Examination of Witnesses (Questions 161-179)
POSTCOMM
24 FEBRUARY 2009
Q161 Chairman: Gentlemen, welcome to
this session which is to examine the Hooper review and the recommendations
that flow from it. It is a review which in theory brings to an
end your own organisation, if what we hear about legislation is
true. The House of Lords is to have such legislation before it
later this week. Perhaps I may begin as I always do by asking
you to introduce yourselves for the record.
Mr Stapleton: I am Nigel Stapleton
and I have been chairman of Postcomm since January 2004.
Mr Brown: I am Tim Brown and have
been chief executive since September of last year.
Q162 Chairman: Do you believe it
is fair to make the general observation that your organisation
has given primacy to competition in its statutory remit rather
than protect the universal service obligation?
Mr Stapleton: I think that statement
is entirely unfair in the sense we are very conscious of the fact
that our primary statutory duty is to maintain the USO. We can
put forward some pretty convincing evidence that competition has
strengthened the USO rather than weakened it.
Q163 Chairman: Would you like to
share some of that evidence with us? This Committee was concerned
about what it saw as a premature rush to competition well ahead
of any European requirement. That concerned us in the report we
prepared three years ago.
Mr Stapleton: Clearly, the numbers
show that the USO made a loss last year of £100 million.
There was an equal profit from the rest of the mail business,
so overall the letters business was profitable. Royal Mail's own
figures indicate that it lost £100 million of profit to mail
competition and five times that amount to digital competition.
Our figures suggest that the amount of profit left on the table
from the delay in the modernisation of the Royal Mail is also
five times that £100 million. I think it shows clearly that
competition is a pretty small factor in terms of what has led
the USO into loss.
Q164 Chairman: But the European Commission's
own directive, had you followed it, recognised the need to allow
the USO operator to adapt to change. There have been decades of
under-investment in post offices. It used to be an all-mail group
which was ill-placed to cope with the competitive environment
into which you thrust it prematurely.
Mr Stapleton: Royal Mail's own
chairman said in 2006 when we fully opened the market to competition
that it was ready to face competition.
Q165 Chairman: To put a more factual
question, do you think from your experience as chairman and chief
executive of the organisation that the regulatory framework gives
you the powers you need? When legislation comes through the House
very soon should we be looking for new and different powers for
Ofcom when it takes on your responsibilities?
Mr Stapleton: I think the Hooper
report indicates that Postcomm lacks what he calls an essential
part of a regulator's toolkit, namely concurrency under the Competition
Act. We also lack specific powers to deal with access. We hope
that both those weaknesses in the legislation under which we are
working will be addressed in the new Bill.
Q166 Chairman: You still have regulatory
responsibility and you see them as weaknesses now in the toolkit
available to you?
Mr Stapleton: We have made that
point over the past four or five years; it is not a new issue.
Q167 Chairman: Do you accept the
case for your abolition? Would you have done a better job had
you had those powers?
Mr Stapleton: I do not think you
would expect me to say anything different, but we believe that
Postcomm has done a pretty good job in the circumstances. I will
ask my colleague to pick up that point. He has been with us for
a relatively short period of time and may be more objective in
his answer than I might be.
Mr Brown: Over the past seven
or eight years there have been quite a few improvements in terms
of Royal Mail's quality of service. When we started out with regulation
Royal Mail's quality was below 90%. In the four years before the
strike action it was at 94%. We see a reduction by one third in
the number of exceptions; that is, individual addresses that do
not receive the same specification as everybody else have been
reduced by a third. The number of losses has reduced. Royal Mail
has delivered quite a lot of improvements in terms of quality
of service over the period. We have also seen pressure on price.
Independent research quoted in the Hooper report shows that the
price is probably about 5% lower for larger customers than it
would otherwise be. It is important that large customers see the
relevance of that because it is they who underpin the universal
service. There has also been an extension of choice for smaller
businesses. For example, from 1 April of next year we will see
metered mail, of which big use is made by smaller businesses and
is at a discount to standard tariff mail.
Q168 Chairman: We are all customers
of Royal Mail Group. For me, the service has collapsed. My post
came regularly at around breakfast time whereas now it comes at
any time in the middle of the day. Small business people working
from home just cannot rely on the post any more. To the average
constituent the idea that the quality of service has improved
is laughable.
Mr Stapleton: One needs to be
clear as to what is in the universal service and therefore what
we are duty bound to protect.
Q169 Chairman: Let me bank that question
and allow others to ask about the universal service obligation.
My colleagues who want to ask about USO may feel that I am treading
on their territory. I want to ask about resourcing the regulator.
You are resourced by the taxpayer; Ofcom is resourced by a levy
on the people it regulates. How do you think the new regulator
should be resourced in respect of mail services?
Mr Stapleton: The regulator comprises
a little over 60 people and the budget is less than £10 million.
Had we continued that would have reduced by 15% next year. Therefore,
it is a relatively small levy on Royal Mail as the dominant operator
and that sort of approach has worked pretty well.
Q170 Chairman: What do you think
about Ofcom taking on your responsibilities? There are competing
logics. You could be seen as a utility operator who should be
regulating alongside the water companies and electricity networks—the
Royal Mail is a network business—or you could say that you
are a communications business and it is right to put you alongside
telecommunications and broadcasting. Do you see the logic in the
communications link?
Mr Stapleton: The important thing
for us is market certainty. If there is to be a change of regulatory
responsibility that should be done in a way that minimises market
uncertainty. Our own submission to Hooper was that it would be
better if a new regulatory framework were to be put in place when
the price controls ends in April 2010 and then there was a change.
That is the reason why to the extent we
can we are working with Ofcom to achieve a smooth transition,
but there are limits to it. Clearly, it can act only within its
vires. It is important that sector-specific experience is
maintained within the Ofcom organisation, because practically
everybody who responded to Hooper, including the CWU, has said
that post is different from a capital-intensive telecommunications
business. Therefore, the regulatory principles need to reflect
the different characteristics of the mail market.
Q171 Chairman: It is always difficult
to say goodbye to an organisation that you have cared for and
cherished for a number of years, but you have no objection in
principle to Ofcom becoming the regulator?
Mr Stapleton: I do not think it
is for us to object one way or the other. We were created by Parliament.
Q172 Chairman: But your experience
is very important. The Committee wants to see regulation of the
mail market and it needs to know whether you think it will be
effective under Ofcom.
Mr Stapleton: Clearly, Ofcom has
a very good track record. The read-across to the communications
sector is an important issue. That is an issue of which from my
perspective I believe I already have experience, because I came
into this role having been co-chairman of Reed Elsevier and having
spent a lot of my career in the communications world. As long
as the sector-specific experience is maintained and the transition
is done in a way that minimises market uncertainty we are supportive
of the move.
Q173 Mr Oaten: Putting it bluntly,
are you saying that Ofcom does so many things that postal issues
will get lost within it as regulator?
Mr Stapleton: I was not saying
that but Ofcom must be careful to ensure that is something that
does not happen.
Q174 Mr Hoyle: Mr Brown, you talked
about the successes. You referred to big customers by which I
presume you mean bulk deliveries.
Mr Brown: Large customers, yes.
Q175 Mr Hoyle: How can you judge
it to be a huge success when the bulk customers get it cheaper
than everybody else? I thought the idea was that we would all
be treated equally, but somehow you give a preference to bulk
customers who are subsidised by the taxpayer.
Mr Brown: That raises a number
of points. It is important to understand the nature of the customer
mix within the mail market. Eighty-seven per cent of all mail
is sent by businesses; only 10% is sent by residential customers
and that is mainly at Christmas. Within that make-up the top 50
customers represent 40% of mail; the top 500 represent 50%, so
it is important in terms of how those large customers perceive
mail as a useful medium for what they do so they continue to use
it and therefore fund the universal service. Without those bigger
customers there would be no universal service and no six-days-a-week
delivery. Therefore, what we have seen is increasing choice and
lower prices such that those larger customers continue to use
mail.
Q176 Mr Hoyle: That does not add
up, does it? What you are saying is that under the access agreement
you must have a USO that delivers for your competitors at a loss.
Does that make sense?
Mr Stapleton: Access does not
involve Royal Mail making a loss on delivering the mail over the
final mile. If you look at the detailed figures Royal Mail is
making a loss on bulk mail products that it delivers end to end.
If it makes a loss on that as well then it is not surprising it
will also make a loss in carrying it over the last mile for its
customers.
Q177 Mr Hoyle: You are saying to
the Committee that it is a fact Royal Mail does not lose money
under the access agreement. That is the first time the Committee
has ever been told that. Everybody has stated to us that the problem
is that the access agreement is so low that you cannot make money
on it, and yet you are telling me that Royal Mail has been making
money. Do you want seriously to consider your position on that?
Mr Stapleton: I said that access
carried bulk mail. Because the bulk mail market is a very competitive
one it is the bulk mailers who have most of the choice in terms
of using digital communications. Royal Mail loses money on end-to-end
bulk mail and also on access, so you cannot carve out access and
say that it is unprofitable when the rest of the product range
is unprofitable.
Q178 Mr Hoyle: I will make it simple
for both of us and say it slowly. Is Royal Mail making or losing
money on delivering access mail at 13p?
Mr Stapleton: It is fully covering
its variable costs.
Q179 Mr Hoyle: So, you are saying
it is making money?
Mr Stapleton: On that measure.
I am an accountant by training and therefore I can give you four
measures of cost, but I am saying to you very clearly that access
is not Royal Mail subsidising the competition.
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