Select Committee on Business and Enterprise Sixth Report


2  The responses

Timeliness

4. We published our Report on 8 February. When we took evidence from the Minister our Chairman noted that "I hope we might look to you … to be a little more rapid than the usual two-month response period to a select committee report".[3] A speedy response would have reduced uncertainty and given us the opportunity to press the Government further if points of difference remained. Postwatch managed to give us a full and considered reply before the end of the month. In contrast, the Government and Post Office Ltd did not reply until 3 April, only just within the normal two-month deadline for Government responses, and immediately before the two-week April adjournment. The relative slowness of the Government and Post Office Ltd replies would have been easier to understand if they had been final statements of the position. In fact, there have been further developments since then.[4] We regret that the Government and Post Office Ltd responses were neither speedy nor definitive.

Welcome developments

5. We were impressed by the speediness and thoroughness of the Postwatch response. We welcome the fact that they have undertaken to keep our concerns about communications and the continued accessibility of the network in mind as they continue their work in ensuring the consumer view is well represented during the Network Change Programme. Postwatch sent us their most recent report on 9 May 2008. We look forward to receiving further reports.

6. While there are matters that still concern the Committee, there are several significant things in the Government and Post Office Ltd responses which we welcome, including:

Nonetheless, some concerns remain.

Local Authority and MP involvement

7. One of our concerns was that Post Office Ltd did not engage properly with local MPs at the outset of the programme. In their responses, both Government and Post Office Ltd maintained there was adequate consultation with local authorities. Relatively little was said about engagement with Members. Since the Government and Post Office Ltd responded to our report on 3 April, Post Office Ltd has announced that in future it will engage with MPs "10 days before the start of the public consultation in their constituencies in relation to the current Network Change Programme, rather than a few days before the consultation begins as at present".[5] While this is welcome, we do not understand why it did not form part of the response to our report, and consider it disappointing that the Post Office took no steps to inform us, or seek to revise its response.

8. Several local authorities had given us evidence suggesting that Post Office Ltd had not taken adequate account of the information they had provided about local conditions and plans. In its response Post Office Ltd has supplied us with figures showing that 123 of the 468 local authorities it contacted had not provided written responses.[6] We note that successful dialogue requires both parties to engage properly, and urge local authorities and Post Office Ltd to work together as the programme continues.

Sustaining the Network

9. In our initial report we noted that it was, according to a parliamentary answer,[7] theoretically possible that the access criteria set by Government could be met by a network of around 7,500 thousand post offices. The Government response to our latest report, however, was encouragingly robust:

Post Office Ltd estimates that a network of around 7,500 outlets would meet the national access criteria but it is neither Government nor Post Office Ltd policy for the network to shrink to the minimum size which would be compliant with the access criteria. The Government's funding package and Post Office Ltd's business case are both based on the network being sustained at around 11,500 outlets to 2011. The Government continues to view such a network as necessary to provide an appropriate level of national coverage.[8]

However, we also note that in their response to our Report of 2007 the Government was categorical that access criteria would replace the "no avoidable closures" provision:

The Government recognises that there will inevitably be future closures in addition to compensated closures under the programme—for example if a sub-postmaster decides to retire or move on and new premises or a replacement sub-postmaster cannot be found. Neither the Government nor Post Office Ltd can prevent that. The Government's access criteria will however establish a minimum level of coverage that Post Office Ltd will be required to maintain. Unplanned closures will be counterbalanced by replacements if the access criteria would no longer be met. Access criteria will replace the "no avoidable closure" policy and ensure that a national network of post offices is maintained. [9]

Post Offices Ltd's response makes clear that "while Post Office Ltd has no desire to see any further reduction in the overall size of the post office network, it does not believe it is possible or desirable to set a minimum number of fixed outlets".[10] There is some distance between this and the Government's assurances both now and in 2007 that it wishes to see the network sustained.

10. We accept that the Government has no desire to see the network shrink below 11,500 outlets between now and 2011. Indeed, it is investing £1.7 billion to safeguard the network. However, there is no guarantee that there will not be further closures after the Network Change Programme as a result of individual postmasters' and postmistresses' decisions. We note that Post Office Ltd itself does not believe "it is possible or desirable to set a minimum number of fixed outlets". We expect Post Office Ltd to share the Government's commitment to maintenance of the network.

Access criteria

11. The access criteria used for the Network Change Programme require Post Office Ltd to consider the availability of public transport and alternative access to key services, local demographics and the impact on local economies when drawing up their plans for closures. Shortly after our Report was published, we wrote to BERR to ask whether these criteria would apply once the current round of closures was over. Their response said that "it is … too early to state what factors in addition to geographical accessibility will be considered in thinking local decisions".[11] Responsibility for reviewing and updating the Code of Practice on Post Office closures and relocations will be devolved to Post Office Ltd and Postwatch, and its successor body, the new National Consumer Council.

12. The Government has asked Post Office Ltd to work with Postwatch to "develop a new code of practice covering 'business as usual' network changes to reflect the current policy and lessons learned from the Network Change Programme," and Post Office Ltd told us that it looks forward to working with Postwatch and its successor body, the National Consumer Council, to draw up such a code. In successive reports we have expressed our concern about the transfer of responsibility from Postwatch to the NCC at such a critical time in the Network Change Programme. We recognise that Postwatch is currently heavily burdened by the need to monitor the Network Change Programme itself. However, we think it is important that the Code of Practice is drawn up speedily, and that the transfer of responsibility does not cause delay. We urge Postwatch and Post Office Ltd to start work immediately.

13. We also asked whether BERR would monitor the extent to which the access criteria were met. We were told that "BERR will seek monitoring returns from both [the NCC and Post Office Ltd] but will not itself undertake any direct monitoring function."[12] While we understand the Government's reluctance to repeat work undertaken by other bodies, the Government should not distance itself too much from the process. The future shape of the network is a matter of direct political concern and will be determined by the Code of Practice. We wish to see a draft of the code before the summer recess. Ultimately, Government, as sole owner of Royal Mail Group, cannot duck responsibility for the shape of the network. While we do not expect it to replicate other parties' monitoring, we expect it to use those monitoring returns to ensure its considerable subsidies are being used to secure a network which meets the public's needs.

Outreach

14. In our original Report we raised questions about Outreach, but welcomed the reassurance that services would continue until at least 2011, and that they might be considered in areas which had previously lost their postal services. After the Report was published, we asked Post Office Ltd for more information about outreach services. We have also received some written evidence, and Postwatch's latest report on the closure programme. These documents have raised two further concerns.

15. The first is that the costings for outreach services may be unrealistic. Outreach services are provided by core sub-postmasters, who will identify and negotiate locations which are suitable. Post Office Ltd told us "the costs for the hire of halls and rental of properties are calculated based on our experience of the pilots we have run. That is built into the fixed remuneration package of the core sub-postmaster".[13] The core sub-postmaster will also ensure the services are provided. Friends of Rippingdale Post Office told us that in one case a sum of £1,000 had been offered to keep an office open for the normal hours for an entire year.[14] Similarly, the Save Tilton Post Office campaign told us that the existing postmistress had been offered £5 per session for the rental of counter space—£1.50 per hour.[15] We are not in a position to investigate these cases, but we will be examining how Outreach develops.

16. Our second concern is that "partner" outreaches are unable to accept postal packets weighing more than 2 kg.[16] We agree with Postwatch that this is a significant issue which should be addressed as a priority. Although Post Office Ltd has told Postwatch they believe relatively few customers will be affected by the inability of some outreach services to handle packets weighing more than 2 kg, it will mean considerable inconvenience for those who need to send large packages, and could have an impact on local businesses. We note that the universal service obligation extends to packages of up to 20 kg. We consider that all Outreach services should be able to handle packages of up to 20 kg.

Closure of Profitable Branches

17. We suggested greater powers for Postwatch to intervene when Post Office Ltd proposed closure of a commercially viable Post Office, and we proposed a presumption against closure of a post office linked to the last shop in a village. These proposals were rejected in the Government and Post Office responses. Post Office Ltd said:

Post Office Ltd works closely with Postwatch in accordance with the agreed Memorandum of Understanding, when drawing up local area plan proposals. While Post Office Ltd maintains a focus on the overall financial viability of its business, a whole range of considerations are taken into account including financial ones when Post Office Ltd makes its proposals. However, it should be noted that all of the branches proposed for closure would enable Post Office Ltd to make financial savings. This may include branches which sub-postmasters might consider as profitable. Post Office Ltd is committed to the sustainability of the network as a whole and does not believe that any other party (including Postwatch) should have the right of veto over its commercial decisions.[17]

In its response, Postwatch noted that the assurance Mr Cook had given us in evidence that all closures would make a saving did not necessarily mean no profitable branches would be closed:

We welcome Alan Cook's assurance that closures will only take place where the result is a material saving to POL. This, however, is not an assurance that profitable branches to POL will not close. Postwatch agrees with the Committee that such proposals would need to be carefully considered—profitable offices are likely to be heavily used, and closures would therefore affect many customers.[18]

18. We can see no material difference between the Post Office Ltd response and that earlier assurance that "there will be no post office that closes that does not produce a material saving to Post Office Ltd."[19] The post office network is a social as well as a commercial asset; as Postwatch says "profitable offices are likely to be heavily used, and closures would therefore affect many customers." We continue to believe there should be a presumption against their closure.

ALLOCATION OF COSTS

19. In previous Reports the Trade and Industry Committee commented on the lack of clarity in Post Office financial figures. The situation is no clearer. The Government had to submit detailed figures when it applied to the European Commission for state aid clearance in respect of its funding for the post office network. Almost all of this was left out from the state aid decision released in January.[20] The attached table shows the way in which revenue and costs were broken down for the Commission: with all the figures removed there is no way to tell what sums were ascribed to each heading.


Table 1 - Breakdown of POL's Revenue and costs of operating its non-commercial branches
2008/9

forecast

(£m)

2009/10

forecast

(£m)

2010/11

forecast

(£m)

Income

Income from SGEI* services

Income from non-SGEI services

Total Income


[…]

[…]

[…]

[…]

[…]

[…]


[…]

[…]

[…]

Costs

Direct

Shared

Sustaining

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

Other Costs

Capital expenditure

Ongoing Network Change

Pension deficit

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

Total Costs […][…] […]
Reasonable profit for SGEI services […] […] […]
Net Income/(loss) […] […] […]

*SGEI - Service of General Economic Interest

20. When he appeared before us in February Mr Cook told us that Post Office Ltd was seeking to reduce costs by £270 million over five years, although the sources for £50 million of that saving had not been identified.[21] He predicted that the Network Change Programme would produce a saving of £45 million. While £29 million of the £45 million could be saved directly by branch closures, a further £16 million[22] would come from overheads. Only £9 million of those overheads could be easily removed; £7 million was much harder to identify.

21. It is very unsatisfactory that there is so little financial transparency about Post Office Ltd's operations. Several people have written to us to challenge Post Office Ltd's allocation of costs to individual post offices, as did callers to You and Yours. Michael Jabez Foster MP told us that:

in looking at the four post offices in my constituency that were "up for closure", I was able to discover that the cost of paying salary and commission to the local Postmaster to run the service was, in some cases, less than the on-costs attributed to central services to support that operation…. When I asked for a further breakdown, for example as to how much would be saved from central costs if a post office was closed i.e. the sorts of cost of delivering money etc, I was told it was about a third. This obviously led me to the conclusion that the central costs are much wider than the support of any particular local office and that, in turn, additional cost is presumably shared out across other post offices that are kept open and thus, in turn, probably makes them unprofitable.[23]

Post Office Ltd's own figures leave significant uncertainty as to where £57 million of savings will come from.[24] It is not surprising there are fears that as offices are closed, overheads per office will increase, and decline will continue.

22. As the table above shows, little is known about the allocation of costs to individual offices. There is apparent evidence that, in other areas, Royal Mail Group and Post Office Ltd lack financially sophisticated figures. We note that, in its first response to the Government Postal Services Review, Postcomm complained about the inadequacy of Royal Mail Group's financial figures, saying the Group had:

a costing system that is inadequate for a business of this scale and complexity, operating in a competitive market characterised by high volumes and low margins. Both of Royal Mail's applications to Postcomm since 2005 for major changes in its letters pricing structure had to be resubmitted because of shortcomings in the original costings.[25]

As far as Post Office Ltd is concerned, the state aid decision on support for particular products (rather than the network as a whole) makes it clear that infrastructure costs are allocated to particular products in proportion to the income they generate and "the method of allocation by income is the only one used internally by POL for the allocation of these costs between products." Activity based costing systems are not used. [26]

23. As we have noted, there is no public confidence in Post Office Ltd's figures. Given the lack of transparency about Post Office Ltd's finances, and the reported deficiencies in Royal Mail Group's financial systems, it is impossible to be sure that the allocation of costs to individual post offices is rigorous. Post Office Ltd is a publicly owned monopoly, which provides many of its services on behalf of the Government and receives substantial taxpayer support; there should be far more clarity about such matters.



3   HC (2007-08) 292-II, Q323 Back

4   See para 7 Back

5   Royal Mail Group Press Release, 9 April 2008, Post Office Ltd to trial further ways to provide sustainable services Back

6   See Appendix 2: Post Office Ltd Response, p30 Back

7   Official Report, 18 December 2007, vol 469,c 1472W Back

8   See Appendix 1: Government Response, p20 Back

9   Trade and Industry Committee, Eighth Report of Session 2006-07, Restructuring thepost office network, HC 593 Back

10   Appendix 2: Post Office Ltd Response, p24 Back

11   Ev 2 Back

12   Ev 1 Back

13   Ev 9 Back

14   Ev 4 Back

15   Ev 12 Back

16   Postwatch, Report to the Committee on the Network Change Programme Back

17   See Appendix 2: Post Office Ltd Response, p30 Back

18   See Appendix 3: Postwatch Response, p39 Back

19   HC (2007-08) 292-II, Q222 Back

2 20  0 C(2007)5623 final, Subject:state aid N 388/2007 - United Kingdom: Post Office Limited (POL) transformation programme Brussels, 28.XI.2007 Back

21   HC (2007-08), 292-II, Q173 Back

22   The original report HC (2007-08), 292-I, cited £19 million, in error. Back

23   Ev 3 Back

24   £50 million on overall, and £7 million on the Network Change Programme Back

25   Para 3.23 Back

26   (2007) 5623 final, Para 61 Back


 
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