Postal Services in Scotland - Scottish Affairs Committee Contents

Examination of Witnesses (Question Numbers 263-318)

Tim Brown and Jonathan Thompson

15 December 2010

  Q263 Chair: Can we make a start? Could those who are leaving do so quietly, and could those that are staying get ready for some more? I meant to say, "Order, order."

  I welcome you to the session. Maybe you could introduce yourselves for the record and also just start off by saying a little about how, as you understand it, the new legislation impacts upon the concerns that we have. Our particular concerns are, first, the maintenance of the Universal Service Provision to the remote rural areas of Scotland in particular, but also to the whole of Scotland, and, secondly, the maintenance of the Post Office Network across the whole of Scotland.

  Obviously, there are other issues concerning pensions and ownership that are UK-wide, but we are not really concerning ourselves with those; we are concerning ourselves with these particular issues and, therefore, the question of your role in all of this is obviously going to be significant.

  Tim Brown: I am Tim Brown. I am the CEO of Postcomm. I have been there for two years, but I had about 18 years in the industry, including working at Royal Mail and Post Office Ltd.

  Picking up the points that you raised, our primary duty, as Ofcom's will be under the new Bill, is the maintenance of the universal service. It's fairly clear in the current Act, and in the new Bill, that a uniform price and a universal service are absolutely key and protected. In terms of the service in Scotland and to Scotland, it is protected by the measure within that.

  For us, there are probably three key things that need to be looked at in terms of ensuring that the universal service in the UK, and in Scotland, is maintained. First is the continuation, and the speed, of Royal Mail's modernisation, which has started. The second is fairer and lighter touch regulation. The third area is ensuring that, in the transfer between ourselves and Ofcom, the process doesn't get stalled and that we can move forward quickly. That is all I would like to say in terms of opening remarks.

  Jonathan Thompson: I am Jonathan Thompson. I am director of strategy at Ofcom, and I am also leading the integration of post into our responsibilities.

  I would echo everything that Tim has said regarding Bill. Under the draft of the Postal Services Bill, I think it is very clear that the universal service is our primary duty, and our primary responsibility will be to ensure the ongoing delivery of the universal service. We are obviously new to this, so we are working very closely with Postcomm to ensure that we understand the issues and that we get up to speed, and we are committed to trying to ensure that the transition is as smooth and as effective as possible so that customers and stakeholders have continuity of regulation.

  In terms of the points that you've raised, I would largely echo what Tim said. It is vital that the universal service is a priority within the Bill and that we have the powers to ensure that that can be delivered. Core to that, obviously, is the modernisation programme that Royal Mail is leading and that we have the powers required to ensure that the regulatory regime supports that and supports an effective marketplace.

  Q264 Chair: Can I just clarify why there are two of you? Are there two regulators?

  Tim Brown: No, there is only one regulator at the moment, which is Postcomm, and we are the regulator until the Bill is passed—if the Bill is passed. At the point of Royal Assent, there is a transition process from ourselves across to Ofcom. So Ofcom is, in a way, picking up what we start, hence why we are working quite closely to ensure that that is seamless.

  Q265 Chair: So we have Christmas past then, or rather Christmas passing. Christmas present is the new man.

  Can I just start by asking you about the Universal Service Obligation? Clearly, you've stressed the fact that it will remain, but it could remain on the basis of one service a month at a pound an item were it not for European regulations, which make the difference. The fact that there is going to be a Universal Service Obligation does not in itself give us any reassurance. In particular, it doesn't give us any reassurance that the present level of service will be maintained, and I see that it is you who will be asked in 18 months' time to review it all. Presumably, you're going to be invited to review it downwards. What reassurance do we have that you're not going to chop it quite drastically to the minimum that you can get away with?

  Tim Brown: In terms of where we are, the universal service for Europe is set out in the postal services directive. That says that delivery is five days a week, and it doesn't include uniform price. You're absolutely right on that. The Bill has six days a week for mail, five days a week for parcels, and a uniform price. So that protection is set in the Bill itself. Our duty now, and that of the regulator going forward, is to help to ensure that that is sustained.

  Q266 Chair: But with respect—which, as I'm sure you're aware, is what people usually say when they disagree—the legislation also says that Ofcom is required to review this within 18 months.

  Jonathan Thompson: The Bill requires us to do a review of the universal service within the first 18 months of our powers taking effect but, as Tim said, that review goes to the Secretary of State. If it goes any further than the set of minimum requirements that are set out in the Bill—the six days a week, affordability and universal pricing—that's not a decision for the regulator. It would be a decision for Parliament. In any recommendations that we make or review that we do of the universal service—which is based on users' needs, which is the core responsibility in our functions and responsibilities—any assessment to reduce the USO beyond that is ultimately a decision for Parliament and not for the regulator.

  Q267 Chair: Can I just be absolutely clear about this? Again, that is not the information that I have. In that case, I don't see why you're being asked to review it in 18 months. If in the legislation—the Act—it says six deliveries, six collections and a minimum price, that is immutable. What then are you reviewing?

  Tim Brown: The review is in terms of looking at how it is provided, and the needs of users. One of the big issues that we find is how people use the post is changing over time, and you can imagine that in a number of years' time the universal service that is required will be different to that which is provided now.

  Q268 Chair: Sorry, run that past me again. How could it be different from six, six, and a minimum price?

  Tim Brown: Number one is that any change is a matter for Parliament and not for the regulator. The work required of the regulator is to understand what customers need, and I suppose that the nearest thing in terms of looking at something fairly similar is within telecoms, when the universal service used to be "number of phone boxes." Now, 20 years on, something different is required about universal service, and other discussions are taking place. So, what the Bill allows for is a review and a discussion about what is needed—plus or minus—by users all over the country, including Scotland, from a universal service. This gives the ability to do that. To change it, however, is a matter for Parliament, not for the regulator. It is having that constant research about what people need and want, and about how that is developing, that's important for us to understand.

  Q269 Chair: I just want to be absolutely clear and specific about this, as we will ask the Minister about it. You're saying to us that the six, six and set price can be changed only by a specific vote in Parliament—specific legislation—and it would be your role, presumably, to trigger off a report to Parliament saying, "On refection, we think that the USO should either be improved or reduced." You would be acting only as the trigger.

  Jonathan Thompson: Exactly. Based on what Tim said, we do a review of how the market is changing and users' needs. If we believe that there might be a case for changes to the USO—and that could be up or down—the ultimate decision to make those changes lies with Parliament. So you are absolutely right. We are effectively the reviewing body that would make a recommendation or suggestions to Parliament, which would then decide on the changes.

  Q270 Chair: I'm glad to have that, because one of the papers that I've been given as a briefing says that Ofcom does not have to come back to Parliament to change or weaken the USO, and you're saying that that is not correct.

  Tim Brown: The issues on which to be clear are the six days a week collection and delivery, and the uniform price, but in terms of the products within it—

  Chair: Ah, right. So what products?

  Tim Brown: When the universal service was first established as part of the regulatory framework 10 years ago, every single Royal Mail product was classified as a universal service. Over time, as needs have changed, some of those products have come out and some have changed. So there is some flexibility within the product content—and that is more within the gift of the regulator—but not in the fundamentals of a uniform price, which our research has shown is the most important thing that people want from a universal service.

  Q271 Chair: Again, to be clear, on clause 30, are you saying that none of that can be changed except by an Act of Parliament? The clause includes delivery of letters and other postal packets, collections, services at affordable prices, registered items service, insured items services, services for the blind and partially-sighted, and legislative petitions and addresses. Can none of that be changed by yourselves in any way whatsoever without coming back to Parliament specifically?

  Tim Brown: Not without coming to the Secretary of State, and without the Secretary of State taking it through the process.

  Chair: Fine. You can understand why we want to clarify this.

  Jonathan Thompson: What you have just said is absolutely right.

  Q272 Mr Reid: Thanks for coming. We had evidence from Royal Mail that Postcomm, as the regulator, takes into account downstream access and that Royal Mail has made losses in that part of the business. Can you explain why?

  Tim Brown: Certainly. The access conditions that we have at the moment were actually set based on negotiations between Royal Mail and UK Mail. We, as the regulator, were sitting watching that debate, but before we had to intervene to make a determination, they agreed a price. The price that was set was higher than we thought was appropriate, but it was agreed between the parties and it included a profit target. What has happened over the period is that Royal Mail's efficiency has not achieved what was expected at that time, so we also recognise, as Royal Mail has pointed out, that Royal Mail now makes a loss on access. However, that wasn't an intention of regulation. We didn't set out to set a regime that deliberately forced them to take it at a loss.

  Q273 Mr Reid: On those efficiency targets, did Royal Mail say to you that it could meet them?

  Tim Brown: In the debate, we set a target of 3% per annum. Royal Mail, at the time of discussion, said that it could achieve 1.5%. If Royal Mail had achieved its 1.5%—there is falling volume to take into account, because it is very difficult for a business to take cost out when it's losing volume, so it is recognised that it is a challenge for Royal Mail—it would be between £400 million and £500 million better off now. So actually, there wouldn't be an issue in terms of loss on access if it had achieved that efficiency. However, I will say again that there are two things: first, it is difficult to take cost down in a declining market, and we recognise that; secondly, the pace of change and modernisation in Royal Mail has really ramped up in the last two years and we are beginning to see some big improvements. We also announced at the beginning of last month a decision, supported by Royal Mail, to increase the price of access to a level which is closer to cost.

  Q274 Mr Reid: That is something that Royal Mail has agreed with—

  Tim Brown: Royal Mail has made a proposal to us, and we go out to consult on what customers' views are and so on, but we have what we call a mind to accept that decision.

  Q275 Mr Reid: We also had evidence from Royal Mail that it was not allowed to compete with private companies in the market of collecting bulk mail from companies. Is that correct?

  Tim Brown: There is a mechanism called Headroom, which is a limit between the price people pay to access what we call the final mile, and the price at which Royal Mail charges its big customers. Headroom provides protection for competition from margin squeeze and anti-competitive behaviour from Royal Mail. That was set in 2006, and we reviewed it again in 2007. Royal Mail was unable to provide costing information to change that. We have now, in this set of recommendations, reduced that protection by about 27%.

  Q276 Mr Reid: Sorry, by reduced the protection, what do you mean?

  Tim Brown: Reduced the headroom within which competition plays. So, it is actually beginning to turn the playing field back towards Royal Mail. One reason that it is now and not earlier is that we have actually had two Hooper reviews, two Bills and an election, and that has really slowed things down. As of April 2010, we should have had a new regulatory framework, so there has been some delay. We recognise that the regulatory framework we have now is not appropriate for the marketplace we have now, which is why we are very keen to change it, and why the way that things are transferred to Ofcom is very important in order to make sure that that doesn't stop.


   Q277 Mr Reid: So is the handover going to hold things up?

  Tim Brown: From Postcomm's point of view, in terms of the early stages in that process, I don't think so. We are working very closely to make sure that Ofcom understands what we're doing and what the issues are, and we understand how it wishes to act under the new Bill and how it does things, so at the moment I wouldn't say that the transfer should hold things up.

  Q278 Mr Reid: Thanks. This question is for Ofcom. We had a discussion earlier about a possible dilution of the USO. We heard evidence from the CWU yesterday. It was concerned that Ofcom might use section 32 of the Bill, particularly subsection (3), where it allows geographic exceptions.

  Chair: That is 32(3)(b).

  Q279 Mr Reid: Thanks, Chair. The CWU was concerned that that would be used by Ofcom to mean that large areas of Scotland would be exempt from the daily delivery, and it wondered what Ofcom's response to that suggestion was.

  Jonathan Thompson: Tim will be able to answer in more detail, but this clause actually replicates part of the framework and what is currently proposed for regulation. There are certain circumstances in which exceptions are made for delivery where it is effectively impossible to deliver on a six-day-a-week basis—for example, certain islands in parts of Scotland. There are certain exceptions that can be made in those circumstances.

  Q280 Mr Reid: Are you saying that when you come to regulate you will only use this clause in cases where it is virtually impossible to deliver?

  Jonathan Thompson: I think our approach will be consistent with how Postcomm has applied it to date. Tim, do you want to talk about how it applies currently?

  Tim Brown: There are about 1,400 exceptions for delivery in Scotland and a total in the UK of just under 3,000. They are usually for four reasons. One is physical access—that it is difficult to do six days a week. The second one is long-term health and safety issues. Third is short-term health and safety issues, and the fourth is customer request. Before this came into play—before 2003—there were over 4,000 exceptions. There are 2,900 exceptions across the country. While 1,400 in Scotland is still a large number, it's only 0.01% of all deliveries, and it's in those circumstances that those exceptions take place. Royal Mail has to apply for those.

  Q281 Mr Reid: Is Ofcom intending to keep this part of the regulation comparable with what's there at the moment?

  Jonathan Thompson: It would be wrong of me to pre-judge decisions we're going to make before we actually take over the powers. My understanding of how this part of the Bill works is broadly consistent with the powers that Postcomm currently has, so I don't see any reason why we wouldn't apply this part of the regulation in broadly the same way.

  Tim Brown: We've had only six complaints in seven years.

  Q282 Chair: We are worried about this. I remember seeing an advert about "exceptional Argyll". If it defines itself as exceptional, would that then allow you to make a difference? Particularly if somebody came along as a private sector operator and said, "Look, this is costing us huge amounts of money because we're cross-subsidising it. We're going to collapse—doom and gloom." That could be deemed to be exceptional.

  Jonathan Thompson: An economic reason for not being able to deliver is slightly different. This is more for physical reasons of lack of delivery.

  Q283 Chair: This is the point. It doesn't say that. It says "do not need to be met in such geographical conditions or other circumstances as OFCOM consider to be exceptional." Other circumstances could very well include the economic situation of the company.

  Jonathan Thompson: What I was getting at is, if there is a view from Royal Mail that the burden of the universal service is becoming uneconomic for it, there are other parts of the Bill that are put in place to try and deal with that situation. So I don't envisage that we'd be using these clauses to try and address those situations. There are other parts of the Bill that try and deal with those circumstances. If it's helpful, I can talk about it in a bit more detail. But I think it's unlikely that this would be the clause that would be relevant.

  Q284 Mr Reid: There is one final area I want to ask a question about. We had evidence from Mull Community Council. I know that Postcomm and the previous chairman and staff were on Mull two or three years ago to meet the local community. The community said that it would rather get 80% of its mail on the first ferry of the day rather than, as happens at the moment, 100% of the mail on a later ferry. Royal Mail had said it couldn't do that because of Postcomm regulations, and Postcomm, despite coming to Mull and meeting people, refused to change the way that it was regulating. Is there any way in future regulation that exceptions could be made by agreement with the local community?

  Tim Brown: You are absolutely right that in 2008 my chair at the time visited Mull to have a look at that. The issue is that all the mail isn't there for the earlier ferry, therefore you get much less, so the quality of service to Mull would be a lot lower than it would be elsewhere.  

  Q285 Mr Reid: Well, the community disagrees.

  Tim Brown: I understand that. In some of the work that we did and looked at, in terms of some of the sending people who had paid for the service, their claim to us was, "We expect a next-day service." So there is an element of balancing both the paying sender as well as the receiver. That is part of where we are. But it is open for Royal Mail and the local community to look at whether there are alternatives. I know that they have looked at whether they can open delivery offices closer to the ferry terminal and things like that, which has not proved to be cost-effective at the moment. But there are, even now, mechanisms on which that could happen. We have not had any request from Royal Mail to change that.

  Q286 Mr Reid: So this could be reopened if there was a request from Royal Mail?

  Tim Brown: If Royal Mail put forward a request on that basis.

  Q287 Dr Whiteford: I want to ask a more general question. What do you see as the potential risks and benefits of these proposals for remote and rural communities?

  Tim Brown: Talking in terms of part 3 of the regulation piece, there is the continued support of the USO, which is probably stressed more greatly in the new Bill rather than in the old one. Ofcom will have greater powers than we currently have, so it has a bigger toolkit to do what it does. The aspect that is in this Bill, which wasn't in the previous one, is the compensation arrangements and the ability, if Royal Mail cannot deliver universal service economically, for mechanisms that allow Ofcom to intervene, either through subsidies or contracting alternative mechanisms. Those things are, I think, strengthening the potential for universal service in Scotland.

  Q288 Dr Whiteford: So you don't see any risks at all from a community perspective?

  Tim Brown: Not from the Bill. I think the general risks, which are across the board for anybody within the United Kingdom, are the continuing decline in mail. Therefore, to be economic, mail relies on the big users of mail. We may call it junk mail, but direct mail bills and statements are those big users of mail that give the volume to underpin it. I think the changing market and people's behaviour are bigger issues for the long-term sustainability of the USO for the United Kingdom, rather than the Bill.

  Jonathan Thompson: I would agree with all of that. I think both Richard Hooper's reports have clearly highlighted the pressures on the universal service and the postal market more broadly. I think Tim is absolutely right. I don't think we have any concerns about the Bill as it is drafted, in terms of giving us the powers necessary to try to ensure the ongoing delivery of the universal service, which is our primary duty. But clearly this is a market that faces a lot of pressure. What is important, from our perspective as the regulator in terms of what we can do, is that we have all the tools and powers that we feel we need to try to ensure that we meet our primary duty. I think this piece of legislation is stronger in theory than existing legislation, so I think we are comfortable with it with regard to that.

  Q289 Dr Whiteford: Some of the evidence that we have heard in recent days pointed out that people in rural and remote communities are more dependent on postal services than people in areas that perhaps have easier access to them. Do you think that there are sufficient safeguards in the Bill to prevent the easy bits of the business being cherry-picked, and the difficult areas for delivery being left to struggle on an increasingly unviable basis?

  Jonathan Thompson: The clear focus of the universal service and the minimum grant that we talked about earlier in terms of affordability, the six-day-a-week service and a uniform price across the entire country do as much as a Bill can do to protect those things. Just to repeat what I said, we are comfortable that how it is currently set out secures that for the future.

  Q290 Cathy Jamieson: Can I go back briefly to the Bill itself and the universal provision? Again, in some of the evidence that we have seen, clause 34 will allow Ofcom to designate more than one provider of universal postal services. Clause 34(7)(b) will allow the regulator to "consider what (if any) designated USP conditions should continue to apply to each of the universal service providers." Can you see a situation in which you would have different providers in Scotland? If so, what would that be?

  Tim Brown: I think the exercise of that power is if there are issues in either the administration for Royal Mail or the compensation fund, rather than when you are looking for mechanisms to divide the universal service if Royal Mail was unable to do so economically. I see that being reflected more as a back-stop case rather than being a primary focus.

  Q291 Cathy Jamieson: Are you saying that that would only be the case if something drastic happened to Royal Mail and it couldn't provide the service? Would you then look to another provider? It seems to me that that clause, as written, gives you the scope to be more proactive and to go out seeking other providers. I just need to be absolutely clear on that.   

  Tim Brown: In terms of how paragraph (a) relates to section 43, we talked about the fairness of bearing the burden of the universal service in the context of: if it is deemed to be unfair, how would you then support and deliver the universal service? So the Bill is about ensuring a universal service and that is provided as its primary focus. The current provider is Royal Mail and therefore it doesn't have to be Royal Mail if there are problems.

  Q292 Cathy Jamieson: Can I just press a couple of points on that? It seems to me that the way that this is written opens up the prospect of two or more providers. For example, because we are focusing in Scotland, we could, perhaps, have a provider in Edinburgh and another provider in the north of Scotland. It appears to me that the way that this is written suggests that the designated UPS conditions could be different for each of those providers. How does that then become a universal service if you have different providers working to different conditions? Do you have any concerns about how that is written, in terms of outcomes for customers?

  Tim Brown: I saw it as a protection rather than a risk. In the context of 43, it says that when there is trouble in providing, under the current set-up, a universal service, it gives the regulator greater tools to try and ensure that the universal service is continued. So rather than it being a risk, it is a safeguard to try and protect it in the case of Royal Mail not being able to provide it economically. And we have to look at how that is continued to be provided. So my understanding about that was, and maybe the Department would be better at answering, that I read that as a protection rather than a risk.   

  Jonathan Thompson: Just to add to that, it may be worth clarifying, from our perspective, how this part of the Bill works. As Tim said, there may be circumstances where the universal service becomes an unfair burden on the current provider, Royal Mail. In those circumstances, we have—

  Q293 Cathy Jamieson: Can you explain how providing our universal service would become an unfair burden? I am not sure what you mean by that.

  Tim Brown: Well, if Royal Mail cannot provide it efficiently or economically, for whatever reason, and cannot make money out of it and therefore requires some form of subsidy or intervention. There are various measures in the Bill, but there is a back-stop, and the third postal services directive allows this. Before, there are three mechanisms: one is compensation from the industry, compensation from the state and the third option is what's called a procurement option; that is, you go out and look for someone else to provide it in those circumstances. So you have got to the point where Royal Mail has said, "Look, we cannot provide this economically. We are going bust in that area, please help." At that point, we help.

  Q294 Chair: Can I just come back to the question of exceptional Argyll? It would be appropriate now for Royal Mail to come back and say, "Look, we cannot make money out of Argyll. It is not possible to make money out of Argyll. We therefore require it to be transferred to somebody else, or we require a subsidy for it." Similarly, the Western Isles, whole parts of rural Sutherland and all sorts of areas are clearly not financially viable.

  Tim Brown: The way uniform price and universal service works is its profit across the entire network, not in individual areas. So there will be other parts of the country where they are making lots of money.

  Q295 Fiona O'Donnell: I am really confused. Why would you ever then get to the situation where you identify that one part was unprofitable if there's cross-subsidy?

  Tim Brown: If we look at the past few years, three or four years ago Royal Mail lost about £350 million on the universal service products. Now, if that was an inefficient Royal Mail ongoing, then no company, publically owned or privately owned, could sustain losing £350 million a year. At that point, you look at how to help support providing the USO. Partly, it may be just a subsidy. Part of it maybe saying, "Actually it is very high cost in 'x'" and, to be honest, the highest cost place of delivery is in London, not in the highlands and islands. So if they looked and found an operator to provide it more efficiently, is that a way of going forward? So, once you have established that the USO as a whole is not economic to provide, then what are the mechanisms you use to try and provide it and for it to continue to be done?

  Q296 Fiona O'Donnell: What if the provider says that the compensation that you've identified isn't of interest to them, so they don't want to provide that part of the service any more?

  Tim Brown: Then the compensation fund comes in and Royal Mail will be compensated to continue to provide it. So you look at the various options. Can Royal Mail provide it efficiently? Can somebody else provide it? The key test is to try to continue to provide it, and how do you look at those bases?

  Q297 Fiona O'Donnell: Presumably, there has to be some negotiation there. I'm just thinking about bus routes we have lost in rural areas because, despite being offered a subsidy by the council or the Scottish Government, they say, "You know what? We're not interested in providing this service anymore."

  Tim Brown: The designated USO provider is Royal Mail. So the default provider is Royal Mail and if it cannot provide it economically there are mechanisms, including compensation, to enable them to provide it.

  Q298 Fiona O'Donnell: Can it force them to provide it?

  Tim Brown: I believe so, yes.

  Q299 Chair: To say, "I believe so" is not the same as "yes".

  Tim Brown: My answer is yes, but I am not a complete expert on every clause of the Bill, so my view in terms of it currently is yes, and I will check. I can ask BIS if there is any reason why that is not the case.

  Q300 Cathy Jamieson: The crucial issue for me is this: is there potential for Scotland to be disadvantaged? That is what this Committee is looking at.

  Tim Brown: I understand that.

  Q301 Cathy Jamieson: For example, if Royal Mail were to say that over the whole area of Scotland certain things were unsustainable, would, in those circumstances, this Bill—and again, this is just for the record—give you the power, essentially, to say that another provider would be brought in?

  Tim Brown: As one option, or compensation. Whereas that is not in the current legislation. So, currently—

  Q302 Cathy Jamieson: So this is new. It is not there now. This is something that has been added to the situation and it gives you a power that you did not have before.

  Tim Brown: Correct. It is in the case of failure and let's hope we never reach there. But yes, that is an additional power to what Postcomm has. We cannot do that, and it is also consistent with the third postal services directive that recognises compensation-type measures will be appropriate for postal services.

  Q303 Chair: Let us be clear though. Even in the case of financial collapse of part or all of Royal Mail, the Universal Service Provision—[Interruption.] There is a Division in the House. You can think about an answer and we'll hear it when we come back.

  Sitting suspended for a Division in the House.

  On resuming—

  Chair: Right, answer that question!

  Tim Brown: Yes. We have a couple of points of clarification from earlier—it was good to have a break.

  Jonathan Thompson: I think it was a question about whether we can require or impose universal service requirements across the whole country on Royal Mail or whoever the provider is—we absolutely can. That is clearly set out in the Bill, so we have those powers universally across the entire country.

  There was another point that I was just going to make about the compensation fund. It is worth clarifying that the ultimate decision on putting in place a compensation fund or procurement from other universal service providers lies with the Secretary of State. We make recommendations to the Secretary of State, but he would ultimately make that decision. That is set out in clause 43 of the Bill.

  Q304 Chair: Could I just turn to the question of post offices, which is the other main issue about which we are concerned? Could you clarify for me the extent to which you have powers to maintain standards of access?

  Tim Brown: In the current Bill and in the previous one, we set standards of access to postal services. So, we place a condition on Royal Mail about minimum access criteria.

  Q305 Chair: Where are these?

  Tim Brown: They are in Royal Mail's licence. We have a licence, which we have from Royal Mail, and that sets those standards. It is for Royal Mail to decide how it discharges them, and they currently discharge them through post offices.

  Q306 Chair: Where are they now, then, for the new bidders and so on? We have seen the access criteria in the BIS document. Are those the criteria?

  Tim Brown: Yes, in terms of distances and service access.

  Q307 Chair: Right. The difficulty for me is that, as I understand it, those criteria could be met with 7,000 post offices, as distinct from some 11,000 that we have at the moment. So, going to those criteria could mean 4,500 closures.

  Tim Brown: It's really a matter for Royal Mail to decide how many it actually needs and exactly what that would meet, so I can't confirm those numbers.

  Q308 Chair: We have a certain number of post offices at the moment. The access criteria could allow a network of far fewer post offices than in the existing provision. As I understand it, that would be about 4,000 fewer. I think we would be a bit anxious if the access criteria that are in the BIS document went through, because that would automatically allow 4,000 closures and would still be within the terms of the legislation. Can you clarify if I have got that correct?

  Tim Brown: I don't know the number, but I can try to find out what the number is. I can't confirm or otherwise whether that would be 4,000 fewer or not, but I understand that the principle is that we don't set, as a number, that all 11,900 offices have to provide postal services.

  Q309 Chair: The problem for us of your giving us information later on is that we have the Minister coming to see us in a little while and, as you will probably be aware, he is a very slippery character. So, we want to make sure that we can pin him down on this particular issue.

  Tim Brown: To clarify, we don't insist that Royal Mail have to provide access to postal services across all 11,900 offices, but I can't give you a figure for what the number is to meet those criteria.

  Q310 Chair: In terms of post offices being of different types—main post offices as distinct from Locals, Outreach, Essentials and all the rest of it—can I clarify whether there are access criteria for main post offices, which offer the whole range of services, because I do not remember having seen that in the BIS document?

  Tim Brown: There are access criteria set for access to all Royal Mail services. We don't set them according to whether they are for main, Locals or whatever the types are.

  Q311 Chair: The difference between mains and Locals is that some offer a smaller range of services than others. What we are not clear about is whether or not all your access criteria could, in fact, be met by the provision of nothing but Essentials, with Essentials being the technical term for sort of half-post offices, as it were.

  Tim Brown: We don't regulate post offices, so it is difficult for me to answer in a lot of detail—I know you had Paula earlier. If Essentials offer and meet the requirements of the access criteria for postal services, we are neutral on whether a post office is an Essential, a Local or a main. From a Royal Mail and a mail point of view, we are interested in access to all postal services.

  Q312 Chair: Access to all postal services?

  Tim Brown: Yes, to all postal services.

  Q313 Chair: "All" is the complete range. That would effectively mean every postal service that is offered and being supplied in every unit. That looks completely ridiculous.

  Tim Brown: Universal service products.

  Q314 Fiona O'Donnell: Perhaps I can recap, because it will be handy now that the Minister is here, as he will know exactly what you have committed him to do in the Bill. So, we have a USO guaranteed six days a week, which cannot be changed unless it comes back to Parliament. We have a price that cannot vary across the country unless, again, that comes back to Parliament, and so is guaranteed under the Bill. You said that some of the products within the USO may not be available. Could you just give us an idea of what those would be?

  Tim Brown: Some examples, in terms of looking back about what we have done over the past few years; for example, special delivery on account for account customers is not in the universal service, but special delivery for individuals is. We have taken some of those things out, and part of the reason is that there is competition. Royal Mail wants to be more commercial so it is giving it more freedom, and it makes sense for that not to have to be provided. Access to a special delivery-type service for consumers, however, is essential so we kept that in. Certain bulk mail products are not in the universal service, because we don't believe it is a requirement for consumers to have access to some or most bulk mail. At the moment, however, we have kept some smaller products for bulk mail for SMEs, because there is no choice for access. We have looked at what the needs and requirements are and what we have to put in the universal service.

  Q315 Fiona O'Donnell: When you say bulk mail services, does that mean that if a small business in an isolated, remote rural location wanted to do a large mailing to promote its products, Royal Mail could decline to provide that service?

  Tim Brown: We have kept some—a few—bulk mail products in the universal service to address those requirements.

  Q316 Fiona O'Donnell: Sorry, I don't know whether that means yes or no.

  Tim Brown: It means yes for the small business. For larger businesses, in terms of not being in the USO, at the moment there is a host of providers and the market is quite competitive for that business. The question we ask is whether we need to protect them to do that. We only introduce the universal service or keep products in where we need to protect consumers, including small businesses.

  Q317 Fiona O'Donnell: Do Ofcom regulate other providers such as TNT as well?  

  Jonathan Thompson: There are certain conditions that we can put on other regulators through the legislation, for example, in relation to protecting consumers in terms of their postal services. We can and will apply those to Royal Mail, and we can apply them to other providers as well. There are certain conditions that the Bill allows us to put on all postal providers.

  Q318 Fiona O'Donnell: And would you deal with complaints against another provider?  Jonathan Thompson: Again, the Bill allows us to put in place conditions on postal operators—to deal with consumer complaints, for example—and to require postal providers to be part of a redress scheme, so that if consumers have a concern and they haven't been able to deal with it with their postal operator, they can then go to a third party who will act independently.

  Chair: As you'll appreciate, you're just the second starter. Now that the main course is here, I think we'd rather move on to the Minister, unless there is a question that anybody is absolutely bursting to ask. No? Thank you very much, and we'll move on to the Minister.

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