Business, Innovation and Skills CommitteeWritten evidence submitted by Consumer Futures

The Implications of Scottish Independence on Postal Services

About Consumer Futures

Consumer Futures (previously Consumer Focus) is the statutory consumer watchdog for energy and postal services in Great Britain, water services in Scotland and postal services in Northern Ireland. It has a wider role in applying learning and insight across other regulated markets.

Introduction

Consumer Futures has a strong presence in Scotland, working to protect and promote the interests of consumers in regulated markets in Scotland. Our role is not only to consider current issues facing consumers, but to look ahead to the potential for problems or opportunities and identify action to be taken. Our current workplan includes consideration of the implications for consumers of any constitutional change in the governance, regulation and operation of essential markets.

In light of the scope of the Committee’s inquiry and that of our statutory remit, our comments relate only to the implications of Scottish independence on postal services.

The views we express are focussed on those issues which will directly affect consumers of postal services and the post office network, both in Scotland and in other UK nations. It is not our intent to express any opinion on the overall desirability of Scottish independence, and nothing in this evidence should be interpreted as either supporting or opposing that outcome.

1. Executive Summary

1.1 Significant challenges already exist across the UK in sustaining a universal postal service that meets the changing habits and needs of consumers at an affordable price. The particular geography and topography of Scotland presents additional challenges. These challenges will be brought in to sharper focus in the event of Scottish Independence.

1.2 Regardless of whether a single market arrangement can be agreed between the Governments of an independent Scotland and the UK, the entire regulatory, governance, policy and contractual framework for postal services and the Post Office network would need to be revisited should Scotland secede from the UK. European law would heavily influence the parameters within which decisions about the scope, scale, quality and affordability of postal service provision could be made.

2. Background

2.1 The postal service continues to play an important role in Scotland with research showing:

95% of consumers in Scotland receive mail each week and 84% sent mail at least once per month.1

94% of businesses and 85% of individuals in Scotland state they will always need to send items by post.2

2.2 The Universal Service Obligation (USO) requires Royal Mail, as the designated Universal Service Provider (USP), to provide a mail delivery and collection service six days a week for letters, and five days a week for parcels, at a uniform affordable tariff across the UK. Quality of service standards are in place which set targets for delivery timescales as well as collections.

2.3 The USO provides a valuable service for people in Scotland, particularly those in Scotland’s rural and remote areas where:

consumers often have to travel longer distances to access face-to-face services;

broadband penetration is less well developed in some areas; and

the growth in online retailing has the potential to offer significant benefits.

2.4 Almost one million people live in rural Scotland and 280,000 of those live in remote rural areas. Rural Scotland accounts for 98% of the land mass of Scotland3. Scotland has approximately 96 inhabited Islands with a total population of around 100,0004. Scotland’s geography and topography affects the provision of postal services in a number of ways, including:

Almost half (45%) of the 3000 addresses exempt from the USO, for health and safety or difficulty of access reasons, are in Scotland;

The three postcode areas in the UK exempt from Royal Mail’s quality of service standards are all in Scotland—HS (Outer Hebrides), KW (Kirkwall), and ZE (Lerwick); and

There is substantial evidence of the difficulties consumers in Scotland, particularly those in rural and remote areas, experience with parcel deliveries by operators other than Royal Mail, including: higher costs of delivery; no delivery to their location; longer delivery times; lack of transparency of delivery costs; and a lack of up-front information about delivery costs.5

2.5 The 1,400-strong Post Office network in Scotland is Scotland’s largest retail chain. It is one of the key means by which consumers and businesses access the postal network and offers unparalleled access to a wider range of services including pensions and benefits, government services, and bill payments. The network is especially important in supporting sustainable communities in Scotland’s remote and rural areas.

2.6 Postal services and the Post Office network across the UK face significant challenges from the increasing use of digital technology, the consequential reduction in letter volumes and increase in parcel mail, and the changing needs of users.

2.7 Governance, policy and regulation relating to Postal services and the Post Office network are reserved matters and the Scottish Government does not have legislative powers in this area.

3. Implications of Scottish Independence on Postal Services in Scotland

3.1 In the event of Scottish independence, the entire regulatory, governance, policy and contractual framework for postal services and the Post Office network would need to be revisited. While it would be possible to retain a single market, with the mutual agreement of both the Scottish and UK Governments, both Governments would require to be satisfied that key issues had been considered in establishing new arrangements.

3.2 The key issues that would need to be considered, whether in an agreed single market context or otherwise, include:

the scope and sustainability of the Universal Service Obligation;

the designation of Universal Service Provider(s);

the setting of appropriate Quality of Service standards;

the contractual relationship between Royal Mail, as the current UK designated USP, and Post Office Limited, as the outlet providing access to mail services on behalf of the USP, and their equivalents in Scotland;

cross- border postal issues including mail costs; and

the impact of Scottish independence on UK postal regulation.

4. Regulatory Framework

4.1 Through the detailed research base accumulated by Consumer Futures, and our predecessor organisations, it is evident that consumers value the accessibility, affordability, quality and suitability of current postal service provision. It is vital that these aspects remain priority considerations for the regulation and provision of postal services. The regulatory framework provides critical means by which the interests of consumers can be protected.

4.2 The parameters within which regulatory decisions would be made in an independent Scotland would be heavily influenced by its position in Europe. As a member of the European Union (EU), an independent Scotland would be required to meet minimum obligations established in the Postal Services Directive (1997), including:

designating an independent national regulator (or regulators) with specified regulatory functions;

ensuring users have access to a universal postal service of specified quality, which is available across all points in the territory, affordable to users and which meets specified requirements, including:

at least one collection and one delivery guaranteed at least five working days a week;

services for registered and insured items; and

providing delivery services for postal packets up to 20kg received from other Member States.

designating Universal Service Provider(s) to deliver the universal service, or parts thereof;

setting and publishing Quality of Service standards;

ensuring postal services tariffs comply with principles of affordability, transparency, encourage efficiency, and are cost-reflective;

ensuring transparent, non-discriminatory access to the Universal Service Provider(s) infrastructure in order to facilitate upstream competition;

ensuring users have access to internal complaints handling and compensation schemes; and

ensuring mail integrity.

4.3 Exceptional geographic conditions can provide mitigation for exemptions from some of these requirements, as is currently the case in relation to delivery requirements and service standards in certain parts of Scotland. However, a substantial level of postal services infrastructure would still be required to meet the minimum requirements.

4.4 The geography and topography of Scotland creates particular challenges when considering the establishment of a Scotland-only postal service, as does the volume of mail likely to be in circulation in a Scotland-only network. This raises questions as to how a sustainable universal service that meets the needs of consumers could be delivered at an affordable price for consumers. The growing tensions between the sustainability and substance of the universal postal service are likely to be brought into even sharper focus in such a context.

4.5 These tensions are likely to be focused on three key areas of postal services regulation: the features of the USO; the cost of providing mail services and the associated effect on pricing; and quality of service standards. If a Scotland-only USO is to be sustainable then decisions will have to be taken about the interaction and balance between these key features. Consideration will also be required about how to ensure sufficient safeguards are in place to protect the interests of consumers.

5. Maintaining a Sustainable Universal Service that Meets Consumer Needs

5.1 The current USO plays a particularly important role in Scotland, especially for consumers and businesses in Scotland’s rural and island communities; older consumers who are more reliant on mail services; and low-internet-users. The service provision requirements placed on the USP(s) in Scotland would be an important means of ensuring the postal service meets users’ needs. These requirements would also strongly influence the cost of providing this service and its long-term sustainability.

5.2 Identifying the features of the Universal Service Obligation (USO) to be prescribed in the regulatory framework would be a key decision. The UK currently exceeds the minimum obligations required of it by the Postal Services Directive—for example, it provides for a six days a week delivery for letters rather than the minimum of five; quality of service standards exceed those set out in the Directive; and a uniform pricing tariff applies. An independent Scotland could make its own decisions about such features of the USO provided its choices were compatible with the Postal Services Directive.

Cost of providing mail services and the effects on mail pricing

5.3 As a member of the EU, Scotland would need to designate a Universal Service Provider (or providers) to deliver the USO and have in place the necessary infrastructure for collecting, sorting and distributing mail. Royal Mail, as the designated universal service provider in the UK, has significant infrastructure already in place in Scotland. Should another postal operator (or operators) be designated to provide the USO there would undoubtedly be associated costs and practical considerations in disentangling the existing infrastructure and putting a new one in place.

5.4 Under European law, the tariff charged by a USP must be affordable to users, must be cost-oriented and encourage efficiency. If providing the USO creates an unfair financial burden on the USP(s), mechanisms are available to member states to help alleviate this burden, such as compensating the USP from public funds or establishing a compensation fund subsidised by non-USP postal service operators and/or users’ fees. Should this be deemed to be the case in Scotland, decisions would need to be taken about whether any of the available mechanisms should be used to alleviate these costs, and if so, who should bear these costs and how.

5.5 Decisions about the extent to which costs should be passed to users would need to have regard to the effects on the affordability of mail services, particularly for those vulnerable consumers who rely on the postal service. The impact of any substantial increase in price could accelerate the switch away from using mail, in turn putting greater strain on the financing of the USO, or cause those who can least afford any increase and cannot use alternate means, to bear a disproportionate amount of the cost6.

Quality of Service standards

5.6 Under the provisions of the EU’s Postal Services Directive, quality of service standards for delivering mail would be required to be put in place. These standards should focus in particular on delivery targets and the regularity and reliability of services. Key considerations will be the levels of quality of service standards and the extent to which any exceptions to these should apply in particular geographic areas.

5.7 At present, Royal Mail’s UK-wide target is that 93% of First Class mail should be delivered next working day and that 98.5% of Second Class mail should be delivered within three working days—these standards rate reasonably highly in international comparisons7.There is also a local target specifying that 91.5% of First Class mail should be delivered next working day within each postcode area. There are only three exceptions to this postcode area target, all of which are in Scotland and cover the most remote areas and islands.

5.8 The standards that the USP would be required to meet will have a direct bearing on the cost of providing the USO, though under European law minimum standards are only specified for cross-border services. Setting quality standards that meet the needs of consumers and businesses but which can be achieved at an affordable cost for the USP will be a key challenge in the event of independence.

6. Accessing Mail Services and the Relationship between Royal Mail & Post Office Ltd

6.1 An important element of the regulatory framework in an independent Scotland would be the setting of access criteria to ensure consumers and businesses are able to access essential mail services, such as purchasing registered and insured mail services; posting items that are too large to fit through post boxes (as well as letters); and applying for mail redirection services.

6.2 At present, an inter-business agreement between Royal Mail and Post Office Limited establishes the Post Office network as the access point for mail services. These arrangements would need to be revisited in the event of constitutional change in Scotland. Even if Royal Mail were to be designated as the USP in Scotland, it would need to consider access arrangements to the mail network, directly and/or contractually via the Post Office network or other networked outlet, within the Scottish regulatory framework.

6.3 Current mail access point arrangements8 are specified by the regulator, OFCOM, within the conditions imposed on the designated universal service provider, Royal Mail. Royal Mail fulfils those conditions via the provision of post boxes and via its inter-business agreement with Post Office Ltd. Additionally, the UK Government has established access criteria specifying the minimum coverage and distribution for the provision of Post Office services.9. An independent Scotland would need to determine whether it maintained access criteria at current levels and where the costs associated with the mail and post office network were borne—through user payment or taxpayer subsidy.

6.4 Consideration would also need to be given to how current UK Government plans for change in ownership and governance of Royal Mail and Post Office Ltd, and the current and future subsidy of services of general social and economic interest via the post office network, impact on the provision of a universal mail service and on Post Office services in the event of Scottish Independence.

7. Cross-border Issues

7.1 In the event of Scottish independence, Scotland and other UK nations would require arrangements to be put in place for dealing with cross-border mail.

7.2 The price of posting mail from Scotland to nations remaining part of the UK and from those other UK nations to Scotland would need to be identified. Typically, postal operators have three main tariffs: domestic; Europe; and rest of the world. Evidence from Europe suggests a number of potential pricing scenarios could result from Scotland becoming independent, including:

International rates could be charged. Royal Mail currently charges consumers EU rates for sending mail between Northern Ireland and the Republic of Ireland;

a standard rate for post between the current UK nations, or between some of the nations, could be charged. An Post, the Republic of Ireland USP, operates an ‘all-Ireland’ rate for mail which distinguishes Northern Ireland from the rest of the UK; and

a preferential rate for mail between Scotland and the rest of the UK could be negotiated and agreed. Preferential rates between neighbouring postal operators are commonly found in Europe.10

7.3 Which scenario is adopted may depend on a number of different factors. In the absence of a negotiated and agreed preferential rate, it would be possible for the designated USPs operating in Scotland and the rest of the United Kingdom to take different approaches to their pricing tariffs, as is seen in Northern Ireland and the Republic of Ireland.

7.4 Quality of service standards for cross-border mail would also need to be put place11. It would therefore be possible for the regulatory framework to set different timescales for sending mail from Scotland to other UK nations, or from other UK nations into Scotland, than are currently in place. A consideration for both Scottish and UK Governments would be the impact on consumers and businesses if uniform quality standards were not applied across the UK.

7.5 Consumers may have particular views on such issues. Research12 by Consumer Focus (Post) examining cross-border mail between Northern Ireland and the Republic of Ireland, found that a large majority of consumers (87%) considered it unsatisfactory that mail to the Republic of Ireland is more expensive than mail to the rest of the UK, and 77% suggested that the tariffs should be the same. Although satisfaction rates with cross-border mail were relatively high, there was low awareness among Northern Ireland consumers of the need to use an inter-state stamp to send post from Northern Ireland to the Republic of Ireland, with half of businesses (48%) and nearly three-quarters of consumers (72%) not familiar with the correct tariff.

7.6 The cross-border tariff and quality of service standards implemented in an independent Scotland and in the nations remaining part of the UK has the potential to have a significant influence on the postal services markets in these jurisdictions. Our research found that over a quarter of all consumers surveyed (which included businesses) had taken post destined for the Republic of Ireland across the border to use An Post postal services, mainly because of the lower cost and perceived faster delivery time. Anecdotal evidence from sub-postmasters in border communities would suggest that this level has increased since this research was undertaken in 2009. Postal competitors are also emerging who are offering competitive tariffs for posting from Northern Ireland to the Republic of Ireland. Similar behaviours emerging in the event of Scottish independence could potentially impact upon the Scottish USP’s and/or Royal Mail’s mail volumes and consequently the sustainability of the USO.

8. Implications of Scottish Independence on UK Postal Regulation

8.1 The possibility of Scottish Independence raises more general considerations for the regulation of postal services in the rest of the UK. The regulatory framework for the rest of the UK would remain intact following Scottish independence and the provisions of the Postal Services Act 2011 would continue to apply, albeit in a revised framework that takes account of the effects of Scottish independence. For example, at the moment, the costs of providing the USO to the diverse geography of the UK is considered and reflected in Royal Mail’s uniform pricing structure. In the event of independence, and given the deeper rural and remote aspects of Scotland’s geography, the pricing regimes adopted either side of the border will become a key consideration, for both Governments, as these will need to reflect the actual cost of providing the USO in the respective jurisdictions.

12 June 2013