The Work of the Department - Business and Enterprise Committee Contents

Examination of Witnesses (Questions 40-59)


14 JANUARY 2009

  Q40  Chairman: I think we are beginning to go over the same ground and we have got other things to discuss.

  Lord Mandelson: --- which is a real loss to the Royal Mail and the people who depend on it.

  Chairman: We will be looking at this issue again with Richard Hooper.

  Mr Hoyle: If I could finally have the last word on it. I would say that quite rightly we had the same disagreements on the Post Office Card Account, he came round to my way of thinking and let us hope he can come round to my way of thinking on this.

  Q41  Chairman: Can I just ask one technical question. When do we expect to see legislation giving effect to any changes necessary?

  Lord Mandelson: Not before too long.

  Mr Hoyle: About the same measure of a minority stakeholder!

  Chairman: I think that is a helpful answer, I will reflect on that.

  Q42  Mr Binley: We have been talking about structure, we have been talking about alliances, we have been talking about modernisation, yet the very heart of the business is about the quality of top management.. Is not the conclusion to your analysis, Minister, that the top management has failed over recent years? What are you going to do about quality top management in Royal Mail, can you tell us that? Will an alliance bring in the level of quality of management that the service clearly is crying out for?

  Lord Mandelson: Well, no single organisational set of managers can take the blame for the challenges which the Royal Mail is facing. The company does have a plan for modernisation which it is taking forward, but it faces new constraints and progress is too slow. Royal Mail has got to change faster in order to keep up with the competitive pressures it is facing. I would say this: the chief competitive pressures come as a result of competition from digital media, not TNT, Deutsche Post or whatever. The loss of operating profit to the Royal Mail last year from developments in technology, the spread of digital media, was five times the amount of loss that ensued from postal competition. Whilst I am acknowledging the point that Lindsay has made we do have to see it in perspective. The greatest challenge to the Royal Mail does not come from a liberalised postal market, it comes from the growth of digital media, texts, e-mails and the rest.

  Mr Binley: So we need not think about a change in the senior management in the coming couple of years?

  Chairman: The chairman is going anyhow.

  Q43  Mr Binley: Yes. I want to know what your plans are for the management of Royal Mail which has been totally not in keeping with a modernised postal business.

  Lord Mandelson: I think you are being a little harsh.

  Q44  Mr Binley: Well I would be, I am a customer!

  Lord Mandelson: You are a very demanding customer.

  Mr Hoyle: I am a shareholder, Brian.

  Q45  Chairman: It is a matter of fact that you have to appoint a new chairman, do you not?

  Lord Mandelson: We are just about to appoint the new chairman.

  Mr Binley: We look forward to that. What about the rest of them?

  Q46  Chairman: I think we will leave that for another day.

  Lord Mandelson: That is a matter for the chairman of the board, not the Government shareholder.

  Q47  Chairman: I think that appointment is a very important appointment.

  Lord Mandelson: It certainly is.

  Chairman: And a very generously paid appointment, by the way, as well.

  Q48  Miss Kirkbride: I just wondered why the Minister thought the Labour Party was so neuralgic on the issue of the Post Office and Royal Mail.

  Lord Mandelson: Why is it?

  Q49  Miss Kirkbride: Yes.

  Lord Mandelson: I think it is principally because they see that public business is best served by a Royal Mail that is in the public sector and able to sustain the very tough Universal Service Obligation that is imposed on the Royal Mail. I think it is a pragmatic view taken by the Labour Party and it is one I happen to share. I do not think the Royal Mail and its customers would benefit from privatisation, which is why I am against it. I think also there may be a concern, as was expressed to me by some Labour MPs recently, that you take one step in introducing a minority stakeholder and it is not then such a big leap to seeing the ownership of the Royal Mail going into the private sector so that the public sector ownership and control is lost. I refute that. I do not believe that we are looking at incremental steps, let alone a slippery slope to privatisation, I completely reject that, unless, of course, by some misfortune for the country this Government were to be replaced by an alternative after the next election with different views on what it might do to the Royal Mail. What a misfortune that would be!

  Q50  Mr Binley: Some say.

  Lord Mandelson: Some say. Let us not look forward to that unlikely event.

  Q51  Miss Kirkbride: Through gritted teeth, for those who did not notice it! Do you regret that there was this promise made in the last Labour Party manifesto which you are going to break the spirit of with your proposals?

  Lord Mandelson: No, no, absolutely not. There is absolutely no question of breaking the letter or the spirit of the manifesto which committed the Government to retaining Royal Mail in the public sector, but making sure that it is restored to health and has a strong successful future. We are able to achieve both those things in implementing the Hooper Review's recommendations, keeping it in the public sector but turning it round, making sure that it has a strong successful future by bringing in the investment, the new ethos and management expertise and experience that I believe the Royal Mail badly needs. Both of those things are in the letter and spirit of the manifesto.

  Q52  Mr Wright: Surely we were aware we needed that expertise 10 years ago. We knew there were going to be difficulties. Certainly the pension deficit was brought to our attention probably four, five or six years ago when we realised there was a particular problem and we did everything we possibly could to help and assist Royal Mail. In terms of what Brian Binley said on the management, I think we have been badly let down and badly served. Here we are again talking about trying to reinvigorate the Royal Mail when in actual fact I believe the management over years and years have badly served the company itself. I think that is where the root cause of the problem is. To go down this particular route, to look at the possibility of bringing in private investors, in my opinion, if that was to go ahead, in two, three or four years' time we will be revisiting this and examining whether or not we are going to have the Universal Service Obligation in terms of the mail service. I have been looking at that particular viewpoint. We have looked at the question of the one price in terms of the postage. I think the most important thing, and we talk about taxpayers as a separate entity from the consumers but every single taxpayer at some point has used the Royal Mail, is I believe they would have been prepared 10 years ago to pay a little bit more on the postage service to protect the universal system. I believe management have badly let this Government and the taxpayers down in running this particular business and I think there will be more of the same in the future unless we are very careful.

  Lord Mandelson: As I have said, I half share your view but I think you are being a little unfair to the present management who have constructed and introduced a modernisation plan. As I have said, it has not been implemented fully, it has not been implemented quickly enough and it needs more capacity, more capability introduced into the Royal Mail to do that successfully. That is what I think our proposals will achieve. As I say, we have not achieved those goals successfully in the last 10 years, that is why we need to look at different ways of doing so now. When you talk about the taxpayer, I just ask you to bear in mind what the taxpayer is being asked to take on in implementing these Hooper recommendations. We are talking about a liability, a deficit in the Royal Mail's pension fund which has grown from three and a half billion to five billion and some predict will reach somewhere in the region of eight billion this year. You are asking the taxpayer to take on a great deal now in underwriting that pension fund deficit. If, in addition, you are asking the taxpayer alone to foot the bill for the investment in the modernisation and at the same time losing Royal Mail's access to that much needed, in my view, management expertise and experience of turning round the postal operator that a minority stakeholder would bring, I think that is asking too much and I do not think the public would stomach our cherry-picking the Hooper Review recommendations and saying, "We will take on the pension deficit, we will fix the regulator, but broadly speaking leave the Royal Mail operation as it is". I do not think that is an acceptable deal or an acceptable bargain for the taxpayer.

  Chairman: I think you sense Mr Hoyle is going to disagree with this, but I really do want to move on.

  Q53  Mr Hoyle: I think we are in danger of misleading the public. The public will think we are absolutely foolish when what we are saying is we are going to give the £9 billion deficit to the taxpayer and, on the other hand, going to leave the £600 million we have got there to spend on investment within the company at the same time we are probably going to give around 30% to a foreign company. The taxpayer will think we are absolutely bonkers.

  Lord Mandelson: That is what we are getting back from that partner, cash and expertise and a good track record in turning round a postal service.

  Mr Hoyle: And leaving nine billion with the taxpayer.

  Q54  Chairman: We will explore these issues again on Tuesday of next week when we have Richard Hooper and the Communication Workers' Union in front of us. Let us move on now to the main economic questions facing the Government in the country. You have made a major announcement this morning and kindly sent me just before this meeting began a fuller statement about what it involves. I have not had time to digest it fully yet. What do you want to say about the nature of that general statement before we begin specific questioning on support for businesses?

  Lord Mandelson: I think what I would like to say, Chairman, is at the heart of the economy's ills is the credit crunch, is the banking crisis, which is not restricted to this country, it is global as we know. The Government intervened last autumn to save the British banks from collapse. Many smaller, foreign-owned banks have now departed the marketplace here leaving a slightly reduced capital pool on which the banks can draw in order to service the needs of the corporate sector, homeowners and others. The banks are not yet back on their feet, they are not yet back to the lending behaviour and performance that we need to service the needs of the economy. The Government continues to keep under review the measures it has already taken in relation to the banks. We are in intensive discussions with the banks now with a view to making further refinements to those measures, those interventions that the Government has already made. In the meantime, the Government also has a responsibility to the corporate sector, smaller businesses in particular which are viable going concerns which have strong prospects but which are finding it a real struggle to find the credit that will enable them to withstand the pressures of the downturn and to get through it and out the other side. That is why since the Pre-Budget Report, when the Chancellor announced our intention to introduce these measures, we have been in intensive consultations with the banks. A lot of very careful planning has gone into what we announced today: the Enterprise Finance Guarantee, which targets help for small businesses; the Working Capital Scheme that will liberate working capital within the banks and enable them to sustain existing credit lines as well as introducing new lending; and the Capital Fund to the tune of £75 million that will enable companies benefiting from it to convert their debt to equity provided by that fund. I make two points. These schemes are tailored very specifically to the needs of small and larger firms alike, to those which have low and relatively medium risk, and, secondly, there is a very strict conditionality attached to these schemes. For the banks to benefit from the resources and the guarantees we are making available they have to negotiate with us how they will use those opportunities to benefit firms in the country which provide the backbone of our economy. That is what is different about these schemes and that is why I am confident they will deliver the results designed for them.

  Q55  Mr Binley: I am delighted that the Government has recognised the importance of the SME sector and particularly the small business sector because money has not been getting through to them and I think we are all aware of that. What you are saying is you are going to work with banks to find more effective ways of getting money through. Can I ask if you would give us some idea of how many of the packages of support announced in the Pre-Budget Report are in truth now available? We have heard a lot of fine words about schemes to help small and medium-sized business but much of that has not started to take effect yet. Could you tell me what is available at this very moment.

  Lord Mandelson: The one billion of guarantees supporting £1.3 billion of lending to smaller businesses under the Enterprise Finance Guarantee is operational and live as from today. The Working Capital Scheme is also live today, although we need to introduce an amendment to the Banking Bill in order to give effect to it. Our implementation of the Working Capital Scheme with the banks will start today and I believe the first tranche of the £10 billion that the Government is making available under this scheme, which will support £20 billion worth of lending, existing and new, will come on stream in a month or a six to eight weeks' time. We need to negotiate that. The banks will bring to us a portfolio of loans which our guarantee will remove, as it were, 50% of the risk from which will then free them up to make other capital available. That negotiation with the banks will start taking place as from today. We have to make really sure now that we are going to hit the mark, we are going to hit the target with this scheme. There has to be genuine additionality in value, performance and result from these schemes in what we see from the banks and I am absolutely determined to take the time to undertake the painstaking negotiation to make sure we do get those results.

  Q56  Mr Binley: Can I pursue that about hitting the target because one of the problems is the difference between loan and overdraft has not really been understood by the Government in this marketplace to date. Are you saying you are going to help small businesses which run their business on an overdraft facility rather than loan?

  Lord Mandelson: They will also have the chance as part of this guarantee scheme to convert overdraft to loans.

  Q57  Mr Binley: You do know that the Federation of Small Businesses reckon when small businesses looked at loan, about 40% of those people were thinking of packing up their business instead of getting themselves committed to putting their house on the line? You know that, do you not?

  Lord Mandelson: I do, and I am very strongly aware from some of the data I have seen from a couple of the banks that the number of overdraft limits being reduced by the banks is certainly significantly higher than a year ago.

  Q58  Mr Binley: Exactly.

  Lord Mandelson: It is precisely to address that need, both the shortage of capital available for lending in the market as a whole, which the Working Capital Scheme addresses, but also the greater difficulty that companies have in sustaining or acquiring new credit lines because the banks treatment of risk is changing given the new conditions operating in the economy. Even where capital is available, lending is available, it is harder to get hold of by companies in particular, but not only small firms. I would just enter this note of caution. I think we will find as the year goes on and as larger companies seek to renew their own lending and credit lines that they will face difficulties which the banks are going to have to address and I suspect the Government is going to have to address with the banks.

  Q59  Mr Binley: I am encouraged. I could not describe myself as a small businessman but I am certainly encouraged by what you are telling me. Can I go on to ask how you are going to monitor and assess the effectiveness of the schemes you have just announced?

  Lord Mandelson: Closely.

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