Postal Services in Scotland - Scottish Affairs Committee Contents


Written evidence from Royal Mail Group

1. INTRODUCTION

1.1 We are very proud at Royal Mail to be the universal service provider in Scotland and the rest of the UK.The future viability of the universal postal service, however, continues to be under severe threat due to a rapid and continuing contraction in the size of the mail market. The UK postal market, and other postal markets, are forecast to decline by up to 40% over the next five years according to Richard Hooper. Decline in the market, along with increased use of email and texting by large mailers, means that by 2015 Royal Mail's end-to-end delivery volumes are forecast to have shrunk by 75% in just over a decade.

1.2 The Group faces a range of competitive pressures, including a restrictive regulatory regime. It is expected that 7.1billion items of Wholesale "access" mail will be delivered over the final mile by Royal Mail's postmen and postwomen by the end of 2010/11 on behalf of our competitors. The current headroom regulation on this mail guarantees upstream players a margin; it also makes it difficult for Royal Mail to set access prices which actually cover its costs. We are subsidising our competitors when our own finances are severely challenged.

1.3 As the only company able to provide the Universal Service. Royal Mail is managing a number of very significant challenges. These include a very large pension deficit, which is disproportionate to the company's size, the ongoing burden of the current regulatory regime and a mails market in severe structural decline. To be financially secure and to provide the Universal Service, we need to:

¾  Accelerate the modernisation programme,

¾  Identify and meet the ever changing needs of our consumers

¾  Invest in the future of our business, including a much stronger IT capability and revenue substitution initiatives.

In short, Royal Mail requires urgent access to external capital.

1.4 We need a sustainable business model. This is in the best interests of Royal Mail's customers, stakeholders, employees and the taxpayer. The Group therefore, very much supports the Postal Services Bill, including the Government's proposals to resolve the pension deficit, provide access to external capital and a regulatory level playing field. Given the company's very challenging financial position, action is required now.

2. ROYAL MAIL IN SCOTLAND

2.1 Royal Mail Group is the only postal business which reaches all 2.5 million addresses in Scotland. It is responsible for collecting and delivering letters and provides a universal service at uniform, affordable prices. Post Office Ltd provides a network of approximately 1440 post offices. Parcelforce Worldwide delivers and collects express parcels in an unregulated, commercial marketplace that covers the whole of Scotland. Royal Mail Group is also one of the country's main employers, employing around 13,700 in Scotland, most of who are employed as postmen and women.

2.2 Royal Mail provides exactly the same services for businesses in Scotland as it does across the UK. Over 90 per cent of rural or small Scottish businesses will rely heavily on the Universal Service for posting and receiving their mail. Royal Mail is proud to play a part in helping the economic development of Scotland and the highlands and is investing significantly in Scotland over the next three years as part of the company's modernisation programme.

2.3 Royal Mail operates World Class Mail in 10 mail centres in the UK including at its Glasgow mail centre and at the Edinburgh mail centre, which went live this month. It has had a significant impact on safety, and has reduced costs inside individual facilities. World Class Mail helps employees bring skills and talents that they have amassed in other areas to their jobs. Royal Mail believes that World Class Mail has been a very successful tool in helping our people to understand what they need to do to be successful in all aspects of handling and processing of mail. Royal Mail needs to accelerate the modernisation programme in Scotland and across the UK. The Group needs the ability to secure the external capital required, however, to do this.

3. THE NEED FOR REGULATORY CHANGE

3.1 Royal Mail fully accepts the need for a regulatory framework. The current regime has generated significant levels of competition. However, as Richard Hooper pointed out, a balance has to be struck between the generation of competition and the provision of a stable universal service. Addressing the regulatory regime is critical to the future of the Royal Mail and the universal service obligation.

3.2 The regulatory regime within which Royal Mail has to operate is very significant. For example, 86% of Royal Mail revenues are regulated, whereas in many other developed countries only universal service products are regulated. The regulatory regime in the UK is more burdensome than in any other country in a number of ways. Firstly, the requirement that there be mandated access to any part of the Royal Mail infrastructure. Secondly, the access headroom regime which provides a net margin between the price Royal Mail charges its wholesale customers and its retail equivalent. Thirdly, the extent of ex ante price control on 86% of Royal Mail's revenue.

3.3 Royal Mail believes that unrestricted competition undermines the ability for it to provide a viable universal service. This is particularly the case where cherry picking by Royal Mail competitors would leave the universal service provider with a significant amount of unprofitable business. In short, Royal Mail needs a clear regulatory direction that provides confidence to stakeholders regarding the viability of the universal service and the future of the business. While the Bill envisages future regulatory change under Ofcom, it is not yet a reality.

4. PENSIONS

4.1 Royal Mail Group welcomes the Governments pension proposal. It will protect the benefits earned by our current and past employees and for our pensioners. It will give them the secure pension they deserve and a stable company to work for.

4.2 Royal Mail agrees with Hooper's view that the introduction of private capital in itself would not help guarantee the sustainability of the Universal Service. He stated his view that the pension deficit, timely access to external capital and the need to transform postal regulation needed to be addressed as well.

5. THE POST OFFICE LTD IN SCOTLAND

5.1 The economics of operating a large network are challenging for both Post Office Ltd and sub postmasters in Scotland and elsewhere in the UK. The recent Government funding and policy announcements for POL are a real and tangible opportunity to modernise the network. They will greatly assist in making the network more sustainable and in maintaining its cherished accessibility in local communities. The mutualisation model that the Minister has outlined could help with the alignment, in the widest sense, between those who are operating the post office and the owners. Government has also stressed that there will be no programme of closures.

5.2 Post Office Limited and Royal Mail have a strong commercial relationship and for this to continue is clearly in the interests of both organisations. Royal Mail is committed to obtaining a long term agreement with the Post Office. The Group has its focus on a robust and long term relationship with Post Office Limited.

5.3 The Post Office in Scotland will be looking to Government Services to grow revenue through providing front-of-office services for Government and also through financial services. With the recent agreement with RBS, some 80% of current account customers can now access bank accounts through the Post Office.

5.4 Recent talks have taken place with Scottish Government officials seeking to build upon the success of the £1 million Post Office Diversification Fund provided last year and encourage the provision of government services through the Post Office network. A Ministerial Working Group will look at how this can be developed across Scottish Government departments and potentially to facilitate similar discussions with local authorities in Scotland who are responsible for the delivery of many government services. It is hoped to build on the success of Post Office products in the area of identity and document checking - which have saved considerable sums for local authorities elsewhere in the UK. Previous Scottish examples of joint working include the delivery of certain police services through the Post Office network.

5.5 Separate discussions are due to take place with Scottish Government officials to explore how Post Office Ltd might be involved in the joint UK Government and Scottish Government funded initiative to provide communities with better access to better digital facilities across Scotland, particularly in the Highlands and Islands. Post Office branches are at the heart of their community. They are well placed to provide a hub for such access, avoiding costly 'reinvention of the wheel' and presenting a joined-up, locally supportive approach for those communities, as well as helping provide much needed footfall to the branches concerned

5.6 Despite these new positive developments, there are a number of post office branches in Scotland which are struggling to be viable because of changes in social habits and falling customer numbers. Sometimes when an incumbent subpostmaster resigns, there is no-one who comes forward to take over the business. However, the business has been successful in Scotland in re-opening many services using a wide-range of solutions. We welcome the Government's statement that there will be no programme of closures.

6. POST OFFICE OUTREACH SERVICES AND HOW THEY WORK

6.1 Post Office Ltd's has worked very hard to set up outreach services tailored to rural communities. There are currently over 700 of these outlets operating nationwide, serving 50,000 customers every week. Around 170 services operate in Scotland, serving just over 9,000 customers a week. Post Office believes these have been a success.

6.2 Outreach services link local communities to a nearby 'core' Post Office which brings the necessary services into the community on a regular basis. There are several variants which include: partner services in local shops which operate at retail tills and are open the hours the premises is open; hosted services in community locations such as village halls, hotels, cafes and pubs; mobile post office services and a home service for very small communities and enables customers to order a reduced range of Post Office® products and services over the telephone. Outreach services receive much support in getting established and they operate with at least the same level of support available to other Post Offices.

7. POST OFFICE ESSENTIALS/LOCAL

7.1 In April 2008, Post Office Ltd announced that it would be piloting a new type of outreach service in urban areas, "Post Office Essentials", now known as 'Post Office Local'. Post Office Essentials/Local allows operators to offer a core set of Post office services over their retail counter.

7.2 The model reduces the cost of operating a post office, because it enables the integration of both space and staff resource in store, between the Post office and retail business.

7.3 Extended opening hours are a key element of the Post Office Essentials/Local model. Post office services can be offered during the same opening hours as the retail store. Where Post Office Essentials/Local has replaced a standard sub post office in the pilots, the opening times have, on average, increased by 45 hours per week. There are eight outlets of this type being piloted in Scotland. They are in Fraserburgh, Harthill; Greenock, Mussellburgh, Cumnock, Symington, Tillicoultry. Auchtermuchty.

8. GOVERNMENT SERVICES

8.1 The recent Government announcement and funding package clearly recognised that the Post Office can become the physical network and act as a 'front office' for national and local Government. It can cater for those who are not online by providing accessible service. It can cover those situations where, even in an online process, a physical interaction is necessary (for example checks of physical documents or those circumstances when the physical presence of the citizen is needed). The Post Office can then digitise the appropriate information - so that the Government Department can handle its internal processes in the most efficient manner. This whole 'front office' approach is a potential win for the customer, Government and Post Office Ltd.

8.2 Post Office Ltd, the Department for Business, Innovation and Skills and the Local Government Association held a joint conference in January 2010 for local councils. Following this, Post Office Ltd and the Local Government Association published a booklet with case studies, sent to all local councils' chief executives. This aimed to promote greater awareness of Post Office Ltd's services; Briefings have also taken place with the Scottish Government on the potential in this area.

(For a full range of services provided in Post Office branches please see Appendix 2).[42]

9. PARCELFORCE WORLDWIDE IN SCOTLAND

9.1 Royal Mail is the only provider of a Universal Parcel service, while Parcelforce Worldwide operates in a purely commercial market place. Over 12 main parcel operators serve Scotland. In many rural areas and on the Scottish islands, it will be Royal Mail which delivers Parcelforce Worldwide parcels.

9.2 In 2005, Parcelforce Worldwide introduced a Scotland Intra rate; this means that if you post from Glasgow to Inverness only one charge applies. Extra charges do apply to the Islands given the distances involved and the transport methods which need to be used. Parcelforce believes that it offers competitive rates for these parcels, given the distance they travel. Other Operators use a zonal system across mainland Scotland. Parcelforce doesn't charge a southbound charge for parcels from Scottish based locations, assisting Scottish Businesses to trade with the rest of the UK.

10. CONCLUSIONS

10.1 Royal Mail believes it is best placed to provide postal services throughout Scotland, as the only postal provider that reaches every corner of the country. It also believes that its network of post office branches can and will continue to provide services to communities across Scotland.

10.2 The Postal Services Bill is a very positive development for Royal Mail in Scotland and elsewhere in the UK. The Group is strongly of the view that if the Bill does not go through, there will be a continuation of what have been chronic problems for Royal Mail. Given the rapid structural decline in the postal markets, the group needs access to external capital to accelerate the pace of modernisation.

10.3 Post Office warmly welcomes the Government announcement of a £1.34 billion funding package for the next four years to maintain and modernise the Post Office network. The economics of operating a large network are challenging for both Post Office Ltd and sub postmasters in Scotland and elsewhere in the UK. The recent Government funding and policy announcements for POL are a real and tangible opportunity to modernise the network. They will greatly assist in making the network more sustainable and in maintaining its cherished accessibility in local communities.

10.4 Royal Mail needs to be given a fair opportunity to compete for the business that is there; otherwise it will further erode the viability of the Group. The consequences for the universal service in Scotland and the rest of the UK will be even greater. Royal Mail believes that if the current bill is not passed, the quality of the universal service throughout the UK, including Scotland will be endangered. The Group needs clear regulatory direction that will provide confidence to all the stakeholders, regarding the viability and stability of the Universal service and the business in the future.

APPENDIX 1

FACTS AND FIGURES ON ROYAL MAIL GROUP IN SCOTLAND

Royal Mail

¾  Royal Mail employs around 12,500 people in Scotland, of which 11,600 are postmen/women.

¾  The Universal Service Obligation delivers to 2.5 million Scottish addresses.

¾  Royal Mail delivers on average around five million items every working day and around 30 million items every week. At Christmas, Royal Mail in Scotland delivers 180 million items on mail across the country.

¾  Collections from over 10,000 posting boxes.

¾  In Scotland, Royal Mail is spending a significant amount of money over the next three years as part of the company's modernisation plans.

¾  There are two world class mail centres in Scotland. One in Glasgow and another in Edinburgh.

Post Office Ltd

¾  Around 800 direct employees in Scotland - Crown Office staff and managers in the network.

¾  There are over 446,000 Post Office Card Account holders in Scotland.

¾  POL serves ~20 million customers a week, conducting ~60 million transactions (including visits from over half of all SMEs every week). 92% of the UK population visit a post office at least once a year.

¾  There are approximately 1,440 Post Offices in Scotland, of which around 300 were designated as urban, 980 were designated as rural, and 160 as urban deprived.

¾  Approximately 1,213 sub post office branches and approximately 170 outreach services.

¾  Eight mobile post offices offer services in small rural communities across the Borders, Dumfries and Galloway and the Highlands.

Parcelforce Worldwide

¾  Employs 352 people, of which 95% are depot staff.

¾  Delivers 4.3 million packages in Scotland in a year and collects around 2.5 million.

¾  Only operator that delivers to each address in Scotland through its partnership with Royal Mail.

¾  Parcelforce Worldwide has depots in Glasgow, Edinburgh, Aberdeen, Inverness and Perth.

¾  New world-class depot opened in Glasgow in April 2008.

25 November 2010


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