Memorandum from Postcomm
At the PAC hearing on 14 May I undertook to
send you copies of Postcomm's market research on customers' needs
from postal services and on the net cost of elements of the universal
service; these are enclosed, together with a copy of our second
Submission to the Independent Review Panel on Postal Services.[1]
I thought it might be helpful to explain the
context of this research. In 2006, Postcomm, Postwatch and Royal
Mail jointly commissioned and funded market research into customers'
needs. At that time there was concern about Royal Mail bringing
forward final collection times from some post boxes, particularly
in rural areas, and about later deliveries. Amongst other things,
the joint 2006 market research asked a specific question about
which day customers considered deliveries were needed least; the
answer was Saturday. Results from the 2007 survey are consistent
with this.
In June 2007 Postcomm published a document summarising
the evidence from our consultation, and research indicated that
the majority of customers were satisfied with the postal service
they received eg price, collection and delivery times in most
areas and ability to post their items, including parcels. We recommended,
however, that Royal Mail take action to restore early rural collection
times to levels which were more acceptable to customers in those
areas. Royal Mail agreed to review all collection points with
a pre-midday final collection time on Monday to Friday, with a
view to putting back the final collection time as close to midday
as possible, where this was reasonable.
At the time, in recognition of concerns about
delivery times we said that we would continue to include this
issue in our ongoing research of postal users' needs, and consider
the cost and efficiency arguments in the course of the review
of the universal service and the discussions leading to the next
price control in 2010.
In August 2007, we published a document on the
"emerging themes" for the postal market from 2010 and
beyond. We said that the universal service should evolve in the
light of changing social, economic and technological conditions,
in line with the European Directive requirement. With this in
mind we promoted a debate about how the universal service should
evolve, in terms of its product coverage and service specification,
in the medium to long term. We said that we needed to ensure that
the service remains aligned with changing customer needs and the
economic costs of providing it. The document made clear that we
would not be proposing any changes without extensive public debate,
nor would we take initiatives that could threaten the long term
health of the mail market.
Postcomm must ensure the provision of a universal
service and have regard to the need to ensure that Royal Mail
can finance its licensed activities. Against the background of
royal Mail's worsening financial situation, its failure to improve
efficiency sufficiently and reduce its costs, we commissioned
Frontier Economics to analyse the net cost of providing the various
elements which collectively comprise the universal service.
As a responsible regulator we need to understand
the costs that the universal service imposes on Royal Mail, as
well as the revenues that this service brings. Royal Mail could
not provide us with the information we needed. What the research
has shown is that in fact being the universal service provider
does not impose large net burdens on Royal Mail. The main activity
which is not required by the European Directive definition of
universal service, and where our research shows that costs are
particularly high, is Saturday deliveries. If Parliament were
to remove the requirement for Saturday deliveries, the report
shows that Royal Mail could save around £270m net a year.
However the report also shows that it should be possible to achieve
this level of savings through efficiency savings without altering
the universal service. The research on customer needs also showed
that residential customers remain attached to Saturday deliveries
as an element of the universal service. Taking account of all
these point Postcomm decided not to recommend any changes to this
aspect of universal service. Bothe Royal Mail and Postcomm are
proposing reductions in the scope of universal service to take
bulk (business) mail out of the universal service under certain
conditions.
I also thought it would be helpful to clarify
an answer I gave at the Committee to a question from Austin Mitchell
MP on whether or not Royal Mail were making losses. Royal Mail
announced in its preliminary results that its Group operating
profit in 2007-08 was £162m. Within the Group, the business
that provides mail (Royal Mail Letters) reported an operating
loss of £3m. The results have not been calculated on the
same basis as 2006-07. We estimate that, had they been, Royal
Mail Letters would have shown an operating profit of £57m.
The essential issue though is that overall the letters business
of Royal Mail is moving in an unhealthy direction and as we made
clear in our submission to the Independent Review Panel, Government
needs to take action to ensure that the business can undertake
the radical transformation that is needed to ensure a healthy
universal service into the future.
I understand that your Committee would welcome
a further evidence session specifically to discuss Postcomm's
submission to the Independent Review Panel and the press release
that accompanied it. I am aware that you and others on the Committee
were disappointed that I did not give the Committee a preview
of this submission during the Hearing. I had understood that my
fellow Regulators (Ofgem and Ofcom) and I had been invited to
a joint meeting specifically to discuss the NAO report on withdrawal
of price controls. Postcomm's work in relation to the Independent
Review covered very different ground, which did not appear to
me to be relevant in relation to the NAO report or the other,
more wide-ranging, questions that were addressed to me during
the Hearing. It seemed to me at the time that it would have detracted
from the planned discussion on withdrawal of price control, and
from the contributions of Ofgem and Ofcom, if I had used the occasion
of the PAC Hearing to announce our position on a very different
matter. I am of course happy to discuss this further with you
and your Members on 30 June.
Sarah Chambers
Chief Executive
27 May 2008
1 Not printed here-can be viewed on the Postcomm website
at www.psc.gov.uk Back
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