Postal Services Bill
Memorandum submitted by TNT Post UK Ltd (PS 10)
1. TNT Post UK Limited started operations using Royal Mail’s downstream access service, in August 2004. TNT Post collects customers’ mail, sorts and processes it, notifies Royal Mail of the details of the items being handed over and then delivers it to each of the Royal Mail sorting centres around the UK. TNT Post is also responsible for customer services, billing and securing payment from the customers. Royal Mail conducts a final sort and its employees deliver it the next working day. The service has been a great success and TNT Post now handles 12 million items per night for thousands of customers. All of these letters are delivered by Royal Mail who continues to deliver over 99% of all letter mail.
2. TNT Post is also a competitor of Royal Mail but will always rely on Royal Mail for final delivery and therefore Royal Mail needs to be an efficient, modern, successful and profitable company.
3. Despite full liberalisation in 2006, Royal Mail retains a near monopoly of final delivery. The Postal Services Bill therefore needs to establish a framework for fair and firm regulation of Royal Mail which provides effective protection for its competitors – both existing and new.
4. When considering the provisions of the Postal Services Bill, and in particular the essential regulatory safeguards, we wish the Committee members to be aware of the facts around the current state of competition as there are a number of myths and misconceptions.
5. It is not in competitors’ interest that there is a weak Royal Mail. We need a strong, efficient and modernised Royal Mail that meets the needs of its customers both commercial and domestic. TNT Post is the biggest customer of Royal Mail. Since we started operations, we have spent around £1.5 billion on Royal Mail services. We want Royal Mail to be a strong and efficient organisation that meets the needs of all its customers.
6. Competition is not responsible for a declining postal market in the UK. For every £1 in reduced revenue for mail that is sent via a downstream access agreement with Royal Mail, £5 are lost to electronic forms of communication. Competition has led to new products and services and lower prices for customers that encourage them to use the postal service which has helped stem the decline of the industry.
7. The playing field is not tipped in favour of competitors. There is not a level playing field in the UK postal market. Royal Mail postal services are almost all VAT exempt but competitors have to charge VAT on their services. This VAT cannot be reclaimed by certain key customers such as banks, insurance companies and charities. These customers account for 40% of the business mail volumes which means this huge part of the market is out of reach of competitors. The playing field is about to tilt even further in favour of Royal Mail with the increase in the VAT rate to 20%, in January 2011. The Exchequer Secretary to the Treasury agreed during the committee stage of Finance Bill No2 (on 26.10.10) that there will be a review of the VAT exemption in mid-2011. It is important that the outcome is an end to the exemption for these categories of business mail.
8. The regulator does not have too much power. Where there is effective and sustainable competition, we fully agree that regulation should be removed. However, Royal Mail is a monopoly with around 99.9% of licensed mail delivered by it. It therefore needs to be effectively regulated to stop it abusing its monopolistic power and to ensure that access continues to be offered on equivalent terms to all customers where there is no choice. For example, it has taken over 20 years for the regulators to lessen controls on BT and then only after a structural separation of Openreach. Competition in the postal services sector is only six years old.
9. Competitors are not cherry picking the largest clients. The way that the market was deregulated meant that, at first, competitors could only approach clients with bulk mailings of over 4000 items. The competitors have worked within these parameters and offered a cost effective choice for customers. Competitors now also provide services to thousands of small volume customers. The number of smaller customers now benefiting from the choice offered by competition is growing by the day.
10. Royal Mail has not "lost" 60 per cent of its bulk mail volumes to access competitors. Although other access operators "handle" 60% of bulk mail, they hand almost 100 per cent of their volumes to Royal Mail and they pay Royal Mail over 80 per cent of the revenue they receive from their customers for final mile delivery.
11. We simply do not know if Royal Mail is losing 2.5p per letter it handles for competitors. We have always said we will pay a fair price but Royal Mail Group lacks transparency in its accounting reporting so it is impossible to tell if they do lose 2.5 p per item. What we do know for sure is that Royal Mail originally agreed to the access price that competitors pay it and renegotiated the price review mechanism in 2007. Those prices are the basis on which competitors have made considerable investment decisions and employed thousands of people. The rate was commercially negotiated and, importantly, was higher than the price proposed by the regulator which included a profit margin of 6%. Every year since 2004, prices have increased. If greater efficiency gains had been made since 2004 Royal Mail could not claim it was losing money.
12. Competitors are concerned about the universal service. All Royal Mail’s customers, including ourselves, need mail to go to every address. A reliable, nationwide service is very important and we fully support its continuation. We also remain committed to paying Royal Mail a fair price and we therefore have a vested interest in making sure mail services are provided as efficiently and cheaply as possible to attract the largest possible mail volumes.
13. Competition in postal services is good for the UK economy and job creation. What is true is that competition has been good for the UK in creating jobs and cutting costs. This has allowed businesses and public sector organisations to invest the money they have saved elsewhere. . A Europe Economics report in 2008 found that competition had already created 3,300 new jobs in the economy and led to an overall economic benefit of £229 million.
14. Competition in the UK must not be allowed to falter. The Bill needs to ensure a continued requirement for the provision of access services and fair and effective regulation of those services. It should also remove any barriers which might deter investment in the UK or discourage private sector job creation. We believe therefore that there is a case for strengthening the Bill at committee stage to ensure: a) there is no room for doubt on protection of efficient access competition; b) that UK tax payers are not asked to bail out Royal Mail’s pension deficit more than absolutely necessary; c) that the VAT exemption is removed or limited to universal postal services only and d) that any form of compensation fund which is designed to support the universal service would never subsidise Royal Mail inefficiency.
November 2010
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