Postal Services in Scotland - Scottish Affairs Committee Contents

Examination of Witnesses (Question Numbers 45-70)

George Thomson and Mervyn Jones

8 December 2010

Q45   Chair: Our next witnesses are two gentlemen I know very well from the National Federation of SubPostmasters. Perhaps you could start by introducing yourselves and then make a brief opening statement.

George Thomson: I am George Thomson, General Secretary. Thanks for the invite to be here today.

Mervyn Jones: Thank you very much. My name is Mervyn Jones. I am a subpostmaster in Hawick. I have been a subpostmaster for 30 years. I am also a Commercial Director of the National Federation of SubPostmasters trading company.

Q46   Chair: Maybe you would like to make a brief statement with particular reference to the Postal Services Bill.

George Thomson: To make a brief statement, the last 20 years have been very difficult for the Post Office network, almost from selling off Girobank in 1990 to the decision to scrap benefit books seven or eight years ago. Everyone in this room knows that there have been closures. The network has halved since 1968. There were 24,500 branches; it is now down to 12,000 or 11,500. So the last 20 years have been difficult. Shopping habits have changed and society is changing. To some extent the Post Office has been in danger of being left behind. We think the Postal Services Bill is an opportunity potentially to get the show back on the road. Every single politician from all the political parties to whom I have spoken does not want any fewer than 12,000 offices in the UK. In Scotland there are 1,446. I think there is a general consensus among all Scottish politicians that that is the kind of level at which they want the Scottish network to remain. Some 68% of the Scottish offices are rural, which is 13% more than the UK, where only 55% are rural. Therefore, in terms of small businesses and the general public, we all have to work together to try to make sure the Scottish Post Office network has a long-term viable future and things can't continue as they have been. I'll say in this room that it's well known that over the last two years the National Federation of SubPostmasters, in particular myself and Mervyn, have been working with both the last Labour Government and the coalition Government to see if there was a set of circumstances in which an independent Post Office Ltd demerged from the Royal Mail would have a future. We have worked behind the scenes. We do believe that the Government's commitment of £1.34 billion over the next four and a half years and to make us a front office of Government means there is a desire to make sure the Post Office network has a viable future. Our job in this room is to make sure that promises and policy are delivered to make sure that happens.

Q47   Chair: You said there was a commitment from the Government that post offices would become the front office of Government. What about Scotland, Wales and Northern Ireland? Do you have similar assurances from the devolved Administrations there?

George Thomson: Mervyn and I had a meeting with the First Minister just three or four weeks ago. Maybe Mervyn wants to come in on that point.

Mervyn Jones: There is certainly a degree of sympathy within Scotland for providing devolved Administration services. We have a concern that there won't be a joined-up approach throughout the United Kingdom and that, in relation to certain devolved areas where the Scottish Government have responsibility for making those decisions, we could end up with disjointed decisions in England and Wales in comparison with Scotland and Northern Ireland. We are really trying to keep a handle on which decisions are the responsibility of the people here and which decisions are the responsibility of the Scottish Government.

George Thomson: For example, at the moment there is a little bit of envy in relation to subpostmasters in Scotland because of the small business rates relief. If the rateable value is less than £10,000 they pay nothing; so some subpostmasters are saving £4,000 or £5,000 a year. Something similar has happened in Northern Ireland and, obviously, Wales. To some extent a lot of our colleagues in England are pretty envious that we are able to do that. We think there is a case in the rest of the UK and England for providing help to small shops through rates relief to make sure they remain on the high street.

Q48   Chair: You mentioned the £1.34 billion from the Government for the next three or four years. Are you confident that that would be enough to set you up for the long term, or would you be coming back in three or four years' time wanting that to be continued?

George Thomson: We think there is a recognition, Alan, by Government that it will make the network far more secure. The £1.34 billion represents £180 million in 2011-12; £450 million in 2012-13; £410 million in the year after; and £330 million in the final year, 2015. That will allow us to restructure the network both by modernising the branches that are there and investing in the infrastructure and physical appearance; it will allow the Crown offices to break even; and there will be implementation of what is called Post Office Local, or Post Office Essentials, which basically puts a post office provision in a convenience store and, say, a local garage or newsagent to make sure that, rather than having two small businesses in a small village that struggle to survive, the retailer and post office are strong enough. It puts us in a stronger position. Will it be enough? Will there be a need for the Social Network Payment to continue to a lesser extent? I think there will be. The person who runs the Post Office Local receives only commission; he or she does not receive a fixed element. As long as that goes into a business that is viable and they can share the costs—for example, if it was a Londis convenience store, as Mervyn has in Hawick—then that becomes viable, but you will still have a situation where it is the last shop in the village and the subpostmaster gets £15,000 or £16,000 from Post Office Ltd but only £1,000 is commission. Because that post office is the last shop in the village and has a bit of retail, there would be no sense in cutting that subpostmaster's income to only £1,000 for the commission. He would still have to get £15,000 or £16,000, so the continuing Social Network Payment, I believe, would have to go to offices like that to make sure the last shop in the village remained at the kind of income level it has at the moment in order to survive.

Q49   Chair: We hear stories that the inter-business agreement that the Post Office currently has with Royal Mail will continue for another five years. Are you confident that after those five years are up the Post Office will provide a good enough service that whoever owns Royal Mail at that time will have no alternative but to renew that inter-business agreement?

Mervyn Jones: I think what we have to do is to make our network as attractive as possible to Royal Mail to make them want to use it, rather than have it enshrined in legislation to make them use us. We would like to see that inter-business agreement as it is now—or as it is about to be revamped—exist for as long as possible to give us time to redesign the network. I'd just add to a point George made earlier. We have a challenge to ensure that our post offices are open longer hours and provide the services that modern-day customers require. That probably means opening until 10 o'clock at night. If I could elaborate a little, my convenience store is open until 10 o'clock at night and opens at 7 in the morning, and it's open seven days a week. But my post office is only open from 9 o'clock till 5.30 because of the costs of delivering the staff wages, and the income that the post office provides and generates outside those core hours does not meet the costs. If I can get to a situation where I can amalgamate that service provision so that I can multi-function my staff and allow them to open the post office and provide services outside the current standard hours, that would enhance customer service and make our network, if we can achieve that on a large scale, much more attractive for Royal Mail to want to use. Customers' shopping habits have changed; they want to post packets and parcels at 7 or 8 o'clock at night; they want to come in and pay their gas bill on a Sunday, and we have to meet that challenge.

George Thomson: In addition to what Mervyn said, we want Royal Mail to make it a no-brainer that they use us in the future because of the hours and the new network. However, in the meantime we want a deal for as long as possible so we are fit for purpose in future. We would still say that Royal Mail should still give us a 10-year deal. What concerns the Federation at the moment is that we know for a fact, and I said this at the all-party group, that the Chief Executive of Royal Mail Group, Moya Greene, is prepared to give us a 10-year IBA. We know for a fact that the Managing Director of Post Office Ltd, Paula Vennels, wants a 10-year agreement. We keep being told by the politicians that it's nothing to do with them. The question I would like to ask is: what is the reason we are not getting a 10-year deal? We have spent a bit of money on this. We know it's not illegal to be given a 10-year deal; we know it doesn't break European procurement legislation because it is an in-house award. So we want to know what is stopping the company signing a 10-year deal.

Q50   Chair: I presume you have asked the companies concerned. What have they said?

Mervyn Jones: Both have said they are happy to sign a 10-year deal.

Q51   Chair: Why don't they?

Mervyn Jones: That is the question we would like to ask, and perhaps you might like to ask the Minister.

Q52   Chair: We will ask him next week.

George Thomson: What is happening at the moment is that both sets of solicitors, for Royal Mail Group and the Government, blame each other. It is like wading through treacle. We want a 10-year deal; we know there is one on the table to be done, so let's do it.

Chair: Thank you. Who wants to come in? Cathy?

Q53   Cathy Jamieson: I was going to pursue some of those issues but I think we are now fairly clear where we need to pursue those matters further. Can I just ask a wee bit about the whole issue of mutualisation and community ownership because I know that is something about which you have concerns? I have concerns about the very loose language that is being used around this. I pressed the Minister on it at the all-party group because he seemed to be using the so-called John Lewis model—which is not a mutual but employee ownership—interchangeably with mutualisation, which is an entirely different democratically controlled structure. Without going into all the technicalities of that, I just wonder whether you can say a wee bit about your concerns in relation to the potential for community and mutual ownership.

Mervyn Jones: Perhaps I may take us back a few steps from where we are now. One of the things that the Federation recognised several years ago was that there was a conflict between what was good for Post Office Ltd and what was good for subpostmasters. We recognised that subpostmasters were being squeezed to achieve a profit target for Post Office Ltd and in essence that put the viability of individual subpostmasters at risk, because in order to generate more profits the commission levels for subpostmasters were cut. Against that background, over three years ago now, the Federation embarked on a project where it took advice on how it could more closely align what was good for subpostmasters and what was good for Post Office Ltd. To be fair, we have driven the agenda along a mutualisation model and are now in a situation where the wording of the Bill allows for that potential mutualisation. We need to ensure that the company we end up with, now that we have been given the funding to restructure, is worth owning and, if it's going to be worth owning, that the model that exists to facilitate that ownership is something subpostmasters will want to buy into.

The John Lewis model is only one of a number of models. I understand that Ed Mayo has been tasked by Government to present four or five different options. I am able to tell you that the Federation is working on its own option which it will present to Ed Mayo so that we end up with a model which may be based on the John Lewis Partnership model—it may not be—but will allow subpostmasters to share in the profits and success of this company once it is restructured. We believe that is a fundamental principle which will drive the network along a path that is going to give the customers the service they deserve.

George Thomson: I think what brought things to a head on mutualisation was the last year and a half in which we had a situation where a large minority of subpostmasters were suffering from reduced income, which in some cases was quite substantial, and yet at the same time there were the highest bonus payments ever paid out to Post Office Ltd management. We said that, rather than their interests becoming more aligned, they were being more and more misaligned and we felt it couldn't go on. You can understand that, Cathy, when a company is doing well and everyone benefits and gains bonuses. It is a bit like the Chief Executive, Moya Greene, saying to postmen, "I'm going to cut your wages by 10% and I'm going to take a £4 million bonus." Obviously, Moya wouldn't do that, but in effect that is what has happened within Post Office Ltd. At a time when the income of subpostmasters was reducing dramatically, we had massive bonuses paid out. As far as we were concerned that was a game-changer; it could no longer continue. That is why we have spent a bit of time and effort to put mutualisation in front of the Government. In fairness, the Government picked up our ideas not only on funding—the £1.34 billion, though obviously we would have liked a bit more, as we always do—but mutualisation.

Q54   Dr Whiteford: I share Cathy's concern about mutualisation. I think we are all a bit vague at the present time about what is actually being proposed here. I want to ask a question that follows on from hers. What are the implications of potential mutualisation for more remote and rural areas? Do you have any thoughts on that? Is that something you have thought about?

George Thomson: On that point there is a school of thought on which I will expand. What's been said to me over a year and a half was, "Do you want post offices to be part of a Royal Mail Group privatisation where, if a company became really hard-nosed, thousands could be closed, or do you want them closer to Government where, obviously, the Government would have responsibility for their future?" So we are coming out of the group. On that point, people have already said to me, "Would it be better being totally owned by the Government and more secure, or would it be better to go along the mutualisation path?" I think that, by going along the mutualisation path but with the Government still being involved, we can make sure that local communities still have their post offices. As you are aware, 97% of all outlets throughout the UK are owned by self-employed subpostmasters. That will continue. What we are talking about is mutualisation of the central company, because really, all Post Office Ltd is is a central body that owns contracts and is responsible for discipline and ensuring that cash and stock come to you. The people who really are the business are subpostmasters. So, in our opinion, as long as the Government is in for the long term, mutualisation will present no difficulties or threats to small and rural post offices.

Q55   Dr Whiteford: Thank you; that's really helpful. My other concern which I share with you is about long-term, indeed medium-term, sustainability. You talk about a 10-year deal, but it is a bit longer than that. What is to prevent a very gradual erosion of services in rural areas under some of these proposals? I have a lot of questions around that, so it is a concern that is very real. The other thing I wanted to ask you about is the post bank, because in the evidence you submitted you expressed some disappointment about that.

George Thomson: We have to be honest here. We were really supportive of the post bank. It was the Federation that started pushing it about three and a half years ago. To be blunt, there were a series of two meetings within a fortnight, one with Labour and one with the Conservatives. Mervyn was also there. Peter Mandelson said point blank, "George, it's going to cost £2 billion to fund a state-owned post bank", which was what we wanted, "and we can't afford it." We then had a meeting with Jonathan Djanogly and Ken Clarke and it was a slightly harder line, even. The response was, "We now own the Royal Bank of Scotland; we now own a large share in Lloyds. If Peter Mandelson said it was going to cost £2 billion, we're against it for theoretical and policy reasons." It became apparent to us probably in February or March of this year that there was no way it was going to happen given that the two big parties had said no. Obviously, things changed slightly with the coalition Government coming in, but we decided to put our efforts elsewhere and try to make sure that banks like the Royal Bank have to sign up to allow their customers access to the Post Office, which is about to happen. In an ideal world I would have loved a post bank. I know for a fact there were moves afoot to see if Post Office Ltd was going to become a separate company. This was about three years ago under the old managing director, Alan Cook. Was there a possibility that National Savings Bank, NS&I, and Post Office Ltd could be merged? It certainly could have been a goal, but I know that the Treasury were not in favour of relinquishing their control of NS&I. NS&I was part of the General Post Office until 1969. It was a post office bank for 108 years from 1861 to 1969, but again nothing came of that. Regrettably, it looks like there has not been the political will to create a post bank.

Mervyn Jones: I think we also need to be cognisant of the potential income that agents acting on behalf of other banks generate for the company and subpostmasters. It is not a great amount of money. I understand that subpostmasters are paid about 18p for doing a banking transaction. If you have staff, it is very difficult to meet the national minimum wage when the payment rates are so low. To come back to your point, we need to ensure that the work we get from Government is profitable and lasting work and sets the network off on a footing that allows subpostmasters to generate enough income to operate profitably. We have a role to play within Post Office Ltd to ensure that its costs are kept to a minimum and as little of the contract price that is determined between Government and Post Office Ltd sticks to the pipe. We need to make sure that as much money as possible from those contracts flows through to the end of the network and regenerates it.

Q56   Fiona O'Donnell: First, thank you very much for being here. I hope it wasn't too onerous a journey. Perhaps I can start by trying to get a picture of the health of the network in Scotland just now. George, you gave us an update; there are five more branches than we thought. Therefore, we have 1,446 branches in Scotland now. How many of those are profitable?

Mervyn Jones: Two thirds are not. For Post Office Ltd? We need to be very clear here because this is really important. When people ask whether a post office is profitable, do they mean profitable for the subpostmaster to operate or for Post Office Ltd to maintain in that community? There are two different answers to that question. To elaborate for a moment, two thirds of those branches are not profitable for Post Office Ltd to operate. They become profitable for the subpostmaster when he amalgamates internally with a retail offer. At some point, if Post Office Ltd look at the network and are put in a position where they say that these branches in rural Scotland are losing us money, then they withdraw that service or change the model to an Outreach or some other form of model. It impacts so negatively on the retail activity and overall business proposition of the individual subpostmaster that it puts in jeopardy the long-term sustainability of that business. Not only do you lose the business—the post office—but you lose the shop, and that is particularly worrying where it is the last shop in the village. It means people then have to travel to buy fresh fruit and vegetables, milk, papers and that type of thing. We need to find a mechanism where there is a recognition within the decision-making process that, by changing the current operating model because Post Office Ltd deem that outlet not to be profitable, it could negatively impact on the profitability of the individual subpostmaster who is currently running a profitable business.

Q57   Fiona O'Donnell: Do you know how many post offices in Scotland are currently for sale?

Mervyn Jones: I cannot answer that specifically, but the general trend is 10% per year.

George Thomson: It is what I said to the all-party group, Fiona. There is no doubt that a post office franchise is not as attractive as it used to be. There is no doubt that it takes longer to sell a post office. We all know of cases where people just hand in the keys and walk away. That is becoming a greater issue. That is why we think the status quo is not an option. On the closure programme Mervyn touched on, I think that is why all the political parties have made up their mind that we cannot have another closure programme of post offices within Scotland or the UK, because when you close a post office it rips the heart out of local retail. But, more importantly, if we are trying to encourage small and medium enterprises to establish themselves in rural areas, we must have a situation where businesses can reach a post office relatively easily, so not just for social customers—the general public—but small and medium enterprises. We must all work together to make sure the network in Scotland remains roughly where it is. People have asked me why 12,000 are so important for the UK. It is pretty simple. As a modern, developed democracy, if we can't have one post office per 5,000 of population in the UK, we must be doing something wrong. There is no way on God's earth we should accept a post office network that does not remain at around 12,000. Everything you do as a Parliament and a democracy should be to make sure that that continues because post offices are so important.

I'll give an example of how important they can be in the bad weather in Scotland. I know post offices that are shops as well. Because people can't reach some of the big supermarkets any longer, a lot more local shopping has been done until they run out. I know of shops that sold 40 loaves of bread a day, but which now sell up to 500 because all the people who leave the town to go to the Asdas and Tescos all of a sudden shop locally. Post offices and small shops are so important for a variety of reasons. If the closure of post offices and shops continues unabated, as it has over the last 10 years, in 10 years' time you may not be able to run to the local shop to get bread and milk when there is a snowstorm, because the local shop may not exist. I think that at a lot of levels we have got to get it right as a society, and that's the challenge in the future.

Q58   Fiona O'Donnell: What in this Bill guarantees the access criteria?

George Thomson: In an ideal world, Fiona, we would have liked greater access and to say it should be around 12,000. We raised that issue with Peter Mandelson and Pat McFadden. They were not keen on that. We have raised it again with both Vince Cable and Ed Davey. Obviously, they are not keen on it either. How can we create a set of circumstances that makes it likely that the network will stay at around 12,000? Funding is part of it; mutualisation, which Mervyn talked about, is part of it; a long IBA is part of it, but more importantly, the key for us is new Government work.

Q59   Fiona O'Donnell: Can you say a bit more about that? What kind of work would you like to see coming to post offices to make them viable and healthy?

George Thomson: The front office of Government is not just a phrase. You made a very good point about the contradictions and conflict. I do believe that in rural areas people who are unemployed should be able to sign on at a local post office rather than have to jump on a bus or use their own car to drive. To take your constituency, for example, someone from Tranent could sign on in Tranent rather than travel five or six miles to Musselburgh. I think that is a potential. There is an enormous opportunity for older people, who perhaps may not yet be internet-savvy, to use the post office for assisted applications, for example when they start their pensions. They could come into the post office; we could help them fill in the form; we could take photographs, if they are necessary; we can check documentation. There is also a concept called Validate where someone gets a letter from a local authority and has to take documentation to a local post office to produce evidence that his or her circumstances have not changed for the purposes of housing benefit. It was trialled under the previous Government and was a big success. However, there wasn't a revenue stream there. There are lots of different things we can do. We want to work with the coalition Government not only to give us a viable post office network but to make sure that Government Departments can restructure and save a bit of money by using that network; but again, it is up to the Government to deliver that.

It would be a disaster if all the half-promises and promises came to nothing. That is why in relation to the Postal Services Bill I said that Post Office Ltd was a financial basket-case at the moment, and it is. I thought long and hard before I used that phrase. MPs must be aware of the enormous journey that will have to be undertaken both to make Post Office Ltd profitable and then turn it into a mutualised company. It won't be done by just a few small changes; the Government need to step up to the plate.

I'll just finish on this point. In the past, quite rightly, various Governments of all different political persuasions have been able to say to us, "Look, George and Mervyn, society, shopping habits and banking habits have changed." To a large extent those Governments have been correct. We have fought a rearguard action to keep work that we have or get some kind of restructuring to keep the network afloat through compensation. We have done all that, but this is the first time a British Government have taken a policy decision to remove the retail arm of a mails company from that company. It is a bold move that is not without risk. The Government have to deliver. If the Government take us out of the group—and they are going to do it, and we have supported them and given them the benefit of the doubt—but they don't deliver on new income streams, then it will be a shambolic disaster. The Government can then no longer hide from the problem because they will have created it. It is not societal changes. The Government must step up to the plate and deliver new work to the Post Office at a reasonable income level, as Mervyn said. They have nowhere to hide. They must work with the Federation, Royal Mail Group and Post Office Ltd to make it a success.

Chair: Fiona, do you want to come in?

Q60   Fiona Bruce: Gentlemen, thank you for coming and for your very clear comments. To turn back to the point about services in rural areas that Eilidh raised, how do you feel that the Outreach post office is working? I ask that from three directions: Post Office Ltd, subpostmasters and customers.

Mervyn Jones: Thank you for your question. It is something that has caused me much thought. People use post offices because they are convenient. If a post office is open only two hours a week it ceases to be convenient. If people have to stand outside in three feet of snow waiting to get into the back of a van, you question the convenience of that offer. But then there is a balance, which is that the network needs to be subsidised and the service provision in rural areas is very difficult. In truth, the company can't afford to pay subpostmasters when an office is maybe having 50 customer visits a week. How do we as a company grasp that nettle?

For the very first time Post Office Ltd have included the Federation in a lot of discussions around the new network models and how they will work. It's not an easy balance to achieve, but we believe that where the service can be hosted in an existing convenience store and the two businesses feed off each other, that is one model, provided the contract is right and we can negotiate on the final detail of that. From the subpostmasters' point of view, some of the Outreach services are more profitable than others. It depends, first, on usage and the type of Outreach model being delivered. Where there is enough to generate a van to go round maybe 10 or 11 different communities, a subpostmaster can do reasonably well. In a hosted site where they go out and provide a temporary service in an existing outlet, it depends on the contract that exists between the host property owner and subpostmaster who is going out, and also its usage. If I am honest, the flat answer is: patchy.

Q61   Fiona Bruce: That brings me to my next question. What could be done to promote this service to give it greater usage?

George Thomson: If you have a situation where a post office closes and there is still another shop in the village or town and it is getting a partial service at the moment, I think the solution there would be Post Office Local, where you have a Post Office Local provision in the shop that remains. It is a cheaper option for the Post Office. The Outreach services have a role to play. If it is a post van, yes, it's better than nothing—absolutely yes—but it's not great. If there is somewhere else, particularly another retail outlet, that could become a Post Office Local or Post Office Essentials, I think that makes more sense because it gives the retailer footfall and the customer longer hours. But certainly we've got to look at the whole model. In Scotland there are about 140 post offices where we provide the service through an Outreach model. In some locations it works; in others it does not work too well at all. Again, we have to work together to try to give the community the best type of post office for the population that use it in that locality.

Q62   Fiona Bruce: That's interesting. When you say "we have to work together", what kind of partnership working is there to look at this, and what would you like to see?

Mervyn Jones: These are all aspirations around the mutualisation of the company. We would see the National Federation of SubPostmasters having representation on the board of Post Office Ltd. George and I have discussed many times that the people best suited to protect the network are not those who manage it but those who run it and have invested £2 billion of their money to ensure that our network exists. In Scotland we have very specific issues, given the rurality of Scotland and population densities and distribution, but we believe that the only way to solve these problems is for us to have a fully inclusive and meaningful involvement with the management of the company. That involves the mutualisation model which allows us to have that full and open interaction. To give an example, the business has consistently refused to allow us to see the inter-business agreement that exists between Post Office Ltd and Royal Mail Group. We have consistently said, actually, we would like to see that agreement. They have moved some way to giving us a briefing as to what is in the agreement, but we have still never managed to see it. It is getting better but it is not in the place we would like it to be yet.

Q63   Chair: I have just one or two follow-up questions. First, are you pressed for time to get away?

Mervyn Jones: No, we have time for you, Alan.

Q64   Chair: Thank you very much. That is the way to curry favour with the Chair. One issue that regularly turns up in my postbag is where a private mail operator tries to deliver a parcel to someone in a rural area and that person is out. Often a card is put through the door to say they have to go to a depot that may be 50 or 100 miles away. My understanding of the present inter-business agreement is that that parcel cannot be left at the local shop because only Royal Mail or Parcelforce parcels can be left at the shop if the shop also has a post office in it. Is that also your understanding?

George Thomson: At the moment, outside companies, or competitor companies like TNT or DHL, can use a local post office if they want to do so but they would need a commercial deal through Royal Mail Wholesale. Royal Mail would negotiate with them and then they would negotiate with Post Office Ltd. That facility has been there for five or six years. My understanding is that, apart from a company called DX, there has been no demand for that service. Subpostmasters would be over the moon if, for example, TNT or DHL were able to conclude a deal or pay for one. The problem is that they would like to use us but don't want to pay the rate. We would love a situation where they can use our offices—so, someone comes back from work, has missed the postman and can come to the local post office and pick up a parcel from DHL or TNT.

In fact we go further. Moya, the Chief Executive of Royal Mail Group, is going to be a tremendous asset to Royal Mail and will sort out the company and take it forward; I know that for a fact. What we have said is that they have postmen taking letters and packets back to delivery offices that could be miles and miles away from where the person stays. Although their hours are increasing, they are not very good. Why not as a matter of policy and a matter of course let postmen, even in towns where they have a delivery office, take them back to local post offices where the public can pick up Royal Mail Group items? That would be far more beneficial. We already have Local Collect but the volumes are very small. If delivery offices start to do that, it would be a win-win. It would be a win for the general public because it would mean longer hours—until half-past 5. As Mervyn said, if we end up doing longer hours with the new Post Office Local, it could be until 10 o'clock at night. So the public are happy with longer hours and it is nearer to their homes. I think it is also a big win for Royal Mail. We have put that to Moya, to give the customers a better service.

Q65   Chair: But you would also like to see a deal with private mail companies for the same service?

George Thomson: Royal Mail was part of the inter-business agreement. Mervyn is right. We have never seen it but we are getting close to it. I have asked whether I can be in the negotiations between Royal Mail Group and Post Office Ltd before they split the company, because it is certain that we will not have the wool pulled over our eyes. We have made the point that with the IBA £100 million is already a fixed element. That includes a provision for the physical bricks and mortar. The problem is that when companies want to do deals and they get any price from Royal Mail within that price to use the Post Office network, there is a reflection of the fact that Royal Mail pays a fixed element of £100 million to keep the Post Office network afloat in terms of the IBA. I think that is one of the reasons why companies like TNT and DHL don't want to pay. They want the service on the cheap, and I think that is why they have not done a deal.

Mervyn Jones: There is also a regulatory issue here in relation to what subpostmasters and other retailers have to provide. For instance, we have to provide a secure area generally where the mail and valuable special deliveries can be locked away. Our staff have to sign the Official Secrets Act and go through appropriate training. There are now lots of regulations about the Financial Services Act and money-laundering legislation with which our staff are required to comply. I am by nature all in favour of competition, but it must be fair and equal competition. If our network is regulated to the point where it costs additional money to provide that regulatory framework to allow us to operate, others should be required to provide the same service. It should be a stipulation in the different contracts. This does not apply simply to the relationship between the Royal Mail and the Post Office; it applies also to Government. When they make up the invitation-to-tender documents, the benefit of having staff who have signed the Official Secrets Act, and the provision of secure areas and that type of thing, should be stipulated, so that we end up comparing apples with apples and we get a fair reflection in the terms and prices of the contracts for which we bid. That is very important going forward.

Q66   Fiona O'Donnell: When you talked earlier about your own post office, I was trying to get a picture of what it would look like if it was open later in the evening. That would be such a welcome development. I hope staff are paid well above the minimum wage because of what is required of them. I am just trying to get a picture of how valuable that is. Given the security you must have in place, often when a store stays open later in a remote rural location, staffing levels drop and you might just have one person.

Mervyn Jones: That's right.

Q67   Fiona O'Donnell: If there is money on the premises, surely there must be extra costs, resources and security issues. To what extent have you looked into that?

Mervyn Jones: Quite a bit. If I may take a couple of minutes to describe my own office, I have a six-position fortress counter. It is probably in the top 5% of the busiest post offices in the UK. We have a Londis convenience store. We have an alcohol and tobacco licence; it is the usual convenience store operation. For me to open my fortress positions outside normal hours, I would have to pay a dedicated staff member to provide that service and it is not cost-effective.

Q68   Fiona O'Donnell: So it's not someone flitting back and forth.

Mervyn Jones: We cannot have them flitting back and forth. What has evolved is what is called a combi-till where much smaller amounts of cash are kept. It's a safe. There is provision for cash. Therefore, it would not be the whole range of services; it would be accepting mail, bill payment and maybe some banking transactions. A lot of post offices now have ATMs anyway, so they can get their money from outside; they do not need to have that service at the post office counter. It also means I can multi-function my staff. Therefore, the savings that I can achieve through multi-functioning staff and increasing their capacity at the shop counter means they can accept parcels. When people come in and we are doing that type of work, hopefully, if the shop is set up properly, they will buy groceries—bread, milk and that type of thing. That interaction is really important. That combi-outlet to provide services outside existing hours would be a sustainable way of doing that.

George Thomson: We have to be careful, however, because this journey will be quite a long and slow one, by which I mean that the fortress positions will still be in place in many post offices for years to come. The offices that do the longer hours predominantly are those that will become Post Office Essentials and Post Office Local. It will be a rolling programme. I don't want the general public or politicians to think—this is why we ask for a 10-year deal—that this will happen overnight. It will be a process and we will get there. Mervyn has alluded to why he can save money by mixing the staff. Something really big has to happen.

You touched earlier on the state of the network. Our big fear—I have to get it in today—is that the bulk of the funding package doesn't kick in until April 2012. That is when £410 million comes in; the year after it is £450 million; and then it is £330 million. The restructuring, modernisation and beginning to sort out the problems starts then. That is a year and a half away. Our big problem is that we have literally hundreds and hundreds of subpostmasters in Scotland who are hanging on by their fingertips and can hardly afford to provide a service and are using pension money. We have many members over pensionable age; we have hundreds of members in Britain over 70 who provide the service. It was their private pension plan but they can't utilise it at the moment because the market has turned. Therefore, in the next few weeks, Mervyn and I will have to sit down with Paula Vennels, Sue Huggins and their team and see how we can possibly help subpostmasters in Scotland and the rest of the UK get through this very difficult 18 months until the big changes from the Government restructuring fund happen and the work starts to come in from the Government. That is something we are concerned about. In fairness, we should have identified that half an hour ago. How do we keep the show on the road for the next 18 months? That is, in fairness, about as big a worry for us as the Government delivering new work. It is a big, big worry.

Q69   Chair: So what would you like to see happen?

George Thomson: The key for us is that, in fairness—and it isn't having a go—we have had so many promises that have not materialised. About a year and a half ago the Select Committee on Business, Innovation and Skills, under the chairmanship of Peter Luff, produced a very good report which referred to a lot of things that could be done. It was put on a shelf and forgotten. There have been lots of good intentions over the past 10, 15 or 20 years about the network but it has never materialised. We do think we are drinking in the last chance saloon. Now that the Government have taken the radical step of removing us from the Royal Mail Group—I was going to say it is unprecedented within the western model but it is unprecedented within in the world—they have to get it right. The key is new Government work. We believe the Government can put down a significant marker in the next few weeks by awarding the Green Giro exceptions contract to the Post Office. As all MPs are aware, it is out to tender. We think it would be extraordinary if the Government awarded it to another company. Not only would it fly in the face of saying they will give us more work. What message would that send out at a time when Ed Davey is banging heads together in all Government Departments about new work for the Post Office? What message would it send out to Government Ministers in all Departments if the DWP is putting a contract in the opposite direction? If I was a Minister, the response would be, "I'm not giving a stuff if they're not giving a stuff."

We must have joined-up government. The key is the Government stepping up to the plate and working with the new Post Office on it and the Federation to make it profitable and help us to mutualise it but continue to use the network. Mervyn and I have said over the years that we believe we have a tremendous national asset that has been under-utilised for years. We have a national asset that is the heart and soul of most communities, even though it is now down to 12,000. Under the last closure programme we have all seen what happens when you close a post office. You rip the heart out of the community and retailing. If the funding package is used properly, if the Government step up to the mark with new work and the IBA is for the long term—at least 10 years—and we work together on mutualisation so that the people who put £2 billion of their own money and provide 97% of the outlets, staff and subpostmasters are owning the company in the future, that is a vision we can get to. It won't be easy but, by God, I hope that the next 10 years will be better than the last 10 years.

Q70   Chair: That sounds a great vision. One worry I have is your small post office in a very small remote village. Even with all this Government work, what makes it viable?

Mervyn Jones: When I am asked this question I think of Orkney. I was up in Orkney some time ago now. The thing that occurred to me was that in one of the villages there the post office was run by a lady in the front room of her home. She was a second-generation subpostmistress in the family. It was open full time and probably didn't receive enough customer visits a week to justify it being open full time, if we are honest. Across the road was a convenience store that attracted people from outlying areas. The natural amalgamation of that community is to move the post office into the convenience store. The question for us is: how do we facilitate that move? We have a role to play with Post Office Ltd to ensure that that convenience store operator sees the value of having a post office and we allow the current subpostmistress who operates from her own premises to redesign her home so it becomes entirely a home again and doesn't have an empty post office counter in the front living room. It can be achieved. If we look at the successful retailers like Tesco, Marks & Spencer and Sainsbury that operate now, they have different levels of service provision. You can go to one of these big out-of-town Tescos that is open 24 hours a day seven days a week and buy everything—right down to the local Tesco Express in the local community. There is an issue that the prices aren't the same in all the different models, for the reason that Tesco Local or Tesco Express is convenient and because of that it can acquire a higher margin and so the products tend to be more expensive. I have an issue about that. But each of those models is placed to fit the community or area it serves. We need to do exactly the same thing with the post office network.

As Fiona Bruce said, I remain unconvinced about the success of the existing Outreach model, but there is work we can do to make that better. We are prepared and willing and asking the Post Office to work with us on the new models to achieve that aim.

George Thomson: In addition to that point, and I touched on this earlier, Mervyn is absolutely correct. When you have an option of two shops becoming one, we can do it. Take the last shop in the village. There will still be a need throughout the UK, particularly in Scotland which is more rural, for a Social Network Payment to make sure that physical location can remain open for the benefit of both the general public and small and medium enterprises. However, we have to be careful going forward with regard to regulation. If, for example, we move from a six-day to a five-day delivery throughout the UK and, let's say, for example, we drop the Saturday delivery, we will have a situation where the number of mail customers on a Friday dies a death. You could have a situation where the Social Network Payment in the UK has to go up because the workload within the Post Office network has declined as a result of the diminution of the Universal Service Obligation provided by Royal Mail. Therefore, even as we go forward we have to be careful that decisions made by Royal Mail and the regulator do not impact on the Post Office network and do not result in the taxpayer picking up a greater tab because of a commercial decision made by Royal Mail Group. The Federation will still keep its specialisation in Post Office regulation; it will still keep a watching brief on postal affairs, because Royal Mail is our biggest customer by a mile. I have a great love affair with the GPO; I joined it in 1979 as an eighteen-and-half-year-old. We still had British Telecom at that time. We have gone on a long journey. I have had a great love affair with this company and I want the love affair with the Royal Mail Group to continue, even though we are having a slight divorce.

Chair: Thank you very much, George and Mervyn. We very much appreciate your staying on longer as well. Let's hope that your vision comes into effect.

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