Examination of Witnesses (Questions 320-339)
ROYAL MAIL
GROUP
24 FEBRUARY 2009
Q320 Mr Bailey: The £600 million
is allocated or at least not used?
Mr Crozier: It is all allocated.
Those funds were there to cover a five-year period and clearly
we would need to be shot if we spent all of it in the first year
because we would then have no money left. Therefore, that money
is allocated and we know what we are doing with it. But the £1.2
billion is part of a wider £2 billion spend on modernisation
itself. Without getting overly technical, I should point out that
even if the pension deficit is taken away from us in some form
there is no guarantee that we will get all of the benefit of that
through a system known as regulatory clawback. Any regulator may
not let us keep the full benefit of that. Genuinely to take out
£1.5 billion of cost we must invest a lot of money. One of
the major elements of that is the cost of parting with people.
Of the 50,000 with whom we have parted company over the past few
years only one was subject to compulsory redundancy. We are happy
that in doing a difficult thing we have managed to treat people
very well. On top of all that do we still need extra capital?
Yes, we do. That capital is of the order of hundreds of millions.
One of the reasons I am being slightly vague, for which I hope
you forgive me, is that clearly we may well be about to go into
a commercial tendering process. I do not think it is particularly
wise of me to try to explain to anyone who may wish to take a
stake in us what it is we do or do not need. I think that would
be wrong of me from a commercial point of view, and I am sure
that my shareholder would not particularly like it either. I am
not quite sure how to handle that part of the question other than
to be as honest as I can. Referring to Jane Newell's letter, in
fairness the trustees think we need capital; I do not believe
the union disagrees with that. We say we need capital. Whatever
one's philosophy on this, I do not think anyone believes that
Royal Mail does not need capital. I hope that is a bit of a given.
Q321 Mr Bailey: Your answer is somewhat
vague as you acknowledge. Commercial confidentiality is always
a convenient reason for keeping answers vague. On the basis of
what I have heard so far it seems to me that what is being proposed
is a capital solution to what is essentially a management and
cultural problem. It has been acknowledged that industrial relations
have been bad and that your costs are higher. I am not altogether
clear whether or not the £1.5 billion cost reduction will
change the fact that labour costs are so much higher. You have
also acknowledged the access to skills that will come through
a minority shareholder. Basically, if there is a minority shareholder
do you not believe that your days will be numbered because to
make those changes you need a change in management and that can
come only via the minority shareholder?
Mr Crozier: The only way to answer
that question is to look at the track record. To correct one point,
the £1.5 billion has already come out of the business and
we need to take out another £1.5 billion.
Q322 Mr Bailey: That reinforces the
point I make.
Mr Crozier: Did we move from losing
£1 million a day to making £1 million a day by accident?
No. I think that in general the management of the company has
brought it a very long way and the track record shows that very
clearly. Are we one of the few organisations around at the moment
in any business sector reporting an improvement in profits? I
cannot think of many. Are many of our competitors announcing vastly
reduced profits? Yes, they are. I think that the management team—obviously,
I would say this—has done a pretty exceptional job under
very difficult circumstances, but we must accept that pensions
is a legacy issue and a giant millstone round the company's neck.
The management of our competitors had this taken away from them;
they did not have to solve it. Clearly, we need a similar kind
of solution and continue the drive to modernise the business.
Companies like Deutsche Post did it over 15 years; TNT is still
doing it after 18 years, and we are trying to do it in three or
four years. We are playing catch-up and those are the grounds
from which we started. Therefore, we have to do it very quickly.
Q323 Mr Bailey: But your costs are
still 40% higher after all these changes and improvements?
Mr Crozier: Yes.
Q324 Mr Bailey: Would any private
sector partner be likely to enter into a partnership without a
substantial change in the management and culture of the organisation?
Mr Crozier: As a minority partner
they would want to work very much hand in glove with the management
of Royal Mail. They would look at the track record of that management
delivery.
Q325 Mr Bailey: The track record
is that after all these improvements costs are still 40% higher.
Taking up Roger Berry's point, it would be very difficult to get
a private sector partner to enter into an agreement on that basis
without substantial changes.
Mr Crozier: I think the private
sector partner would look at the opportunity to continue that
modernisation and see a lot of benefit from it, and it would also
look at the position of the company had it not taken out £1.5
billion of costs and it was still losing £1 million a day.
Frankly, it would not be in great shape at all; I doubt that it
would even be here.
Q326 Mr Bailey: Therefore, a private
sector partner would not be looking at how much money it would
get on its investment in future and what changes would be needed
to make that money?
Mr Crozier: Frankly, the government
wants a return on the investment it has put in and any private
sector organisation would want exactly the same thing. Nobody
invests in anything without wanting to get back the money, and
hopefully a good return on it.
Q327 Mr Oaten: Referring to the three
reasons why we need a private sector partner to come in, Roger
Berry appeared to be trying to get from you that you could achieve
it with consultants and your own skills and knowledge. My understanding
of what you are saying is that the issue are so big and the change
in the market so enormous that you just cannot tag on some consultants
and you do not possess the necessary skills and the only way to
get that expertise is to bring in a major substantial partner.
Mr Crozier: I think it is the
quickest and best way to do it. We employ 185,000 people. It is
not a case of bringing in the odd individual. Such an individual
does not make a difference to 185,000 people; it is a bigger,
wider cultural change. We have a lot of management throughout
the company as you must have in an organisation of this size.
The senior management is extremely well supported by the shareholder;
who has made that support clear to us in no uncertain terms on
a number of occasions. All interested parties have also made that
clear. But we accept that what we need within the organisation
is a lot of project directors and people with the technology skills
to deal with the stuff that we are about to put in. To refer to
Anne Moffat's point, we also need HR skills within the organisation.
We need lots of things. We need to find a way quickly to satisfy
the combined criteria of capital, expertise and commercial opportunities.
Please do not forget commercial opportunities. If you operate
in a market where your business is declining by 8% per annum and
you do not find new revenue streams eventually you have a horrible
problem.
Q328 Mr Oaten: You do not think that
the three problems can be solved with independent solutions and
the only way it can be done is to bring the three together in
this package?
Mr Crozier: I do not think anyone
could say genuinely that it is the only way it can be solved.
What I am saying is that we think it is the best way to solve
it.
Q329 Anne Moffat: I ask you a really
easy question that you can answer yes or no. You said that absolutely
everyone agreed you needed capital, cash, dough, money or whatever
you want to call it. Given the position you are in, if money is
offered to you do you mind from where it comes as long as it is
legitimate?
Mr Crozier: It is a matter for
the shareholder.
Q330 Anne Moffat: What is the shareholder
offering you?
Mr Crozier: I think the fairly
simple answer to give is: it is a matter for the shareholder.
Q331 Mr Hoyle: I think the management
of Royal Mail is good; I think you have got it right and you deserve
a pat on the back. Do you agree with that?
Mr Crozier: It is definitely not
for me to say, but thank you very much.
Mr Hoyle: In that case you have turned
the corner with £255 million profit in nine months compared
with a loss of £1 million a day which is a major achievement.
What expertise do you believe should come in and can do better
than you have done? Why is it that the competitors you want to
bring in are losing money when you are increasing them? I fail
to understand what benefits will come from a company whose profits
are dropping when at the same time your profits are rising.
Mr Oaten: They are going down next year.
Q332 Mr Hoyle: In fairness, so may
theirs, but this is where we are at the moment.
Mr Crozier: It is a good question.
Let us stick to the letters business for now because that is the
bulk area we are talking about. That business makes just under
a 1% profit margin. There are different regulatory regimes, but
TNT probably makes a 15% profit margin; Deutsche Post, I believe,
makes about the same. Although the amount of profit we make sounds
like a lot of money when it is put in the context of the sheer
scale of the pension problem and the volume declines frankly it
is nowhere near where it should be. I know this is a very difficult
subject because people say that that is a lot of money. In context
it is a tiny amount.
Q333 Mr Hoyle: I accept all of that.
To move on, with this deal the pension fund liability remains
with the taxpayer.
Mr Crozier: In some shape or form.
Q334 Mr Hoyle: The liability is left
with the taxpayer, so why does a private company want to come
in? It wants to come in because it believes it can make money.
It cannot come in for any other reason. Therefore, if profit is
to be made I want that profit to come to the taxpayer because
it is about having the best deal for the taxpayer. What we are
saying is that this is the worst deal because the profits will
go to a private company and a foreign government and the liability
will remain with the taxpayer. I perceive this as a very poor
deal. The big question is: how much money do you think you need
as an investment?
Mr Crozier: If I am being honest,
I am not sure I agree with your statement.
Q335 Mr Hoyle: I am a taxpayer and
the liability is being left with me.
Mr Crozier: All of us seem to
be agreed that the pension problem needs to be fixed.
Q336 Mr Hoyle: We fix the pension
problem, but let us get down to the nitty-gritty: how much money
do you believe you need to put the company right?
Mr Crozier: Perhaps I may finish
my answer. If the government sells a stake in Royal Mail—let
us say it is 30%—clearly it will get 70% of any upside of
putting these two things together. Therefore, the taxpayer is
not losing out; it is the opposite. The taxpayer does not have
to invest any money in equity capital in the business and it is
getting a 70% share of a bigger and more successful organisation
that is better than a 100% share of a lesser organisation. It
is not an unusual route for us. If you look at the Post Office,
there is a joint venture with the Bank of Ireland which has allowed
us to get into financial services.
Q337 Chairman: But it is not ownership
in the Bank of Ireland?
Mr Crozier: No; we have a joint
venture company; we own 50%. Partnership is a tried and tested
way for the Royal Mail Group to move into markets where it has
not had experience or to bring in expertise that it does not currently
have. We have done it on a number of occasions.
Q338 Mr Hoyle: How much money do
you need to put the company right?
Mr Crozier: I have already answered
that question.
Q339 Mr Hoyle: Can you remind me?
Mr Crozier: I said that we needed
of the order of hundreds of millions of pounds, but I was not
at liberty to give an exact number.
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