absolutely buy into that, that that would potentially be a very sensible thing to do, but that is not what they are doing at the moment. Q39 Mr Weir: Would you not be able to do a mailing on one occasion? Is the point that they are not doing this every day? Somebody may use this for one specific general mailing? Mr Leighton: But only two per cent of the customers do. Q40 Mr Weir: The point is that any business might want to mail out. You say it takes 4,000 customers. Any business at any one time might want to mail out to 4,000 people. They will not be doing it every day but they may wish to do it on an occasional basis. Is it not right that they ought to have the ability to do so? Mr Leighton: They do. The issue is that only two per cent do. Where do you draw the line on this? As I say, if you leave it in there all it will mean is that we will lose a load of that business, because actually it is the big customers who use it. Mr Crozier: Mike, this is where regulation catches you because, clearly, if we want to give people a discount, we have to be able to justify that on the basis of the work that they give us and the work that they do, and, clearly, unless they are posting at that level, we cannot justify those discounts, therefore we would be non-compliant. Q41 Miss Kirkbride: First of all, you mentioned earlier about mail moving much faster to competition than European rivals. Why is that and what is Europe doing to force the pace of this? Why are we so much more ahead than the others? Mr Crozier: To be honest, I think that is a question for Postcomm. It is very much driven by Postcomm. Q42 Miss Kirkbride: Is there nothing in Europe causing this? Mr Crozier: There is nothing in Europe. In fact, to be honest, it is quite the opposite, not surprisingly, and most people are now building barriers to make sure that does not happen. I think we are very much atypical in a sense, and, again, just to repeat it so we are clear, we are not anti-competition at all. In many ways it is helping us to drive through a lot of the changes in attitude, culture and behaviour and things that we need to take our business on as long as it is done in a level way, and that is what concerns us. We are way in front. Q43 Miss Kirkbride: I suppose the reason why there is regulation of what you do is because of the final mile. It is because it actually is not that easy to replicate all these postmen running round the country in their little vans going down country lanes, etcetera. You said earlier that you thought that an alternative delivery service would emerge in the big cities. I wonder if you could explain to me what kind of business that is, because I do not really understand your business but it would seem to me that a lot of the stuff that is going to be taken away from you is Nat West banking or O2's account, and they could live anywhere. They could live on the Isle of Skye or they could live in Broomsgrove or they could live anywhere. Therefore setting up a city delivery service is not going to help that. What kind of business would make it worthwhile people setting up a cherry-picked delivery service for the final mile? Who are they? Mr Crozier: There are two ways in which they might do that, they could do a mix of the two as well. They are not necessarily mutually exclusive. The simplest way is to set up a city delivery, just pick the major cities and to take all of O2's mail, to use the example you gave, or whoever it might be, and to deliver themselves, to collect, ship and deliver all the mail in those cities, to then take the mail that goes to all those other customers and metaphorically put it in the post box so that we are delivering all the unprofitable stuff and they are delivering the profitable stuff. The second way they can do it is that a lot of the bigger customers are less interested in speed (i.e. the next day) and more interested in reliability, and so the way that they could also provide the final mile in all the other areas is to do a once a week delivery. It is only through the USO that we deliver to every address every day. They could quite easily decide just to deliver once a week in each of those other areas. So they could do either of those two things or a combination of those two things. Mr Leighton: The way I would look at it is I always think about what would I do if I was in competition. I would build a couple of mail centres. That would cost me 35 million each. So I would put 70 million of capital down. Then I would go to the top 70 accounts, all roughly in London --- Mr Crozier: Try not to give too many people too many ideas! Mr Leighton: Because everyone says how easy or difficult it is, so that tells you how much the capital is. Then I would go and get five or ten per cent of their business, and I would collect their business, I would put it through my mail centres, I would drop it off into our mail centres and get access to delivery and I would make a lot of money. Mr Crozier: There are two things worth remembering. We have a huge fixed cost-base, because no matter how much business we lose we still have to deliver to every house every day. A certain amount of work goes with that no matter what the size of the company. The second thing is, unlike other utilities, we are very dependent on GDP for growth or non-growth, we are a barometer of the economy, because people cut back when things are tough, they spend more when things are not. We are not a copper wire, or a pipeline, or anything, we are people, so again it is a fundamental difference on our business from some of the other ones that perhaps regulation is more used to working with. Q44 Miss Kirkbride: Basically your picture would be that if you could price competitively with your business mail then you would be happy to compromise on the USO social mail, but on bulk business mailing, if you could.... Mr Crozier: We have to be able to price and compete on the business side because that is the only bit that would be competitive, and part of bringing those prices down or holding those prices will be the need for social mail stamp prices to go up a little bit, because clearly you have to balance between the two, and that is - we are back to where we started earlier today - the basic cross-subsidy that exists, as it does in every original company. Q45 Mr Weir: We have touched on price and price controls to some extent. Obviously you are not happy with what Postcomm are proposing, but what alternatives to Postcomm's price control proposals have you investigated? Mr Crozier: The most basic thing that needs to be right is that prices need to be cost reflective. Any customer has the right to expect that the price that they pay bears some resemblance to the cost of providing the service that they are buying. It cannot be right that people currently bay 30 pence for a service that costs 35 pence, and the true economic cost is probably 45 pence, so clearly there is a difference there. Our proposals are very clear that by 2009/2010 we would like to see a first-class stamp price of 30 pence. Q46 Chairman: How much? Mr Crozier: Thirty-nine pence by 2009/2010. Mr Leighton: Four years' time. Mr Crozier: Which is still well below the true economic cost of 45 pence and would still make us the cheapest country in Europe by quite some way. Our view is that if we do that sensibly over a period of time with rebalancing, that has got to be better than the USO hitting some real problems and then needing an enormous fix further down the line. Q47 Chairman: You mentioned earlier the concept of zonal pricing between rural and urban areas. I understand what you are saying about social mail, but there are business in rural areas as well. You are citing the Swedish example, which sounds to me very much like you perceive that the cost of delivering in rural areas.... You already say in your submission that there is a much higher cost for delivering in rural areas than there is in urban areas. Is the subtext to this that delivery in rural areas is going to be more expensive to the customer than delivery in urban areas once we have liberalisation? However you want to dress it up, that is the subtext that seems to be coming through here. You will have a universal service obligation at point X but you will be under-cutting that, at least for business customers, within urban areas so that the universal service obligation will, if you like, become the maximum price which will be paid by rural areas whereas a much lower price or substantially lower price will be paid in urban areas? Mr Smith: The thing to remember is that it is the posting customer that plays. So someone posting, a business posting to a rural area will pay more than a business posting to an urban area. Q48 Chairman: You talk about businesses - I find it difficult to get my head round this - you talk about mail sort, you talk about business mail, are you talking purely about bulk business postings? It seems to me the small business is writing out to customers in rural areas, in effect they are going to have to pay the cost of the social mail because they are not going to be able to get into this large-scale mail, so the cost to business in rural areas who are dealing with relatively small volumes of mail could increase quite substantially. Would you agree on that? Mr Leighton: I do not know if I agree or not. It is a bit complicated. Q49 Chairman: It is not that complicated. Mr Leighton: Let me come at it the other way round. If the point you are trying to make is if you are a rural business it is not very good for you, I am not sure that is the case. That is the point. It goes back to Adam's point. We have our friends from the press here and before you know where we are it is a 39p stamp. Let us be very clear. We are talking about a 39p stamp in four years time of which the economic price of delivery will be 45 pence. Q50 Chairman: I understand that. You are getting away from the point. The point I am trying to get to is to this. You are talking about lower costs for businesses based on large-scale bulk mailing, the mail sorts and such like. You also made the point earlier that most of your customers, less than two per cent, can do this mail sort because of the volumes required. Following the logic of that, most small businesses do not use mail sort so the costs to them are about to increase. Is that not the case? Mr Leighton: On the assumption that if you put the price of the stamp up, that is an increase, yes. Q51 Chairman: Yes. They are going to increase, but if you are only reducing costs to businesses for the large scale, there will be a disproportionately high cost for smaller businesses? Mr Smith: That is not quite true, because what you will see also is that we are proposing to increase the discounts for people who use meter products or pre-paid postage products as opposed to stamps, as most small businesses do. They use meter mail and PPI. Mr Leighton: If the price of a stamp goes up, does it mean that people are paying more? Yes, it does. Q52 Anne Moffat: Not much more, because it was the price of the stamps. What about the second-class stamp, and will you be able to link the price increases to improving the quality of service or is it just to keep a level playing field? Mr Crozier: With second-class we have got to 29 pence in the same time period, which is not much. The quality of service: we are now producing our best quality of service results literally in our history. We are currently up to about 94 per cent next day delivery for first-class mail. We have never been at those levels before. The great thing from our point of view is that we have now been consistently delivering on target first-class mail for about 15 months, and we really have built on that base. I think that is because people rightly assumed in some ways that a lot of the changes we made were about cutting costs, but they were also designed to improve quality of service, and they genuinely have delivered that on the ground. We are seeing that right across the country and, clearly, we think there is the opportunity to continue to improve that, because in any competitive market your quality of service is absolutely crucial. Why do people want to stay with us? It is because we provide a great service. It has got to be the number one priority. It has to be. Mr Leighton: When you earlier pointed out: why would we want to maintain the USO as it is, which is five days and a Saturday, is that as soon as you start taking away from quality of service that is an issue for us. We also collect on a Sunday. You can look at the economic costs of delivering on a Saturday and collecting on a Sunday and you have not got a very strong case. Actually if you then say, but that is what there is today, that is the benchmark and that is what our competitors have to be up against, we are very much in a position of saying we have got to improve services rather than take them away, and that is fundamental for us. Q53 Sir Robert Smith: In answer to Michael Weir's question you did not mention obviously that the rural delivery costs you more, and therefore, although you say the poster is the customer, the person paying the postage, what we have seen with parcels in the Islands and the more remote parts of the UK is that you are no longer a customer because the complete opening up of the parcels market and cost reflective pricing in those rural and remote areas meant that basically people said, "We will deliver to you anywhere in the UK as long as it is not in the Highlands or the islands of Scotland." The worry could be that whilst you have a universal service obligation, if your bulk mailers start to see a real difference in price for reaching those last few customers, they start to put a surcharge on to their customers and therefore the universal service disappears in terms of the recipient of mail in this country. Mr Leighton: That is a potential issue, but I think the whole thing ---. Going back to the USO, the bits that we can drive, the bits that we can control, we fundamentally believe that we have to keep it in place as it is, and, as I say, both Adam and I over a period of time, it is the heart of what we do. The USP of the Royal Mail is the USO, every day, the same price everywhere, and certainly while we are around that will be the case. Mr Bone: I am beginning to think that I am listening to a monopoly industry here, or a nationalised industry, defending greatly the need to stick the price of stamps up and forgetting to look at the efficiencies of delivery. You talk about putting stamp prices up over the next few years, but you could also be looking at reducing the costs of your delivery and being more efficient and helping the consumer in that way, or have I got that wrong? Mr Hoyle: You mean scrap their own deliveries? Q54 Mr Bone: No, I am suggesting that the quality of service would be a more efficient way of doing it, which is what other businesses have to do? Mr Leighton: Can I answer your question by asking one specific? Q55 Mr Bone: You are looking for one and a half per cent service and efficiency, Postcomm is looking for three per cent. Mr Leighton: Let us come to Peter's first question, and you are right to raise the point, and we are a monopoly, but let us just position ourselves where we have come from. The reason the business survives today and is in a reasonably good case is not because we acted like a monopoly, it is because we drove the revenue up and took the costs down huge amounts. We did not ask for a penny from anyone, we generated reasonable levels of profit, generated a load of cash, got no debt, moved everything around, changed the whole thing around. We have not acted like a monopoly. Our performance in the last three years will stack up to any company in Britain at any time. That is the number one thing. The second thing is that the reason we did that is that we could not rely on just putting the price of stamps up, we have had to take the costs out of the business, we have had to become more efficient, we have had to deliver more products, we have had to do all the things that a normal company would do, and our whole point is that I wish people would just treat us like a normal company, because that is what is not happening to us. Because we are a monopoly we have to have a regulated guardian. Do not believe for one minute that this is a monopoly talking. No monopoly I know has done what we have done in the last three years. You will remember we have got 33,000 less people in this organisation. You do not think we stripped costs out, talk to them. This has been serious stuff. Mr Crozier: Peter, to pick up on your point, we do not want to put prices up. We want to rebalance prices. We need to put some up and we need to put some down. So it works both ways. It is not just one thing. You have to have both sides. That is the problem. We have taken £1.4 billion worth of costs out of the business, we have parted company with 33,000 full-time people, 25,000 temporary people, we have made a massive inroad into the cost base. Even with all those one-offs during the renewal plan, we ran at 2.2 per cent efficiency above inflation and wage inflation and all those things. The idea that you can sustain that every year and actually put it up to three per cent, we believe is not doable. We think one and a half per cent net improvement is going to be going some to do that, and again we are trying to push ourselves incredibly hard, as we have done already, but also be realistic, because again, if you assume you are going to get something which you are never going to get, then all the risk is on the business, all the risk is on the USO and you have to get the balance right. So we are far from a monopoly sitting here being smug, actually we have done an incredible amount to sort out this business, but let us be clear. The danger is you get to the end of the three-year plan and everyone thinks it is done. We have got some huge challenges. We have got a £4 billion deficit we have to fix, which is historical, we need £2.2 billion to modernise the business and the only way we are going to drive that efficiency is if we invest that capital sum in automating our processes. You cannot have the efficiency without putting some investment into the company. It is very important we accept those challenges are still there. They have not magically gone away. Q56 Miss Kirkbride: I just want to finish off the point about the business service and how you would like that to be the unregulated bit, without the price control on it. I suppose the comparison Postcomm might be making is BT where the copper wire is the end of the line and your copper wires are your postman, etc; they are not that easily replaceable, it cannot be done overnight, and you have got a monopolistic position on that. So what is your answer? If you do not have price control on some of your service provider business then why should you not abuse your monopolistic position by increasing the price in a disadvantageous way, thereby preventing competition? What is the answer to that? Mr Leighton: The simple answer is we would lose business. Q57 Miss Kirkbride: Not in the short term. Mr Leighton: We would. We could lose it now. We are exactly the same as everybody else; if you did not need to price up in any business you would not price up; in fact, you would always try and price down because you get more business that way round. The fact of the matter is that if we priced up, if we used that in business, then I can guarantee we will lose a bucket-load of market share. That is the answer. It is as simple as that. Q58 Roger Berry: Can we turn to the £4 billion pension deficit? Mr Leighton: Do we have to? Q59 Roger Berry: Yes, please, because (a), as you rightly point out, it makes you technically insolvent, but (b) you identify the solution as being (to use your phrase) "creating the right pricing framework", which basically does mean, does it not, that consumers will have to pay more for their postage? I understand that. My question is: have you looked at alternative ways of dealing with the £4 billion pension deficit other than through charging customers more? Mr Crozier: We currently pay £400 million a year into the pension fund, about £140-150 million of which is historical deficit. With the change to FRS17 that payment will go up next year to about £800 million, with somewhere between £400-500 million a year of that being historical pension deficit. So it is the historical part that is a real issue. Clearly, we can look at lots of ideas as to how we might look at that liability going forward, but what that does not do is sort out the historical part of it. That is the real nub of the issue - for the regulator as well, in fairness. Again, just to be clear, the prices that we mentioned, including the 39p, take that pension issue into account, so it is not "add more money on top of that"; that is what we are proposing as the 39p in 2009/10. Q60 Roger Berry: So the answer - it was a yes or no answer, really - is you think there is no alternative, basically. Mr Leighton: I think it is very difficult just because of the size and the scale. Remember, on the deficit we have been paying in £140 million cash. This is cash generated, we have not gone and got anybody for this; we had to generate the cash to put it in there. Going forward, that number could be £400 or £500 million cash, just for the deficit. So our pension cash payments that come straight out of the business were £400 million and are going to be £800 million, of which £400 or £500 million is the deficit. There is no way that in a business like ours you can generate sufficient cash to be able to do that unless you deal with that deficit. Short of robbing a bank and probably the Bank of England (probably not the Bank of England because they have not got that much), that is where you are. It is such a big hole that it has got to be dealt with in some way, shape or form. If we could do it out of our own resources we would try and do it, because that is the way we have always done it, but the scale of the cash amount is just too big. Q61 Roger Berry: I agree. Let us be blunt about this: the pension deficit is, to a substantial extent, the result of decisions of government in previous years, decades. Is what you have just said that you think there is a responsibility therefore on government, or not? I think you are implying that but you are being a bit coy in saying it. Mr Leighton: I think we have always taken it that anything that has happened in the last three years we will take the good and the bad, and take it on the chin - that is the way we have done it - but this is such a big difference and it has such a big impact, not just on the balance sheet, as you say, which therefore looks negative and gives you problems, but it is the amount of cash you have to pay. You have to generate that cash to pay it out of the business. We have gone from, really, putting no cash into the pension deficit three years ago to paying £400 or £500 million of cash going forward, and that is just too big a thing for us to take on when we have got all this other stuff going on as well. In the end you would go pear-shaped. Q62 Roger Berry: Am I being unbelievably dim or have you not answered my question? Mr Leighton: I could not comment on whether you are dim or not, Roger, and neither would I want to be drawn on it! Q63 Roger Berry: Given the second part of my question, is that a yes or a no? Mr Leighton: I think it is an unanswerable question. Q64 Roger Berry: If I were you I know what I would be arguing. Mr Leighton: What would you be arguing? Q65 Roger Berry: I am asking the questions. Mr Leighton: You might have an argument we have not thought of. Q66 Roger Berry: The number of times you have referred to the "historical deficit" and the number of times you have referred to £4 billion and the number of times you have pointed out that is why you are technically insolvent - why are you not saying what I would expect someone in your position to say about that historical deficit? Mr Leighton: I think we have always been the same. What we have been saying, consistently ---- Q67 Roger Berry: It is not in the submission and you have not said it this morning. Third time lucky. Mr Leighton: There is an issue, and the issue has to be resolved. How the issue gets resolved is for debate because, first of all, it is a big sum of money and we cannot get away from that. Secondly, there are a number of ways that it could be approached, including not doing anything about it at all, but all we can do, in terms of the regulatory bit we are talking about, is say: "Look, this is the impact of that deficit on our numbers going forward and unless in some way shape or form that gets picked up then it gives us a problem". Q68 Chairman: I think I am being dim now, actually. When were the pension holidays taken? Mr Smith: The pension fund was in surplus until 2001, and in fact it was 105 per cent funded, which means the company could not put any more money into it. So it was the 13 years prior to 2001 when the pension fund was, I believe, in surplus for the whole period. Q69 Roger Berry: It seems that figure came from you, Chair, rather than from Allan, but there we go, he is being very coy on this one. It is most unusual, but there we go. Mr Leighton: Sometimes you have to be coy about things, Roger. Chairman: So that deficit has come since 2001? Q70 Sir Robert Smith: But not in the last three years? Mr Leighton: No, it has been building. Mr Smith: The pension fund was, I believe, under-funded in 2002. Q71 Roger Berry: Can I say, in all seriousness, and I was not being flippant in trying to press the issue, I would dearly like to see some figures on how we arrive at the current position of £4 billion. Mr Leighton: We can do that. Roger Berry: I think that would be incredibly helpful in terms of what it is reasonable for Royal Mail to do, and to explore the alternatives. Chairman: I think we will move on to a less contentious area now: the ownership of the Royal Mail group. Q72 Mr Hoyle: Obviously, we would not expect too many problems with this, but there is a difficulty: what is going on? We read in the press that there may be shares given to employees and we read in the press that there may be a sell-off. What is the situation? Mr Leighton: What does it say in Voice? You have Voice there. Q73 Mr Hoyle: I can read it if you want me to, but I think you will have read this already. Mr Leighton: The way we have always thought about the business is in chunks. After three years of renewal we are now thinking about the next three years. The thing we have always been consistent in is that from day one we have always felt that our people should have more of a share in the company. We have always said that because we think that the more our people are involved, basically, you get a better performance and that has turned out to be the case. We have put in Shared Success, everybody got their one share and the net effect of that is we paid out £200-odd million as a dividend to our people and that had a huge effect. It had a huge effect because the business performed, everybody knew what they needed to do and for once people got what they were supposed to get. It was over £1,000, and to our people that is a lot of money and they did some great things with it. That is really what it is all about. Therefore, we have been consistent from day one and we have said we want to be able to build on that. At some stage would I like to give our people some shares in this business? Yes, I would. I think it is fundamentally the right thing to do; I think our people actually believe it is the right thing to do, which is the most important thing as far as I am concerned. Our recommendation is we should find a way of doing it. There are many ways of doing it, we think it should be done and we think it is the right thing to do. Q74 Mr Hoyle: Let us press you a little more on that because I think it is interesting. People would say everybody has got a stake in the business because it is owned by the people of this country, so our people have already got a shareholding. In fact you can actually use profit-sharing to give people the belief in the company they are working for and they also get it direct without: "Who has got shares, who has not?" because people come and go out of a business. So would you allow the trading of shares or would it be on the stock market or would they have no value whatsoever? There is a great danger - and we have seen this with Rover, where employees were given a share that was worthless; it was a junk bond. I am not suggesting you are offering junk bonds but there is a danger; if you cannot trade it what is its value if somebody leaves? It is all a bit of mystery and smoke and mirrors, if we are not careful. I am sure you must have a better explanation. Mr Leighton: It is none of those things. It is very straightforward. First of all, it cannot be traded on the stock market because it is not a publicly quoted company. There are all sorts of different ways: you can create a trust, the shares can be bought by the trust, the trust can issue the shares to our people, our people can trade the shares within the trust, the trust never sells the shares and the trust pays a dividend. So this is very easy to do; it is not all complicated and our people would understand it and actually the general consensus around the business is that people want to do that. That is a very different way. We have moved our people's pay up - the basic pay was very poor and we have done a lot on that from where we started out because we always thought our people were underpaid - and we have simplified the bonus scheme, and this would be a way in which the people shared in the success of the company. So it was always going to be a matter of debate, depending on whether you think it is right or wrong, but clearly the view of the business is that this is the right thing to do and we should do it. Q75 Mr Hoyle: So rather than setting up a trust and deciding whether you give shares - do you take them back off them when they retire? Or once somebody leaves the company? How long do you have to be there - so long before you get shares? It seems a very, very complicated system when surely, surely, the quickest way and the cheapest way to ensure they get a fair dividend is actually to have profit sharing so you give it automatically and people understand where it is coming from. Everybody reads this in the press but what discussion has taken place with the shareholder for this agreement? Mr Leighton: Let us go back to where we started out. We have been very consistent from day one in saying: "This is what we want to do". I am very consistent in saying to you, as I say to everybody else: "This is what I think we should do for our company." More importantly, if I ask the people in the company they say: "That is what we should do; we would all like to be part of it." So the only discussions that have taken place with anybody, whoever I get a chance to talk to, whichever the stakeholder, from Postcomm through to the DTI are, consistently: "This is what I think we should do. This is what I would like us to do." Q76 Mr Hoyle: There is only one stakeholder; there is only one shareholder. I think we have got to be clear and we have got to get it on the record, Chairman. Has the stakeholder had discussions about this and has an agreement come through? Mr Leighton: There has been no agreement with the stakeholder. Chairman: There are lots of stakeholders. Q77 Mr Hoyle: There is only one shareholder. Mr Leighton: The shareholder has not agreed to do this. Q78 Mr Hoyle: But discussions are taking place? Mr Leighton: Of course discussions take place. I think the DTI have always said, and I think Alan Johnson got up in Parliament and said that this is something that he would be interested in, and he was very categoric and on the record in saying that. Q79 Mr Hoyle: This is critical: if the shares were offered to people within Royal Mail, would the number of shares be equal between wherever you are in the company, if it was envisaged to go ahead? Also, would these shares be used to reduce pension rights and the pension funds, and have you had discussions and talks to envisage a way of reducing that pension fund? Mr Leighton: The answer to your question is that the number one thing is they would be done equally, because I think that is the way to do it - that is the way we did it on Shared Success; everybody gets the same, it does not matter who you are; that is fundamental to this. Secondly, there is no linkage at all between this and anything that might happen in terms of the pension deficit, pension schemes or any other part of the business. It is a completely different thing. Q80 Roger Berry: So employee ownership would neither directly nor indirectly generate revenue for Royal Mail? Mr Leighton: We would absolutely directly generate revenue for Royal Mail. Q81 Roger Berry: No financial advantage whatsoever? Mr Leighton: The reason that would drive it is: if your people are involved in owning the company and have shares in the organisation does that drive the profitability of the organisation? Absolutely, 1,000 per cent, I think it would make a huge difference, and I think Shared Success absolutely demonstrated that. Q82 Roger Berry: So coming back to Lindsay's original point, I absolutely understand the argument you are making. Therefore, why employee ownership rather than profit-sharing? Mr Leighton: Because in our judgment and in the work that you look at, in terms of organisations, when you get to that stage, ie it is a share, then that has a more motivating effect. Roger, you have to say the other way round is that if we did not think that was the case then we would not be suggesting that that was the way to do it. I genuinely believe that. From all the evidence in all the organisations I have worked in that has been the case, and certainly Shared Success was a great example of that. Q83 Roger Berry: I would be interested to see the evidence that you cite, because I know of evidence that was addressed that employee share-ownership is not preferable to profit-sharing in terms of motivation of employees. I would be delighted to know what evidence you have got for that, because clearly you are saying this is not just a guess, this is actually based on hard research, and I would very much like to know what research you are referring to. Mr Leighton: We can give you that with pleasure, Roger. Mr Crozier: Can I come in here, because I do not want to lose the thought? Again, the danger is one looks at each little piece in isolation. The start point from this is the one you have rightly identified, which is that the trading performance now is very good but we have got some historical issues there - the negative balance sheet. So there are actually three conversations that kind of go on, in terms of what needs to be pursued. One is how do we fund the pension deficit, because that lies at the heart of a lot of this. The second question that lies there is how do we fund the modernisation of the business, and the third is how do we engage with our people for them to want to make this modernisation happen? Just to go back, what we did was get much smarter at what we already did. The next stage is about fundamentally changing what we do. It really is about automating the pipeline and a lot of capital investment, and that is going to require a huge amount of change from our people and they need to be fully engaged in that level of change. That is why we believe this is the right route to go. Clearly we can provide the evidence, but it is just important to join up with all the other bits because they all work together; you cannot just fix one piece. For instance, if you do not figure out how to sort the pension deficit and how to fund the modernisation, what exactly are you going to give people a share in? So they are all linked. Q84 Mr Hoyle: What percentage, because it is absolutely critical, are you envisaging? Fifty per cent? Twenty per cent? One hundred per cent? Mr Leighton: We think we should start with 20 per cent. Q85 Mr Hoyle: So you start with 20 per cent. That is the ownership. Am I right to think that you have been using Morgan Stanley, and they have been doing some reports for you? Has that been part of what could be capitalised on other shares if they were to come to the market? What have they actually been advising you on? Has it been part of this shareholding for employees or is it whether to advise you to then say to the Government: "We have an ownership here by the people within it but we do believe that you have got a problem with the deficit in your pension fund"? Are you then going to consider a further percentage to be opened on to the market? Mr Leighton: Just so that we are very, very clear: the only thing we are proposing is that we have three things to fix: the pension deficit, capital into the business and we think we should give our people, in some way, shape or form - that is all we are interested in. That sees us through the next three or four years, which for us is the next three or four years of our horizon. The shareholder has already made it very clear that the shareholders will not entertain privatisation of the company. That is the context of it. Any advice we get from any advisers is in that piece of context. Q86 Mr Hoyle: So they are advising you on employee shareholding and nothing else? Mr Leighton: They could be advising us on the balance sheet and all sorts of different things. I do not want to go into the technicalities, but are they advising us on full scale privatisation - you know they are not. Q87 Mr Hoyle: Therefore, which Roger and I have been chasing, if you give the shares (and I understand that that is what you wish to do and that is what is in discussion at the moment) how do you get round the deficit within the pension fund, if you are not getting a value on the shares, and everything else? That is not being addressed, is it, through any of this? Mr Leighton: It goes back to Adam's point (and, for once, I am not being evasive): the three bits are really quite important. You have to do, in our view, all three. This is a hat trick. You cannot have any one of them; any one of them does not give you what you need. It is a joined up business with a joined up issue that needs those three things being dealt with. Q88 Mr Bone: If I was, as I was in the past, deciding who to use as a postal provider and we have got full liberalisation, do you think there would be some reliable measurement of the service management so that I could transparently see which service provider, yourselves or other licensed providers, is actually right for me? Mr Crozier: It is a good question actually. If you take some of the learning from Sweden earlier, when it was first introduced, you had literally hundreds of companies diving in and providing mail services and the vast majority of those companies disappeared very quickly. I have no doubt a lot of customers were hurt in the meantime. We have been very clear with Postcomm that we would like to see everyone operate under the same rules and regulations. So, for instance, we check all our employees' records in terms of criminal records and all sorts of other things to make sure that we have got that integrity there. We provide independently done quality-of-service research that tells all our customers how well or not we are doing on their behalf. As it currently stands, none of our competitors publish any quality-of-service data. So we would like to see everyone operate under the same set of rules, so that people genuinely can make a comparison. Clearly, we say that because we think we are bloody good; we think we provide a really good quality of service and we think that should be one of the things that customers are really interested in. As always, it is very easy to say: "I will deliver you this" and then not do it, whereas ours is all independently researched, and I think that is the way everyone should be. Q89 Mr Bone: That is clearly a yes to that. Who should draw this up? Should it be some independent body? Does it happen on the continent? Mr Crozier: In fairness, Postcomm are drawing up a sort of code of conduct, if you like. It does not cover quality of service, interestingly, as far as I am aware; it is more around the way that the business is done. I think quality of service is actually pretty crucial to just about any company and certainly we have always published that. It has always been independent, we will continue to do it and we would like to see other people do the same. Q90 Mr Bone: Does it happen in the EU at the moment? Mr Crozier: I do not think it does. I am not sure. There are not really any direct comparisons, to be honest, but I do not think it does. Q91 Mr Bone: Is this because we are moving into uncharted waters? Mr Crozier: We are ahead of the game, so it is difficult to find out. Mr Leighton: None of the national players have to set out quarterly their quality-of service data. Mr Crozier: If you take Germany, their first-class target for the next day is 80 per cent; ours is 93 per cent. So it is a very different regulatory regime. They do not have compensation payments like we have. When Alex talked earlier on about our operational window being shorter, there are all sorts of other things that are different, too. We have got tougher quality of service targets, we have got compensation and all sorts of other things, so the regime is very different. Mr Bone: I want to give you an example, and this is not flippant but it is one of the problems that a business would have. During the General Election we employed some sort of Mailsort and my election address went out in Sherwood, and I went down very well in Sherwood but, unfortunately, I was standing in Wellingborough. The election address eventually finished up in Wellingborough the day after the election. Now, I am not sure whose fault that was. If you take that into a business, you have got to have clarity so you can decide: "It is the fault of the Royal Mail because, actually, they are very poor at doing this" or "It is actually the fault of --- Mr Hoyle: The agent! Chairman: That certainly would not be true. Q92 Mr Bone: It certainly was not the fault of the agent then. That was subcontracted to Central Office. Mr Crozier: Clearly, I cannot comment on the specific issue but I am very happy to go away and look at that. We have independent, incredibly detailed quality of service analysis, and the other interesting thing about this, if you just move away from first class and second class, is that we are hitting pretty much all of our business targets, but the truth is more and more we will move away from that because if I am a major customer, actually I am not very interested in the fact that Mailsort reach is at 99.6 per cent nationally; what I care about is what is it on my mail. More and more quality of service will become part of an individual contract, where I will deal with you, customer X, and these national things - other than for things like first class and second class - will go because everybody wants a different kind of delivery. If I am running a call centre and I am trying to generate response for that call centre, actually the worst thing we can do for them is deliver all their mail the next day because they could not cope with all the telephone calls. Actually they might want 10 per cent of it delivered every day for ten days. So, more and more, what people want is a tailored service, and that is part of our problem with all the regulatory set-up as it is. We find it almost impossible to treat customers as individuals, and actually what does everyone want now - they want to be treated like an individual customer; they do not want to be given the same as everyone else. So we are kind of fighting against a natural way of working, but which customers do not want. They are quite happy if the improvements come from us rather than from other people. Q93 Judy Mallaber: The Government has committed itself to not privatising Royal Mail. How confident are you that Royal Mail can stay as a public sector organisation and still compete against private sector competition when the postal market is fully liberalised? Mr Crozier: First of all, technically, we are a stand-alone plc that happens to be 100 per cent owned by one shareholder (just to be technical for a second). Can we compete in a competitive market? Yes, if given a reasonable run at it. We have absolute confidence in our company's ability but it depends on the regulatory set-up that is concluded sometime in the next two or three months and it also partly depends on how we look at these funding issues that we have just discussed around the pension deficit and around the money to modernise. It partly depends on our ability to engage with our people. So the road takes you back to: as long as we have a reasonably level playing field and we can tackle the things that need to be tackled, then yes. I know that is a qualified answer but it needs to be a qualified answer. Q94 Judy Mallaber: Setting those aside, because I think we have explored those quite fully, will previously state-owned national operators elsewhere in the EU still have advantages over Royal Mail after January 2006? If so, what are those advantages? Mr Crozier: They will have huge advantages because the modernisation that we are talking about embarking on they did without any competition and over a 10-15 year period. So they have already done what we have not even started, so clearly there is an advantage there. There is also the advantage that there is therefore no risk for them. We have got to cope with competition while we seamlessly transfer from one kind of operation to another. Operationally, that is a very difficult thing to do. They do not start with any costs or prices that are misaligned, they just come in and they charge what they want to charge. They do not start with any problems around creating new products; they can do it overnight, we might take 12 months. So their ability to be agile and compete from day one is far greater than ours, so, yes, absolutely, they have advantages, not least of which is they are making enormous profits somewhere else. Mr Leighton: This will be an unregulated business for them. So you go and attack everybody else's markets and you try and create big business in everybody else's markets because they are not regulated. That is where you make your money. Q95 Judy Mallaber: This comes back to your original pleas for all the flexibility that you are seeking. Mr Leighton: Absolutely. I always feel as if we come away sounding as if we are a bunch of wimps, but the big deal is it goes to the same old thing, which is that potentially we could still have a very strong Royal Mail in a very competitive environment. That is what we could play with here. It gives us the opportunity to go and attack a few people on their back doorsteps in the same way, but the only point I think we are trying to make to you, and it does go back to the same three things, is that there is the pension deficit, there is where is the capital coming from and what can we do for our people. They are the only three core issues, and if we get any one of those three wrong or all three of them wrong then it is going to be pretty bloody difficult. Mr Crozier: And the regulation, secondly, is the absolutely pivotal part of that. Q96 Miss Kirkbride: I am bemused by so much of what you have said today because it seems to me that certainly one of the answers to all of your three problems would be privatisation. Therefore, I wonder if you could tell us, in your discussions with the Minister, why it is that he has set his face so much against it? After all, we have a Government who is prepared to privatise air traffic control and other things, so what is the big deal about the Post Office? Mr Leighton: You will have to talk to the Minister. The other thing which I have to say (forget about the Minister) is that actually the only thing on which I have ever been on the record in relation to privatisation is saying that we should not privatise it. Q97 Chairman: Should not? Mr Leighton: Should not. Q98 Miss Kirkbride: Why not? Mr Leighton: My sense is this is a commercial entity. Everybody keeps thinking it is a public service, it is not; it is a commercial entity that provides a public service and only if it is a commercial entity can it provide the public service without the taxpayer picking up a load of costs for it. So the idea of the way in which it was set up was actually quite a clever idea; the problem is the execution all fell to bits, as is always the case. My view is that if you have got an entity, which this is, which is primarily a commercial entity but provides a public service, of which there are two chunks - the USO and the rural network - which are the things that are supported by the commercial entity that we have got here, this business is not in a state where it could be privatised anyway, and, secondly, I am not sure that that is naturally the next step. I think the big opportunity of the next launching pad of the business is to get it to a real commercial entity that provides a public service that does it extremely well. Therefore, it might well be a role model for how these businesses, these great national enterprises, should work going forward. I still think that you can get all the benefits of privatisation without going the whole hog and that is why I think it is really important that you get your people to take a share of ownership in that, in some way, shape or form. Q99 Miss Kirkbride: You could raise capital. Mr Leighton: We could raise capital if we wanted to anyway, provided we have got a balance sheet which is fine, no debt and great assets. Mr Crozier: That leads straight back to the need to sort out the pension deficit, because clearly you cannot go and raise capital while you have got a negative balance sheet. Mr Leighton: It is part of our debt. Q100 Chairman: You just mentioned the rural network there. We have had evidence from the National Federation of Sub-postmasters expressing concern that if this all goes wrong there could be implications for the Post Office network. That is a fair concern. Mr Leighton: Absolutely. Under the umbrella of Royal Mail we try and look after all the businesses and make sure that they are all aligned. Mr Crozier: Do not forget, some 40 per cent or so of their business derives from the Royal Mail, so the two businesses are absolutely, inextricably linked. Q101 Sir Robert Smith: You still have not said what your vision is for this pension deficit to be solved. Mr Leighton: It is very straightforward: somebody has to put in the money, it has to be paid over a longer period of time than the 12 years, which is what is in there today, or there is some partial way of taking the pension deficit down. The only way it gets solved is in some way the cash has to come from somewhere. That is the reality of it. I think that is what is exercising people's mind, and people are looking at what is the best way to try and solve this in some way, shape or form, because it is the one thing that is pivotal to everything. Q102 Sir Robert Smith: If you have got your 2 billion and your 4 billion and everything else, basically the only lever left is the regulator getting the playing field right for you to be a viable, commercial business. Mr Leighton: Absolutely. To go Roger's point, you can either put the prices up to such an extent it covers the pension deficit - well, that will be death for everybody, so that is not really an entity - or somebody puts the cash in. It is as simple as that. Q103 Mr Hoyle: It is a knock on Number 11 for you. Mr Leighton: Lindsay, you are closer to that than me. If you could knock on the door for us it might be very helpful! Q104 Mr Weir: We have heard a lot this afternoon of pleas to be treated as an ordinary business, but there are some advantages over your competitors which are currently protected by the regulator and the Government, such as VAT exemption and the Postcode Address File. Do you believe that you should be allowed to have these advantages after full liberalisation and why? Mr Leighton: We had this conversation this morning and I am just relieved to have any advantage. I will hang on to any advantage as long as we possibly can, because in the end we will have all our advantages taken away and, to a degree, over time perhaps all the advantages get taken away but our problem is: let us not take them all away at once. Actually, let us not make it disadvantaged. The VAT thing is very interesting because it is not quite all that it seems because if you are a business and you charge VAT you can claim VAT back. It is not exactly as it seems. There are one or two customers who you know do not pay any VAT so there is an issue on the back of that. In the mix of stuff, do I expect a situation (if you take a 5 or 10 year view) where all this will get dissipated in some way, shape or form? Answer: probably. However, the issue for us is everybody wants to do everything to us all at once, and that is the only thing that we object to. To be honest, we would not be doing our job if we were not coming and saying: "Look, can you help us out a bit on a few things because everything is not perfect?" This business was -6 out of 10. Today it is +2. So we have come a long way. Hang on a minute, we are at +2 against 10 but our margins are not anywhere near our competitors', our regulated business is 90 per cent of what we do, we are under pressure on a lot of fronts and we have got the volumes going down off the back of it. We are not saying: "Bale us out" but we are also saying "Don't sink the ship just at a time when, actually, we might be able to keep ourselves afloat and get ourselves into a reasonable position". Q105 Mr Bone: I am not entirely sure but are you suggesting that it would be good to postpone the final stage of post service reform in the UK for some of the reasons you have mentioned? I just want to ask you that question first. Mr Leighton: It is too late. My sense of it is we are where we are, it is going ahead, let us be real about what the situation is. So we have to accept all that and take that on the chin - that is life - but in the mix of this it just happens to be life at a time when we are going to get a bit of regulation that is probably the most important piece of regulation that any national entity has had, actually. When all the others went - and Judy mentioned BT - they had a much better balance sheet and a much better profit position than we did. I think we are where we are, we have got to go with it and it is not going to change anything off the back of that. Mr Crozier: It is more important to get the regulation right. Mr Leighton: Absolutely. Q106 Mr Bone: Listening to you, I understand the problem because you want the freedom that a privatised company would have, you want less regulation but also, to a certain extent, it has been decided that you need protection in some regard of the monopoly for the very peculiar reasons that you do have to do this special delivery - if you like, social mail. You did say very early on, Adam, and I remember this and I thought to save this one for the end, that "competition is not good for everyone." I have never thought that; I think competition is good for everyone, but it is certainly good for the consumer, is it not? Mr Crozier: It depends on which consumer you are. If, for years, people have been artificially keeping stamp prices low and to pay for that you keep your business prices high then you have got to rebalance and, clearly, in the short term if you are a social customer and the price goes up to 39p in 2009/10 you are paying more. Q107 Mr Bone: We are going to go round the old argument of whether you can improve efficiency rather than just putting the price up. Mr Crozier: To get to keeping it at 39p we have to improve by 1.5 per cent plus cover all the wage inflation and everything else. So that is doing that, that is not just people sitting back and saying "Let's raise the prices". I think our track record shows that we have done that. Q108 Mr Hoyle: Just taking you back to what you were saying about VAT, you are absolutely correct that it does not matter to businesses; okay they have to fill in an in-and-out form to the VAT but it does not cost them anything; they pay it out and they claim it back. The person that will get hit if VAT comes in is Auntie Nancy who sends the birthday card, the Christmas card - all those people out there would suddenly have to pay VAT that they could not claim back. Let us hope that you do not have to impose VAT because we will hit the customers that we are meant to be looking after. Never mind what they tell you, you hold firm. Mr Leighton: You can lead that campaign for us, Lindsay. Mr Hoyle: With pleasure! Q109 Chairman: Can I conclude by asking one semi-personal question, if I may? I run my constituency from the constituency, so the quality of the postal service to Worcester and Worcestershire matters to me a lot. It has got a lot better recently and much more reliable, so thank you for that. However, what used to drive me absolutely scatty and the British Chamber of Commerce evidence struck a real chord with me, was when it used to arrive at totally unpredictable times of day. They are making a plea in their evidence, they are saying your quality is not all you say it is; they are saying your quality has not got as good as you claim because the targets you are setting are, effectively, not the kind of targets that businesses want you to have. Having a target of getting it there by around lunchtime is not good enough; businesses need it by 10.30 or 11.00 in the morning, to cash cheques and so on, and actually what they really need is predictability - it is coming at roughly the same time every day. Do you think your quality is really all you say it is? Mr Leighton: I am going to let the CEO answer that. Mr Crozier: Absolutely I do because it is independently done. It is the best quality of service on record that the Royal Mail has ever had. Our delivery performance, in terms of getting it there by lunchtime is, frankly, better than any other country that I am aware of in Europe. Secondly, for businesses we do get mail there before 9 o'clock but the problem we have --- Q110 Chairman: For businesses you have it there for 9 o'clock? Mr Crozier: By 9 o'clock. We have one issue, which is how do we deal with very small businesses. This is something we are talking to the Small Business Federation and others about. With a lot of small businesses nowadays (and we mean by that they receive less than 15 letters a day - just to give you a rough cut-off point) the problem is they are very hard to identify because a lot of them are run from residential areas - whether they are businesses or homes. That is something we are looking into trying to improve. Even the Small Business Federation does not know what is a business and what is a residential address. So we are trying to get inside that and find a way to improve the service to smaller businesses. So, for very small ones, I absolutely accept we have got to find a way round that. The consistency of time of day should have very much settled down now; I accept that a year ago when we put all the changes in it was moving around a fair bit, but I hope pretty much everywhere has settled down now and people should not be seeing that. In relation to the very small businesses run from homes, we are talking to a number of people about how we can improve that because that does need improving. Q111 Mr Hoyle: What I am interested in, which you have not mentioned and I thought you might have done, is Deutsche Post and the tie up with Exel where they have taken them over. There we see somebody who has not got the same constraints, who has had a different liberalisation because the market has not been opened up in the same way - great advantages - yet they have bought straight into our market and straight into direct competition. What does it mean and what is it going to do? What is the disadvantage? Mr Leighton: First of all, it shows the scale of that organisation. They have paid a huge premium for that. Q112 Mr Hoyle: Way over the top. Mr Leighton: So it demonstrates they are a big scale player and they are interested in being in this market place. Exel is a global business, it gives them a different angle in that it gives them access to the retailers - they do a lot of distribution for retailers - and it is possible that they could use that as a way of moving mail around the UK. Mr Crozier: I think the biggest thing - to go back to what Peter said earlier, which is why it is not about being monopolistic in any sense - is that the rest of the world is not hanging around while we have all these conversations; the rest of the world is getting on with it. Therefore, it is a competitive marketplace. We have lost a billion items already. This market is opening and opening very, very quickly and we need to have the agility to compete in that market. Q113 Mr Wright: You have talked at length about the need to increase the price of postage over the next three or four years to 39p. One of the things you have not mentioned is the fact that there are also plans to shed the workforce by 30,000 over the next four or five years or so. How much of this is actually being driven by the liberalisation of the market and has this also been driven by, and connected to, the pension deficit? Finally, has there been consultation with the staff side or, indeed, with the shareholder? Mr Crozier: There is no consultation because there is no firm idea around job numbers at all because it depends on a huge number of factors: it depends on market share and what happens with the competition; it depends on the regulatory settlement and it depends on how much capital expenditure we are allowed to go forward with because that will determine how much automation we can bring in, which determines what the effects are on jobs. Again, without trying to avoid the question, it always goes back to the fact that these things are all connected, and until we know within the next couple of months what the settlement is going to be from Postcomm or what cap-ex is going to allow, and all sorts of other things, we literally will not be able to answer that question. We are very happy to answer it, Chairman, in two or three months' time when we know where we are, but until we know that anything is just pure speculation, because that is all it can be. Q114 Mr Wright: So although we take things we read in the press with a pinch of salt many times, the report that was in the Telegraph, I believe, is that according to plans that the Royal Mail has submitted to Postcomm, the mail regulator, the management is planning to reduce the workforce by a further 30,000. So it is pure speculation on their part, there is not a final figure? Mr Crozier: There are lots of different scenarios, but the final one depends on where we get to on all these settlements. Q115 Mr Wright: There will be consultation presumably? Mr Crozier: Of course there will be. It goes without saying that we will have to, through competition, become more efficient, and that will absolutely lead to a number of job losses, but the extent of that we just cannot say until we know where we are. Q116 Mr Wright: Is that also linked to the £4 billion pension deficit - the need to cut costs to try to save money to put extra resources ---- Mr Crozier: Not directly. The need to do that is to be competitive, because the only way for this company to thrive and to have the possibility of fixing the pension deficit is to be a successful, commercial organisation, and to be successful commercially we have to be at least as efficient, if not more efficient, than our competitors, and that is the drive behind this. Chairman: I made a quality of delivery promise to you that we would finish at 12.45; we are a minute over already, but I do not think that is too bad. I hope you do as well in the future. Gentlemen, thank you very much indeed.
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