House of Commons - Business and Enterprise

Select Committee on Business and Enterprise Sixth Report

3 The future of the network and Royal Mail Group

24. There are currently two reviews of mail services underway. Since August 2006 Postcomm has been conducting a strategy review. In December 2007, the Government asked an independent panel, chaired by Richard Hooper, to review the postal service sector. On 6 May the Independent Review published its interim report. It noted that by 2012-13 Royal Mail Group could face an annual negative cash flow of around £400 million. Royal Mail Group's provisional statement for 2007-08 shows that, for the first time, Royal Mail Group sustained a loss on the universal service.[27] It is not surprising that the review reports an emerging consensus that "the status quo is not tenable".[28]

25. In 2006-07 Post Office Ltd made a loss of £99 million: this result included, for the first time, six months worth of the Government's £150 million annual Social Network Payment. It is clear that the Government has put a great deal of money into the network. Royal Mail Group's accounts for 2006-07 note that:

During 2006-07 the following payments were made by Government to support the post office network:

£145 million to reimburse Royal Mail Group Ltd for amounts that had been advanced to Post Office Limited; and
£231 million to fund the ongoing cash requirements of Post Office Ltd to meet its debts as they fall due.

In addition £150 million was paid to Post Office Ltd during the year to fund the maintenance of a rural network of post offices, £75 million of this was paid during the first half of the year by way of a transfer from Royal Mail Group, its immediate parent company. The remaining £75 million was paid during the second half of the year by Government in the form of a subsidy and recorded within revenue as a Social Network Payment.

All of the above payments made during 2006-07 were made in accordance with approval received from the European Commission under relevant state aid rules.

In 2007-08 Post Office Ltd's loss was £34 million. The improvement was attributed to receiving a full year's Social Network Payment of £150 million (rather than the £75 million received the previous year).[29] This suggests that there has been, if anything, a slight deterioration in the underlying financial position.

26. The rationale for continued state support of the post office network was set out clearly in the application for state aid approval. The network provides services of general economic interest. The state aid documentation divides these services into two categories: delivering specified services "using its network in accordance with the contractual terms which apply to each service" and "maintaining a network of post offices beyond its optimum commercial size and providing services of general economic interest over that network".

27. The European Commission notes that the network provides the following specific services of general economic interest:

a) processing of social benefit and tax payments;

b) processing of national identity and licensing schemes;

c) universal cash payments for public utility services;

d) universal access to basic cash and banking facilities and Government savings instruments, especially for rural customers and those on social benefits; and

e) access to universal postal services.

More broadly, the network provides support to rural businesses and economies, access to cash and bill payment services in places where such access is limited, and, to some extent, a way to access government services. Post office closures hit deprived people and areas hardest.[30]

Closure decisions

28. Royal Mail Group and Post Office Ltd are private companies, in which the Government is the sole shareholder. Post Office Ltd, in particular, has conflicting commercial and social purposes. Its offices are part of the commercial network of a company. Even though that company is ultimately owned by the taxpayer, it is expected to operate along commercial lines. On the other hand, as the state aid decision accepted, Post Office Ltd runs a network which provides services of general economic interest. This twofold responsibility has the potential to cause conflicts of interest. The company has been given responsibility for deciding which offices to close to meet the network change target of 2,500 closures. Although the access criteria give some broad guidelines about the social importance of the post office network, the company has a great deal of discretion as to how to apply them. We understand why the Government is reluctant to become directly involved in decisions on the closure of particular offices. Closure proposals rest on a great deal of detailed local and commercial knowledge, which central Government cannot replicate. Nonetheless, it is not satisfactory that Royal Mail Group is left to be the sole arbiter of the network.

LOCAL AUTHORITY INVOLVEMENT IN POST OFFICE PROVISION

29. At the time our Report was published, it was clear that some local authorities and local organisations wished to support local post offices, but little progress had been made. On 8 March the BBC reported that "Essex County Council has become the first local authority in the country to discuss taking over the running of post offices earmarked for closure. The council is negotiating a buy-out price from the Post Office and said some 15 branches could be saved within two months".[31]

30. We asked Post Office Ltd for more details of what was proposed. It is clear that negotiations continue, and that the intention is not to subsidise post offices per se, but to make them part of other businesses. Post Office Ltd also suggests that particular transfers will only be approved if they do not impact on those parts of the network within Post Office Ltd's control.

31. We understand the logic of this: Post Office Ltd is underpinned by a sizeable contribution from the taxpayer. In an earlier inquiry Post Office Ltd had indicated that a fully commercial network could comprise only 4,500 outlets. Although Essex County Council has said that it hopes the branches it funds will break even in time, some form of public subvention will be made in the short term. There is a danger that publicly funded organisations—some supported by a local authority and others by general taxation—will compete against one another. However, this case also shows the difficulties inherent in the current position, in which social and commercial interests have to be balanced, and in which local interests may run against the wider interest of the taxpayer in producing a sustainable network. These difficulties prompted us to recommend that that there should be presumptions against closing branches which were profitable for Post Office Ltd, and against closing branches linked to the last shop in a village.

THE STATUTORY FRAMEWORK

32. Central Government is understandably reluctant to take local decisions, so we recommended that the consumer body should have the power to block closure of profitable branches. To our surprise, Postwatch was unenthusiastic about the proposal. It noted that such a veto could only be exercised if it had the resources and knowledge to understand Post Office Ltd's finances. It said: "a power of veto on decisions would require an independent analysis of POL's business model, accounting practices, and financial projections—activities that Postwatch does not have the statutory remit to undertake".[32]

33. Postwatch is not alone in its apparent reluctance to look at the post office network in depth. The Postal Services Act 2000 gives Postcomm the duty of securing a universal postal service through licensing the providers of such services. It also provides advice and information to the Secretary about the number and location of post offices, and it produces a report on the network each year. However, although it is currently conducting a strategy review, Postcomm has said the review will not focus on the future structure of the post office network "because Postcomm has no direct regulatory locus over the counters network".[33]

34. We are surprised that Postcomm and Postwatch take such a light touch approach. The Postal Services Act 2000 gives both bodies extensive powers to seek information. For example, the Commission has power to require documents from any person or information from any person who carries on a business under section 47 of the Postal Services Act 2000 for "any relevant purpose". "Relevant purpose" is defined in section 47(6) to include the exercise of the Commission's functions under section 42 which includes the duty under section 42(1) to provide advice and information to the Secretary of State about the number and location of post offices and their accessibility to users of postal or other services.

35. Section 57 of the Act gives the Postal Services Council (Postwatch) power to investigate any matter relating to the number and location of post offices. Section 58 gives the Council power to require the Commission, the universal service provider or any licence holder under Part II who is not a universal service provider to supply to the Council such information specified or described in the notice as the Council may reasonably require when exercising its functions. We do not understand why Postwatch could not demand extensive information, if this was necessary to advise the Secretary of State. Nor do we understand why Postwatch might not legitimately advise the Secretary of State about the location of a particular post office. This point was raised very late in the inquiry, and we have not had the opportunity to discuss it with witnesses. However, we would be concerned if regulators and consumer bodies were not using their powers to the full. We are likely to return to this in the autumn.

Wider responsibility

36. A great deal of Post Office Ltd's difficulties comes from loss of bill payment services for government and other regulated services. Royal Mail Group's Annual Report for 2006-07 noted the pressure caused by the removal of state or regulated services from the system:

Underlying revenues fell last year by £45 million. This reflected the continuing effects of payments of benefits directly into bank accounts, a decline in the number of car tax licences issued in branches as motorists stepped up their use of the DVLA web site, the replacement of the E111 forms with the issue of the European Health Insurance Card and the loss of the BBC Licence contract.[34]

Yet one of the grounds for allowing state aid to the Post Office is that it provides "universal cash payments for public utility services". Although the state aid letter refers only to public utility services there is a further group of services, such as energy or water, which are considered so fundamental they are strongly regulated. There appears to be little or no co-ordination between regulators, between regulators and Government, or between government departments about the social effects of withdrawing payment services from the post office network. Given the grounds on which state aid was granted, and the current tender for the new Post Office Card Account, the loss of which could devastate the network, we believe this needs further consideration.

The reviews

37. Neither of the reviews currently taking place are considering the post office network in detail. The Postal Services Minister told us that the Postal Service review was focusing on mail services, rather than the post office network. Postcomm's review also excludes the post office network. In its response to Postcomm's separate strategy review Postwatch noted:

Although the consultation document does not mention the post office network, we see this network as an integral part of the delivery of postal services and therefore an essential part of the Strategy Review.[35]

Postcomm's response to the Independent Review says that further information "assessing the advantages and disadvantages for full separation of POL from Royal Mail will be published in Postcomm's annual network report … in October 2008".[36] We would expect this to give more financial analysis than has been available until now.

38. The interim report of the Independent Review noted that the views of domestic consumers about the postal service might best be summarised as "satisfied indifference".[37] This may be true about the mail service; it is not true about the post office network, which is very closely connected to the universal service provider, both operationally and financially. Research commissioned by Postcomm noted the "trade off between a network with a large number of access points capable of receiving the largest postal packets (which is likely to have unprofitable post offices) and a sustainable network (which is likely to have fewer access points".[38] Royal Mail Group paid £358 million to Post Office Ltd in 2007-08 for providing services.[39] Our successive inquiries have shown that people value their post offices, and, as the controversy surrounding the current closure programme demonstrates, that they feel passionately about the need to protect them. We have no doubt there would be public outcry if changes to mail services resulted in further reduction of the network.

39. We do not think it is reasonable or prudent to conduct reviews of mail services without looking at the relationship between Royal Mail Group and Post Office Ltd. Given the lack of clarity about the finances of the network, and the apparent disjunction between the Government's desire for a network of 11,500 offices, and Post Office Ltd's much more nuanced response, we recommend that Postcomm and the Postal Services Review include a thorough examination of Post Office Ltd as part of their work. There should be as much clarity as possible about the operational and financial relationship between the post office network and the universal service provider, and about the potential effects of changes in postal services on the post office network. We intend to examine output from those reviews in the autumn. One thing is clear—history has given us a network which remains among the largest in Europe. The Government and the European Commission accept the network provides a valuable service: all Government departments should bear that in mind when they consider how to provide their services.

27 Royal Mail Holdings plc, Preliminary Statement (Unaudited) for the year ended 30 March 2008 Back

28 Independent review of the postal services sector, The Challenges and opportunities facing UK postal services: An initial response to evidence, p 31 Back

29 Royal Mail Holdings plc, Preliminary Statement (Unaudited) for the year ended 30 March 2008, p 3 Back

30 See, for example, Guy Rubin, Polly Raymond and John Taylor, The last post: the social and economic impact of changes to the postal services in Manchester, New Economics Foundation, December 2006 Back

31 http://news.bbc.co.uk/1/hi/uk/7284758.stm Back

32 See Appendix 3: Postwatch Response p37 Back

33 Postcomm's Strategy Review, The Postal Market 2010 and Beyond: Emerging Themes, August 2007, p 4 Back

34 p6 Back

35 Postwatch, Postcomm's Strategy Review,' Emerging Themes': The Postwatch Response, 14 December 2007 Back

36 Postcomm, second submission to the independent review, para 4.29, p49 Back

37 Para 44 Back

38 NERA Economic Consulting, Access to Postal Services: A Final Report, Back