Examination of Witnesses (Questions 240-259)
POSTCOMM
24 FEBRUARY 2009
Q240 Anne Moffat: Have the British
public as stakeholders been getting value for money from Royal
Mail, you and everybody who has been involved in the process up
to now?
Mr Brown: Every year we conduct
independent research as to what consumers and residential customers
think. Eighty-five per cent of all respondents say that they receive
good or very good value for money and have overall satisfaction
with Royal Mail services. The great British public still rates
very highly the service that it gets from the Royal Mail.
Q241 Roger Berry: There are different
answers from a whole variety of sources. According to the media
today, the letter that went from Royal Mail Pensions Trustees
Ltd to the secretary of state asserted it was absolutely essential
to have a strategic partner, but if you read the letter, which
in total covers one side of a sheet of A4 paper, it does not say
that at all; it says that the pensions deficit needs to be addressed
and recommends support for the Hooper report. Are you surprised
that the letter from the pension trustees in making the case for
something to be done to address the pension deficit does not explicitly
support what you have been saying which is a minority shareholding
in Royal Mail? It is for the media to explain how that story became
slightly distorted in the coverage.
Mr Stapleton: That does not surprise
me. I have not seen the letter as you clearly have. Jane Newell
as chairman of the pension trustees has a very clear perspective
in terms of protecting the interests of pensioners. She is making
the point that the deficit is likely to move to the sort of number
that Royal Mail cannot afford to pay.
Q242 Roger Berry: But the trustees
of the pension fund are not in a position to comment professionally
on whether or not Royal Mail should have a private sector partner,
are they?
Mr Stapleton: That is precisely
the reason why I am not surprised it is not in the letter.
Roger Berry: It is interesting to note
the difference between the media coverage and what we agree on.
Q243 Anne Moffat: I am still very
confused by everything I am hearing. If management cannot do its
job and asks for consultants to be brought in to do it is the
management any good in the first place? It seems to me that it
keeps throwing good money after bad. If the money had been spent
more wisely it might not be in the position it is in today. To
say that the whole problem is to give the most profitable of the
mail service to a private concern and leave the rest of it in
the wilderness is ridiculous even to contemplate. How do you feel
about that?
Mr Stapleton: It is not my understanding
that the government plan is to give the strategic investor a share
of, in your words, the most profitable parts of Royal Mail.
Q244 Anne Moffat: Did you not say
earlier when talking about the internet and new technology that
that is the way forward and that is where the profit will be?
Do you agree that that is the case?
Mr Stapleton: What we have said
very clearly is that the profitability of Royal Mail is under
threat because both recession and structural changes in the market
cause mail volumes to decline. That was not foreseen back in 2006.
A comment was made that we got the market estimates wrong. Our
market estimates like those of any regulator were based on Royal
Mail's market estimates. Our estimates and those of Royal Mail
for the actual volumes in 2010 are 100m items apart on 21 billion
items. Everybody has failed to see the structural change in the
market, but the strategic investor will have to cope with competition
and the effects of transition to digital media. That investor
is not being allowed to cherry-pick the attractive parts of Royal
Mail; it will try to get a profitable business in supporting the
USO in this changing world.
Q245 Chairman: Your recollection
of the evidence about market volumes does not coincide with mine.
I will have to check the record, but I believe the evidence we
have received is quite to the contrary; it disagrees with you
profoundly on the judgment you reach.
Mr Stapleton: There is a difference
in estimates in terms of the encroachment of access competition,
but on total market volumes we are 100,000 apart.
Chairman: I believe we have received
evidence that total market volumes will go down contrary to your
estimate, but I must check the record.
Q246 Mr Bailey: Before I deal with
my specific area of interest, I just want to follow up some of
the points made about a minority shareholder. You have a situation
where the most politically contentious recommendation of Hooper
is that there should be a minority shareholder. In analysing the
Royal Mail's lack of efficiency—it says it is 40% less efficient—it
mentions the network of mail centres and delivery offices, automation,
working practices and pay. At the end of the day all of those
are management issues. What I cannot get my head round is why
a minority shareholder and partner can transform the management
culture to deal with those issues when in effect you could bring
in somebody else and just change management. I do not think that
central point has been adequately answered by you in the responses
so far. Can you explain what it will bring?
Mr Stapleton: First and foremost,
it is an answer that needs to come from the shareholder rather
than the regulator. The regulator does not manage the business;
it looks after the interests of customers.
Q247 Mr Bailey: But what reasons
do you give for being in favour of it?
Mr Stapleton: If you go back to
our strategy review published in August 2007, then you saw practically
the same headline on the BBC as it gave 15 months later to the
Hooper report. The headline on our strategy review was "Royal
Mail needs radical change"; the BBC headline on Hooper was
"Royal Mail faces call to change". Our strategy review
did not talk about ownership being part of that change but about
the pension deficit and modernisation. Clearly, that modernisation
has not happened. I think that with the passage of time we need
to look at bolder initiatives to make it happen. Having as a partner
someone who has made those changes before and has a track record
must be bolder than just more of the same which was what we were
looking at in August 2007.
Q248 Mr Bailey: But you could just
change management?
Mr Brown: We are fairly clear
that because of the third element, greater separation between
Royal Mail and politics and government and allowing management
to take decisions with as little political interference as possible—we
see much greater separation in places like the US—you cannot
take each one in isolation. That is why it is a package of those
three. It is not designed to solve one thing; it is a mix of those
three things. That is why we think it is important as one of the
measures to support Royal Mail.
Q249 Roger Berry: At this point the
government with a minority shareholding in the majority of banks
is having the devil's own job changing the leadership and management
culture of those organisations. In this environment I find it
extraordinary that you are saying to us it is self-evidently true
that a minority private sector shareholding in Royal Mail will
bring about the leadership transformation that is necessary. If
it is so easy to do that in the Royal Mail with 30% please tell
the government how to do it in the banking industry because it
is finding it very difficult to do it. I am astonished.
Mr Stapleton: With respect, the
government has had only two months to do it and we do not suggest
that a strategic investor will make much difference in its first
two months.
Roger Berry: I doubt that it is only
the timescale.
Q250 Mr Bailey: The other issue is
the political relationship. Again, that could be changed without
a minority shareholding.
Mr Stapleton: Essentially, that
was tried when the Postal Service Act was created in terms of
setting up Royal Mail as a plc with a commercial remit. It has
not happened in terms of complete transparency with management
being allowed to do what it thinks is the right thing for the
business. One needs to look only at what happened over the protracted
period when management felt that in order to transform the business
it needed 20% employee ownership. It did not happen.
Q251 Mr Bailey: Is a 30% stakeholding
going to make a difference? There are unanswered questions. Basically,
I still do not believe that you have made the case. Perhaps I
may turn to the demerger between Post Office Ltd and Royal Mail.
Normally, when companies merge the reasons given are "natural
synergies, potential outlets" and so on. You have acknowledged
in your comments that there is a natural synergy between Post
Office Ltd and Royal Mail, but at the same time you support the
demerger of the two. Why?
Mr Brown: We are in favour of
Post Office Ltd staying in public hands. Post Office Ltd has been
a separate limited company for over 20 years. It has had its own
board and managing director for that period of time. Currently,
one third of its business is postal; the remaining amount is concerned
with financial services, telephony and other things. To a decreasing
extent, unfortunately, it is concerned with government and public
sector business. There are important relationships between Royal
Mail and Post Office Ltd. The latter is an access point for postal
services, but we believe there are benefits in Post Office Ltd
and Royal Mail concentrating on their own businesses which are
different. Post Office Ltd is a retail business delivered through
about 11,500 private businesses; it delivers information and financial
services, whereas Royal Mail is a distribution company. We see
the differences. We also make very clear in our recommendations
two other things: first, it is important to have a long-term transparent
contract between Royal Mail and Post Office Ltd; secondly, there
is a need for greater cost transparency in the charges made between
the two. The third aspect is the need for a commitment by both
central and local government to continue to use postal services
going forward. We believe that in the context of all those things
demerger is the right thing for Post Office Ltd.
Q252 Mr Bailey: Could you not envisage
a situation where it was to the commercial advantage of Post Office
Ltd to allow access to companies that might be in competition
with Royal Mail such that it undermined the viability of Royal
Mail?
Mr Brown: I think there are two
parts to that question. We already see other networks being created
for access to packet and parcel services. DHL already has deals
with people like Staples and WH Smith; recently HDN, another packet
and parcel carrier, has been doing a return service through PayPoint
which, as you know, has 19,000 outlets. We already see other competitors
beginning to extend themselves into the retail business and having
retail outlets. At the moment Post Office Ltd is excluded from
that debate and discussion and does not have that access. We know
there are one or two other operators who would welcome the opportunity
to use Post Office Ltd. As to the second part of the question—whether
that would lead to undermining the Royal Mail and the USO—we
do not believe that is the case. Royal Mail is looking at other
access points for its services. The innovation of SmartStamp and
the accessing of stamps online has been a huge success and is
a great way forward. Royal Mail already uses other outlets such
as Tesco, Sainsbury and such like for access to stamps. At Costco
you can get a discount on stamps. Therefore, we already see greater
use of other access channels and we wholeheartedly support it
because anything that improves and eases access to postal services
is good news. It really illustrates the point that there are two
different strategies, one for Royal Mail in ensuring access to
its services including postal services and the other for the future
of Post Office Ltd.
Q253 Mr Bailey: Effectively, both
acting independently could engage in wider competition that undermined
each other?
Mr Brown: I do not think it is
a question of them undermining each other. They need to develop
to support and sustain what they are doing.
Mr Stapleton: In any situation
where you demerge a business that is a major customer of the other—at
this point about one third of Post Office Ltd's revenue comes
from mail—obviously you put in place a long-term agreement
that ensures continuity of that business and a structured relationship.
The key point is that the sustainability of the Post Office network
requires two things: first, more revenue coming into the Post
Office network; second, a closer identity with local communities.
It is our feeling that that demerger direction, particularly in
the context of a strategic partner in the Royal Mail Letters business,
would be a good thing for the Post Office, but it requires a proper
long-term agreement to make sure that what you are concerned about
does not happen.
Q254 Chairman: If you are promoting
all of these alternative postal service access points to Royal
Mail in the interests of the consumer, which is probably good
thing, and also protecting the Post Office network what is the
regulatory or ownership issue as far as Post Office Ltd is concerned?
How many flowers bloomed in Mao Tse-Tung's China? You are allowing
in all this competition for access to mail services. Why do we
need the Post Office network in the world that you envisage?
Mr Brown: First, 70% of the Post
Office's business is not mail.
Q255 Chairman: So, it is not a mail
issue and is nothing to do with the regulator?
Mr Brown: Our duties under the
Postal Services Act are about access to postal services, so we
are interested in how the consumer accesses postal services.
Q256 Chairman: Notwithstanding the
different ways to access postal services you expect Post Office
Counters to remain the major way in which consumers access those
services?
Mr Brown: Absolutely; I did not
mean to give any impression otherwise.
Q257 Mr Oaten: In terms of accountability
for the whole system and the role of government, is this something
in which government should be heavily involved to ensure there
is a universal service, or should it be a light touch? What kinds
of controls under the new regime do you believe government should
have over placing controls and demands on the future regulator?
Mr Stapleton: One of the recommendations
of Hooper with which we wholly agree—obviously, Postcomm
produces an annual report but it is not discussed with this Select
Committee—is that there should be more accountability to
Parliament by the regulator.
Q258 Mr Oaten: More of this?
Mr Stapleton: Yes.
Q259 Mr Oaten: I bet you are glad
that it will not be you in the future.
Mr Stapleton: Not entirely, no.
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