House of Commons - Postal Services in Scotland

Postal Services in Scotland - Scottish Affairs Committee Contents

2 Background

The Post Office in Scotland

7. There are 1,446 Post Offices in Scotland (12% of the UK wide network), making the Post Office Limited Scotland's largest retail chain. 70% of Post Office branches are located in rural areas, and 171 branches are in the 20% most deprived wards in Scotland. A higher proportion of Post Offices in Scotland are rural than in the UK as a whole, where only 55% of Post Offices are located in rural areas.[4] Since 2000, two separate programmes of closures resulted in a 28% reduction to the size of the network in Scotland. Despite this, it still "far exceeds" other networks such as the Royal Bank of Scotland (with around 320 branches).[5] The National Federation of SubPostmasters (NFSP) noted that the strength of the Post Office lies in its depth and reach — it remains bigger than all the bank and building society branches together.[6]

8. This reduction in the size of the network has occurred alongside a reduction in the volume of mail. The Royal Mail Group (RMG) noted that a 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.[7] However, the Communication Workers Union (CWU) claimed that while mail volumes have "fallen steadily since 2005",[8] 46% of customers in Scotland state that the amount of mail they receive is increasing (compared to 35% of consumers in England), and that the balance of mail volumes is shifting, with parcel and packet volumes growing and forecast to continue increasing in the coming years.[9] Consumer Focus Scotland (CFS) research indicates that 49% of consumers in Scotland send mail every week, with the same proportion of consumers visiting Post Offices at least once a week.[10] It is, they argue, "important to recognise the continuing strong demand for postal services in Scotland".[11]

9. The National Federation of SubPostmasters (NFSP) reported that Post Office use is highest amongst people living in rural areas — 58% of those living in accessible rural areas and 67% in remote rural areas visit a Post Office once a week or more. Postal Services in Scotland are "highly valued" by both business and consumers.[12] CFS found that 80% of consumers in Scotland feel the Post Office plays an important role in their local community,[13] and argued that Post Offices have a critical role to play in "supporting sustainable communities in Scotland's remote and rural areas, and in its deprived urban communities". They said:

While Post Offices fulfil this role in many areas across the UK, the remoteness of many rural locations, and the nature and concentration of urban deprivation in areas of the Central Belt and elsewhere, makes the viability of the Post Office network of particular importance to consumers in Scotland.[14]

The necessity for legislation: the Hooper Review

10. Successive governments have acknowledged the importance of the Royal Mail and the Post Office network to communities across the UK, and have made a series of attempts to reform and modernise the service. In December 2007, the previous Government commissioned Richard Hooper, former deputy chairman of Ofcom, to undertake an independent review of postal services in the UK. The Review, published in December 2008, identified a lack of investment which had restricted modernisation and inhibited the ability of Royal Mail to compete.[15] The Review recommended a package of measures in order to modernise Royal Mail and to sustain the universal service. These were:

?a strategic partnership between RMG and one or more private sector companies with demonstrable experience of transforming a major business and ideally a major network business;

?the transfer of historic pension liabilities from RMG to government to enable the company to reap the benefits of modernisation; and

?a new regulatory regime to place postal regulation within the broader context of the communications market through the transfer of responsibility for regulating the postal services market from Postcomm to Ofcom.[16]

11. The previous Government proposed legislation to implement these recommendations in the Postal Services Bill 2008-09. However, although passed by the House of Lords, the Bill did not have a second reading in the House of Commons. The reason given for this was that the Government had been unable, because of unfavourable market conditions, to find an appropriate partner for Royal Mail, and that it would return to the issue when conditions changed.[17]

12. The new Government asked Richard Hooper to update his Review. The update was published in September 2010.[18] Hooper identified a further deterioration in postal services in the 18 month interim between his two Reports: the decline in total number of letters being delivered was greater than had been forecast in his 2008 report, and was continuing to decline (with worldwide falls in the next five years expected to be in the region of between 25%-40%). Hooper also identified a reduction in Royal Mail's share of the market, a condition he attributed to an incomplete modernisation programme and the £8 billion pension deficit. The update recommended:

a less burdensome regulatory framework;
a Government takeover of Royal Mail's £8 billion pension deficit; and
the injection of private sector capital through a sale or flotation.[19]

The Postal Services Bill 2010-11

13. The Postal Services Bill 2010-11,is based on Hooper's conclusions and recommendations. The Bill includes several key proposals:

to enable the sale of shares in Royal Mail to private buyers (up to 90%), with a possible employee share scheme (at least 10%);
to separate Royal Mail from the Post Office, which will remain in public ownership;
to transfer Royal Mail's pension deficit to Government;
to change the regulatory responsibility from Postcomm to Ofcom; and
to create an administration that enables the continuation of the universal postal service in the event of a privately owned Royal Mail entering insolvency.[20]

14. Introducing the Bill, Mr Vince Cable MP, the Secretary of State for Business, Innovation and Skills (BIS), said:

Royal Mail is in a difficult position — there is no hiding from the facts: mail volumes falling; a multi billion pound pension deficit; less efficiency than its competitors and an urgent need for more capital at a time when there are huge constraints on the public purse [...] This is an important package. It will secure the services that consumers and businesses rely on. It will give employees a stable company to work for, shares in the future of the business and the secure pension they deserve. It will remove the risk to taxpayers of an expensive bail out.[21]

Mr Edward Davey MP, Parliamentary Under Secretary of State, (BIS), emphasised the need for legislation, and told us that last year, Royal Mail had a "cash flow negative position of £500 million [...] its pension deficit is £8.3 billion [...] its core business fell by 7%". He concluded that Royal Mail is "under-invested. It is inefficient. It needs to change".[22]

However, Mr Cable emphasised:

The Post Office is a separate business. It is not for sale and there will be no further programme of closures. We will break the cycle of declining visitor numbers through new ideas and new services to win back customers.[23]

The Comprehensive Spending Review and Post Office Funding

15. The Government further demonstrated its commitment to the Post Office network in the CSR 2010. Last year Post Office Limited (POL) made an operating loss of £80 million before a Government subsidy of £150 million to compensate it for maintaining unprofitable branches. This year POL expects to make an operating loss of around £130 million before subsidy.[24] The Chief Executive of POL has stated that only 4,000 branches, from a network of just fewer than 12,000, are currently commercially viable.[25] POL's figures show that less than 23% of rural branches generate over £40,000 per annum in remuneration, compared to 69% of urban and 65% of urban deprived branches.[26] Post Office Limited's financial position is a particular issue for Scotland, given that 70% of branches are in rural areas, where revenues are significantly lower than average.

16. Following the October 2010 Comprehensive Spending Review, the coalition Government has committed £1.34 billion of funding to the Post Office over a four year period. This includes £180 million in 2010-11, and £410 million, £415 million and £330 million in each of the three following financial years to 2015. Almost half (48%) of the funding is earmarked as the 'network subsidy' (i.e. £196.8 million in 2011-12, £199.2 million in 2012-13 and £158.4 million in 2014-15). Just over a third (37%) of the funding package is dedicated to modernising the Post Office network. This includes making 'significant investments' in about 4,000 main Post Offices based in town and city centres. These would have the "full suite of post office services, including all the mail services, the full suite of Government and financial services and everything the Post Office does".[27] In addition, the Post Office is to convert around 2,000 sub offices to the new 'Post Office Local' model.[28] Mr Davey told us that this package of investment was put in place to "secure the 11,500 Post Offices".[29] He explained that as part of this funding arrangement, "Post Office Limited has to deliver a Post Office network over the four years of our contract with them that is as least 11,500".[30]

17. The funding was welcomed by Mr George Thomson, General Secretary of the NFSP who said that this financial commitment "means there is a desire to make sure the Post Office network has a viable future".[31] He added that the funding would allow for the restructuring of the network "both by modernising the branches that are there and investing in the infrastructure and physical appearance".[32]

18. In addition to the coalition Government's package of funding, many Post Offices in Scotland have also benefitted from the Scottish Government's Diversification Fund. The Fund of £1 million in 2010/11 has been used to help sustain and develop the small businesses which are built around Post Offices, with a view to improving their financial sustainability. The scheme closed for applications in September and awards of up to £25,000 were made to 49 Post Offices based in Scotland. A range of projects from setting up an internet café to selling local produce, were funded. The NFSP notes that evaluations of other Post Office grant schemes, for example, in Wales, show they have resulted in increases in customer numbers and increased sales turnover.[33]

19. However, despite the increase in funding for the Post Office network, concerns were raised by Members of the House during the second reading debate, that the Bill provides no mechanism to secure the long term future of the Post Office network, in particular the number of Post Offices in non-profitable areas and the consequent ability of the Royal Mail to provide a universal service across the UK - and Scotland in particular.[34] In reality, much of the network in rural Scotland is funded through a subsidy from the more profitable urban network across the UK. In this context, it is not clear how the Bill, or the increase in funding, will protect consumers over the long term, in deprived urban, rural and remote areas of Scotland.[35]

20. We welcome the coalition Government's commitment to the continued provision of postal services and the future of the Post Office network as signified in the Postal Services Bill 2010-11 and in the Comprehensive Spending Review 2010. We particularly welcome the financial commitment to the Post Office of £1.34 billion over the four years of the Comprehensive Spending Review period, and the fact that this package of funding is designed to secure the network of Post Offices across the UK at its current level (11,500). Nevertheless, the network in Scotland is in a precarious position financially, with rural branches typically being less well remunerated and less economically viable — thereby many Post Offices in Scotland remain vulnerable to closure and customers face the threat of a demise in the provision of postal services. We recommend that the Government take note of the position of large parts of the network in Scotland, as highlighted in this Report, and take the appropriate measures required to secure a viable and sustainable network, equipped to deliver a range of postal services in Scotland.

4 Scottish Government, The Scottish Government Urban/Rural Classification 2009-10, August 2010 Back

5 Written evidence from the Communication Workers Union Back

6 Written evidence from the National Federation of SubPostmasters Back

7 Written evidence from Royal Mail Group Back

8 Consumer Focus Scotland note that the number of letters sent fell by 7.3% in 2008-09. Back

9 In its evidence to the BIS Select Committee Report into Post Offices in 2009, Postcomm reported that Royal Mail was forecasting packet volumes to grow by around 20% from 2007 to 2017. Back

10 Consumer Focus, June 2010, Scottish Postal Services: Consumer Survey 2010 Back

11 Written evidence from Communication Workers Union Back

12 Ibid. Back

13 Consumer Focus, June 2010, Scottish Postal Services: Consumer Survey 2010 Back

14 Written evidence from Consumer Focus Scotland Back

15 Department for Business, Innovation & Skills, Modernise or Decline: Policies to maintain the universal postal service in the United Kingdom, December 2008. Known as the Hooper Review Back