2 Royal Mail Group payments to Post
Office Ltd
2. Post Office Ltd is a wholly owned subsidiary of
Royal Mail Group. In 2007-08 it received £358 million from
Royal Mail Group for providing mail services. We were surprised
to find that this did not cover the costs of providing these services.
We draw particular attention to the following exchange between
Mr Alan Cook CBE, Managing Director of Post Office Ltd and the
Chairman of our Committee:
Mr Cook: To explain the current situation, to
be clear, the Royal Mail Group is the parent company and then
there are Royal Mail Letters and Post Office Ltd I act as Managing
Director of Post Office Ltd and I sit on the board of Royal Mail
Group. We are quite closely integrated today. Having said that,
there is a need for us to provide transparency in terms of the
financial relationship, so we have what we call an inter-business
agreement that exists between Royal Mail Letters and Post Office
Ltd which defines how much is paid by Royal Mail Letters to Post
Office Ltd for the services we provide. … As things
currently stand, given the profitability of Post Office Ltd, the
payment that Royal Mail makes to us is not sufficient for me to
make a profit on it. [emphasis added] The way I am tackling
that is to make the business more efficient by taking out cost
and generally improving efficiency until such time as we can make
a profit out of that business.
Chairman: I was interested by what you just told
me, Mr Cook. […] I want to make sure that you did actually
say that the payment that you receive from Royal Mail is not sufficient
to meet the cost of the services you are asked to provide for
that arrangement?
Mr Cook: Yes. The business is losing a lot of
money today. That is the problem we are trying to fix effectively.
Chairman: Is there an issue here about the Royal
Mail Group shoving costs on to the Post Office Ltd subsidiary
which is being funded by taxpayer subsidy?
Mr Cook: I think I can make Post Office Ltd profitable
from the money that is paid to us by Royal Mail. I do not think
the problem is that Royal Mail do not pay enough; I think the
problem is that it costs too much to run Post Office Ltd
Chairman: Your cost base is too high?
Mr Cook: Yes. I have to say that that is a very
subjective view because it is not easily benchmarked.[3]
3. We have commented in past reports about the
relationship between Royal Mail Group and Post Office Ltd and
the lack of transparency in Post Office Ltd's finances.[4]
Both bodies are wholly owned by the Government and provide vital
services to the public: there should be far more openness. It
is possible that Royal Mail Group is paying a fair price for the
services it receives and the problem is that Post Office Ltd is
inefficient. As the state is sole shareholder in the business,
it is in the public interest that Post Office Ltd is under pressure
to become more efficient. It is also possible that Royal Mail
Group is inappropriately using a state-supported part of its business
(Post Office Ltd) to cross subsidise its mail services. Given
the close relationship between the two bodies, and the lack of
any obvious benchmark, it is impossible for us to judge which
is the case.
4. We repeat our earlier conclusion that it is
neither reasonable nor prudent to conduct the reviews of mail
services without considering the relationship between Royal Mail
Group and Post Office Ltd and urge those currently conducting
reviews to take this fully into account. Moreover, Royal Mail
Group and Post Office Ltd should provide clear information on:
what services Royal Mail Group expects Post Office Ltd to deliver
for it; how Royal Mail Group determines the price it pays for
these services; and how much it actually currently costs Post
Office Ltd to deliver them.
3 Qq 23, 26, 27 and 28 Back
4
Trade and Industry Committee, Eighth Report of Session 2006-07,
Restructuring thepost office network, HC 593; Business
and Enterprise Committee, Sixth Report of Session 2007-08, After
the Network Change Programme:the future of the post office network,
HC 577 Back
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