Postal Services Bill

PS 16

Memorandum from UK Mail

1. Having seen with interest the Evidence Sessions held on 9th and 11th November, UK Mail Group plc (UK Mail) makes this submission with the aim of providing confirmation of or further information on some of the points made by those giving evidence, in particular regarding the nature of competition in the UK mail market.

2. Competition in this market was enabled by the provisions of the Postal Services Act 2000 and the licence agreed by under that Act between Postcomm and Royal Mail. This established the ability for other mail operators to pay Royal Mail to make the final delivery of items which they had collected and distributed - what has become known as ‘downstream access’. In this way, competition could develop despite the historical monopoly of Royal Mail’s final delivery capability.

3. UK Mail collects customers’ mail, sorts and processes it, advises Royal Mail of the nature, quantity and locations for handover of the mail and then delivers it to each of the Royal Mail sorting centres around the UK. In this way, UK Mail is able to bring together its well established, efficient and reliable collection and distribution network with the unique ‘everywhere, every day’ delivery capability of Royal Mail, to provide a full collection-to-delivery service to posting customers.

4. This innovative approach has been successful, with UK Mail now carrying some 13 million letters each day for several thousand posting customers. Every one of those letters is delivered by Royal Mail and UK Mail spends about £150 million each year as a customer of Royal Mail – helping to sustain Royal Mail in providing the Universal Service.

5. Of the letters carried, 2m are sorted by UK Mail each day for presentation to Royal Mail for final delivery. We have 14 new, highly efficient sortation machines in 8 locations around the UK employing some 300 staff - a multi-million pound investment in sortation capacity which is in addition to similar investment in developing our collection and distribution network.

6. We believe it should be recognised that, contrary to some misunderstandings, the price Royal Mail charges for downstream access was not imposed on it. Royal Mail is not ‘required by the regulator to subsidise its competitors’. UK Mail was the first company to reach agreement with Royal Mail for downstream access in 2004, including a freely and commercially negotiated price, which Royal Mail accepted as providing a reasonable profit margin.

7. Tim Brown (Postcomm Chief Executive) said in his evidence on 9th November [Q105], the price agreed between UK Mail and Royal Mail in 2004 was:

‘higher than we thought looking at it independently, and it included a return’.

[Postcomm’s analysis at the time of the agreement was that the price gave Royal Mail a margin of 6-8%]

8. If Royal Mail is no longer achieving that level of profit on the price for downstream access, it is only because it has failed to improve its efficiency. As Mr Brown went on to say [Q105]:

‘access prices have gone up by 14%, yet it now looses 2½p per letter, Royal Mail claim. Our first issue would be one of the reasons for that: the inefficiency or the failure to modernise over the last five years is worth more than 2½p per letter. So if they had been efficient, access would not be unprofitable’

9. It should also be recognised that the typical access price of 14p-15p per letter for the final delivery is some 75% of the 19p-20p which Royal Mail charges for its own 2nd Class bulk mail collection-to-delivery services (indeed, for some Royal Mail 3rd class bulk mail collection-to-delivery services, the price can be the is the same or even less than the access price, which is just for the final delivery). Hence, while 60% of bulk mail may now be collected and distributed by operators other than Royal Mail, Royal Mail still delivers all of that mail and still receives some 75% of the revenue.

10. UK Mail, and similar mail operators, are not Royal Mail’s only customers for downstream access. Many large mailers (such as the major banks and insurance companies) are direct customers of Royal Mail for this service and account for about 50% of such mail. These customers then pay UK Mail (or others) to undertake the collection, distribution and handover to Royal Mail. This is the context for the responses given by Alan Halfacre (Chairman of the Mail Users Association) on 9th November to Q114-116.

11. Hence, where UK Mail is a competitor to Royal Mail (rather than a customer of Royal Mail) is in the activities of collection, sortation and distribution. This is the background to the response by Nigel Stapleton (Postcomm Chairman) on 9th November to Q98 when he said:

‘all that has gone to competition is upstream bulk haulage, which is a network totally separate from the retail network’

12. UK Mail does not expect or require Royal Mail to ‘subsidise competitors’. We are, however, concerned that the price which Royal Mail charges us and others for the final delivery is a true and fair price based on correct allocation of costs and passing on efficiency gains . Also, that the charge to us for final delivery is included by Royal Mail at the same rate within its price when selling collection-to-delivery services. If not, Royal Mail may be improperly subsidising its competitive collection-to-delivery services from that part of the market (final delivery) where it has more than 99% of the market.

13. UK Mail wants an efficient, successful Royal Mail that is driving efficiency to the benefit of all customers and is at the heart of a vibrant UK postal market - continuing to provide services to a wide range of customers, including downstream access customers

14. UK Mail strongly believes that competition has been a positive development in the mail market. Since 2004, competition has brought:

· A boost to the UK economy of more than £250m and the creation of more than 3,500 new jobs in the UK ("Benefits of postal liberalisation", Europe Economics, 2008)

· Customer choice, including the creation of a number of new products, and lower prices – stimulating the postal market and slowing the reduction in mail volume caused by electronic alternatives

· Reduced postal bills for public and private sector customers, including businesses of all sizes

· Encouragement for Royal Mail to improve efficiency, quality of service and range of services

15. Competition from other postal operators is not responsible for a declining UK postal market, or for the current fragility of Royal Mail. Nigel Stapleton said on 9th November [Q98]:

‘Hooper in 2008 said that Royal Mail had lost five times as much revenue to other media as it had lost to mail competitors. We have looked at that number two years later and it is now 10 times as much going to other media rather than to access operators.’

16. A major reason for Royal Mail’s financial problems is its failure to improve its efficiency in recent years. Nigel Stapleton also said [Q98]:

‘If Royal Mail had modernised at the 1.5% efficiency improvement that it committed to in 2005, it would have made £666 million profit last year, not the £166 million that it announced...’

17. The Postal Services Bill therefore needs to establish a framework enabling a commercially healthy Royal Mail, while also providing for the appropriate regulation of Royal Mail that will allow effective competition and require improved efficiency from Royal Mail.

18. Where there is fully effective and sustainable competition, UK Mail agrees that regulation should be removed. But where Royal Mail has more than 99% of the market and there is an economic bottleneck, as with final delivery, there needs to be appropriate regulation to enable sound competition. Competition in the UK must not be allowed to falter. The Bill needs to ensure a continued requirement on Royal Mail for the provision of downstream access services and fair and effective regulation of the terms for those services.

19. UK Mail believes therefore that there is a case for revising the Bill at Committee stage to ensure continuing protection for efficient competition and that the existing powers of Ofcom in relation to mandating downstream access should be similarly included in the Postal Services Bill.

20. We believe revisions to the Bill are necessary in Clauses 37, 43, 44 and 48 and in Schedule 9 paragraph 4. Suggested revisions are being provided in a submission to the Committee from the Mail Competition Forum, of which UK Mail is a member, and rather than repeating them unnecessarily in this submission, we ask the Committee carefully to consider those suggestions.

21. We also believe the Bill needs to set a clear requirement for Ofcom to regulate a privatised Royal Mail in a way that will require efficiency improvements. Increased Royal Mail efficiency will help to keep mail prices competitive against other media and so mitigate some of the decline in the mail market. Improved Royal Mail efficiency is the best way to ensuring the provision of the Universal Service, rather than through individuals and businesses having to pay higher prices or efficient operators having to pay for Royal Mails inefficiency.

22. We are concerned that the Bill could otherwise replace an inefficient state mail company which has a 99% monopoly of final mile mail delivery with a powerful, protected and privatised but still inefficient Royal Mail.

23. The Postal Services Bill must continue to enable effective competition and require improved efficiency, not just focus on protecting the Universal Service – otherwise competition and the Universal Service will be lost through stagnation, inefficiency and decline.

November 2010