Conclusions and recommendations
Royal Mail efficiency
1. Although
there are disputes over the extent and causes of Royal Mail Group's
inefficiency, it is clear that Royal Mail Group is less efficient
than its competitors. Clearly, any decision about the company's
future has to address this. (Paragraph 27)
Labour relations
2. Whether
or not the Postal Services Bill [Lords] is enacted in its current
form, the country needs a modern, efficient Royal Mail Group.
Good labour relations are essential to achieve this. It is clear
to us, from our previous experience as the Trade and Industry
Committee, that in the past there have been faults on both sides.
If Royal Mail Group is to have a prosperous future, whether or
not it remains in the public sector, both sides must change. Royal
Mail Group must ensure that its current rhetoric is matched by
its actions. The unions must accept that negotiations on working
practices are not a matter for Government, and that national agreements
should be honoured. We emphasise that this relates to matters
of day-to-day management; it is of course legitimate for the union
to raise matters such as the ownership of Royal Mail Group with
the shareholder — Government — and therefore with
Parliament. But both Government and Parliament must be confident
that the management issues can be properly addressed by the company
itself. (Paragraph 32)
Royal Mail Group and the universal service obligation
3. We
make this Report in the confident assumption that the universal
service obligation for postal services is necessary for the United
Kingdom. There is no doubt that, as the Independent Review of
the Postal Services Sector said, "the ability to deliver
items toward 28 million business and residential addresses in
the UK is part of our economic and social glue." (Paragraph
34)
4. Royal Mail Group
is charged with the universal service obligation, and if the obligation
is to be sustained, Royal Mail Group needs a suitable financial
and regulatory framework. The Independent Review concluded that
these were not currently in place, and we agree, in the words
of its report, that the status quo is not an option. But that
does not mean that the package of changes proposed by the Government
is the only way forward. (Paragraph 35)
5. There is a choice
between ensuring the Universal Service Obligation (USO) covers
all those services which are socially and economically necessary,
without reference to the market or limiting the USO to only those
products which the market will not provide. In the first case,
it is likely the USO will be self financing; in the second it
is possible that extra costs will need to be met, either by a
levy on industry or directly from the taxpayer. Parliament may
wish to reflect on whether it or the regulator should make that
important choice. (Paragraph 51)
Price controls
6. Modernise
or decline recommended
a full evaluation of the access price control regime. We agree;
we have great doubts about its continued operation. We are sure
its problems have been increased by the poor relationship between
Royal Mail Group and the regulator, and the lack of clarity on
both sides (Paragraph 63)
7. Given that full
cost transparency may be unachievable, we are surprised that when
faced with evidence that the USO provider was losing access market
share at twice the rate predicted, and that end to end competition
had actually declined, Postcomm did not reassess its regime, particularly
since e-substitution was also affecting Royal Mail's business.
(Paragraph 67)
8. In suggesting that
Royal Mail Group could improve its position by increasing prices,
Postcomm appears to have overlooked the fact that competition
in the mail market is not just between rival mail carriers, but
also between post and other methods of communication. The purpose
of regulation is to benefit the customer; indeed, this is the
rationale for introducing competition into the market. Something
is seriously wrong when a regulator proposes measures which would
increase the cost to the customer, and might even risk reducing
the size of the market overall. (Paragraph 70)
Effect of competition
9. We
share Postcomm's concern that it is important Royal Mail should
not abuse its market position. We also agree that competition
can act as a spur to improve performance, and has done so for
Royal Mail Group. We have no doubt that further efficiencies are
possible and desirable. However, the reason why the EU postal
service directives advocated gradual market opening was to allow
time for incumbent universal service providers to adapt. In its
submission to the regulator's consultation on price control, the
Government noted that "the regulatory risks to Royal Mail
should be kept at a minimum otherwise Royal Mail may be at a disadvantage
to other operators." The Trade and Industry Committee warned
that market opening was ill timed. Royal Mail Group asked for
price control to be reviewed because of its rapid loss of market
share. In retrospect, Postcomm has paid too much attention to
market opening, and to using price controls to increase Royal
Mail Group's efficiency, and too little to the need to preserve
the universal service obligation. (Paragraph 72)
Government role
10. The
relationship between the Government and regulator when a regulated
company is publicly owned is complex. The history of the pricing
review demonstrates that there is a thin line between the Government's
role as shareholder, and its role in setting policy. Some of the
principles the Government set out in its submission to the pricing
review have been respected, but Postcomm's regulatory regime has
left the taxpayer with no return on assets, and Royal Mail has
been exposed to significant regulatory risks. Economic matters
for which the regulator should be responsible can overlap, or
even conflict, with wider policy matters, where Government has
a legitimate right to expect its views to be taken into account.
(Paragraph 76)
11. It also seems
to us that the regulator may have treated the shareholder more
harshly than it would have done if the shareholder had not been
the government. Even though the final outcome of the price review
was not as severe as the first proposals, a regulator faced with
a private sector pensions deficit of the scale of that of Royal
Mail, and a company which had not paid a dividend for some time,
might have found it harder to put forward a pricing regime which
expected that much of the cost of the pension deficit would be
borne by the company, and not passed on to customers. (Paragraph
77)
Regulatory Framework
12. Given
the changing structure of the communications market and, more
particularly, the regulator's inability to work effectively with
Royal Mail, we support the abolition of Postcomm and the transfer
of responsibility to Ofcom. (Paragraph 78)
13. The House will
need to examine the details of the regulatory structure set out
in the Postal Services Bill [Lords] carefully, but, on
our reading, it is more likely to result in targeted regulatory
conditions. The Bill allows regulation to be loosened if this
is appropriate. In principle, we welcome the increased flexibility
that the Bill will provide. (Paragraph 79)
14. We consider the
House should consider carefully whether it is appropriate to remove
the current power to change the definition of the universal service
by affirmative order. If the Bill is left as it stands, then any
change will require primary legislation. On a more detailed point,
we would like an explanation of how the requirement to set the
universal service by reference to users' reasonable needs fits
with the provisions relating to the designation of the universal
service providers, where continuing designation is linked to the
imposition of conditions on the provider. (Paragraph 81)
15. We recommend that
the Government clarifies exactly what restrictions will be placed
on the regulator in practice. For example, why are the conditions
the regulator can place on access different from those it can
use in its general price setting powers? Is it the Government's
intention to prevent Royal Mail Group from being forced to provide
services to other postal operators at less than cost? If it is,
does the Bill satisfactorily reflect that? (Paragraph 85)
Vulnerable users
16. We
are concerned about the extent to which Ofcom will be required
to take into account the interests of vulnerable or marginal members
of society in provision of postal services. Under the Bill their
interests would have to be taken into account as part of Ofcom's
duty to review whether the universal service provider is meeting
the reasonable needs of users, but members of particular groups
may feel better protected if the requirement to address their
needs is listed expressly on the face of the Bill, or if the Government
can give an assurance that the advisory committees of the Communications
Act 2003 will be expected to advise on postal services in addition
to their existing tasks. (Paragraph 88)
The Competition Commission
17. The
Government should explain why the power for the regulator to make
references to the Competition Commission has been removed. We
welcome the fact that the Bill includes the right for the universal
service provider to appeal to the Competition Commission against
price conditions imposed by Ofcom, but would like to know the
reason why this right of appeal is not extended more generally
to other conditions that are imposed by Ofcom. (Paragraph 90)
Funding of the USO
18. Although
Modernise or decline considered that a levy on all postal
service operators would be inappropriate because it would in effect
reward Royal Mail for inefficiency, the Bill contains powers for
Ofcom to establish a mechanism for operators to share costs. We
welcome this, although we agree that, given Royal's Mail current
inefficiency, such a levy is not yet appropriate. We would like
the Government to provide more detail about the circumstances
in which it considers such a levy should be imposed. We draw the
House's attention to the fact that, as the Bill currently stands.
the decision to impose a levy will rest with Ofcom alone. (Paragraph
92)
Relationship between the regulator and Royal Mail
Group
19. The
Bill gives the regulator greater powers to require financial information,
and to specify the information that should be provided. This has
been a weakness in the current regulatory system, and we welcome
its rectification. However, the Postal Directive sets out the
method by which costs are to be allocated to different services.
We think it is vital that Ofcom's regime is compatible with European
requirements, and that the universal service provider will not
be required to produce two sets of figures. (Paragraph 93)
Accountability of the Regulator
20. Even
though the regulatory structure to be brought in by the Postal
Services Bill [Lords]has the potential to be far more
satisfactory than current arrangements, we do not believe that
legislation will end the need for Government to monitor and indeed
make policy on such an important area. The events of the past
few years should demonstrate that. There is a need to find a mechanism
which will preserve the regulator's economic independence, while
allowing the Government to intervene on matters of legitimate
policy concern without requiring primary legislation. We note
that this is being examined as part of the Digital Britain report.
We recommend that if as a result of that work Government and Parliament
agree it is legitimate for Government and Parliament to have powers
to ensure policy is implemented by Ofcom, those powers should
extend to mail services as well as digital communication. (Paragraph
99)
The role of Post Office Ltd
21.
We believe there should be more information about the practical
consequences of separating the affairs of Post Office Ltd and
Royal Mail Group. (Paragraph 104)
22. The Postal Services
Act 2000 says "'post office' includes any house, building,
room, vehicle or place used for the provision of any postal services".
We note that the Postal Services Bill [Lords] changes this,
and defines "post office" as "premises in the United
Kingdom from which postal services, or services provided under
arrangements with a government department, are provided directly
to the public". This could imply that the link between post
offices and postal services may gradually diminish. The Government
should explain what in this definition will distinguish a post
office from another government office, such as a Job Centre.
(Paragraph 106)
23. The material published
so far does not give nearly enough detail about the rationale
for a separation of Post Office Ltd and Royal Mail, or its practical
consequences. We will explore these issues further in our related
inquiry into post offices. We recommend that the practical consequences
of such a separation be explored in scrutiny of the Bill. (Paragraph
107)
Royal Mail pension plan
24. Over
many years the Trade and Industry Committee warned about Royal
Mail Group's pension deficit. Competitors coming later to the
United Kingdom market have not been burdened by such historic
deficits. We note that in other countries the pension deficits
of the universal service operators have been dealt with as part
of the preparation for postal market opening. We agree that Royal
Mail Group's pension deficit needs to be tackled as a matter of
urgency (Paragraph 115)
25. We consider that
the approach set out in The Future of the Universal Postal
Service in the UK to allocating responsibility for Royal Mail
Group pensions between the taxpayer and Royal Mail Group itself
is basically sound. Royal Mail Group will retain responsibility
for future liabilities; the taxpayer will deal with historic liabilities
(Paragraph 117)
26. In our view a
strong case can be made for state aid clearance for removal of
part of RMG's pension liabilities without radical restructuring
or compensating competitors. (Paragraph 120)
Scheme amendments
27. The
new scheme cannot be amended at a later date in any way that would
adversely affect the position of scheme members. However, this
restriction does not apply where either a) scheme members consent
to the amendment is secured or b) where "the scheme is amended
in the prescribed manner" (which means amended in accordance
with the new scheme as created by the Secretary of State).We believe
the House should explore what rules the Secretary of State intends
to introduce in relation to amendments. (Paragraph 122)
Transfer of liabilities
28. The
private sector partner will enter an agreement with the Government,
conditional on the pensions liabilities being transferred. Parliament
will then be faced with an artificial choice between allowing
the pensions transfer, and with it the private sector partnership,
to progress, or blocking the private sector partnership by refusing
to transfer pension liabilities to the new scheme. (Paragraph
124)
A private sector stake in Royal Mail
29. The
regime proposed by the Postal Services Bill [Lords] in
one sense restricts the government power to dispose of assets,
by explicitly requiring the Government to maintain a majority
stake. There is no such provision in current law. However, we
note that the definition of a majority holding would be satisfied
by holding 50.1 percent. This new restriction is balanced by
the removal of the requirement for each disposal to be approved
by resolution. When it discusses the relevant clauses of the Postal
Services Bill [Lords], the House should bear in mind that
the law already provides for private sector partnership in Royal
Mail Group, and would even permit a majority shareholder from
the private sector. However, as the law currently stands, Parliament
has to approve each disposal of shares, and has to be given details
of the proposed disposal. (Paragraph 127)
30. It is entirely
unacceptable for Parliament to be asked to approve such fundamental
changes to Royal Mail Group when there is no indication of how
much money Royal Mail Group needs for investment and while the
Government appears to have no business plan and has not indicated
the use to which any private sector cash would be put. In fact
any partner may see the need of considerable investment above
and beyond that capable of being generated by Royal Mail Group.
The House is entitled to demand clarity on these points before
the Bill receives its second reading. (Paragraph 144)
Conclusion
31. We
are unconvinced by the argument Lord Mandelson put forward for
seeing the proposals of the Postal Services Bill [Lords]
as a package. The regulatory framework needs to be changed as
a matter of urgency and in its own right. Similarly, the problem
of the pensions deficit needs to be addressed. However the Government
already has powers to dispose of shares in Royal Mail, and would
have those powers even without the Postal Services Bill (Paragraph
147)
32. There might be
a case for seeing the deal as a package if it were clear that
Royal Mail would need more funding even after reform of the regulatory
system and removal of responsibility for the pensions deficit.
However, there are grounds for believing that the reforms in Part
2 (Royal Mail Pension Plan) and Part 3 (Regulation of Postal Services)
of the Bill, particularly the potential elimination of access
headroom, would release enough cash to fund Royal Mail's modernisation,
and that the proceeds from any sale are very likely to go straight
to the Treasury. It would be helpful to know if any prospective
partner shared that view. (Paragraph 148)
33. Whatever other
arguments there might or might not be for private equity stake
in Royal Mail Group, a capital injection cannot be relied upon.
(Paragraph 149)
34. It is unlikely
that the best price for any shares in Royal Mail would be obtained
now, although we acknowledge that the deal could be structured
over several years and payments could reflect current market conditions
as those payments were made. (Paragraph 150)
35. Whatever one thinks
of a private sector partnership, is the Government's position
which is to say that there will be no removal of the pensions
deficit until such a partnership is concluded, justified? Is it
in fact more rational to remove the deficit as quickly as possible
and revisit the question of whether a private sector partnership
is desirable when there has been time to see if Royal Mail (and
its workforce) can continue to improve their performance? (Paragraph
152)
36. The next question
is what is the justification for the size of the partnership.
Thirty per cent was the figure cited by Lord Mandelson at second
reading, but why? It may be that it is linked to the provisions
requiring companies with shares to offer to buy out other shareholders;
but that would not apply in this case. Although Mr Hooper cited
a case where a minority shareholder had produced beneficial effect,
in many cases, minority shareholders find themselves in the frustrating
position of providing cash without effective control. Interestingly,
no one appears to be putting the case for a sale of a majority
stake in Royal Mail. (Paragraph 153)
37. The third question
is how much openness there will be about the partnership agreement
which will set out such controls as the minority partner will
have. This is likely to include the right to appoint a certain
number of directors. However, the influence available by this
route will presumably be limited by Lord Mandelson's undertaking
to the House of Lords that "public ownership carries with
it the voting rights and economic benefits appropriate to a majority
shareholder." The agreement will also, we presume, set out
arrangements for the partnership to be dissolved if the minority
partner wishes. Normally this would be done either by selling
shares on the open market, or by a firm undertaking that the majority
stakeholder would buy out the minority partner if that was desired.
Such agreements can also include clear statements as to whether
and how the minority partner can increase its stake in the future.
What will be the arrangements here? What will be the arrangements
for GLS, the most profitable part of Royal Mail's business? Under
the current scheme, Parliament will not have any right to see
that agreement before the Government enters into it (or indeed,
afterward). Is the Government prepared to make such details public
before a partnership is agreed? Why does it feel it needs to
change the law so that specific Parliamentary approval for each
disposal is no longer needed? (Paragraph 154)
38. In the proposals
to separate Royal Mail and Post Office Ltd, account must be taken
of the operational independence between Post Office Ltd, Royal
Mail and individual postmasters. At the moment the Post Office
provides access and delivery points to Royal Mail Group letters
and parcels. Will this continue if the proposal to separate them
takes place? (Paragraph 155)
39. When the Government
announced its acceptance of the proposals in the Independent Review
on 16 December, it also made it clear that TNT, a major competitor
to Royal Mail, had expressed an interest in entering a strategic
partnership with the company. The fifth question is whether if
the recommended partner turns out to be an existing major competitor
of Royal Mail the loss of competition that would inevitably result
is a price worth paying for the equity stake? (Paragraph 156)
40. Finally, the challenges
faced by Royal Mail are huge — the decline in the letters
market is enormous. That is why the Government is inserting a
provision for a possible future levy to fund the USO. It is an
heroic assumption to imagine that cash generation or debt finance
will be attractive routes for securing the additional investment
that will be needed in the medium term to open up new markets
and diversify, even with a profitable letters and parcels business.
The House should not make that assumption without firm evidence.
(Paragraph 157)
41. More money may
well be required. This can really only come from three routes
— cash generation within the business, debt finance or new
equity injections from the public or private sector. But if additional
equity investment is needed, with a 30% partner, either the Treasury
will still provide 70% of that investment — which will then
be subject to all the same state aid rules which we are told the
company is seeking to escape — or it will come entirely
from the private sector partner, who will expect an increased
stake in the business as a reward for the extra risk capital supplied
to the business. We note that the definition of "publicly
owned" in the Bill would apply even where the private sector
held a 49.9% stake. Some will have no problem with this steady
increase in the privately owned proportion of the company —
but others will. (Paragraph 158)
42. We are left with
the conclusion that either the Government has not fully thought
through its position about future share sales, or that it has
done so and is refusing to reveal its hand. Either case is worrying.
In any event, if shares are sold to a new strategic partner,
a stake of 30% does not look like an end-game to us. (Paragraph
159)
| 
