Examination of Witnesses (Questions 340-359)
ROYAL MAIL
GROUP
24 FEBRUARY 2009
Q340 Mr Hoyle: I do not mean that
you should put a value on the sale.
Mr Crozier: That is the question
I am answering. At the beginning of a commercial process, if it
happens, it would be wholly wrong to give away to any potential
buyer what sort of money the company is looking to raise. That
would be a big mistake from that point of view. I know that that
does not answer your question, for which I apologise.
Q341 Mr Hoyle: In part it does answer
it; I think we are getting somewhere. Lord Mandelson said that
hundreds of millions were needed. You have just made a couple
of hundreds of millions in profit. Therefore, we are beginning
to move in the right direction. The key is, surely, the loss-making
access agreement. You have already said that for every letter
you deliver at the moment you lose 2p, so why is it we do not
renegotiate the access agreement and charge an amount that gives
you the profit you require for investment including investment
in the pension fund? Surely, that is a better way forward, because,
first, you keep hold of the company; second, you are making money
from what is at the moment a loss-making regime; and, third, the
taxpayer retains its full interest?
Mr Crozier: To take the second
question first, in fairness in Richard Hooper's report it is very
clear that there needs to be a number of regulatory solutions
as part of the package. He absolutely identifies access headroom
as being one of the problems. In our view and that of Hooper that
needs to be fixed, but it is one part of an overall package of
support. We are making £200-odd million profit, which is
fine, but we cannot keep spending the same £200 million on
everything. If we have an 8% volume decline that means £560
million is disappearing. If we have the pension problem and it
doubles potentially that is another £280 million. These things
need to be solved in the round. We have to find a package of solutions,
whatever the right one is, that solves all of those problems.
Mr Hoyle: I think we are more or less
at the answer. You accept that you lose 2p, so what does that
cost you?
Q342 Chairman: It is about £100
million, is it not?
Mr Smith: It is 2p on five billion
items.
Q343 Mr Hoyle: You are losing £100
million a year. Therefore, if we turn that loss into a profit
by increasing it to, say, 6p that gives you an extra £300
million a year profit. Is that not sensible?
Mr Smith: It depends on what you
think will happen to competition.
Q344 Mr Hoyle: Even Lord Mandelson
referred to it being renegotiated.
Mr Smith: There are people who
want to enter the delivery market in the UK. If that is the case
is the best thing for Royal Mail to do to put up the price of
its delivery service? That may or may not be the best thing to
do commercially.
Q345 Mr Hoyle: Are you saying that
Lord Mandelson was wrong to say that we should look again at the
access agreement?
Mr Smith: No; the headroom agreement
does need to be looked at.
Q346 Mr Hoyle: Therefore, we can
make profits in that way as well and so it will be a benefit?
Mr Crozier: It is already part
of the package of solutions that Richard Hooper proposes. He has
said very clearly—I completely agree with him—that
a large number of changes need to be made on the regulatory side
as part of this package alongside sorting out the pension problem.
It is not for us to say how the government should solve it. We
have always said that it should be done in some form. The third
element is bringing in capital, expertise and a commercial opportunity.
I think that the solution lies in that package in the round.
Q347 Mr Hoyle: Did Lord Mandelson
put you in an arm lock or head lock to agree it?
Mr Crozier: No.
Q348 Chairman: You talked about capital
being timely and flexible. Referring to your defence of the case
for strategic partner, to what extent is there real concern about
the Treasury's reluctance to sign up to a long-term commitment
to investment? The history of the period from 1976 and 1998 shows
that the Treasury was not a very co-operative partner. To what
extent—I do not like saying this because it is ammunition
to UKIP—do the EU state aid rules have an impact? Richard
Hooper placed great importance on putting the Treasury in an arm
lock and compelling it to sign up to a long-term agreement.
Mr Crozier: The state aid rules
have a huge impact on the way investments can and cannot be made.
We see that already in that the current investment plans has not
yet had approval. It will also have a big impact on any solution
on pensions. Any solution on pensions is likely to take north
of a year, possibly 18 months, to go through or otherwise. These
are not quick processes once the EU starts them. It is not an
easy process. We still have some funding from 2001 and earlier
that is being considered. To be fair to the Treasury, it makes
it a lot more difficult for it to provide funding. Clearly, as
in the case of the recent investment it must prove that it is
a commercial loan with a commercial rate of return; it is not
an investment as such.
Q349 Chairman: You say that if you
are to get timely and flexible access to capital EU state aid
rules and the Treasury pose a problem?
Mr Crozier: Admittedly, the markets
are very difficult at the moment, but by and large in normal circumstances
our competitors are able to get investment at a moment's notice.
They can change prices at a moment's notice and therefore they
are much more agile than we can ever be.
Q350 Chairman: What structure do
you expect to see for Royal Mail Holdings in the new world, if
it happens? The Royal Mail part of the business will be x
per cent if it happens; if there is a strategic partner it will
be, say, 30%. Post Office Ltd will remain 100% state owned and
Royal Mail Holdings will be above that and will hold a 70% and
100% interest in different bits of the business. Is that right?
Mr Crozier: I was slightly confused
by the previous debate on this part, so I ought to make our position
very clear. Post Office remains part of the Royal Mail Group.
Q351 Chairman: Holdings?
Mr Crozier: I heard the debate
about separation, but the way it would work in principle is that
Royal Mail Holdings will be at the top. Obviously, that is 100%
owned by government. On the other side is Royal Mail letters,
parcels and what have you and that will be owned x per
cent, though clearly much more than 50%; and over here is POL
which is 100% owned. The Post Office gets about 30% of its income
from the Royal Mail, but it is probably not as well known, though
arguably it is more important, that the mails business generates
substantially more than half of Post Office's footfall.
Q352 Chairman: I just want to ask
about the issue of ownership. There is no dispute—it is
common ground between you and the government—that Post Office
Ltd will remain 100% owned by Royal Mail Holdings which in turn
will be owned 100% by the government?
Mr Crozier: As far as I am aware,
that is correct.
Q353 Mr Clapham: Before I turn to
the Post Office, I should like to make one comment having heard
the exchange between you and Mr Hoyle about the way we move forward.
What you said about industrial relations tended to suggest a very
understandable approach. You have a situation where a 30% partner
is coming in. A company like TNT has a particular approach to
industrial relations and that might upset the apple cart and make
things much worse. You have to bear in mind those kinds of things.
As to how things work at present, the group wants to ensure that
Royal Mail remains an integral part of the business. Earlier you
talked about the way you saw the business changing. You said that
in 2012 50% of the business would be dealing with parcels. What
is the relationship between parcels and the Post Office network?
Where do the parcels come in? Is it part of the European approach
to your business, is it the connection with the Irish venture
or is it purely in the UK that we will see that change?
Mr Crozier: Fifty per cent of
our revenue will come from parcels. Obviously, the parcel flows
are from various sources. Some come in through GLS, our European
parcels business; some come in from other international postal
operators; some come through Parcelforce; and a huge number come
through the Post Office itself. Bank of Ireland has no impact
on the postal side; that is purely a joint venture in financial
services. We see an increasing role for the Post Office in future
from the point of view of customer convenience, for instance as
a pick-up and drop-off point. One of the great reasons why people
shop over the internet is for the convenience of getting everything
delivered at home, but the reality is that something like 60%
of people are not at home during the day. People who order goods
from, say, Amazon or whoever may not want it delivered to their
home but to a post office near their work or homes because it
would be a more convenient place to pick them up. This was one
of the things we trialled in the run-up to Christmas. Increasingly,
for drop-offs and pick-ups the Post Office will have a very valuable
role in what I suppose could be called the e-commerce economy
as it opens up.
Q354 Mr Clapham: That vision makes
it plain that the link between postal services and the Post Office
will be extremely important for that kind of development.
Mr Crozier: Indeed.
Q355 Mr Clapham: If we look at Post
Office Ltd, you have a good network advantage at the present time
such that you will be able to use it in future to grow the business.
Presumably, when we begin to talk about postal services you will
seek to retain that but with modernisation of the actual framework?
Mr Crozier: Yes.
Q356 Mr Clapham: Are we likely to
see postal services retained or will there be a reduction in the
number of such premises?
Mr Crozier: I think you ask two
different questions. If I get it wrong please correct me. The
government closure programme is virtually complete and there are
no plans to go through further closures. That does not mean that
from time to time other post offices will not close for a specific
local or individual reason, for example someone retires, but generally
there is no closure programme. Will Royal Mail continue to use
the Post Office? Absolutely, yes. Although we are very much part
of the same group we also have what we call an inter-business
agreement that runs between the two. You need to have that for
all sorts of reasons to ensure that the mail is flowing from one
to the other and back again. That is a very important arrangement.
Obviously, at group level I must ensure that that is one of the
things that works for the group in the round. I do not see any
reason why anyone would not want that to continue. The Post Office
is a very important part of providing the USO and giving people
access points. The best way to think of it is that it is our shop
window or retail arm. I see no reason why that would change.
Q357 Mr Clapham: The delivery offices
that are connected to the sub-post offices are likely to remain?
Mr Crozier: Yes. There are about
1,100 special delivery offices, which we call SPDOs. They are
very small sorting offices in small post offices usually in rural
areas or villages. The truth is that that is the most cost-effective
way to provide that service. Maybe in the long term—who
knows—there will be another way, but it has been looked
at many times and it seems to work.
Mr Clapham: As to the moneys you receive,
does they include an amount for the commercial advantage of the
exclusive access to the Post Office network?
Q358 Chairman: Do you pay for the
uniqueness of the arrangement?
Mr Crozier: No, because there
is no exclusivity. I believe that Postcomm touched on something
called condition 9 of its regulation. People can apply for access
to post offices, so that already exists under the regulatory setup.
Q359 Chairman: To be clear, anyone
can apply to use the network for rival mail services but no one
has chosen to do so?
Mr Smith: Exactly.
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