House of Commons - Postal Services in Scotland

Postal Services in Scotland - Scottish Affairs Committee Contents

3 Universal Postal Service

Universal Service Obligation

21. The Universal Service Obligation (USO) sets the minimum standards of service that Royal Mail must keep. It has been described by Billy Hayes, General Secretary (Postal) of the Communication Workers Union (CWU), as the "glue that binds the nation together".[36] The USO means:

that customers pay the same price regardless of where they are sending a letter to within the UK; and
that Royal Mail have to be able to collect and deliver mail once every working day to every address in the UK.

22. Ian McKay, Director of Scottish Affairs, Royal Mail Group, said the USO was of fundamental importance:

As far as the USO and its importance to the group and to Scotland are concerned, the USO operates right across the UK. The great advantage of the USO is that it evens out in that way the demographics, geography and other natural things which are there giving an organisation such as ours difficulties [...] From our point of view, the USO is absolutely central to what we do presently [...] The USO is the absolute base rock for everything else that we do. It is through the USO that our network is able to function and to provide a service, not just in Scotland, but generally.[37]

23. CFS told us that, at present, Scottish Consumers receive a broadly similar level of postal services to elsewhere in the UK. Royal Mail's licence requires the next day delivery of 93% of first class mail, and 91.5% in each postcode area. This requirement applies to 13 of Scotland's 16 postcode areas, the exceptions being ZE (Shetland) KW (Orkney), and HS (Western Isles). In certain exceptional circumstances, Postcomm exempts Royal Mail from making daily deliveries to a property — for example, because the address is difficult to access, or because of a health and safety risk to Royal Mail staff. Around half of these exceptions are in Scotland (1,400).[38]

The Bill

24. The Postal Services Bill will implement EU Directive 2008/6/EC which provides that EU Member States must ensure the provision of the universal service is guaranteed and must include certain minimum requirements.[39] These requirements include:

one collection from appropriate access points every working day;
one delivery to all addresses every working day;
to include postal items and packages up to 20 kilograms; plus
a service for registered items and insured items.[40]

25. Clauses 28 to 45 of the Bill cover the provision of the universal postal service. Clause 30 sets out the services that must, as a minimum, be included in a universal postal service.[41] Mr Davey told us that the EU Postal Directive requirement to deliver five days a week, is "significantly less than we have in clause 30" of the Bill which "sets out in the law minimum requirements that the UK Government have decided".[42] By designating Saturday as a working day, a six day a week collection and delivery is provided in the UK. He said that the coalition Government (like the previous Government) had therefore "gold-plated the European Directive".[43]

26. Mr Davey explained that, in addition to the EU Directive and the minimum set out in the Bill, there is also a Universal Postal Service Order.[44] The order mirrors the current framework from the Postal Services Act 2000, under which the Royal Mail is designated as the universal service provider. Mr Davey pointed out that these three separate tiers of provision in the Bill strengthen the protection of the USO. He said: "to change the postal directive, there would have to be a new postal directive in Europe; and to change the minimum service requirements set out in clause 30 there would have to be measures in Parliament".[45] The Chair asked: "you can understand our anxieties, which reflect those of people who have been to see us. If I may, I will run through some of those things, just to be absolutely clear. To change from collecting letters six days a week, with one price for everywhere, the clause specifies that the matter has to come back to Parliament and has to be the subject of an order that is voted upon in both Houses, so there is no way of slipping out of that". The Minister answered "yes".[46]

27. The Minister further explained:

Clause 33, entitled "Review of minimum requirements", basically sets out three safeguards. The first is that Ofcom would have to do a review of users' needs and make recommendations. The Secretary of State would have to accept those recommendations and decide that he wants to change the minimum service requirements. The Secretary of State would then have to come to Parliament with an order, which would have to be agreed by both Houses. But that order, if a Secretary of State were so minded after an Ofcom review, would not be allowed to change the uniformity of price and service. So unless there was another Act of Parliament, under clause 33, even if an order was made, which I don't think is likely, it couldn't change the universal service in respect of the uniformity of price and service.[47]

28. Part Three of the Postal Services Bill provides for the transfer of Postcomm's regulatory responsibility for the postal sector and its staff to Ofcom. The Bill requires Ofcom to carry out its postal services functions in a way that it considers will secure the provision of a universal postal service. In doing so, Ofcom will be required to have regard to the need for the universal postal service to be financially sustainable and efficient.[48]

29. Mr Douglas White, Senior Policy Advocate, Consumer Focus Scotland, told us that the Bill "recognises some key and very important components of the Universal Service Obligation: the need for collection and delivery of mail six days a week and the uniform tariff across the United Kingdom, which is clearly extremely important for consumers in Scotland".[49] However, CFS noted that "adequate safeguards needs to be in place to protect the provision of the USO and, more generally, the consumer interest," and registered "serious concerns" over the range of clauses contained in the Bill that "provide opportunities to reduce the scope of the USO".[50] Mr Billy Hayes, General Secretary (Postal) CWU, considered that there are "15 clauses in the Bill that undermine the USO".[51]

30. These concerns were shared by the Federation of Small Businesses (FSB), who stated that the Bill was "not clear" about what defines the universal postal service, and that there appeared to be "several clauses which allow for a withdrawal of what is currently understood to define the universal service". They expressed concern that "any step back from current expectations would further disadvantage small businesses, especially in rural and remote areas where geographical location, population and other factors already exert pressures".[52] The CWU warned that each possible reduction to the USO puts mail services in Scotland at particular risk.[53]

The 'break-up' of the USO?

31. Royal Mail Group has argued that the current regulatory regime grants unfair advantage to its competitors who are unburdened by the universal service obligation.[54] They predict that the cost of providing the USO is likely to increase as mail volumes decline as these lower volumes are not matched by falling costs. They noted:

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.[55]

32. The CWU fear that a privately owned Royal Mail will necessarily seek to reduce the scope of the USO in line with its commercial interests; a trend which has been seen in the Netherlands where, a year after full liberalisation of the mail market took place, the private USO provider labelled the obligation "a kind of Jurassic Park [which]we should get rid of",[56] because they had wanted "to move away from mail services being provided as one delivery, one collection, five days a week, as set out in the European directive".[57]

Exceptional Conditions?

33. In referring to clause 32(2)(b) of the Bill, Mr John Brown, Regional Secretary (Postal) CWU, said that: "Ofcom can waive the requirement for the universal service obligation if there are "geographical or other" operational conditions that it deems to be exceptional, and that Scotland could be deemed to be "exceptional, therefore universal service could be reduced".[58] The FSB also noted a concern in relation to "efficiency and financial sustainability". They argue that this suggests that were it less efficient and less financially viable to provide a service to a particularly remote area, the service might be suspended, thereby negating its 'universality'.[59]

34. Subsection 32(2)(b) of the Bill allows Ofcom to exempt Royal Mail from making daily deliveries to a property in certain exceptional circumstances, for example because the address is difficult to access or because of a health and safety risk to Royal Mail staff. Under current similar provisions, 1,400 of these exceptions are in Scotland.[60] The Minster argued: "It is not some sort of get-out clause; it is for exceptions only for health and safety, geography and weather".[61] Mr Tim Brown, Chief Executive, Postcomm, told us that these exemptions account for only 0.01% of all deliveries and only six complaints had been received in seven years.[62] Mr Jonathan Thompson, Director of Strategy, Ofcom, told the Committee "our approach will be consistent with how Postcomm has applied it to date".[63]

35. We presented these concerns to the Minister—particularly in relation to clause 32 (2)(b) which refers to waiving the requirements of the USO if it considers "geographical or other conditions to be exceptional". We sought assurances that this provision was neither intended for, nor would ever be applied to, a whole area of the country—either for geographical reasons or, particularly, for economic reasons. Mr Davey gave "total assurances" that this would not be the case and that this was not "some kind of get-out clause".[64]

'Cherry picking'?

36. Clause 34 provides for Ofcom to designate more than one Universal Service Provider.[65] Mr Dave Ward, Deputy General Secretary (Postal) CWU, expressed a concern that the Bill may "lead to the break-up of the USO and of Royal Mail being the sole provider of that".[66] Mr Brian Scott, Assistant National Secretary, Unite, argued that if Ofcom allowed more than one Universal Service Provider, this could open the door for other companies to go "cherry picking"[67] the most profitable parts of the business. Andrea Henderson, Secretary, Furnace Community Council, Argyll, agreed that private companies "cherry pick" and are not interested in "more remote places which will not be profitable".[68] CFS pointed out the potential consequences of this: "even if Royal Mail continued to use the Post Office in rural areas only, the ability of the network to cross-subsidise from its profitable urban branches would be lost. The future of many Post Offices, particularly the 981 largely loss-making post offices in rural areas, would therefore be in doubt".[69] We were particularly struck by comments that the Royal Mail can only provide the USO at present, because the profitable parts of the network subsidise the non-profitable parts of the network.[70]

37. However, Ian McKay from Royal Mail claimed:

we are very proud operators of the USO, we wish to continue to operate the USO, we have no plans to change the USO, and we don't have any wish to see the terms of the USO change [...] I think that someone said [the USO is] the jewel in the crown, and we certainly regard it in that way. It is central to our operation, and it's central to our future operation too.[71]

38. We sought further assurances that the Universal Service would not be broken up and shared amongst a range of providers, thereby allowing companies to "cherry pick" the most profitable part of the network. The Minister again offered his total reassurance that this was not the case, and that the USO would not be broken up. He said: "the core policy objective behind the Bill and our overall policy is to protect the universal postal service to make sure that it is financially viable".[72] Tim Brown, Chief Executive of Postcomm, explained that the new Bill therefore contains mechanisms to strengthen the potential for the universal service in Scotland if necessary through compensatory arrangements or the use of another provider:

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.[73]

39. The Minister made it clear that in these circumstances, there could be more than one provider—but these provisions were intended as "safety nets" for the USO rather than as threats to it.[74] He concluded that "the chances of getting to a point where there is more than one universal service provider are very, very limited and very, very unlikely".[75] CFS concluded that the "USO appears sustainable for the immediate future".[76]

40. The Universal Service Obligation (USO) is the cornerstone of mail and postal services in the UK. The six day a week delivery and collection service, and the universal tariff are fundamental to the future of postal services and the Post Office network in Scotland, and consequently, to ensuring the financial sustainability and viability of many remote and rural communities throughout Scotland. We therefore strongly resist any potential diminution of the USO.

41. We were particularly concerned with two clauses in the Bill. First, clause 32 (2)(b), which allows Ofcom to waive the USO if there are "geographical or other" conditions which it deemed to be "exceptional". Given its unique geography and the financial position of much of the existing network, we fear this has the potential to allow the regulator to categorise large areas of Scotland as "exceptional". We note that this wording is the same as the current legislation and welcome the Minister's assurances and his explanation that this, and other similar clauses in the Bill, do not mean that the USO is no longer applicable to parts of Scotland—either on the grounds of geography or economics. We recommend that clarification be included on the face of the Bill that this clause should only ever be applied to a very small number of addresses, similar in order to the current number.

42. Clause 34 allows Ofcom to designate more than one universal service provider. If this clause were used to allow the cherry picking of the most profitable parts of the network, this would impact the USO and be detrimental for Scotland. We welcome the Minister's assurance that this is not the Government's intention. We welcome the safeguards in the Bill which protect the USO, and which provide for more than one USO provider only in the most extreme circumstances, e.g. the bankruptcy of the existing USO provider. However, we recommend that the Government provide further clarity to that effect during the passage of the Bill.

OFCOM REVIEW

43. The Postal Service Bill requires Ofcom to review the minimum requirements of the universal service obligation within eighteen months, a point of concern for some witnesses such as the CWU, who warned such a review could lead to the erosion of the universal service.[77] Jonathan Thompson said that Ofcom's role would be only to review the universal service and make recommendations to the Secretary of State, while "any decision beyond that to reduce the USO is ultimately a decision for Parliament and not for the regulator".[78]

44. The FSB expressed concerns in relation to Ofcom's duty to carry out its functions in such a way that it considers "will meet the needs of users of the universal postal service".[79] The wording of the clause leaves Ofcom to decide what consumers should want or need. The FSB believes that Ofcom should be required to consult business customers— particularly small businesses—to determine what constitutes reasonable needs of users. CFS would also like to see the Bill require Ofcom to consult with representatives of residential and SME customers, especially vulnerable customers, when conducting such a review. In undertaking such a review, the needs of rural users require particular attention, because the introduction of zonal pricing tariffs, reducing the number of days when mail is delivered or collected, or loosening the criteria through which Royal Mail could exempt properties from receiving daily deliveries of mail would "each hit rural Scotland disproportionately hard".[80]

45. However, we also note the need for flexibility in this respect. The residents of the Isle of Mull told us that they would rather receive 80% of their post early in the day, and receive the remaining 20% the following day, as this would result in an earlier delivery time for the post. However, the regulator does not allow the Royal Mail to do this. If exceptions are at the request of local residents, the regulatory framework should be sufficiently flexible to meet the needs of customers.

46. We note the importance of Ofcom in providing safeguards to the USO, but are concerned about the Bill's requirement for Ofcom to review the minimum requirements for the USO within 18 months. We fear this may be seen as an opportunity to decrease the requirements of the USO. While we appreciate the need to review the service, as customer needs may change, we recommend that further safeguards be put in place to guarantee that the needs of customers and small businesses who live and work in remote, rural or island communities, are met. Any change to the USO would have a disproportionate impact on these communities. We recommend that Ofcom not merely consult with stakeholders, but undertake assessments of the social and economic impact of proposed changes before making any recommendations. We recommend that the Bill include a requirement for Ofcom to consult with representatives of key groups in these communities, including residential, small business and vulnerable users, before they make any recommendations to change the existing USO.

ACCESS TO THE NETWORK

47. The network that Royal Mail manage is far bigger than any of its competitors. When Postcomm allowed competitors access to the downstream market, it allowed companies such as TNT and Business Post to cherry-pick large volumes of bulk mail, such as circulars from supermarkets or statements from banks, and put them into the Royal Mail network. We heard evidence that the price Royal Mail charges for the access to its network is too low, but that Royal Mail was unable to determine the price. The CWU said the price was negotiated by the then Chief Executive, Adam Crozier, at a rate he thought profitable rather than one he feared Postcomm would impose upon Royal Mail. Royal Mail was now in the position where it delivered the competition's mail at a loss.[81] We asked Royal Mail whether there was anything they could do about this. Mr McKay told us:

If someone is coming into the market and only taking bulk orders from a big mailer and then passing them to us for the final delivery, which is by and large what happens—in fact, it happens in something like 60% of all bulk mail; that is where we now are—the regulator establishes the price of that transaction.[82] [...] The difficulty we have is that the price that was established actually ended up with our losing something like 2½p on every item. When I say to you that that is 60% of all the bulk mail and 40% of all addressed mail in the whole system, it means that it costs us something like £160 million a year.[83]

The CWU said that if the competition wants to use the network, then Royal Mail should be allowed to negotiate freely with it.[84] Tim Brown, Chief Executive of the current Regulator Postcomm told us:

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 [...] 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 [...] 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.[85]

48. Private firms are making profit off the work of Royal Mail and the Post Office network in parts of the county that are unprofitable. If Royal Mail is going to provide this service at a loss in the unprofitable and difficult parts of Scotland, they should be able to charge the private companies a higher price. Royal Mail need to be able to negotiate sustainable terms for last mile delivery of private mail and parcels.

Separation of Royal Mail and the Post Office

49. Currently, Post Office Limited and Royal Mail are both part of Royal Mail Group, which is owned by the Government. The Bill proposes to separate the Royal Mail (which provides the postal service) from the Post Office (which provides the Post Office network). Royal Mail will be sold to private buyers to up to 90% of its shares with a possible employee share scheme of at least 10%; the Post Office will remain in Government ownership but with the possibility of a move to a mutual ownership structure by the end of the current Parliament. The National Federation of SubPostmasters (NFSP) identified this as the issue within the Bill "of most significance to the Post Office network, and of most concern to the NFSP".[86] The NFSP pointed out that "there is no known international precedent for separating a mail company from its retail arm".[87] Ian McKay, Director Royal Mail Scotland, said:

To make it very clear, think of the range that we need to deliver the USO. It's 28 million addresses everywhere, up hill and down dale. To do that and to service that, we need a network of a size to be able to do so. The Post Office Network is bigger than all the supermarket branches put together; it is bigger than all the banks and all the building societies put together. Here in our most natural of partners, we have the most natural of partners for that, too. That is why, from our point of view, it is literally an unthinkable separation.[88]

While it might seem unthinkable to some that Royal Mail ceases to use the Post Office network, there is absolutely nothing in the legislation to prevent the unthinkable from coming to pass, with significant adverse implications for rural Scotland.

THE INTER BUSINESS AGREEMENT (IBA)

50. The Inter Business Agreement (IBA) is the contract through which Royal Mail uses the Post Office network as the access point to its mail services. This contract accounts for one third of Post Office Limited's turnover, some £343 million of its revenue in 2009-10, and one third of SubPostmasters' pay (which the NFSP estimates at £240m in 2009/10). Of this, around 60% is variable income based on the levels of transactions undertaken, while 40% is fixed income, based on Post Offices providing bricks and mortar access points for the public to use postal services. The CWU pointed out that Royal Mail business and mail account for just under 37% of turnover and generate around 50% of business conducted in Post Office branches. They argued that if the Royal Mail were to be privatised, subsequent contracts would require a competitive tender process "with no guarantee that Post Office would retain the contract".[89]

51. In their written evidence to the Committee, the NFSP registered their concern about the Government's proposal to separate Post Office Limited from Royal Mail because they feared that "this unprecedented separation" may "adversely impact on the Post Office network".[90] The CWU agree and wrote that "the proposed separation of the Post Office from Royal Mail fundamentally threatens the future of the Post Office network. The survival of the Post Office, in anything like its current state, is dependent on its relationship with Royal Mail". It further highlighted that the rural branch network is likely to be at "particular risk" should the relationship with Royal Mail weaken.[91]

52. The NFSP have therefore called for a minimum 10 year IBA which would guarantee that Post Office Limited (POL) will continue to act as Royal Mail's exclusive retail outlet: and that customers could continue to access Royal Mail services at Post Offices. They added that this would "allow time to stabilise the network" and, if necessary, to "seek alternative revenue streams to ensure both POL and the network are less reliant on Royal Mail income".[92] Mr Scott, Assistant National Secretary, Unite, also said that an 8-10 year plan would "give a degree of certainty" and "allow people to get on with providing a service",[93] while Mr Ward queried whether Royal Mail would be willing to make the necessary investment if they were unsure the IBA would extend beyond 10 years.[94]

53. We found broad consensus that a long and robust IBA between the Post Office Limited and the Royal Mail is the most desired outcome. Donald Brydon, Chairman of Royal Mail Group, told the Public Bill Committee that, when Royal Mail comes to be sold, the agreement between the Post Office and Royal Mail will be enshrined in the prospectus. He also pointed out that RMG, POL and NFSP "all want that agreement to be as long as is legally possible".[95] However, Mr Thomson, NFSP, said that trying to get an agreement signed was "like wading through treacle".[96]

54. The NFSP reported to us suggestions that a 10 year contract would breach EU or UK procurement or competition law. They said that, based on the legal advice they had received, any such suggestion was "erroneous". They continued, "we believe that this is more a question of political will on the part of ministers to permit this".[97] Mr Davey told us that while the IBA was a commercial arrangement between the Royal Mail and Post Office Limited, the coalition Government were "putting nothing in the way" of such an agreement.[98]

55. Some witnesses commented that there should be provision in the legislation for an agreement between the POL and RMG. However, rather than having this "enshrined in legislation," Mr Mervyn Jones, Commercial Director, NFSP, said that the Post Office network should be "made as attractive as possible", so that, as Mr George Thomson, General Secretary, NFSP, said, it is a "no-brainer" that the Royal Mail will use the Post Office network in the future.[99]

56. The separation of Royal Mail Group and Post Office Limited, and the future ownership of both organisations has been the subject of much political debate. Regardless of the ownership of Royal Mail, we see considerable advantages to a long, stable and robust relationship between Royal Mail Group and Post Office Limited, not least to facilitate proper business and financial planning. We recognise that the Inter Business Agreement (IBA) is a commercial agreement and we welcome the Minister's commitment not to put anything in the way of such an agreement. However, we recommend the Government take a more proactive approach to facilitating a long and robust IBA, through removing any obstacles: practical, legal or otherwise that may exist. Ideally, a ten year agreement should be reached prior to any sale of Royal Mail. We understand that this may affect the marketability of Royal Mail, but it is essential to the sustainability of postal services in Scotland. It is in everyone's interest, not least that of the consumers, that such an agreement is reached as soon as possible.

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39 www.publications.parliament.uk/pa/cm201011/cmbills/078/en/11078en.htm Back

40 www.consumerfocus.org.uk/policy-research/post/background-briefings/universal-postal-service Back

41 Postal Services Bill Clause 30 [Bill 120 (2010/11) As Amended in Public Bill Committee] Back

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44 Postal Services Bill Clause 29 [Bill 120 (2010/11) As Amended in Public Bill Committee] Back

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