Postal Services In Scotland

Written evidence from the Communication Workers Union

Summary

· Despite declining mail volumes there remains strong demand for postal services in Scotland which are highly valued by both businesses and consumers.

· The proposed privatisation of Royal Mail and its separation from the Post Office jeopardises the future of the universal postal service and the Post Office network.

· A privately-owned mail operator will seek to reduce the financial burden upon it by reducing the universal postal service. Rural areas - where the universal service is most expensive to deliver - will suffer disproportionately.

· Royal Mail is modernising successfully in the public sector. Privatisation will not help or speed up the modernisation process.

· Separation from Royal Mail threatens the Post Office’s main revenue stream and puts the network at risk. Less economically viable branches in urban-deprived and rural areas will be most likely to face closure.

· Proposals on the mutualisation of the Post Office are not well developed and leave fundamental questions over the future of the network unanswered.

· The provision of Government and financial services at the Post Office must be expanded. We are disappointed by the lack of detail and ambition in the Government’s recent policy document on the Post Office.

Overview

1. The Communication Workers Union (CWU) represents around 215,000 employees in the postal, telecoms and related industries. We are the recognised union in Royal Mail Group for all non-management grades including those responsible for the collection, sortation and delivery of letters and parcels.

2. The Scottish Affairs Select Committee is seeking views on the importance of postal services for individuals and businesses throughout Scotland, in urban and rural areas, and how these might change in the future.

Demand for postal services in Scotland

3. While mail volumes have fallen steadily since 2005, it is important to recognise the continuing strong demand for postal services in Scotland, as in the rest of the UK. Recent 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; 80% of consumers in Scotland feel the Post Office plays an important role in their local community. [1]

4. Further mail volume decline is expected; however, we believe the importance of postal services for both businesses and the public in Scotland will remain high. 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 being forecast to continue increasing in the coming years. [2]

5. In line with this trend 43% of people in Scotland surveyed by Consumer Focus thought they would do more of their shopping online in the future and 34% of people in Scotland surveyed in Postcomm’s research stated that they would buy more goods online or by telephone, if it was easier to get them delivered. [3]

6. Mail also clearly remains integral to businesses – the Federation of Small Businesses report that 98% of their members use mail services on a weekly basis and repeated research from Postcomm has shown that businesses place a high value on daily collections and deliveries and would resist changes to the basic universal service provision. [4]

How the range of services provided by Royal Mail Group could be expanded to include Government, local government and financial services

7. There is clearly significant potential for Royal Mail Group, in its current form, to expand its range of services to include government, local government and financial services in Scotland. The post office network in Scotland comprises 1,446 branches – almost 70% of which are in rural areas – which far exceeds other networks such as RBS, with around 320 branches, or the Citizens Advice Bureau, with around 200. [5]

8. Expanding the services available at the Post Office is essential to safeguard the network going forward. Last year Post Office Ltd (POL) made an operating loss of £80m before a Government subsidy of £150m to compensate it for maintaining unprofitable branches – this year POL expects to make an operating loss of around £130m before subsidy – and the Chief Executive of POL has stated that only 4,000 branches, from a network of just under 12,000, are currently commercially viable. [6]

9. Post Office Ltd’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. 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. [7]

10. The National Federation of Subpostmasters has also reported that in 2009 almost a fifth of Scottish subpostmasters received nothing at all in wages from the Post Office. [8] Therefore, while the Coalition Government has stated that there will be no programme of post office closures, the Select Committee should be conscious of the financial risk to many existing branches. There is no guarantee in the Postal Services Bill to keep the network at its current size or that there will be any duty to sustain the network in the future. Post Office closures will continue as subpostmasters leave and are not replaced.

11. The Government’s recently-announced £1.3bn funding package for the Post Office will not mean an increase in the annual network subsidy payment which supports the unprofitable parts of the network. [9]

12. Whether new services are provided through the Post Office is largely dependent upon Government will. We are seriously concerned over media reports which have suggested that Post Office Ltd may lose out on the contract for ‘green giro’ benefit payments to PayPal. [10] While the contract itself is worth around £70m over five years, which may seem modest, it involves a potential 400,000 transactions a week and generates significant footfall for the network. Given the extent of Government subsidy to POL and the professed strategy to turn it into the ‘Front Office for Government’, we believe that removing this business from the Post Office would make little sense and would further weaken the network.

13. We are also concerned over plans to transform 2,000 sub-post offices into ‘essentials’ or ‘local’ post offices by 2014, offering only a proportion of Post Office services. [11] In many instances this slimmed-down provision will be provided through other shops and business premises. We do not believe that this model of limited services and facilities will be able to act as the ‘Front Office for Government’ and we are concerned that this shift is a blueprint for the future and heralds a significant downgrading of the network.

14. We have also consistently campaigned as part of the Post Bank Coalition for the expansion of financial services available at the Post Office and for the Government to establish a publicly owned Post Bank. We believe that the current joint venture between the Post Office and the Bank of Ireland – the vehicle through which current Post Office financial services are provided on a 50:50 profit-sharing model - is now holding the Post Office back and will not deliver the step change that is necessary to help secure the future of the network; after almost seven years the vast majority of subpostmasters in Scotland still earn nothing at all from joint venture products [12] .

15. As with Government services we are disappointed that BIS has provided little detail regarding how the Post Office will capitalise on the potential to expand its offering on financial products and instead appear to have taken a step back. [13]

The Post Office network in Scotland and its role

16. In 2009/10 there were 1,446 branches in Scotland, including around 90 Outreach services (which may be mobile or home delivery services provided in conjunction with a subpostmaser). Of these branches, 68% are in rural areas, 21% in urban and 11% in urban deprived areas. The proportion of rural branches is significantly above the UK average of 55% and the proportion of urban branches making up the network is significantly below the UK average of 34%. [14]

17. The Scottish Government’s Diversification Fund is helping some post offices launch new business activities with a view to improving their financial sustainability. 49 Post Offices are reported to have so far received awards of up to £25,000. Local authorities have also sought to support local post offices.

18. Nevertheless, the network in Scotland is in a precarious position financially, with rural branches typically being less well remunerated and less economically viable. It is clear, however, the post office is a vital public institution in Scotland. Just under half of those surveyed by Consumer Focus (49%) in Scotland visited the post office at least once a week, with 87% of respondents visiting it at least monthly.

19. It is important to note that potentially vulnerable groups are more likely to use the Post Office regularly, with over 60% of people aged 65 and over, disabled people and those earning less than £15,000 per annum doing so on a weekly basis, compared to the national average of 49%. The Post Office remains an important public service playing an essential role in the community.

The Postal Services Bill and the Universal Service Obligation

20. The proposed privatisation of Royal Mail and its separation from the Post Office jeopardises the future of the universal postal service and the Post Office network. [15]

21. Privatisation is not necessary for the modernisation of Royal Mail. The business is modernising successfully in the public sector, underpinned by the Business Transformation Agreement between the CWU and Royal Mail. The business’s modernisation programme is fully funded and any funds raised by the sale of Royal Mail will not go to the business.

22. On completion of the modernisation programme in 2012/13, Royal Mail expects to be making close to the maximum level of profit it would be permitted by the regulator. By the end of this process the Hooper review recognises that in terms of automation Royal Mail will be close to leading European operators.

23. Alongside privatisation the Government is proposing to remove Royal Mail’s pension deficit, which will save the company close to £300m per year. Further change to the regulatory regime is needed to enable Royal Mail to compete. Such changes would have a significant effect on Royal Mail’s financial position and the sustainability of the universal service; neither proposal requires privatisation.

Universal service

24. Royal Mail has consistently argued that universal service obligation (USO) imposes a significant financial burden on the company and restricts its ability to compete. The cost of providing the USO is likely to increase as mail volumes decline as these lower volumes are not matched by falling costs.

25. A privately owned Royal Mail will necessarily seek to reduce the scope of the USO in line with its commercial interests; this trend has been seen in the Netherlands where, a year after full liberalisation of the mail market took place, the private USO provider TNT – which has been discussed as a potential investor for Royal Mail – labelled the obligation "a kind of Jurassic Park [which] we should get rid of". [16] TNT now plans to move from six deliveries of business-to-business and business-to-consumer mail a week to three and will deliver only the legal minimum and we would anticipate similar moves in the UK after privatisation. [17]

26. The Postal Services Bill purports to protect the universal service by setting out a minimum universal service obligation in line with the current requirements for six deliveries and collections a week at an affordable and uniform tariff. We have serious concerns over the range of clauses contained in the Bill that provide opportunities to reduce the scope of the USO.

27. Firstly, the definition of the universal service is a bare minimum and does not cover all postal products currently contained in the universal service under Royal Mail’s licence. Current USO products such as bulk mail – which many small businesses depend upon – may be dropped by the regulator without any form of Parliamentary approval and are likely to come under pressure from a private operator.

28. We believe that the removal of products from the USO could have a particular impact on areas in Scotland. As Royal Mail’s failed attempt to move to zonal pricing for retail bulk mail products indicates, there is pressure to align costs to pricing and, with greater distances to cover and lower population density than the rest of the UK, Scotland could suffer from similar moves by Royal Mail on products which are free from USO restrictions in the future.

29. Secondly, with regard to prices, while the Bill requires services to be "affordable" and in line with a "uniform tariff" the potential for significant changes to the current service remains. The Hooper report stated that the average weekly spend on postal services by residential households was 50p which arguably leaves significant scope for price rises

30. With each possible reduction to the USO we believe that mail services in Scotland are at particular risk. We note that Parcelforce and other parcel providers feed parcels into Royal Mail’s network for delivery to the Highlands and Islands given the additional financial burden that accessing these areas presents. Any reductions in the service based on cost are likely to hit these regions first and hardest.

31. We are also concerned that the Bill allows for the universal service to be split up among different mail operators, opening up the possibility of the sort of ‘cream-skimming’ which has been seen with the loss of bulk mail contracts by Royal Mail to downstream access operators. With competitors able to take the more attractive areas of the universal service - deliveries in densely populated urban areas - Royal Mail may be left with the more expensive rural delivery routes reducing the business’s ability to recoup the cost of the universal service. Again, despite the purported safeguards to the USO, this opens up the possibility of provision varying across the country with rural and less accessible areas likely to suffer.

32. Finally, the Bill imposes no restrictions on ownership of Royal Mail in the future and there has been significant speculation in the financial press that the more profitable parts of the business such as GLS and Parcelforce, which are relatively discrete units, will be sold off to make a quick return for an investor, mirroring the asset-stripping seen in private equity deals.

Impact upon the post office network

33. 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. Mail products, and the customer footfall they generate, are the Post Office’s largest and most important revenue stream: in 2009/10 the Post Office received £343m in revenue directly from Royal Mail businesses and mails account for just under 37% of turnover and generate around 50% of business conducted in branches.

34. With POL making an operating loss of around £100m a year before Government subsidy, it is clearly essential for the Post Office to retain this business in the future; however, this will inevitably be more difficult as a separate business, rather than a subsidiary of the Group.

35. In private ownership Royal Mail will inevitably look to reduce its costs and the inter-business agreement with the Post Office would be no exception. Given its financial position, it is difficult to see how POL could compete should Royal Mail seek to reduce costs on the current agreement; the relationship will therefore come under immediate threat from the Government’s plans.

36. There will also be significant costs arising from splitting the businesses and undermining the current natural synergies that exist in Royal Mail Group. Royal Mail’s Chief Executive, Moya Green, has stated that Royal Mail currently undertakes a number of central functions on the Post Office’s behalf worth around £150m per year for which no payment is made.

37. The rural branch network is likely to be at particular risk should the relationship with Royal Mail weaken. There is nothing in the Postal Services Bill to guard against this, either by ensuring the continuation of the inter-business agreement or by requiring the maintenance of the post office network.

38. Given the heightened risk to post offices in Scotland, and while we clearly oppose the Bill, we believe the Bill must be amended to increase the role of the devolved parliaments, for instance by extending the requirement for an annual report on the Post Office and Royal Mail to be laid before them.

Mutualisation of the Post Office

39. The Postal Services Bill includes provision to transfer the Government’s holding in the Post Office to a mutual organisation. The provision in the Bill does little to specify what form a mutualised Post Office would take, making it difficult to assess the impact a mutualised Post Office may have.

40. The Bill leaves important questions on basic issues unanswered – from structure and membership, to the role of any mutual body – and we are concerned that the Bill includes wide-ranging provisions for the disposal of the public’s holding in such a valued institution, with almost no detail or requirements for parliamentary approval.

41. The most important area of uncertainty, however, is how the post office is to be made sustainable - an issue which is necessarily prior to any proposed mutualisation. As outlined above, we believe that the separation of Royal Mail and the Post Office seriously jeopardises the achievement of this goal.

42. The Government has also acknowledged that there is likely to be a need for a continuing subsidy to the Post Office to keep open certain unprofitable branches in the future. It is unclear how this, or the statements that the Post Office will become the ‘front office for Government’, fit with the proposal to end Government ownership of the network.

18 November 2010