Postal Services Bill

Memorandum submitted by National Federation of SubPostmasters (PS 07)

1. Summary

1.1 The NFSP has significant concerns that proposals within the Bill to separate Post Office Ltd (POL) and Royal Mail may lead to changes in arrangements between the two companies. These changes are likely to lead to POL no longer being treated as an in-house provider by Royal Mail, as it is currently, but will instead result in POL not being treated any differently to any other supplier, with the long shared history between the two companies overlooked and the public’s perception of the two companies as being synonymous ignored. Post offices are heavily dependent upon Royal Mail business for income and for driving customer visits to post offices; while for the public and small businesses, post offices provide a convenient and trusted location to carry out Royal Mail transactions. We therefore believe that a minimum 10 year contract must be put in place between POL and Royal Mail if the companies are to separate.

1.2 If POL is to survive outside of Royal Mail Group, it is essential that new government services are made available at post offices. Funding to ensure the continuation of these services across the post office network must be secured before any separation takes place; and there must be a sufficient number and range of attractive new services to ensure their ongoing viability.

1.3 While we strongly welcome proposals to allow the mutualisation of POL in principle, we fear that in practice mutualisation is worthless unless urgent action is taken to safeguard existing income and deliver new revenue streams to allow POL to survive as a stand-alone company.

1.4 The NFSP does not take a view on whether or not Royal Mail should be privatised. However, we believe that if privatised, it is essential that Royal Mail remains in UK ownership in the interests of the nation’s economy and social cohesion.

1.5 We also strongly support proposals within the Bill to overhaul the regulation of postal services, which are both necessary and overdue.

2. About the NFSP

2.1 The National Federation of SubPostmasters (NFSP) is the trade union and membership organisation which represents subpostmasters. Subpostmasters are independent business people who act as agents to POL and run sub post offices, which make up 97% of the national post office network. The NFSP is the only organisation recognised by POL to represent subpostmasters.

3. The post office network

3.1 Post offices provide individuals and small businesses with an unrivalled range of mail, government, banking and retail services, as well as informal advice and support, in a trusted local environment.

3.2 Every week 20 million people visit a post office. For every £1 transacted in the UK, 14p is handled through the post office network.

3.3 Post offices are heavily used by the most vulnerable people in society, including older people, disabled people, people on low incomes and also those living in rural areas.

3.4 Small businesses are also extensive users of the post office network, and in particular its mail services. Twenty percent of small businesses use post offices every day1, while 59% use the post office at least once a week2. Eighty-eight percent of small businesses use the post office to purchase stamps and send letters, 77% to send parcels3.

3.5 Research for the regulator Postcomm in 2009 calculated post offices’ "social value" at up to £10bn and concluded that the network "provides a major social net benefit to the UK population" 4.

3.6 A report last year by the House of Commons Business, Innovation and Skills Committee concluded that post offices provide a focal point for communities – "an instrument of social cohesion", "preserves the fabric of our society", "a place where vulnerable and non-vulnerable people alike share services" 5.

3.7 However, the post office network has reached a critical point in its history. Two major government closure programmes, the withdrawal of many key government services and other social and economic changes have resulted in 7,000 post office closures over the past decade.

3.8 The strength of the post office network lies in its depth and reach. With 11,500 post offices and 500 outreach services, the network remains bigger than all the bank and building society branches together. It is essential the post office network stabilises now, as an ever reducing network would inevitably undermine its future viability.

3.9 Sub post office income remains worryingly low, continues to reduce and must be tackled as a priority. New work urgently needs to be brought into the post office network, increasing income for the remaining post offices and ensuring they can continue to serve local communities.

3.10 Eighty percent of post offices are run alongside a shop. According to research both by Postcomm6 and by the NFSP7, two-thirds of these shops would be unlikely to remain open if the post office closed.

4. Postal Services Bill

4.1 While there are some aspects of the Postal Services Bill which the NFSP supports, there are other aspects about which we have significant concerns. We will address the various relevant aspects of the Bill in turn.

5 Separation of POL and Royal Mail

5.1 The issue within the Bill of most significance to the post office network, and of most concern to the NFSP, is the proposed separation of POL from Royal Mail.

5.2 Currently, POL and Royal Mail are both part of Royal Mail Group, which is owned by the government.

5.3 The Bill proposes to retain POL within public ownership, and to separate it from Royal Mail, which will be privatised.

5.4 To our knowledge, there is no known international precedent for separating a mail company from its retail arm.

5.5 Under the current Inter-Business Agreement (IBA) between the two companies, income from transactions carried out in post offices on behalf of Royal Mail accounts for one third of POL income (£343m in 2009/10) and one third of subpostmasters’ pay (which the NFSP estimates at £240m in 2009/10).

5.6 Of this, around 60% is variable income based on the levels of transactions undertaken; while 40% is fixed income, based on post offices providing bricks and mortar access points for the public to use postal services.

5.7 Mails business generates more than half of all visits to post offices.

5.8 In addition to the central role which footfall and income from Royal Mail transactions provide throughout the entire network, there are 900 "mailwork" sub post offices, where the subpostmaster provides premises, facilities and supervision for Royal Mail delivery staff. These are overwhelmingly located in rural areas – around one in seven rural post offices is also a mailwork post office. Mailwork subpostmasters are paid according to the number of postmen and women they supervise. This pay is frequently around 25% of a mailwork sub office’s total Post Office income.

5.9 The NFSP is concerned that the separation of POL and Royal Mail will mean that current business arrangements between the two companies may well change. As a separate company, Royal Mail may seek to renegotiate existing contracts, or may reconsider whether POL should remain as its exclusive retail outlet.

5.10 Any changes to Royal Mail, and to the relationship between Royal Mail and POL, that adversely impact on the post office network will unquestionably risk further widespread post office closures. Many sub post offices already urgently need new sources of income to remain viable, and would not survive further reductions of income as a result of loss of Royal Mail work or changes to remuneration for this work.

5.11 The NFSP believes that in order to avoid further post office closures, existing levels of Royal Mail work at post offices must be maintained with a minimum 10 year IBA between the two companies following separation.

5.12 A minimum 10 year IBA would guarantee that POL will continue to act as Royal Mail’s exclusive retail outlet; and that customers could continue to access Royal Mail services at post offices. It would allow time to stabilise the network and if necessary seek alternative revenue streams to ensure both the POL and the network are less reliant on Royal Mail income; and allow post offices to use the recent government funding package (see section 8) to improve their customer offer, such as introducing longer opening hours, offering Royal Mail and the public a first-class service.

5.13 Advice received by the NFSP leads us to believe that suggestions that a 10 year IBA between POL and Royal Mail would be in any way in breach of UK or EU procurement or competition law are erroneous. We believe that this is more a question of political will on the part of ministers to permit this. The NFSP is concerned that a fear within government that Royal Mail may generate less income if tied to a 10-year IBA with POL may lead to attempts to prevent this.

6 Other mail services at post offices

6.1 Subpostmasters have an unrivalled specialisation in mails, and post offices should continue to serve the public and business as one-stop-shops for all mail needs.

6.2 The NFSP supports new mail services being introduced at the Post Office, such as Local Collect which allows people to collect undelivered parcels from nearby post offices.

6.3 Postcomm suggests that new mails operators may want to use the size and geographic coverage of the post office network to sell their products and services to domestic customers and small businesses. The NFSP agrees that if this is how postal competition develops, post offices must act as dropping off and collection hubs for mail companies – increasing convenience and access for the public. To maintain the network’s integrity, this should be agreed on a network-wide basis, rather than by arrangements with individual post offices.

6.4 To date POL has contracted with one alternative mail company: since summer 2009 the DX Group has offered a collection service of undelivered DX Group mail items at local post offices. However, while this new work is welcome, we caution about arrangements with other mail companies bringing individual post offices additional income. New business from other mail operators is likely to be at the expense of losses of Royal Mail business.

7 Government work

7.1 In its supporting documentation around the Bill the government says it is "working to recreate the local post office as a genuine front office for government" 8.

7.2 The NFSP endorses this initiative – we have long asserted that post offices are the natural home for all forms of central, devolved and local government transactions, verification and information, providing a local and trusted environment for citizens to interact with the state. This also offers potential cost-savings to government by enabling it to cut back-office functions.

7.3 We understand that the government will shortly publish details of its plans for more government work at post offices, which we will respond to when available.

7.4 However, the NFSP believes that it is essential that concrete details are provided and contracts signed for new government work at post offices before any separation of POL and Royal Mail takes place. Proposals for new government work have been raised many times before - including in 2009 within an extensive parliamentary select committee report 9 and the NFSP’s report Six Steps to a Sustainable Post Office Network - but these proposals have consistently failed to translate into additional work across post office counters.

7.5 Instead, POL income from government services has continued to fall year on year, down to 20% in 2009/10 compared to over 40% just five years ago10.

7.6 If trials for new government services at post offices are to be launched, ministers must be certain that there are available and identified funding streams to allow the services to be rolled out across the network on an ongoing basis if the trials are successful. The NFSP believes that there is a risk that trials could be unveiled but however successful they prove, there will not be the funding available to allow the services to be offered on a nationwide, permanent basis. In addition, ministers must ensure that there is a comprehensive range of new services to help ensure their long-term viability.

7.7 Even if existing levels of Royal Mail work were maintained, guaranteed major new sources of income are still required for there to be any possibility that POL could be financially viable outside of Royal Mail Group and that further post office closures can be avoided. Any threat to Royal Mail work makes it doubly imperative that the government acts to deliver more work through post offices.

8 Funding for post offices

8.1 The government has paid POL a subsidy of £150m a year since 2003, in recognition of the vital social and economic role which post offices play in their communities.

8.2 On 27 October 2010, the government announced £1.3bn of funding for the post office network over the next four years. The government says this will secure its long term future by allowing the Post Office to invest, improve its offer and win new revenue streams. The government also says the funding package will ensure that there is no new closure programme.

8.3 The funding is broken down as follows: £180m in 2011/2012; £410m in 2012/13; £415m in 2013/14; £330m in 2014/15. Further details are awaited on precisely how the money will be spent.

8.4 The NFSP has welcomed the government’s announcement of renewed funding for post offices. However, two previous rounds of major funding from government intended to help stabilise the post office network, in recent years, ultimately failed to achieve that aim. The government must learn lessons from these previous failures and ensure this time the funding is complemented by major new sources of income for sub post offices, within the context of a coherent, long-term plan for a sustainable post office network.

9. Mutualisation

9.1 The Bill contains provision for POL to a mutual company.

9.2 Supporting materials for the Bill issued by the government11 indicate that ministers plan to consult on what kind of mutualisation might work best for POL. This information states that this work will not be complete until spring 2011, while the full realisation of mutualising POL is likely to take the duration of this parliament.

9.3 The NFSP welcomes these proposals. Increasingly, the interests of POL and of subpostmasters are no longer aligned. Subpostmasters have an estimated £2bn of their own money invested in the network, through their initial purchase and ongoing maintenance of and investment in their post offices, and should have a far greater say in how the network is run.

9.4 We understand that mutualisation can take many forms, and we look forward to actively contributing to the process of ensuring the right model is developed for the business, the network, subpostmasters and their customers.

9.5 However, the NFSP strongly believes that any plans for mutualisation are worthless unless urgent and significant action is taken to turn POL around.

9.6 POL continues to run as a heavily loss-making company. It has only technically been in profit for the last two years (£72m in 2009/10, £41m in 2008/9) due to the government’s £150m subsidy payment. Performance figures for the six months up to 26 September 2010 show that the company’s external revenue decreased by £28m compared to the same period in 2009; and its operating profits for the period fell from £41m to £20m12.

9.7 The NFSP believes that this can only be remedied with a minimum IBA with Royal Mail; a funding programme which delivers long-term sustainability for the network rather than short-term survival; and contracts to allow post offices to become the front office for government.

10 Privatisation of Royal Mail

10.1 The NFSP does not take a view on whether or not Royal Mail should be privatised.

10.2 We do however strongly believe that if Royal Mail is to be privatised, it must remain within British ownership.

10.3 Royal Mail is a strategic UK company, integral to the wellbeing of the country’s economy and society. Business, in particular small businesses, across the country depend on its services; while communities across the UK depend on the six-days-a-week collection and delivery at a uniform and affordable price through the Universal Service Obligation, which only Royal Mail can provide.

10.4 The UK is already out of step with other G8 nations in failing to maintain a strong indigenous stake in essential national infrastructure. Other G8 nations have ensured a much stronger stake for their national self-interest in essential services such as gas, electricity and telecoms, as well as postal services.

10.5 The NFSP believes that it is essential that any new owners of Royal Mail are themselves rooted in the UK’s society and economy, and that the UK government should take steps to ensure that this is achieved.

11. Other aspects of the Bill

11.1 The NFSP strongly agrees with the government’s proposal to take on the Royal Mail pension deficit.

11.2 We also support the proposal within the Bill to transfer regulation from Postcomm to Ofcom. We believe that this move could lead to a more proportionate, as well as cost-effective, regulatory regime.

11.3 The level and nature of regulation is likely to be central to Royal Mail’s success or failure in the coming years. The company has been heavily over-regulated by Postcomm for many years and a level-playing field, allowing Royal Mail to compete equally with rival operators, is now urgently required – for the sake of the company, and its ability to deliver the Universal Service. Indeed, unless regulation of Royal Mail is rapidly and thoroughly overhauled and where appropriate significantly scaled back, the government may find that Royal Mail may yet prove to be unsellable.

November 2010

References

1 Federation of Small Businesses (FSB), "Small Businesses and the UK Postal Market", December 2006

2 Postcomm, "Customer Survey – report of findings from research with residential customers and SMEs 2009", March 2010

3 FSB, "Postal Report, Securing the future of the Post Office", September 2009

4 Postcomm, "The Social Value of the Post Office Network", August 2009

5 House of Commons Business and Enterprise Committee, "Post Offices – securing their future", July 2009

6 See 4

7 NFSP, "Subpostmaster Income Survey 2009", July 2009

8 Department for Business, Innovation and Skills, "Delivering for the future: a universal mail service and community post offices in the digital age", October 2010

9 See 5

10 Postcomm, "Postcomm’s tenth annual report on the network of post offices in the UK 2009-10", October 2010

11 See 8

12 Royal Mail Group, "Operating profit fall but results show modernisation is working", 2 November 2010