Examination of Witnesses (Question Numbers
121-139)
NATIONAL FEDERATION
OF SUBPOSTMASTERS
31 MARCH 2009
Q121 Chairman: Welcome to our second
oral evidence session of our inquiry into securing the future
of post offices and the post office network. We know you and your
organisation well, but nevertheless I always like to begin by
asking you to introduce yourselves particularly as you do not
have name tags.
Mr Thomson: I am George Thomson.
Mr Jones: And I am Mervyn Jones,
the National President.
Q122 Chairman: Thank you very much
indeed for your written evidence to the Committee which of course
is encapsulated, I think, in its entirety in the very good report
you produced which you launched last week, thank you for that.
Before I invite Brian Binley to ask the first question, can I
just ask you what the timescale is? What is the urgency? The closure
programme of the previous 18 months is now completed, we are down
to a new and supposedly stable network, but fears are around about
another round of closures, we are trying to forestall that, but
are closures still continuing? What is the situation?
Mr Thomson: That is a very good
point, Peter. Obviously we are glad the network change programme
is finished, it was a regrettable but necessary network change.
However, many subpostmasters are finding it really hard to survive,
and there is a growing database that subpostmasters, the ones
that are meant to be stable, are actually handing the keys in
and are walking away. In addition to that, there have also been
examples where subpostmasters have phoned up both the Federation
and the Post Office and said they are having to close their office
because the utility company has disconnected their electricity.
On the evidence I have, it looks like one post office a day is
closing as we speak, which is very, very worrying, after a closure
programme.
Chairman: That is quite a high figure
actually, Mr Thomson, I am interested by that.
Q123 Mr Hoyle: Is it just possible
to ask, are there any new ones opening in other areas?
Mr Thomson: Seven or eight Post
Office Essentials have opened, which is our new trial, not quite
the full service. This is separate from the ones I have told you
about closing.
Q124 Chairman: And one or two additional
Outreaches have been opened, we have seen one of them ourselves
in Devon, and some County Councils, I think Essex have re-opened
one or two as well.
Mr Thomson: That is correct.
Q125 Chairman: But basically it is
quite a worrying situation here, there is some urgency. Am I right
in saying that the Government is committed to maintaining the
access criteria, which we were told would mean a network of 7,500
offices, but actually there is no obligation on them to re-open
every office that closes unless the access criteria are breached?
Mr Thomson: That is absolutely
spot on. The Government have indicated they want the network to
be round about 11,500 to 12,000 including the 500 Outreach offices.
However, there is nothing in statute that makes them have to do
that.
Chairman: Thank you very much indeed,
I am grateful for that background. It does show the Committee
that this is not an idle canter through the issue, there is actually
some urgency in getting this mess sorted out.
Q126 Mr Binley: Just as a supplementary
to your first one, geographically is there any difference between
suburban, urban and rural areas, or are most of them closing in
rural areas or suburban areas or indeed urban areas?
Mr Thomson: It is across the board,
the offices that are closing. The reality is that postmasters'
salaries have been growing slowly, but the cost of running the
post office has been going up quite dramatically, which means
that many of them physically cannot make ends meet, that is the
reality. They want to serve the public, they want to serve the
community, but they physically cannot afford to remain in that
post office providing that service to the public.
Q127 Mr Binley: I understand that,
thank you for that, I am most grateful. Can we then talk about
the revenue that subpostmasters get from mail services? It is
a very crude and wide question to ask, but how much revenue do
they get from mail services? Give me the answer in your own words
obviously, because it is such a big question, but you might help
us to start with in that respect.
Mr Thomson: This is an absolutely
key figure. Postmasters last year received, for the mail they
do on behalf of Royal Mail Letters, £165 million commission.
Now that is commission. I think what is more worrying is that
postmasters are paid by commission and also a fixed element, but
when you factor in how much Royal Mail Letters are paying towards
the fixed pay element as well, that £165 million goes way
through £200 million, and I think it is fair to say, without
any fear of contradiction from anyone in the UK at any level,
that subpostmasters, in terms of their commission, which is variable
pay and fixed pay, receive more than 50% of their salary from
Royal Mail Letters. Absolutely massive.
Q128 Mr Binley: Let me qualify salary,
because these are small businesses, are they not? Do you mean
their total income?
Mr Thomson: Remuneration from
POL (Post Office Limited). More than half of the remuneration
from POL to subpostmasters comes from the money that Royal Mail
Letters pays POL.
Q129 Mr Binley: I am very grateful
for that. That is very helpful to us. Would you like to add anything
to that, because you are on the other end of it, are you not?
You are on the receiving end of that, as it were.
Mr Jones: One of our major concerns
is the inter-business agreement between Post Office Limited and
Royal Mail and the future of that agreement, particularly in light
of the Hooper report, and the prospect of both companies becoming
sister companies, that relationship is key to the success of the
network. One of the grave concerns we have is that there is talk
at the moment of that being a five-year contract. That will then
create great uncertainty for subpostmasters who seek to take out
long-term mortgages to buy their businesses; many of them have
homes attached to their post offices, so they are working on 25-year
loan plans, and to have this uncertainty arising every five years
will undermine first of all the value of subpostmasters' investments
and actually call into question whether or not they would be prepared
to invest in the businesses for the longer term, so it is a very
big issue for us.
Q130 Mr Binley: Mr Chairman, may
I just touch on cashflow? I do not want to tread on anybody else's
feet, but we have talked about over 50% coming from Royal Mail
to sub-post offices, how does that impact upon your cashflow?
Do you have it regularly, do you have it upfront and early, how
is it paid? Because cashflow is a vital part of a small business,
is it not?
Mr Jones: Of course it is, and
we find there are seasonal trends in cashflow, for instance subpostmasters
get an income from Bureau de Change and travel money, which obviously
is falling at the moment due to the exchange rates and less and
less people going away to Europe on holiday. Traditionally, we
had a rise in income in the summer for those offices that offer
that service, and then obviously at Christmas we had a fairly
decent injection with the Christmas mail. But we are concerned
that the fluctuations now seem quite a bit bigger. In the summertime,
as foreign exchange sales fall off, if you like that injection
will come just in the way it has in the past. We are very concerned
about subpostmasters' income though. The key to this is not necessarily
the average subpostmaster's remuneration is increasing, the key
to this is profitability is falling, and we need to recognise
that only 45% of gross income from Post Office Limited actually
flows down to subpostmasters, who actually conduct 80% of the
work, and simply by giving contracts to Post Office Limited does
not necessarily mean that you are creating a viable network for
the future. We need to ensure that not too much of that contract
price sticks in the pipe, but flows down to subpostmasters to
enable them to invest for the future and generate an income.
Q131 Chairman: You claimed a very
interesting figure, that subpostmasters do 80% of the work.
Mr Jones: That is my understanding.
Q132 Chairman: How is that figure
derived? Is that a guesstimate or is there any evidence to support
it?
Mr Jones: I am sure the Post Office
will give you the exact figures, but our estimates are that of
the Crown offices and the other franchises, the 12,500 sub-post
offices are responsible for 80% of the work but receive 45% of
the gross income that the company actually generates.
Q133 Mr Binley: Thank you. Forgive
me on this cashflow thing, but yes, profitability is very important,
of course, but if profitability is going down and cashflow is
intermittent, that is a policy for disaster for some people, is
it not?
Mr Jones: Absolutely. Rising costs
and falling income, that is the position we find ourselves in,
and buying a post office is no longer seen by many people as the
sound investment it was 10 years ago. Many people are finding
it difficult to sell their businesses on to retire, and we have
many instances of subpostmasters being unable to move on.
Q134 Mr Binley: I do not want to
go any further, but I have the point I want. Profit and cashflow
are not the same thing, and we need to understand that, for small
businesses particularly. Can I go on to my second question? Considering
the implications for some sub-post offices of POL efficiency drives,
which will close sorting offices in rural areas, are network decisions
being driven by what makes money for POL, not what makes financial
sense for sub-post offices? Is there a problem there?
Mr Thomson: One of our big worries
regarding the Hooper report and the Postal Services Bill is the
point you made there. Over 900 sub-offices also have an attached
mail work delivery office and in Europe, when there has been a
rationalisation within the mail company, there has been a rationalisation
of delivery offices. Our big fear is both income streams, from
both running the delivery office and running the post office,
are needed to keep that facility in the community, and if one
of the income streams are taken away, ie running your sorting
office, then the whole shooting match may have to close down.
So we are very concerned, and Mervyn has alluded to it already,
subpostmasters need more of the money that is paid into POL coming
right down the pipeline to pay them as well, because the pressures
of actually running a post office financially are getting harder
and harder. Now obviously there has been some good news in the
last few months, the Post Office Card Account was very good news,
we will touch on that later. A lot of nice warm words have been
talked about for the future. But when we come here today, we do
not want nice warm words off the Government or off the Opposition,
we want action on the ground. I know you will touch on it, colleagues,
but it really is surprising that the Hooper report analysed in-depth
Royal Mail Group excluding POL, and we feel that was a glaring
omission to ignore POL when it actually does £1.5 billion
worth of work for Royal Mail Letters per year, and that POL receives
£356 million a year from Royal Mail Letters. Now to omit
that from a structural review of the whole company quite frankly
is a glaring omission.
Q135 Mr Binley: My final question:
can I ask why you feel so strongly about the possible separation
of Royal Mail Group and POL, specifically how would such a change,
and I quote now, risk a reduction in POL's and subpostmasters'
income, which is what your submission says?
Mr Thomson: There are two or three
points. First and foremost, the National Federation of SubPostmasters
welcome many of the facts and figures and many of the analyses
that come out of Hooper review and the Postal Services Bill. We
support the pension deficit being taken over by the government,
because quite frankly if it was not, then Royal Mail Group would
be bankrupt, so we welcome that. We welcome PostComm being discontinued
and Ofcom taking over the functions of PostComm, because PostComm
concentrate too much on competition at the expense of universal
delivery, that is definite. We support Ofcom having the ability
in the future to levy other letters carriers to make sure that
universal service is protected, and when it comes to private capital,
the Federation view is that we do not have a problem with private
capital coming into Royal Mail Letters; we think it should be
a British company rather than a foreign postal operator, but we
do not have an issue with private capital coming into a public
company, because after all, our members have £2 billion of
private money tied up in POL, providing the bricks and mortar
for POL, so we do not want to be hypocritical, but the reason
we feel that there are difficulties here is once you take Royal
Mail Group as a separate company from POL, because that is what
the Postal Services Bill is saying, and you have Royal Mail Holdings
above that, even if you have an initial deal, I think there will
be massive pressure in the new Royal Mail Group to actually try
and cut the 356 million they pay as the inter-business agreement.
One way round it, for example, quite easily, if I was a manager
in the new Royal Mail Group, I would say to myself, wait a minute,
we are paying Post Office Limited £356 million; if we put
prepaid postage packs in every supermarket and every garage and
people can just put it in, pricing in proportion, post it anywhere,
I reckon quite easily I could reduce subpostmasters' income, even
if you had an inter-business agreement, by £50 million or
£60 million. So we need guarantees here today, we need guarantees
from this government regarding what they plan to do with the Royal
Mail Group and POL and Royal Mail Holdings. I have said before,
colleagues, we have had a lot of nice words but we have had absolutely
no concrete actions whatsoever.
Q136 Chairman: Can I just test you
one more time before I hand on to Michael Clapham? Given that
Royal Mail and POL have effectively separate boards at present,
surely that pressure is there now?
Mr Thomson: The reality is it
really is not, because we are part of the same company, Royal
Mail Group. At the moment, POL—
Q137 Chairman: You will still be
part of Royal Mail Holdings—
Mr Thomson: My understanding in
reading the Postal Services Bill a good few times is that Royal
Mail Holdings would be a very small company, and I think it would
be very, very easily taken apart within a very short period, so
it is there but to all intents and purposes we would become two
separate companies. The worrying aspect is that at the moment,
when we have the inter-business agreement, because we are part
of the same company, Royal Mail Group, procurement law does not
come into play very high up. Once we become sister companies,
ie two separate companies, all of a sudden any deal that POL and
Royal Mail Group do together, they will have to have one eye looking
over their back in case other companies say it is anti-competitive.
If you are part of the same group, you do not have that problem,
but when you are actually a separate company, that is what we
are talking about here, separate companies, you do not have that
protection, and procurement law will come into play as well regarding
the inter-business agreement.
Q138 Chairman: So you are frightened
of free and fair competition?
Mr Thomson: We are frightened
of nothing, but if you are part of a company and you are a physical
cost on the ground anyway for that £356 million, at the moment,
it would be stupid Royal Mail trying to take too much work away
from the network, because they have to pay for the network anyway.
If you do not have to pay for the network because it is a separate
company, you do not have that consideration.
Mr Jones: Can I just also make
the point that we are not frightened of competition, what we are
frightened of is uncertainty, and planning small business for
the future. We are dogged with uncertainty and have been now for
the last 10 years. We have had two closure programmes. We are
not quite sure if we are getting the Post Office Card Account.
We see the effects of direct marketing from the Department of
Transport and others. We lost the contract for television licensing.
And all of these things, when you have no control over your margin—and
this is very, very important, subpostmasters have no control over
their margin. We cannot put our prices up to make our business
profitable. We are relying on the contracts coming through to
Post Office Limited and then getting a fair proportion of that
money flowing through to the network, and clearly it is not happening.
Chairman: I did warn my colleagues that
every question is linked to every other question on this subject,
and I think we are at risk of taking almost all Michael Clapham's
questions away from him by the questions we have asked already.
I think there is a real risk of that. I still think there are
some questions that he wants to ask, I hope at least.
Q139 Mr Clapham: Just exploring that
issue of profitability of sub-post offices a little bit further,
we know there is only a small proportion, according to POL, that
are profitable. What are the features that you see that sort of
make a post office profitable? Here we are talking in terms of
profitable both for POL and for the subpostmaster.
Mr Jones: Right, because the two
things can be in conflict, and what is profitable for Post Office
Limited may not be profitable for a subpostmaster. We need to
be able to identify clearly that at the moment there is a conflict
between the two aspects, because the more Post Office Limited
can squeeze away from the network to enhance their profitability
and meet their core costs, the less comes down to subpostmasters.
So in answer to your question, what I am finding now is the most
successful people who run post offices have a very strong retail
offer attached to their post office and, going forward, subpostmasters
have to look at where is the greatest potential for income growth
for their business, and many of them are finding that it is actually
not from within post office income, but it is driving sales in
their private businesses, and that is where subpostmasters increasingly
have to turn their attention.
Mr Thomson: In addition to what
Mervyn said, Post Office Limited have basically said that an office
has to have a salary about £58,000 to be profitable for POL.
One of the things we had during the closure programme was that
an income way below that from the post office, if it is combined
with a newsagent or a retail shop, could make that business very
profitable for that individual subpostmaster running the business
at an income level way below that. That was one of the issues
during the network change closure programmes, that subpostmasters
who believe that their business was intrinsically profitable were
being closed. That was one of the big issues that we had, so if
you run a post office with a good small shop, you can make money
at a level significantly below what the Post Office thinks a break-even
figure is.
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