Examination of Witnesses (Questions 300-319)
ROYAL MAIL
GROUP
24 FEBRUARY 2009
Q300 Chairman: If we talk about change,
perhaps I may be a little cheap for a minute or two. I think that
the executive summary in your submission to the Hooper review
talked about the need to accelerate the pace of the cultural and
operational transformation. Are you happy that you have succeeded
in changing the culture of Royal Mail? The people who work there
say to me that you are still "mired in the worst of the public
sector". They say that the top floor is fine but communications
with middle and lower management still are not working. They say
that you have all got chauffeured cars and senior directors wait
outside for you all day; you still tend to employ expensive contractors
and consultants rather than think of the payroll. There is a lot
of criticism of the culture of senior management. Is that an unfair
anecdote or do you recognise some of those criticisms?
Mr Crozier: I do not. I will start
where I should start. My personal belief is that the vast majority
of our people are absolutely fantastic and do an amazing job,
sometimes in terrible weather. I am full of admiration for what
they do. As an organisation we are on a learning curve in moving
to a world where we have to compete and be commercial. I think
that shift has been a difficult one for our people. If you look
at culture changes in any big organisation they will not happen
in five years; they tend to take 10, 15 or 20 years. I speak to
people at BA and BT who say that even today there are large elements
of the cultures that existed in those organisations back in the
1970s and 1980s. Cultures in any organisations do not change in
a short period of time. Do I think our people are willing to go
on that journey? Yes. Are they genuinely concerned about what
it means for them? Absolutely. I think there is a lot of fear
but also recognition that we have to do it. A lot of the senior
and middle management have changed. We used to have a group centre
of over 11,000 managers. That group centre now consists of just
over 200. The situation has changed beyond all recognition in
some areas, but cultures take a long time to follow on.
Q301 Chairman: You will know this
Committee has been critical in public of some of the letters that
the chairman has written to staff which have a very aggressive
machismo style to them. Do you believe that the flow of information
within the organisation now works well?
Mr Crozier: It works a lot better
than it did. When my colleague and I arrived one of the first
things we did was write to our people and, naivety being a great
friend sometimes, discovered that that was the first time management
had ever written to them in 350 years. That seemed very strange
to me as someone who had run other companies. Has it got a lot
better? Yes. Is it perfect? Absolutely not. Do we need to find
ways to improve it and bring people with us? Absolutely. When
we look at it, what kind of expertise do we need going forward?
Like all big companies, we need more and better project directors
and in any situation like this people who are experienced at bringing
in the kind of technology that we are about to use. This is not
a kind of NHS IT issue. The machinery and technology we need to
bring in exists and works so the risk is not to do with the machinery
and the kit itself; it is the management capability in installing
it. Do we need increased numbers and better skills in HR? Yes,
we do. We know that we need to improve and we have been doing
it steadily over the past few years. Like any company, we need
to bring in skills at all levels of the business.
Q302 Chairman: One of your major
previous roles was as a consultant to an advertising agency. I
was a public relations consultant. I value consultants, but do
you think that Royal Mail Group makes too much use or not enough
use of consultants and contract staff at present, or do you think
you have it about right?
Mr Crozier: We do not use many
now. When I arrived I think one word to describe it would be "horrific".
There was a ton of consultants in use; they were coming out of
every door. We pared all of that back because we did not find
it useful. We wanted to concentrate on the few things that would
make a difference to the organisation. I am not saying that we
do not use them; clearly we do in specialist areas where they
can bring in skills that we really do not need to have all the
time. We do not need to pay to have those skills sitting in the
business day in and day out. I think that is the correct way to
use consultants when they add value.
Q303 Anne Moffat: I am not particularly
in favour of consultants and the need for them in the way you
describe, that is, to have consultants for consultants' sake.
The amount of money they charge is extraordinary. Is not one of
the successes of a slight improvement, if not quite a good one,
of the industrial relations between you and the workforce and
unions that now you have a single goal? You all want to see the
success of the company? It is all about the survival of the Royal
Mail and everybody has to work to that end. If you and the unions
have that agenda it must improve the industrial relations even
when there are very hard decisions to make. I welcome your words
and the way you are now approaching the relationship with the
workforce because, as I am sure you will agree, they are the absolute
backbone of the Royal Mail and they work to protect the company.
I think all of us, including government, should work hand in hand
to do that. Do you agree that is the philosophy of the way forward?
Mr Crozier: It almost has to be.
Whatever our philosophical or ideological differences, I do not
doubt that everyone in this room wants the Royal Mail to be successful
and I think the support among the public for our people to do
well is huge and is reciprocated by the vast majority of our people.
We have to do more. The only caveat I give you is that we have
done, are doing and will be doing some things that are very difficult
not just for this union but any union to work with. They are hard
and tough and are not things that ideally people would like to
do, but they reflect the reality and scale of the challenges we
face. That does not mean I disagree with what has been proposed.
Anne Moffat: I do not want to steal other
people's thunder, but maybe there is no support for a minority
shareholding.
Q304 Roger Berry: Believe it or not,
I do not approach that question from an ideological point of view.
I am quite interested in the evidence put on both sides of the
argument. Why does the Royal Mail Group so passionately believe
that a minority private sector shareholding is necessary for the
future modernisation of the company?
Mr Crozier: As part of Hooper
we said that in our view it boiled down to three requirements:
equity capital, a pension solution and a change in the way we
were regulated and the fairness of it in the wider market. Richard
Hooper came out with a package of various solutions. For us it
is undeniable that that package of solutions would in the round
leave the company in a better place tomorrow than it is today.
As this debate has taken place over the past few months one interesting
point that has been made—I have met various MPs—is
that we have been ploughing money into the Royal Mail for years.
That is not true. This is quite an important point. Undoubtedly
money has gone into the Post Office. Under the system of external
financing limits, which was normally an opportunity for public
bodies to get funding—it was before my time—for the
Royal Mail it worked in reverse. Between 1976 and 1998 the Royal
Mail paid out under that system £2.4 billion. On top of that
it paid about £1.4 billion in corporation tax. In the same
period and since we have not had any injections of equity capital.
The money put in recently by the government, as it has been at
pains to explain, is very much a commercial loan that we have
to pay back at a rate of interest. What this business desperately
needs to make all these investments, give it a better balance
sheet and provide a buffer against the huge risks it faces is
equity capital. We do not need another loan or more debt, because
we have more than enough debt thank you very much; we need equity.
That is of great importance to us. Alongside that, we have never
said anything other than that we need to continue the drive to
bring better expertise into the business. As we make that journey
we need that expertise to ensure that as we spend the money we
run the modernisation process and get it right. We never say that
we are carefree because we are far from it.
Q305 Roger Berry: There are three
elements in the package. Do you agree that if the element of equity
is capital injection on sensible terms it is perfectly sensible
to separate the three elements of the package? You have to solve
the pension deficit problem—period?
Mr Crozier: Correct.
Q306 Roger Berry: As I recall, your
submission to Hooper was less gung ho on private equity investment
than some of you now are and made the point that capital injection
was a third pillar but it had to be on sensible terms, so is it
right that the question is: what is the best source of that capital
injection?
Mr Crozier: It is not for us to
tell a 100% shareholder from where that capital should come. Our
job is to say that we require equity capital, and it is undeniable
that the company needs equity capital not just to cover all the
risks it faces but for the extra investment and everything else.
Q307 Chairman: It might be helpful
if I remind you of what you said in your submission. Your third
point was, "Access to equity capital would reinforce commercial
disciplines and enhance access to talent that would help drive
Royal Mail to transform itself into a truly customer-focused business."
Therefore, access to capital would enable you to do the things
that the package is supposed to achieve.
Mr Crozier: Yes.
Q308 Roger Berry: To cut to the chase,
you have referred to equity capital, not private sector equity
capital?
Mr Crozier: We did not in our
submission.
Q309 Roger Berry: Exactly. Increased
government equity would be a possibility, would it not?
Mr Crozier: It is not for us to
say from where it comes.
Q310 Roger Berry: Intellectually,
it would be a possibility, would it not? You have kindly pointed
out that in your submission you did not talk about private equity
capital but about equity capital. That is the phrase you have
used repeatedly this morning. It is a matter for government to
decide what to do. I do not ask you to tell government what to
do, but as leader of the organisation there are three elements
in the strategy with which I think we all agree, but when it comes
to capital injection you are simply saying that there needs to
be capital injection that does not burden you with debt that you
might not be able to repay in a sensible period of time?
Mr Crozier: We along with many
others made submissions to Richard Hooper and he looked at the
totality of those inputs and came out with a package of recommendations.
We accept that in the round that package of recommendations is
undeniably the best way forward. For us a crucial part of it is
whether a partnership brings capital and experience and can short-circuit
the introduction of experience, and, importantly, whether it can
bring new commercial opportunities. That is what a good partnership
brings. Obviously, in this process government has accepted the
Hooper report and, assuming it goes through, in the process of
finding a partner what we shall be looking for from that partner
are three things: capital, expertise and a commercial opportunity.
Q311 Roger Berry: Let us stick to
the specific question. Your professional position as the leader
of the company is that the third part of the package is the need
for capital. You have repeatedly pointed out that you are talking
of equity capital. You did not refer to private equity capital
in your submission to Hooper. If the government came to you today
and said that it wanted to give you x as additional equity
capital would you turn it away?
Mr Crozier: How would they do
that?
Roger Berry: At the moment in certain
parts of the economy the question is: who is at the front of the
queue? I know that you do not want to get into trouble with your
major shareholder, nor do I, but you have said you want a capital
injection on terms that do not burden you with loan repayments
that are not sustainable. Equity capital from anywhere including
government would do it. I am not asking you to say that you would
prefer to do it one way or the other, but in terms of the capital
part it amounts to the same thing. Now we come to the other points
that you raise. You say that you want private sector involvement,
even though you did not talk about that in the submission, but
there are other things. Perhaps we can deal first with expertise.
You have a lot of expertise. You can get some of these consultants
back; you know far better than we do how that works. You do not
need a private shareholding to get expertise, do you?
Chairman: I think that what you said
in your second submission to the Hooper review was that access
to equity capital would enable you to access talent, so that was
your view originally.
Q312 Roger Berry: You must know as
I do that there are ways to get that talent other than equity
capital. It happens all the time.
Mr Crozier: Please do not forget
that we need timely and flexible capital and here we are four
years into the process. If we look at when we started to talk
to the government about needing more capital and where we are
in the EU process four years later it still is not in place.
Q313 Roger Berry: We on this Committee
have been talking about this issue and know what the problems
have been. I share your frustration. I think you have answered
the question about capital injection. If we look at the other
aspect of private equity other than capital injection, expertise,
I assume you acknowledge that you know how to buy in expertise
without the necessity of bringing in private equity capital. Am
I being too obscure? We will come to the third point in a minute.
Mr Crozier: If you ask what in
our view is the most supportive way to bring in capital, expertise
and commercial opportunity all at the same time in a structured
way and on a reasonably full basis then a partnership is one of
the best ways to do that. That goes alongside part of the wider
package of pension reform and regulatory change.
Q314 Roger Berry: This really is
not good enough. We all agree on pension and regulatory reform;
if we do not it does not matter for the purposes of this debate.
It is intellectual nonsense to say that a package consists of
three things and you cannot have any of it without having all
of it. I am pursuing the particular bit about the minority shareholder
and strategic partner. We have dealt with the question of capital.
You can go out and buy the expertise. I think the third point
is particularly interesting. I absolutely understand why you might
want a strategic partnership of some kind with another company
that has experience in expanding the kind of operation in which
you are now engaged, but presumably you would also acknowledge
that you can have partnerships with companies without them having
private equity share ownership?
Mr Crozier: You can of course.
Q315 Roger Berry: Given that it was
not in your submission to Hooper, why do you now say that somehow
this strategic partner who is a minority shareholder is so important?
Mr Crozier: The Hooper report
very clearly said that here was a recommended package of solutions
to fix the problems in its entirety. I may be using the wrong
words, but the government has accepted those proposals in the
round and said that is the package of measures it wants to take
forward. It is undeniable from the company's point of view that
that package of proposals leaves the company in a better place
tomorrow than it is today.
Q316 Roger Berry: I am not sure that
it would leave you in a better position than it is today—I
think it could be in an even better position—not least because
of the grief that will be caused in certain quarters if the minority
shareholding proposal goes ahead. I think that I have got all
I want on the record, with respect. To put one other question,
are you looking for a partner who would therefore cease to be
a competitor in the UK market? Are you concerned about any anti-competitive
implications of a strategic partner arrangement when there is
private equity?
Mr Crozier: In any aspect of any
partnership in any business one of the things you have to take
into account is any competitive issue that it throws up. That
would just be a matter for the company, the regulator, the Competition
Commission and no doubt various other bodies. There is no doubt
that a fairly reasonable range of organisations would be interested
in partnering with the Royal Mail. Some of them will give rise
to competition issues and some will not. Obviously, that is something
of which you must take account in the round.
Q317 Roger Berry: I absolutely understand
Royal Mail's position and I have a great deal of respect for the
way you have presented it. My final question about the bit that
was not in your submission to Hooper is whether you think there
is a lot of private equity investment out there at the moment
gagging to invest in Royal Mail after all we have heard this morning
and in recent years?
Mr Crozier: I give two answers
to that. First, do I have tremendous faith in the Royal Mail?
Yes, I do.
Q318 Roger Berry: I do; we all do.
Let us move on.
Mr Crozier: Do I think people
would like to invest in Royal Mail? Yes. Second, is the economic
climate an extremely difficult one? Clearly, yes; you would be
mad not to think that, but as always for the right investment
there is a market there. Obviously, if there is a process that
will tell us the answer to that question. You do not know until
you have conducted it, but no one can deny that it is not an easy
market. But if the thought behind the question is whether it can
be done, yes, I think it can.
Q319 Mr Bailey: So far you have emphasised
the need for capital. You have got access to £600 million
from the government. You believe that you will strip out of the
business £1.5 billion in costs. You will be relieved of the
annual sum £280 million for pension contributions. On the
surface that would seem to be a substantial potential sources
of capital in future. You say that you are on course to deliver
profits that nearly double the performance in 2007-08. What is
your assessment of the extra capital that you need, and what do
you need it for?
Mr Crozier: I will try to answer
each of the questions you put. First, to be clear we got £1.2
billion from the government, not £600 million.
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