Business, Innovation and Skills CommitteeWritten evidence submitted by The Communications Union (CWU)

The Implications of Scottish Independence on Postal Services

Overview

1. The CWU is the largest union in the communications sector in the UK, representing over 200,000 employees in the postal, telecommunications and financial services industries, including over 17,000 members in Scotland, and is the recognised union for all non-management employee grades in the Royal Mail Group.

2. The Business, Innovation and Skill Committee Select Committee are seeking views on the implications of Scottish Independence on business, higher education and research and postal services.

Impact on Businesses

3. An independent Scotland would clearly have wide reaching effect for Royal Mail, the Post Office and other businesses operating in the postal sector. Currently so many factors remain unknown, including the legal and regulatory framework of an independent Scotland, that companies are reluctant to speculate publicly on the implications of independence, as the House of Lords Economic Affairs Committee recently noted.1

4. It should be noted that neither the UK government nor the Scottish Executive have published reports in any great detail on the future of the postal and telecom networks in an independent Scotland. At the present time we can only speculate about the challenges these sectors may face based on the limited evidence available.

Demand for Postal Services

5. While mail volumes have fallen in recent years, there is continuing strong demand for postal services in Scotland, as in the rest of the UK. Consumer Focus Scotland research in 2010 showed 49% of consumers in Scotland send mail every week, with 80% of consumers saying the Post Office plays an important role in their local community.2

6. In addition, 46% of Scottish consumers reported the amount of mail they receive is increasing, compared to 35% of English consumers. In line with the general increase in parcel volumes, 43% of Scottish consumers state they would do more shopping online in the future,3 despite there being evidence of poor coverage for residents in rural Scotland as, will be discussed.

7. Mail also remains integral to businesses, with the Federation of Small Businesses reporting 98% of their members use mail services on a weekly basis and repeated research showing that businesses place a high value on daily collections and deliveries and would resist changes to the basic universal service provision.4

EU Status and Implications for Postal Services

8. The European Union (EU) status of an independent Scotland has implications for the future of the postal service. The Scottish Executive believes an independent Scotland would remain part of the EU, whilst the UK Government believes they would have to apply to join.

9. However there is currently no provision under EU law for a part of a member state becoming independent. The European Commission has been reticent to give an opinion until the nature of the separation has been agreed by Scottish and UK ministers.5 However in 2004 the Commission stated, in response to a question by a Welsh MEP, that a separating region would be outside the EU from the day of independence, and would then need to apply for membership.6

10. Were an independent Scotland to apply to become an EU member state, then the state would be required to ensure a universal postal service existed and to operate to certain prescribed standards. The state would also be subject to competition rules governing the internal market in postal services.

11. Under European regulations the universal service provider is required to provide one delivery per day not less than five working days a week.7 Existing UK law, which requires a six day a week delivery to the home or premises of every individual in the UK, would not apply in an independent Scotland. Similarly, UK law requiring a uniform tariff for postal services would no longer apply as there is no such obligation under the European Directive.

12. Other areas that would be open to change include the provision of postal items up to 20kg rather than the 10kg EU minimum, and the future of the free-of-charge postal service to blind or partially sighted people and free carriage of legislative petitions and addresses.

13. The EU Postal Directive also requires that for intra-community cross-border mail, 85% of mail items should be delivered within three days of the date of posting and 97% of mail delivered within five days of date of posting.8

14. An independent Scotland would also have to join the Universal Postal Union (UPU) and pay terminal dues9 as both an inward and outward postal destination. However future arrangements for cross-border mail between an independent Scotland and the rest of the UK are unclear.

The Universal Service

15. As discussed above, the extent of minimum universal service requirements in an independent Scotland would depend on whether the country was to be a member of the EU. The UK Government has legislated to extend the universal postal service beyond the minimum set at an EU level.

16. The government of an independent Scotland would need to choose whether to similarly extend the universal service minimum requirements. The regulator Ofcom also places additional requirements on the UK USO that would need to be considered by an independent Scotland. These include: a next-day delivery service, a distinction between first and second class post, the cap on the price of second class stamps, charges to other postal operators to deliver their sorted mail, the geographical or special circumstances where the USO does not apply, imposing quality of service targets and the density of access points to meet the reasonable needs of users.

Cross-border Mail

17. A future Scottish government may seek to negotiate a position similar to that of the Isle of Man and the Channels Isles, where postage rates are the same as to and from UK destinations.10 However the Scottish Executive has indicated they believe facilities for cross-border mail would be similar to those for mail sent between the Republic of Ireland and Northern Ireland.11

18. Under this system, posting a standard letter from Northern Ireland to the Republic of Ireland is categorised as an ‘Airmail Service’ within the EU and charged 56p by Royal Mail. Whereas the Republic of Ireland’s An Post operates an ‘all-Ireland’ inland rate for mail, which distinguishes Northern Ireland from the rest of the United Kingdom, charging standard letters from the Republic of Ireland to Northern Ireland at €0.55, and letters to England, Scotland and Wales at the full EU interstate price of €0.82.

19. However there is evidence that much confusion exists about the correct tariffs for cross-border mail in this model.12 In addition, no formal standards of service are required by either the UK or Republic of Ireland regulators of their respective postal operators. Whilst the cross-border mail service exceeded EU performance targets, it did not meet the standard considered acceptable by consumers.13 Any government in an independent Scotland would need to address these issues.

20. There is the prospect that mail from Scotland to England would be classified as international post. There are a number of international and European agreements enabling the transmission of post internationally, based on a system of terminal dues involving payments from one operator to another based on a proportion of the cost of postage in the sender country. Countries which do well under this system are those which have relatively low postage costs, and those which are net exporters of mail, both of which are currently the case in the UK. The trend in recent years has been for net exports of post to increase substantially:

a. Table 2:

BALANCE OF TRADE, UK INTERNATIONAL MAIL 2009–2011

Source: Universal Postal Union postal statistics database

21. Data is not currently available on the balance of post between Scotland and the rest of the UK and the net cost effects of an independent Scotland are therefore difficult to predict. It should be noted that as Government agencies are significant users of postal services, any transfer of responsibilities from England to Scotland would affect the volume of cross border mail. However international letter mail amounts to only 2% of global mail volumes,14 so any costs or benefits of cross border mail would be insignificant compared to the costs of delivery to the more remote parts of an independent Scotland.

Future of Royal Mail

22. Spokespeople for the Scottish Executive have said they do not anticipate any significant change from the current UK-wide system; that existing methods of delivery for the people of Scotland would continue uninterrupted;15 and that an independent Scotland would inherit its “fair share” of assets from the UK Government.16 However, there would likely be substantial changes to the postal service if the Scottish people voted yes in the referendum.

23. In an independent Scotland, Royal Mail would no longer be bound by Westminster legislation which imposes a duty on the company to provide the universal postal service. A new Scottish postal services provider would likely need to be established. However, the significant set up costs that would be required suggests more likely options are either a service agreement with Royal Mail or the transfer of the existing Royal Mail network to a new Scottish company, which may affect Royal Mail jobs in Scotland. We would expect the Scottish Executive to be in discussion with Royal Mail on these issues.

24. The planned privatisation of Royal Mail would also have significant implications for an independent Scotland if it goes ahead. It is likely a privatised Royal Mail would seek to divest itself of responsibility for universal postal services in an independent Scotland in line with its commercial interests. Royal Mail has consistently argued that the USO operates at a net loss, with the recent decline in letter volumes only offset by price increases.17 The cost of providing the USO is likely to increase as mail volumes continue to decline and are not matched by falling costs.

25. Although it is not possible to identify a Scottish element of the USO cost, the unit costs of delivering the universal postal service are likely to be high in Scotland compared to the rest of the UK because of the prevalence of remote rural areas with low population density. The cost of delivery to these areas is currently subsidised by customers elsewhere in the UK so that a single price applies regardless of geographic location. However, this would not apply in an independent Scotland and the result may be significantly higher stamp prices for customers in Scotland, or substantial costs to the Scottish taxpayer.

Parcel Delivery

26. Currently Royal Mail is required by UK law to provide universal service products at a uniform tariff regardless of geographic location. For many residents of Scotland’s remote areas, Royal Mail parcel products provide the only viable means of delivery.

27. A report by Citizens Advice Scotland in 2011 found that 83.8% of people surveyed living in remote parts of Scotland had been refused delivery altogether by a retailer using a carrier other than Royal Mail, and that increased charges are the norm.18 Since then the situation has not improved, with a follow up report in December 2012 finding that 63% of the 534 retailers investigated charged extra for delivery to certain parts of the UK.19 The top 10 postcodes, to which the small firms surveyed refused to send goods, cover a total of over one million excluded residents.20

28. This affects these communities’ ability to access e-commerce, and is exacerbated by the fact these areas often have the most to gain from e-commerce, since the local provision of retail facilities is limited and travel costs to retail destinations high. Just over 86% of people living in these areas order products or services online more than 10 times a year.21 Consideration therefore needs to be given to how parcel delivery and access to e-commerce would work in an independent Scotland.

29. More information is also needed about the future of Royal Mail Postbus routes in an independent Scotland. Currently they carry more than 50,000 passengers a year in the UK, with a number of bus routes in Scotland, and are used by people who do not drive as well as tourists.22

Future Viability of the Post Office Network

30. The Post Office network is highly valued by residents of Scotland. In recent surveys, 49% visited the post office weekly, with 87% of respondents visiting once a month.23

31. At the end of March 2012 there were 1,425 Post Office branches in Scotland, down from 1,433 branches in 2011 and 1,446 branches in 2010.24 Of these branches open in 2012, 67.6% were in rural areas, 21% in urban areas, and 10.5% in deprived urban areas. The proportion of rural branches in Scotland is substantially higher than the UK average of 54.6%, and the proportion of urban branches well below the UK average of 34.1%.25 Currently five Crown Post Offices in Scotland are facing closure and franchising in retail outlets at alternative locations under the Post Office’s Network Transformation programme.26

32. The financial position of the Post Office network in Scotland is precarious because of the high proportion of rural branches, in which revenue tends to be low. The last Postcomm Annual Report on the Post Office Network in 2010 found that less than 23% of rural branches generated over £40,000 per annum, compared with 69% of urban branches and 65% of urban deprived branches.27

33. As with the postal service, the effect of Scottish independence would depend on whether responsibility for the post office network remained with Post Office Ltd., or transferred to a new company. Post Office Ltd. is currently entirely owned by the Crown and it is not yet clear what arrangements would apply post-independence.

34. The post office network remains reliant on Government subsidy, without which it would be loss making. Its first six month trading statement since separating from Royal Mail in April 2012 showed operating profit up £5m to £61m, but this was accounted for by a £13m increase to £103m in its taxpayer subsidy.28 Whilst figures are not available for the Scottish element of the UK Government subsidy, whoever took responsibility for post offices in an independent Scotland would need to provide substantial subsidy to maintain the network at its current level. It is not yet clear from the Scottish Executive how the post office network might be funded in an Independent Scotland.

35. Consideration must also be given to the future of the ten-year commercial agreement between Royal Mail and Post Office Ltd. signed in 2012 and which is crucial to the survival of the post office network. It is unclear whether this relationship would hold in an independent Scotland given changes in the legal framework and the potential for a change in the company providing postal or post office services.

36. The planned privatisation of Royal Mail also poses a threat to the post office network in Scotland. If a privatised Royal Mail, freed from political considerations, were to end its relationship with the Post Office, then the rural branch network would be at significant risk; this would have serious implications for postal services in Scotland.

Stamps

37. It is not yet clear if the Queen would remain the Head of State in an independent Scotland and her image used on Scottish postage stamps. The Postal Services Act 2011 introduced a requirement that UK stamps must feature the image of the Queen, but such legislation would not apply in an independent Scotland.

38. The Yes Scotland campaign says the proposal of the current Scottish Government is that the Queen will remain Head of State in an independent Scotland in order to preserve the social union with England, Wales and Northern Ireland.29 However other political parties that support Scottish independence want an elected Head of State. The issue is likely to either be subject to a referendum or a feature of the first Scottish Parliament elections in 2016 post-independence.

The Future of Telecoms

39. There are other issues of access and universal service that should be considered in an independent Scotland, most notably related to telecoms and broadband provision. However, as with postal services, it is difficult to draw any firm conclusions about the impact of Scottish independence at the present stage.

40. BT currently operates in Scotland as ‘BT Scotland’ and claims to provide £789m in Gross Value Add (GVA) to the Scottish economy; equivalent to 0.7% of Scottish GVA. It employs 7,500 people in Scotland and supports 12,500 Scottish jobs through its supply chain.30

41. It is likely that BT would continue to operate in an independent Scotland; however, the legal and regulatory framework under which it operates would change. Ofcom, which currently has a significant degree of control over prices and how BT’s network is accessed by private operators, would cease to have jurisdiction in an independent Scotland and a new regulator for Scotland would need to be established.

Broadband Provision

42. An independent Scotland would also affect the UK government’s plans to provide superfast broadband to at least 90% of UK premises and for the UK to have the ‘best’ superfast broadband network in Europe by 2015.31A Scottish government would instead have responsibility for setting and funding its own broadband targets.

43. The Scottish Executive has set out their ambition for all of Scotland to have access to next generation broadband by 2020, with significant progress to be made by 2015.32 However currently Scotland is lagging behind the rest of the UK in terms of broadband take-up.33

44. In their recent paper making their economic case for independence, the Scottish Executive said they would use new regulatory powers to meet the connectivity needs of rural and urban areas in Scotland by setting coverage obligations for providers to reflect the unique demands of the population.34 However it is not yet clear how this would be funded in an independent Scotland.

45. The CWU is calling for the introduction of a legally binding universal service obligation for broadband across the UK.

Conclusion

46. Given the current lack of industry-specific information, it is clear far greater consideration must be given to the structure of regulation, the nature of the ‘Scottish Universal Service’, the legislative framework governing it, and the cost implications this would entail for any postal or telecom provider if voters are to have an informed choice at the 2014 independence referendum.

7 June 2013