Business, Innovation and Skills Committee - Minutes of EvidenceHC 539-II

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Wednesday 9 October 2013

Members present:

Mr Adrian Bailey (Chair)

Mr Brian Binley

Paul Blomfield

Katy Clark

Caroline Dinenage

Julie Elliot

Rebecca Harris

Ann McKechin

Mr Robin Walker

Nadhim Zahawi


Examination of Witness

Witness: Rt Hon Vince Cable MP, Secretary of State for Business, Innovation and Skills, gave evidence.

Q1 Chair: Good afternoon, Minister. Welcome and thank you for agreeing to address us on this issue. Just one thing I should say: could I remind members of the public that they should not make comments or gestures in response to questions and answers during this evidence session? I am aware that this is a very contentious issue and people may have strong feelings, but please do your best to contain them. Before I commence questioning, could I just invite you, Minister, to introduce yourself for voice transcription purposes?

Vince Cable: I am Vince Cable; I am Secretary of State for Business, Innovation and Skills.

Q2 Chair: Thank you, Minister. I would like to start with a question that you may be familiar with: why should good companies be destroyed by short-term investors looking for a speculative killing, while their accomplices in the city make fat fees? You may recognise that as a rhetorical question that you were asked at the Lib Dem Conference.

Vince Cable: I do indeed, yes.

Chair: As the architect of a flotation of a profitable, popular, publicly owned company, selling 70% of its shares at knock-down prices to the very financial institutions that you have historically criticised, you appear to be contradicting that position. Are you in a position to answer your own question?

Vince Cable: Very comfortably, and indeed I heard the phrase "short term" in the transcript of what I once said. That is not what this is about. There is quite a lot of connection between what I am saying to you about this flotation and what I said in my last evidence session with you, which was about the Kay Report and long-termism. One of the major objectives of this flotation is to try to obtain a long-term, secure, responsible, institutional investor base. That is primarily what this is about, and indeed we worked hard to sample views in that sector. This is about long-term, stable, secure investment.

As far as the fees are concerned, we can talk about that in detail. They are rather competitive compared with other privatisation, some of which I have criticised. I seem to remember when I was in Opposition being very critical of things like QinetiQ being rather poor value for money. We are trying to make sure on this particular occasion that our fees are competitive and that we are operating on a proper commercial basis.

As far as the other pejorative remarks that I made, I think we need to make a very clear distinction between short-term speculative activities-I have referred in the past to "spivs and speculators". There are such people in the market, but we are trying to ensure that on this occasion the share book is dominated by responsible, long-term institutional investors who will help the Mail through a long period of adjustment and hopefully successful business.

Q3 Chair: I understand your sentiments, but can I just quote a point made in The Guardian today? How can you ensure that ownership of the Royal Mail moves to responsible investors able to take a long-term responsible approach, given the fact that 70% are going to institutional investors anyway? It is very likely if there is a profit to be made that a high proportion of the retail investors will immediately sell those shares to the institutional investors that want them.

Vince Cable: If-and as is the case-the institutional investor bids are heavily oversubscribed, we are in a position to ensure that the responsible institutional investors do, in fact, make the purchases. We have not decided on the allocation yet; that will before trading opens on Friday. However, we are in a position to ensure that we do get the right kind of investor community. We are talking about pension funds and insurance companies that hold the savings of millions of people, and we have been very clear that that is the kind of relationship we want to have; that is long-termism. That is what the Kay Report was all about; those are the institutions we were talking about. That is where the investment will go.

As for the 30%, obviously we cannot account for how the retail investors use the shares when they have acquired them. Most of these are very small retail investors and we are committed to protecting that particular group to ensure that they obtain satisfaction. Most of them will want a small stake in the business. They are not large private investors who are in it to make a killing, so I think the risks you talk about are very remote.

Q4 Chair: Just to follow this point through, are you actually saying that the shares will only be allocated to those institutional investors that you are satisfied will hold those shares for long-term strategic benefits rather than for short-term profits? If so, how are you going to make that judgment?

Vince Cable: That is the target market, and the people who are advising us will manage that allocation. In preparation for this flotation our shareholder executive advisers have been in discussion for about a year with the investor community, trying to establish how they would approach this flotation. Amongst other things, that has helped to frame the price range. We are confident that the community we are talking about has sufficient demand to be able to meet them without-because I mean we could make a decision simply to offload as much as possible to the people making the highest bid, and you would then probably get a lot of hedge funds and short-term speculators in the market. However, the aim is to place the shares with the long-term investors, the kind of people I have described. We are absolutely confident that that will happen, but of course the individual allocations are still to be made.

Q5 Chair: The Committee may come back to that at some stage to see how far that has been borne out by reality. Just before I move on, slightly tangentially, there has been a lot of debate about the value for money of this privatisation. How do you measure it, and will you do an analysis of the value for money of this privatisation at a later date to see if there is anything to be learnt, as we know there are other potential privatisations in the pipeline?

Vince Cable: In terms of the latter part of the question, the National Audit Office will of course be doing an evaluation of value for money; I am sure the Public Accounts Committee will want to hear from me and my officials. We are prepared to co-operate with them and make that investigation as thorough and professional as possible, so we are prepared for that perfectly legitimate questioning.

The issue of what the metrics are and how to measure them is partly proceeds. Clearly, we judge it on that not just now, but in future, because there will be a significant stake remaining in the public sector. We have to think about the value of that stake, which is why we have to take a long-term view about this flotation. There is the proceeds both now and in the future, but we also have to think about value for money in terms of whether this transaction has helped us deliver our basis objective from the outset, which was to enable the Royal Mail to deliver the universal service obligation, to be able operate in an increasingly competitive market and to raise capital to do that. The value for money test is therefore quite a broad one, but it starts with the proceeds now and in the medium to long-term.

Q6 Rebecca Harris: You have talked a bit already about the anticipated 30/70 split between retail and institutional investors. It is true what you said about the longterm stability, and also not selling off to the highest bidder, as you put it. Within that, how have you assessed making sure that we will be getting enough competition to get value for the taxpayer from the sale as well?

Vince Cable: In terms of the value, we have applied various tests, and various tests were used to fix the price range within which we are now operating. We have made it very clear we are now operating at the upper end of that range. How did we determine that? There were several steps in the process. The first was a long-term process of consultation with the big, long-term institutional investors to get a sense from them about how the company would be valued in order to get the kind of investors we wished to have. Secondly, there are metrics out in the market which we would use. Obviously, you look at comparable situations. There are not many, but there are several European mail companies that have privatised: Belgium quite recently through an IPO; Austria has been trading for some time. You look at the dividend yield, and in the UK I think we will finish up with something like 6%, which is below what is happening in the Belgium case, for example, which is what you want to achieve, so it is very competitive.

We have independent advice. The people advising us, Lazard’s-whose fee is not based on the outcome-are just giving us good, independent advice. All of these factors have been used to provide a proper, professional assessment about what the proper price should be. We are confident that it is priced in the right place.

Q7 Rebecca Harris: Thank you. How did you arrive at setting a minimum application size for the public at £750? Did you make an assessment of the affordability of this deal to the general public, or was it about-

Vince Cable: Are you asking about the 70/30 split?

Rebecca Harris: No, the fact that the minimum application size for the public to purchase is £750.

Vince Cable: That was felt to be a figure that was sufficient to attract people of very modest means and ordinary households, and indeed that has been the case. We have not got the final figures yet, but my very rough estimate is that we have had about 700,000 applications, and it is about six or seven times over-subscribed. There was a lot of interest, and that does suggest that we did not overprice it.

Q8 Rebecca Harris: Does it worry you that many members of the public will be very disappointed that they did not get an opportunity to get in on this?

Vince Cable: That takes us into the issue about the balance between the retail investors and the institutional investors. As I say, we set aside roughly 30% for the retail. Obviously the corollary of increasing the retail would have been to have reduced the institutional investor component. As a matter of the long-term future of the Mail, we felt the 70/30 was right.

Q9 Mr Binley: I am becoming a weak and elderly gentleman, Secretary of State, as you know. I noticed that the prospectus was 440 pages, so it took a bit of carrying. I just wonder, bearing in mind that the BT privatisation was 60 pages, British Gas 80 pages and Railtrack 250 pages, are we on an upward path to be the producer of the largest prospectus? Why is it much bigger?

Vince Cable: There have not been many IPOs recently.

Mr Binley: No, you have beaten the record there.

Vince Cable: We may have so far, but for good reason. Surely, the whole point is to be as transparent and as open as possible to give information. The worst thing to happen would be people saying, "You are not telling us what is going on here." It is completely transparent. The risks are spelt out. These are shares: they are risky; there is a need to spell out in detail what those risks are, so there is a good reason for being-

Q10 Mr Binley: Are you saying that earlier privatisations did not do that spelling out? Where is the difference?

Vince Cable: We did not set out to beat any record of length. This is quite a big and complex business, as you well know. The aim was to meet current standards of corporate governance and to meet the expectations of the public. We are dealing with very sophisticated investors in the investment community who ask searching questions, so naturally you have to get the information out there.

Q11 Mr Binley: Would you be kind? It does interest me, seriously. I do not wish to tell you that you have not given me a fair answer, but I do not think you have given me an answer to the depth I hoped you would be able to. There is a sizeable difference between the two. You might be kind and get your office to write to me, if you felt that was okay.

Vince Cable: Yes, indeed. It is a fair question.

Q12 Mr Binley: The other thing that concerns me about the prospectus is that it was published on 27 September and the deadline for applications was yesterday. Is it reasonable to ask investors to study a 440-page document in that timeframe? Are you happy that these very clever people who will be making investment decisions will really be able to take in all of the detail that you have just referred to?

Vince Cable: The serious big long-term investors will have been looking at the Royal Mail for a long time and making their judgments on its accounts and other information. They are not coming to this completely fresh. We have not had any complaints at all that this was not sufficient time. It is comparable to Direct Line, which was another recent operation in the market. The fact that there has been such heavy demand suggests that people did make an informed judgment and made it quickly. I can understand where you are coming from, but I do not think in practice it has been a problem.

Mr Binley: Okay, it is not the most serious question you will be asked today. Thank you. If you could arrange for that letter, I really would like to know what the difference is in detail.

Q13 Paul Blomfield: Just briefly following up on that, Secretary of State: if I heard you right, the justification for the length of the prospectus was because you wanted to spell out the risks in detail. Are you saying that the risks of this sale are proportionally bigger than the 60 pages for BT, the 80 pages for British Gas and so on?

Vince Cable: No, I would not say that. I do not think anybody started this exercise by taking the BT prospectus and saying, "What do we need to add?" We started from a blank sheet of paper, trying to fulfil the obligations, which a prospectus is supposed to perform during IPO. If it is being criticised for saying too much rather than too little, that is probably a good criticism.

Q14 Chair: Can I just pick up one other point on this issue? The short period of time to examine the 450-page prospectus: do you think that that gives an advantage to the institutional investors, who will have a high degree of professional scrutiny that would not be available to the small retail investor?

Vince Cable: Clearly, they do have more resources, but the fact that the retail demand is so high does suggest that there was a lot of interest in this. I suspect that most investors have not have read through every single page, but they have had an opportunity to do so, and since their money is at stake they probably would have been wise to. However, the demand is so large that I do not think we can honestly say that the prospectus has put people off.

Q15 Chair: No, obviously not. Do you think it is more to do with the press publicity about the undervaluation than the quality of the prospectus?

Vince Cable: I hope not. There have been people out there, perhaps rather unwisely listening to a few people operating on the fringes of the market and encouraging people to believe that this is cheap stock. We do not know how it will turn out; we have no idea how it will turn out-

Chair: We will go on to that in a moment.

Q16 Julie Elliott: You have almost alluded to the fact that you think that the high demand for the shares has proven that this 440-page document has been easy to understand and absorb. Do you not think there is a risk that smaller investors may have committed their money not fully understanding what was in all of those documents and may get into difficulties down the line because of it? It does seem a ridiculously fast period to open expressions of interest and close them.

Vince Cable: I do not think it is ridiculously fast. This is fairly standard for IPOs.

Julie Elliott: It is not fairly standard selling of such a major institution as the Royal Mail, to be fair.

Vince Cable: No, but I think we will find that a large number of serious private investors-the people who took this decision seriously-have taken steps to find out what is involved. Most people understand the basic principle that when you buy a share there is risk attached to it. This is not a widows and orphans fund; this is a share. The price will go up, the price could go down. Most people understand that, and they may not have wanted to probe every single detail of the Royal Mail’s prospectus to understand that very basic proposition. It is rather unwise for people to have gone out-and I think my opposite number has done this-during the sales process on the basis of a certain amount of gossip around the markets saying that this is a cheap stock, and implying that people should rush out and buy it. It may prove to have been a good decision; it may not prove to have been a good decision. Frankly, there is a certain amount of irresponsibility in all of that.

Q17 Nadhim Zahawi: Secretary of State, you say that shares can go up or down. You are right, shares can go up or down, but you also know that when there is an IPO, the institutions will sweep up the overhang. Since you have the employees locked in for three years, you are pretty certain that the price will have to go up because the institutions will sweep up the overhang. That is what happens. Where would you deem the price to have been wrongly set in terms of that increase in share price on day one? That is, if it goes up by 40%, will you think that we got the price wrong? 50%? Where would you have put the price?

Vince Cable: I think we should just totally ignore the froth that will arise in the immediate aftermath.

Nadhim Zahawi: The institutions will sweep that up.

Chair: Can I just intervene? We are going to go on to the price range in a moment and perhaps have a fuller debate, so if we can just defer this. Ann, you did say that you had a very quick question. Is it on the same thing?

Q18 Ann McKechin: It is on the prospectus. You have made some comments about the balance between retail and institutional investors this afternoon, Secretary of State. Can I take from that that it is no longer Government policy to promote a share-owning democracy?

Vince Cable: We do welcome individual share owners, and that is why there has been a significant retail offer. I am not trying to turn a slogan out of it; it was not my slogan originally, but we do welcome-let us not forget the first big step was to ensure that there was some substantial work around the share. We also added a substantial retail component. Let us also remember that the institutional investors consist of millions of people who have policies. This idea that somehow institutional investors are totally separate from the retail investor community is completely wrong-

Chair: But the whole purpose of Kay was to demonstrate that it was not.

Katy Clark: I should declare my entry in the Register of Members interests: I am a member of the Communication Workers Union and I am Chair of their Parliamentary Group. We have already touched very fully on the whole value for money issue. As you know, there is a huge amount of press speculation that the share offer will be oversubscribed, but also that the property has been undervalued.

Vince Cable: Sorry, what has been undervalued?

Q19 Katy Clark: The Royal Mail has been undervalued. We will go onto detailed questions later about specific properties, because obviously there is a huge amount of property that Royal Mail has. Once all the froth has gone, what you would say would be evidence that there has been an undervaluation: if it is a 10% mark-up or a 20% premium? What would the level be where you would say, "That is clear evidence in retrospect that there was an undervaluation."?

Vince Cable: I am not going to give a very specific answer. We are talking about the long-term. You could take any point in time-three months, six months. That would be more realistic than just taking the next few days, but what we are interested in with the Royal Mail is getting a privatised institution that works over a period of years. The shares are going to fluctuate throughout that period. Taking a snapshot in time-

Q20 Katy Clark: Say May 2015: at that point what mark-up would be acceptable?

Vince Cable: We have not defined that. We have said that what we think is a realistic price range for the sale to get good value for money for the taxpayer, and to provide a stable investment base. That is the purpose of establishing the price, and we think we are in the right place.

Q21 Katy Clark: You have said that Lazard’s were involved in the decisions about the valuation. Would you be able to give the Committee more information about how you have arrived at this valuation? Royal Mail was only formally separated at the start of the financial year, so you have not had a huge amount of time to value it. Can you provide the Committee with a lot more detail, either in writing or here today?

Vince Cable: I am not sure there is a great deal to provide. I explained the process. Progressively, over the last year, ever since it was clear from the approval of Parliament that we were going to proceed with this flotation, careful thought has been given as to how to do it. Consultations have taken place with the institutional investor community, the longterm investors, the people we are keen to engage with, about appropriate levels of price that would assure a satisfactory flotation. We had those conversations for a long period of time. In September, once the intention to float had been indicated, we had what were called pilot fishing: much more detailed conversations with the potential investors about a sensible price range, and that again helped to inform the judgment. As I say, we are tracking comparable institutions, other Royal Mail institutions across Europe who are in a similar position, to establish what would be a sensible price. That has framed the context in which we have been operating. As I say, we have independent advisers who can give us more detailed information.

Q22 Nadhim Zahawi: Going back to that issue of pricing and price range, Gert Zonneveld, Co-head of Research at Panmure Gordon, argued last week that Royal Mail was being undervalued by about a billion because investors were expecting it to go into the FTSE 100. When deciding on the price range, have you taken account of the Royal Mail going into the FTSE and a premium applied to the FTSE 100 because of tracker funds etc.?

Vince Cable: Of course, but in relation to Panmure Gordon, there are a lot of equity analysts out there, as you know. This is one and it is an outlier. I do not want to rubbish them as an institution because in the banking crisis they were very good; they got things right that a lot of other people got wrong. However, on this particular occasion, they are way outside the estimate of most of the equity analysts. We respect their judgment, but it is very different from the consensus.

Q23 Nadhim Zahawi: But you took into account the Royal Mail going in to the FTSE 100 when you came to your decision.

Vince Cable: Of course, and that would normally be expected when you have an IPO.

Q24 Mr Binley: Is it true, Secretary of State, that the value of something is only known when people put money on the table? Consequently, it is rather easier to be clever when you have more information than you had when the thing started. Is there not some of this around that? Are you not concerned that stuff coming from Panmure Gordon, with the headlines that it produced, might in the longer run be unfavourable to some of the smaller people involved-the pension funds and all of that-than you perhaps would have wanted to be the case?

Vince Cable: I am not criticising them. They have a job to do.

Mr Binley: I just have.

Vince Cable: Well, I am not. They are out there; there is a range of estimates; it is a perfectly legitimate public comment. People in public life have to be a bit more careful not to indulge in encouragement of mis-selling. However, brokers have a job to do and we look at them all.

Q25 Chair: To a certain extent, this is a reflection of the argument about the asset values of the company, which we will go into in a moment. In a previous incarnation, I was an auctioneer. I would start by assessing the value of something, projecting it to my public, and I knew that if I pitched a price and I had 30 hands go up, I had undervalued that. Do you not feel that that is exactly the case here?

Vince Cable: No, I do not. The auction market is slightly different from a market where you are trying to place stock that will have long-term enduring relevance, so a rather different situation. I have given several reasons why we think the price range was entirely sensible and robust, and we think that will be vindicated in time.

Q26 Julie Elliott: I do want to comment on something you have said, Secretary of State. You described Panmure Gordon as an outlier; I have to say, I have read several other people saying the same thing. They are not the only people saying that this has been very much undervalued. I would like to pick up on a couple of things you said before I ask my question. You have talked about pilot fishing. It is not an expression I am used to. Is this recorded information that you can provide the Committee, what pilot fishing is?

Vince Cable: It is just a bit of jargon, which is having informed conversations, basically.

Q27 Julie Elliott: Is this recorded information that the Committee could have access to?

Vince Cable: I would doubt it.

Julie Elliott: So these are anecdotal conversations that have no substance, and that is what you based your decision on.

Vince Cable: No; clearly you are talking to prospective investors about the market in which they operate, and getting a sense from them about how they value potential offerings. It is perfectly prudent behaviour; I would not have thought there was any problem with it.

Julie Elliott: But it is not backing up any evidence to suggest how you have come at this offer, which many people think is an undervaluation.

Vince Cable: I am just describing how we did it.

Julie Elliott: If there is any information that you can provide the Committee on that-specific information, because all we are getting is anecdotal information at the minute-I would be very interested to see it. My main question-

Vince Cable: Can I just pick you up slightly? You say that there are lots of people out there saying this is undervalued. There is one of a variety of equity analysts, which you and several other people have quoted; there are people from the grey market, which is a very thin market of highly speculative activity, and my opposite number. I am not aware of any other major sources of information going around saying this is undervalued.

Q28 Julie Elliott: I am not going to get into a discussion about it because it is not for you to question me about the issue. I am saying that Panmure Gordon is not the only person saying this, which is what you were alluding to before, or that is what I understood you to be saying. What I want to ask about is: what influence did your Department have on the setting of the offer range? What role did the Shareholder Executive have? You have said you have been in discussion with them for a year, but could you provide a bit more detail on that?

Vince Cable: The Shareholder Executive, which is an important part of my Department, has been managing this whole process. They have been leading the conversations. They rely on external advice, which I have indicated, but they are the key players within Government.

Q29 Julie Elliott: What role did your Department have in it?

Vince Cable: They are part of the Department. The Royal Mail team in the Department relies very heavily on the Shareholder Executive.

Q30 Julie Elliott: When you were setting the offer range, did you take into account the oversubscription for previous Government privatisations?

Vince Cable: We are certainly aware of the history. Of course, previous privatisations may well have been oversubscribed in the first instance, but the trajectory of their subsequent share value has been very, very disparate. Some have gone up and some have gone down. You do not necessarily read a great deal into that in terms of the valuation.

Q31 Julie Elliott: Previous privatisations, such as British Gas and BT, included priority applications for pensioners. That was not included in the Royal Mail privatisation. Is there any reason for that?

Vince Cable: No, there was no particular reason for excluding them, but I would imagine there are large numbers of pensioners amongst the 700,000 people who applied.

Q32 Julie Elliott: Was it considered that there may be a priority application for pensioners?

Vince Cable: No, we did not. We considered prior allocations for Royal Mail employees and there was a separate allocation for them-priority bidding-but no, we did not set aside a particular category for pensioners.

Q33 Paul Blomfield: Just briefly on the back of Julie’s previous question on price, did you seek an opinion from Lazard’s, as your official adviser, on that price?

Vince Cable: Yes, they have been involved in the process throughout, and I and the Minister of State have been involved and certainly discussed it with them, yes.

Q34 Paul Blomfield: Sorry for cutting into you there. Did their opinion confirm that price?

Vince Cable: Indeed.

Q35 Paul Blomfield: Can you share that with us?

Vince Cable: Yes; I am speaking on their behalf.

Q36 Katy Clark: The Government has an option to sell a further 15% stake in the company. Why did you decide to retain that percentage of the shares at this time?

Vince Cable: A judgment has to be made as to whether the sale should take place in one, two, three, four chunks. It was decided that from the point of view of value for money it was best to have a substantial flotation now, which would take the company into majority private ownership, and that we should retain a stake. If there is a subsequent up-valuation of the shares then the taxpayer will be able to get the benefit of that.

Q37 Katy Clark: What is your thinking on when-or if-the Government would sell the remainder of the shares?

Vince Cable: We have not come to a decision on that, and obviously it will be dependent on how the market evolves.

Q38 Katy Clark: You will be aware that a lot of campaigns are saying that you should maintain the shares that you are not selling now in order to influence future decisions that are taken, particularly to try and ensure the protection of the Post Office network. Is that something that you have given consideration to?

Vince Cable: The protection of the Post Office network is, in a way, a separate issue; as you know there is a long-term agreement until 2022. However, we need to be careful when we talk about trying to influence decisions. The purpose of this flotation is to enable Royal Mail to operate on a commercial basis. I am not in the background trying to influence decisions beyond those of any other large private investor. We will have a stake and we will use that responsibly, but there is in fact an agreement that we have reached with the Royal Mail, which is completed now and which will establish the arm’s length relationship on a proper basis.

Katy Clark: I think you will get more detailed questions on that later.

Q39 Chair: Would you seek to exercise that stake to prevent the sell-off of profitable subsidiaries? I am just thinking back to the Railtrack experience, where you had a company with an enormous property portfolio and other subsidiaries that sold them off, and we all know what happened to Railtrack. Would you seek to avoid any repetition of that sort of experience with Royal Mail?

Vince Cable: We will remain large minority investors, and we will behave as responsible minority investors. We are not seeking to use this as a mechanism for continued state control of the industry; that is the whole point of the flotation. We are not aware of the risks; there may well have been problems with Railtrack, but we are not aware of comparable problems here that require that level of scrutiny.

Q40 Chair: No, and obviously there is the public safety angle for Railtrack that is not relevant to Royal Mail. However, you had a company with an enormous property portfolio that sold them off and did not invest in the core business. That is the point I am trying to make.

Vince Cable: Sorry, yes. There are particular issues around property and various allegations have been made that there is a vast stock of property sitting out there which is being undervalued, and that is not the case.

Chair: We will be coming on to that issue in a minute.

Vince Cable: I just want to answer your question. I will save the answer up for later if you prefer.

Q41 Caroline Dinenage: I would like to talk about the employee scheme. Under the terms of the share sale, a 10% stake in the business has been reserved for Royal Mail employees. However, they have to wait for a minimum of three years before they can sell their shares. Are there any ways in which employees can realise the value of their shares before the three years are up?

Vince Cable: No; it is locked in for three years. It is attractive in terms of the stability of the business, and because of the tax arrangements that will apply it is quite a favourable deal for the employees. We have considered a variety of options as to how that scheme should work, but the three year lock-in was one key element of it. I should just say, in terms of the employee share scheme, there have been a lot of criticisms of the flotation from employee’s representatives, but of roughly 150,000 workers only 371 have opted out of the free share offer, which suggests that it was actually very popular.

Q42 Caroline Dinenage: Have you got any feedback as to why people would have opted out of it?

Vince Cable: As I said, there are such small numbers-well under 1%.

Q43 Caroline Dinenage: If an employee leaves the company within the three years they then forfeit the shares; what would then happen to the shares that they forfeit?

Vince Cable: I do not think that is correct, but can I just give you a written answer to that? I do not think that it is a question of forfeiting it, but I would want to be absolutely clear before I give you a definitive answer. I think there is a difference between holding the share and not realising it, and leaving the company. The fact that people leave the company does not necessarily involve the loss of the share, but I will check that.

Q44 Caroline Dinenage: Perhaps in that answer you could include under what circumstances: if, for example, the answer is that they would have to forfeit their shares if they left within three years, if there were any circumstances under which they could retain them as well.

Vince Cable: I will happily give you more information.

Q45 Mr Binley: Why did the Government discriminate in this way, Secretary of State? What was the reason for taking away a right that other shareholders have that employees do not?

Vince Cable: Sorry?

Mr Binley: You have not put a block on other shareholders selling their shares in three years, but you have on the staff. I just wonder why you discriminate in this way.

Vince Cable: There is good reason for treating it differently because of course they get them free. It is not something that they have purchased.

Q46 Mr Binley: But once you give them they do not belong to you. Why have you still discriminated in that way?

Vince Cable: There are different models of worker share ownership, and this is one that we have chosen. It is evidently popular with the workforce because they have chosen to take advantage of it.

Q47 Mr Binley: Can I just go a little further: it is not illegal to sell options on shares, is it?

Vince Cable: I do not think so, no.

Q48 Mr Binley: Therefore, if a group got together and got enough shares together, they could sell an option, get some money, and allow other people to take that risk, then?

Vince Cable: I would have thought that was perfectly legal. You are the first person who has suggested it.

Mr Binley: I hope it is. I do not want to tie Post Office workers down too much; I think we are doing that already.

Q49 Ann McKechin: The value of the real estate of Royal Mail is clearly a key component in the assessment that was made of the bid price. Can you provide to the Committee the independent valuation certificate that you undoubtedly must have obtained regarding the value of the property estate?

Vince Cable: Yes, it was independently valued. There was a valuation, I think, in March, and the valuers for the wider estate were BNP Paribas Real Estate, and Jones Lang LaSalle did the valuations for the London development properties. The information was fully declared in the prospectus, and as far as I am aware there is nothing out there that is being concealed.

Q50 Ann McKechin: If necessary, would you be happy to share that with the Committee?

Vince Cable: I am sure that could be made available.

Q51 Ann McKechin: As I am sure you will be aware, there are three major assets the Royal Mail has in London: Nine Elms, Mount Pleasant and at Paddington. Can you just remind the Committee what value was put on each of those by your financial advisers?

Vince Cable: I cannot, but I can give you a rough approximation. We are looking at comparable sites: there are 14 acres in the biggest of the sites; one is nine, and Paddington, I think, is one acre, so we are talking about 23 acres. Not all of that is necessarily development land, but potentially-

Ann McKechin: It is prime land, yes.

Vince Cable: There was land close to the Nine Elms site that has been redeveloped on a comparable basis. We understand that it is £10 to £15 an acre that was the value realised from those sites, so that gives you some indication of the value of the Royal Mail land nearby. That is far less than has been claimed in some of the public statements.

Ann McKechin: I think your company’s prospectus valued the freehold property at just £787 million. As you will be aware, there has been quite a bit of speculation in the papers that the value of the Mount Pleasant site alone could net up to £1 billion.

Vince Cable: That seems, in view of what I have just told you-

Q52 Ann McKechin: Is the sale value of these Royal Mail assets-which the Royal Mail has already declared are no longer required as part of their business operation-going to go to the institutional investors who are going to be purchasing the Royal Mail shares, or is there going to be a payback of windfall profits to pension funds?

Vince Cable: I think neither. It was made very clear that these sites were available for sale; as I say, they have been independently valued. The estimate that has been made from properties nearby in the market suggests that we are talking about sums considerably less than a billion. We can pursue the details of valuation. There is nothing at all covert about this; this has all been openly and independently assessed and referred to in the prospectus. All the investors were aware of this information.

Q53 Ann McKechin: Yes, but the properties are now surplus to purpose; if they are now sold after privatisation at considerably above the valuation price that was provided by your valuers, is there any provision going to be made for any of that surplus to be paid back to the British taxpayer, who has had to indemnify Royal Mail regarding the hole in its pension fund?

Vince Cable: The two things are not connected. As I understand it the valuation was significantly above the book value and so the market development value of the sites was presumably properly taken into account. You seem to be implying that there is some undeclared potential windfall here that is going to be improperly acquired by the new ownership.

Q54 Ann McKechin: No, I did not imply that, Secretary of State. What I am saying is that it is very clear that it is the intention of Royal Mail to dispose of a significant amount of its capital estate. Clearly, in London-where prices, as you have rightly pointed out, are rocketing ahead well above the rate of inflation-people will be concerned that other people will be making a fast buck out of capital estate, rather than actually dealing with the business of the Royal Mail at hand. The taxpayer has paid out a considerable amount of money in terms of indemnifying the pension fund and might anticipate that, should such a windfall occur, quite legitimately, that part of that at the very least should be paid back to the taxpayer. Would you agree?

Vince Cable: No, I do not think you can isolate just one aspect of the Royal Mail business in that way. The Royal Mail will hopefully earn profits; it will do it through its trading business and it will do it through asset transactions. They have been quite open and the prospectus is quite open that these assets are available for sale. That is taken into account in the valuation of the company. This is not something new.

Q55 Ann McKechin: For clarity, there will be no clawback clauses?

Vince Cable: There is no suggestion that this particular set of transactions should be taken out of context. It is an overall part of the sale package, known about in advance, and it is part of the price that people will be paying for the company.

Q56 Ann McKechin: Is it not the case that a major part of the way that they are going to maintain and increase the profit of this company over the next few years is through the disposal of capital assets. That would follow the experience of TNT and others.

Vince Cable: I would be surprised if it is the main source, but it clearly is a source. The Government does the same: we spend money; we have an income stream; and we have asset disposals. All businesses operate on that basis, and Government operates on that basis. There is nothing sinister about it.

Q57 Katy Clark: It is not just London obviously: Royal Mail owns property all over the country, more than 2,000 properties. Have you sought any advice about what number of properties are likely to be sold over the next few years?

Vince Cable: My understanding is that, apart from these three sites that Ann McKechin has asked me about, most of the other sites across the country are operational. They are not available for development, but like any other business it will try to use its assets as efficiently as it can.

Q58 Chair: Just on this subject, obviously you have had a valuation of £787 million. Instinctively, that seems to me to be a very low valuation, but I am not a valuer. Can you first of all share with us-maybe not today but at least subsequently-the basis and the evidence for this particular valuation?

Vince Cable: I will share with you as much information as possible. I want to be open and help the Committee, and as I have said earlier I am sure the National Audit Office will probe this issue, amongst others. We obviously want to co-operate; there is no attempt to hide anything here. Yes, we will provide you with as much information as we can.

Q59 Chair: The point is that this is crucial to the overall valuation of Royal Mail and its potential profitability in the long run. Could I move on: if subsequently it was found that this property and this land was worth hugely more than its valuation as of the time of the sale, would you look at some sort of windfall tax on Royal Mail to return some of the benefit back to the taxpayer?

Vince Cable: There are contexts in which windfall taxes have some merit and I have argued for them in the past. Singling out one aspect of a company’s business, and imposing a windfall tax on it because it has given an uncomfortable result, does not seem to me a terribly sensible basis for tax policy, to be quite honest. If somebody has made a serious error, there is an issue of accountability, but just randomly going around imposing windfall taxes on particular transactions does not seem good to me. I would never advocate that.

Chair: I think you could argue that it would not be on the transaction so much but the level of profitability that would arise from it.

Vince Cable: There is an issue around the price of land and profits for land. There are some us-if you look at the details of my CV, you will find that I am the president of the organisation that promotes the idea of land value taxation; I am something of a minority in the Cabinet on that, I would suspect. That would be the way to deal with it, rather than picking on any particular transaction and trying to tax it.

Q60 Chair: Are you averse to any way-and I would not be dogmatic about the way of doing so-of returning some of the benefit of those inflated values back to the taxpayer subsequently?

Vince Cable: I think your question is very loaded.

Chair: Yes, it was meant to be and I make no apologies for that.

Vince Cable: It assumes that somebody has made a mistake and it assumes that somebody has been highly culpable in the valuation process, and I do not buy that unless you have any evidence to the contrary. As I say, I do not think we can just isolate one bit of this overall transaction and say that the taxpayer should retrieve something from it.

Chair: What we want is the evidence, because we are not in a position to make conjecture.

Vince Cable: That is hardly a fair line of questioning, and we will have to see.

Q61 Chair: Can I just return to the issue before about employees who leave the company and their shareholding. I checked the prospectus and it does appear that employees who leave will lose their shares. This obviously has considerable implications because, as I suspect will happen, Royal Mail may at some stage within the three years downsize some of its operation, employees could lose their jobs and on the basis of this could lose their shareholding. Would you like to comment on that?

Vince Cable: You have just corrected me on the understanding of the position, which I was not totally clear about and wanted me to write to you. That would seem unfair, and I will certainly take up the issue about the probably rather small number of cases of people who may be disadvantaged in that way. That does seem unfair.

Chair: I would be welcome for further information on that and how you will address it.

Q62 Mr Binley: Let me pursue this further, because it impacts a bit upon my earlier question and it opens up the whole thing about options as well, it seems to me. Do you not feel in your heart, Secretary of State, that what we are doing in respect of the shares, which you say are given and therefore are of less value, it seems to me, is that we are being unfair to a workforce-not necessarily management, but the general workforce-that has been immensely loyal to the Post Office and to Royal Mail for a long time?

Vince Cable: No, not at all. I certainly share your view that the workforce has made a massive contribution to the company; that is often overlooked in the slightly conflictual situation that has arisen. They have made a massive positive contribution to the modernisation programme and indeed to the current profits, and they deserve credit for that. That is one the reasons why we wish to ensure that the workforce does enjoy the benefits of free shares, which, because of the price at which they are sold, is going to be more valuable than what it was.

Q63 Mr Binley: If that is the case, what powers do you have to stop the sort of redundancies that might impact rather heavily in this situation, knowing that if somebody is not employed their shares do not belong to them. They will be taken back.

Vince Cable: I have just checked-I have been given a little bit of help-and there has been a lot of thought given to the issue of people who leave because of redundancy or disability and their shareholdings will be protected.

Q64 Mr Binley: So you could not have forced redundancies which relieve honest workers of their share ownership? Is that what you are telling me?

Vince Cable: If they leave under good circumstances-and it may be health or disability-

Q65 Mr Binley: If they punch a mate and get the sack, you are telling me that they should not keep the shares, but if they are really nice people and quieten the fight down, you are saying that they should?

Vince Cable: The distinction has been made in the programme-and I know it is a somewhat unfortunate phrase, but "good leavers" is the phrase that is used-and people who leave under good circumstances, such as redundancy, health, or disability, will be protected.

Q66 Mr Binley: So you want it there, and it seems that it is being designed as a disciplinary weapon, then. Is that the case? Is that what you are telling me?

Vince Cable: I think you are reverse engineering the scheme; that was not the purpose of it. The purpose of the scheme was to ensure that the workforce has proper rewards as shareowners, free shares, and that they are properly engaged with the company that they are part of. They are genuinely valuable. We have the difficulty of a relatively small number of people-we hope-who will leave, and the question that you and Caroline Dinenage have been raising, which is a small number of cases and how fairly we deal with them.

Q67 Mr Binley: One final comment, which you may wish to come back to me on. You and I both have a compass inside us which tells us what is right and what is wrong. I am fearful that my compass is pointing in the wrong direction. You are a good man; do you not feel that? Do you not have any compassion at all in this respect?

Vince Cable: On what?

Mr Binley: On this particular matter, where you say if somebody leaves the company they lose their shareholding rights.

Chair: Can I just intervene at this point? I have further checked part of the prospectus and yes, there is an exception for the case of redundancy.

Mr Binley: I am happy with that, but if people leave for whatever reason-be it illness, moving to another part of the country because their circumstances demand that-you are telling me that people will suffer as a result.

Vince Cable: No, they will not. Those cases that you have cited would be protected under what is called the good leaving policy.

Q68 Mr Binley: Okay, but if I punch somebody, I am not?

Vince Cable: Yes.

Chair: Getting back to this substantive issue-redundancy, yes-but there are a whole range of perfectly normal and human problems that an individual may have in the company that would force them to leave employment, and they would not get compensation.

Mr Binley: That is absolutely right.

Vince Cable: When we use the word "compensation"-

Chair: Sorry, they would not be able to retain their shares.

Vince Cable: Maybe I need to do some more detailed work on these exclusions and inclusions. I think as a result of your questioning we have established that people who leave the company for good reasons, which I think would be the vast majority of cases, would retain their shareholding. I think we are all clear about that.

Q69 Mr Walker: We have heard some questions about land values, but obviously one of the greatest assets that Royal Mail has is its brand. It is a fairly unique brand in its use of the royal title. What guarantees are in place over the long term to ensure that the Royal Mail cannot assign the Royal Mail brand to a third party?

Vince Cable: There is an agreement that has been reached with the Royal Household over the circumstances in which the brand can be used, specifically in order to stop it being abused. If you remember, when it went through Parliament the concern was the opposite-that it would lose the royal association-and that has now been embedded in the law, but there is an agreement with the Royal Household over a variety of circumstances where abuse could occur and we have ensured that does not happen.

Mr Walker: That agreement is a royal associations agreement; it says that it can be removed if it brought the Crown into disrepute.

Vince Cable: Indeed, Mr Walker; that is the phrase.

Q70 Mr Walker: I think it also talks about it would be withdrawn if it ever ceased to be a universal service provider. Would the Government or your Department have the power to offer the brand to someone else in those circumstances?

Vince Cable: You are talking about the extreme circumstance where the Royal Mail is no longer able to perform the universal service. We would regard that as a rather extreme hypothetical set of circumstances. I do not think anybody has thought ahead to what that would mean in terms of the royal designation. It is unlikely it would be transferred; we are dealing with a wildly unlikely hypothetical event.

Q71 Mr Walker: We are not repeating the same mistakes as previous Governments and Administrations that tried to call it Consignia?

Vince Cable: That was dropped fairly quickly.

Q72 Nadhim Zahawi: Is it possible for Royal Mail to transfer the Royal Mail trademark outside the group?

Vince Cable: I do not think so. Are you talking specifically about the royal association?

Nadhim Zahawi: The trademark.

Vince Cable: I do not think that it is, but I will check the facts on that.

Q73 Nadhim Zahawi: The Mails Distribution Agreement came into operation on 26 March 2012 and will last for 10 years. Under what circumstances could Royal Mail review that agreement within that time period? What assessment have you made, Secretary of State, of the impact on Post Office Ltd of (a) Royal Mail withdrawing from that agreement within 10 years, and (b) of the agreement not being renewed after 10 years?

Vince Cable: Sorry, this is the Distribution Agreement?

Nadhim Zahawi: The Distribution Agreement that came into operation on 26 March 2012 and is going to last 10 years.

Vince Cable: The Distribution Agreement in relation-?

Nadhim Zahawi: With the Post Office.

Vince Cable: That is a contractual agreement that is in place. It provides a remarkable level of long-term security and we think it is something that the Post Office would regard as a considerable asset. Of course, it has been reinforced by the public statements of the Royal Mail senior management that they would regard it as inconceivable that they would want to weaken their relationship with the Post Office, which provides a very considerable mutual benefit.

Q74 Nadhim Zahawi: And have you read an assessment as to whether they would withdraw after the 10 years? Let us assume that they cannot withdraw within the 10 years.

Vince Cable: I have just checked your earlier point and the brand cannot be transferred without my consent. You have that confidence.

Q75 Nadhim Zahawi: That is good news indeed, Secretary of State. The master service agreement between Royal Mail and Post Office Ltd is a transitional arrangement which Royal Mail will continue to provide services such as finance, IT, and facilities management to Post Office Ltd for around a year. Can you set out your strategy for Post Office Ltd once that agreement has ended?

Vince Cable: I cannot at this stage but, if you want details on it, I will provide them.

Q76 Nadhim Zahawi: That would be very welcome.

Vince Cable: I do not think that there is any question of the stability of that arrangement, but we will certainly dig into the detail for you.

Q77 Nadhim Zahawi: There will, presumably, be some cost implications to both the Government and Post Office Ltd post the agreement.

Vince Cable: Yes, correct, but I think we are assuming that it will continue. I will check that.

Q78 Mr Walker: Just coming back to this relationship between the Post Office and Royal Mail, we see this as one of the substantial differences between this and previous attempts of various Governments to privatise the Royal Mail. The Post Office is being maintained in public ownership and there is talk, though, of mutualisation. What impact, if any, would that have on the 10-year agreement between Royal Mail and Post Office Ltd?

Vince Cable: It would not. The 10-year agreement stays. It is a remarkably good agreement when it is taken in conjunction with the other things we are doing to support the Post Office network. As you know, there is a large amount of investment going in, despite severe financial constraints on the Government. The Post Office network, as you say, remains under public ownership. We have stopped large-scale Post Office closures, which happened previously. That has been, effectively, stopped by this process. We are exploring mutualisation with the postmasters and postmistresses. We do not yet have a very clearly defined outcome to that discussion, but we would like to see that model develop, if we can.

Q79 Mr Walker: If you were to go down that route-and I accept that this is a theoretical question-of mutualisation, would you be encouraging Royal Mail to look at a longer-term deal or to extend or perhaps renew that 10-year agreement at that stage?

Vince Cable: Once the Royal Mail is under new ownership, it is not in my gift to tell them to renew the agreement or not. There is a contractual arrangement. It is long-term, but once we are no longer majority owners of the Royal Mail, we are not in a position to direct them on operational matters of that kind. That is a fact of life.

Q80 Katy Clark: In previous inquiries, we have heard about the other avenues that might be taken; for example, Tesco or other outlets might provide services. After the 10 years, if we accept that the business agreement will last the 10 years, and you are very clear that you do not think it is appropriate for Government to try to interfere with a privatised Royal Mail, do you not think it is highly likely that post offices will not necessarily be the people who get all the contracts?

Vince Cable: As I understand it, under this Government, since March 2011, all Government contracts have gone to the Post Office. That is not, in any way, affected by the Royal Mail status. That is a separate transaction between Government Departments and the publicly owned Post Office network.

Q81 Katy Clark: I am talking more about the arrangement whereby Royal Mail use the Post Office network.

Vince Cable: Sorry.

Katy Clark: You are aware that many people are extremely concerned that post offices will not survive.

Vince Cable: What we do have, apart from the contractual arrangement, is continued assurance from the senior management that, in terms of the way in which they regard their relationship with the Post Office, it is unthinkable that they would want to diminish it. Additionally, they derive considerable benefit from it, as does the Post Office network.

Q82 Katy Clark: I understand that, but do you not think that, once the current business agreement that has been entered into comes to an end and Royal Mail is under no legal obligation to provide all the work to the Post Office network, they will be looking at other options? Particularly in towns and places where you have supermarkets and other types of outlets-garages or wherever-it may be that the Post Office will not be the people who will get that work in all places in the future. This is a real concern that many people all over the country have.

Vince Cable: I know that it has been expressed as a concern. I find it implausible, precisely because it is so much in the interests of the Royal Mail to continue this connection. The Post Office network has a reach that no other organisation does have. That is why we value it so much. It is extremely valuable for the Royal Mail to keep it. We have had no hints or indication that the Royal Mail would want to do anything other than continue it, but it would be for them to decide. We are talking about 10 years’ time.

Q83 Chair: Can I just raise a couple of points on this? Firstly, as we know with private sector companies, senior management may change quite dramatically in response to different levels of profitability, shareholder demand or a whole range of things. How would the Government potentially exercise its holding to ensure stability and a commitment to promises made?

Vince Cable: As I have said several times in other questions, we remain a large minority shareholder under the new arrangements, and we will exercise that as a responsible shareholder would. That would not, however, imply interfering in individual management decisions. Is that what you are implying?

Q84 Chair: No. What I am trying to get at is that commitments made now over the course of the next few years may well be modified in response to the sort of pressures that you would expect a private sector company to have, particularly from shareholders. Possibly in response to other competitors, there may well be a much stronger drive to improve levels of profitability, and maybe that would be at the expense of existing arrangements. Ministers and the Government could well come under incredible pressure in that area.

Vince Cable: I think what I said right at the beginning is relevant. One of the reasons for trying to establish a long-term institutional investor base is to have investors who have an expectation of a steady dividend yield, steady return and stability in the company, rather than some fly-by-night operator who wants a quick buck. Given the investor base that we have been seeking and are now very likely to have, I think the change of style that you described is extremely unlikely.

Q85 Chair: Already, Royal Mail has adopted certain approaches which have had some impact, shall we say, on Post Office Ltd, and I can quote. I believe the increase in the price of parcels has, no doubt, been good for Royal Mail but has impacted Post Office Ltd-a figure has been given of £10 million. Similarly, there will be a temptation for Royal Mail to try to reduce costs by maybe having direct arrangements with some of its key providers, and particularly internet companies or sales people and so on, which will remove some of the revenue streams from Post Office Ltd. The National Federation of SubPostmasters is not exactly the most militant body out, but they have expressed really huge and, I think, justifiable concerns on this.

Vince Cable: I think at least part of the negativity around this sale, at least with some people, is the belief that the Post Office itself was going to be privatised, which is not the case.

Q86 Chair: No. That is not the issue at all.

Vince Cable: No, I know it is not, but I felt it was important to make the point.

Q87 Chair: I am trying to examine the potential impact of a privatised Royal Mail, answerable to its shareholders and in pursuit of a profit motive which perhaps was not there under public ownership, and its impact on the revenues of Post Office Ltd, which we all know is very vulnerable.

Vince Cable: I cannot see any reason why that should change from the present, because, as you know, the Royal Mail has been quite aggressive in managing and trying to survive in a very competitive market. They are earning significant profits this year; indeed, that is one of the points that have often been made by critics of the flotation. They are a profitseeking organisation; they are tough; and they are competitive. Under public ownership, 50,000 people have lost their jobs in the last 10 years. Nobody could say that this is not an aggressive, tough, commercial operation, so I see no reason why that should fundamentally change in their dealings with the Post Office or anybody else.

Q88 Chair: It opens up the debate of why it needs to be privatised anyway.

Vince Cable: You invited that, in a way, Mr Bailey, if I may say so.

Chair: Can I just move on now to one of the issues which are of huge concern to a lot of Members, I think, and that is the universal service provision?

Q89 Paul Blomfield: Secretary of State, you will be aware that, when the oral statement was made to the House on 12 September, your ministerial colleague wrongly informed the House that minimum requirements for universal service could only be changed by primary legislation, and he has subsequently corrected the record.

Vince Cable: It is an affirmative resolution of the House.

Q90 Paul Blomfield: He has corrected the record, and I am sure you will agree it was unfortunate.

Vince Cable: His fundamental point was that it can only be changed with the agreement of Parliament. Obviously, he did not get the Parliamentary procedure right.

Q91 Paul Blomfield: Do you know when a statutory instrument was last successfully prayed against?

Vince Cable: It is affirmative action, so that is not the issue.

Q92 Paul Blomfield: The point I want to probe was that you have adopted a different approach for ensuring that the universal service is geographically uniform across the country. In the latter case, it requires primary legislation to change; in the former, secondary. Why did you differentiate between the two?

Vince Cable: Sorry, I do not fully follow the distinction.

Paul Blomfield: The different aspects of the universal service provision: one, in relation to minimum requirements, only requires secondary legislation; the other, in relation to geographical spread, as I understand it, requires primary legislation for change. It is a different approach. Why?

Vince Cable: When people define the Universal Service Obligation, their primary concern is to ensure that there is, indeed, uniformity across the country and that people have access to delivery networks and that they have a standard price. That is the core of the universal service, I believe. There are also a lot of standards that we committed ourselves to and which can only be changed by Parliament. Arguably, that is not of the same order, but nonetheless they are both important and they both require Parliamentary change.

Q93 Paul Blomfield: You do not think it is as important that we maintain a service over six days rather than five, for example.

Vince Cable: I think it is fundamentally important that it is part of the universal service, and that is why we are committed to it and why Parliament has to change it. The geographical spread is a different dimension and is fundamental.

Q94 Paul Blomfield: You are fundamentally committed to a six-day service, you said.

Vince Cable: We are committed to the six-day service, and only Parliament can change that.

Q95 Paul Blomfield: Why did you differentiate? Why not have that go through a primary route as well?

Vince Cable: I seem to remember that this was extensively debated at the time when this went through the House. The simple fact of the matter is that the Universal Service Obligation is something the Government has committed itself to. It cannot be changed. It certainly cannot be changed by the Royal Mail, and it cannot be changed unilaterally by the regulator. It will have to go to Parliament, and that is the fundamental principle that we have accepted. We did accept that, within the definition of universal service, there were some things more fundamental than others. They are both extremely important and they both require Parliament to change.

Q96 Paul Blomfield: Can I move on, then, to talk about the geographical aspect of the service? Ofcom stipulated that 98% of post offices have to be within half a mile of homes, and, for the other 2%, "Royal Mail must provide sufficient access points or other means of access to the universal service (e.g. collection on delivery from very remote or isolated locations such as farmhouses) to meet the reasonable needs of users." How would you describe "reasonable" within that context?

Vince Cable: Is that not for Ofcom to decide the detail of how that use of universal service is interpreted? I think that would be part of the licence agreement. Beneath the Universal Service Obligation, there are the specific terms and licence conditions, and I think that level of detail is incorporated at that point. It is Ofcom’s job, as I understand it, to oversee it.

Q97 Paul Blomfield: I was simply seeking your view, as Secretary of State, on what you thought was reasonable, given the sensitivity of the issue.

Vince Cable: Plucking out of the air a figure is probably not really helpful, and we have a regulator to help us define that.

Q98 Paul Blomfield: Why not set the level at 100%, so that most vulnerable post boxes are covered? Would that not have given people the reassurance that they are looking for?

Vince Cable: I do not know the reason why we are talking about a tiny fraction being excluded. There are practical problems. As you probably know, there are a few exemptions from the Universal Service Obligation in respect of Scottish islands that cannot be serviced every day because of ferry services. There may well be practical reasons of that kind.

Q99 Paul Blomfield: Is it possible for the Royal Mail to take a different view and to use that differently as a way to reduce service in less profitable areas?

Vince Cable: That is not my understanding. My understanding is that the regulator has close oversight of that in terms of the licence conditions under which Royal Mail will operate, and that the Royal Mail will not be able to unilaterally change the terms of its operation.

Q100 Chair: Just before I bring in Ann on a specific Scotland dimension, can I return to the Mails Distribution Agreement and Post Office Ltd? You made the point that it was, effectively, of 10-year duration. When you said that, I was slightly uncomfortable. I have checked since. This is in the prospectus: ‘The Mails Distribution Agreement and its operation will be reviewed by the parties"-i.e. Post Office Ltd and Royal Mail-"within six weeks following the fifth anniversary of the commencement date." Given the fact that it has been running for something like 18 months already, we are only three years or so and a bit away from that. I suppose the issue is: how profound can the review of the operation be? As I see that, that does not really guarantee that it will not change for 10 years.

Vince Cable: I have seen nothing to indicate that there is a wish on either side to have a fundamental review of the relationship.

Q101 Chair: Surely, the whole purpose of privatising Royal Mail was that there will be a different approach by Royal Mail to that which prevails at the moment.

Vince Cable: My understanding-and it has been made very clear in the statements of the senior management-is that they do not wish to change, let alone dilute, the agreement they have with the Post Office.

Q102 Chair: As of this moment.

Vince Cable: Given that it is in their interests to sustain the present arrangement, it seems very improbable to me that they would wish to reopen the question.

Q103 Chair: With respect, Minister, the fact that they are introducing various other means of increasing their profitability at the expense of sub-post offices does not seem to indicate a huge commitment to sustaining the arrangement with Post Office Ltd.

Vince Cable: I have just checked the facts of the matter, and you have quoted the prospectus. Maybe I could just give the detail as well. It says: "Any changes proposed as a result of that review must either be agreed between the parties"-both parties have to assent to it-"or, if they are unable to reach agreement, be taken to an expert for resolution. The other limited circumstances in which a party may seek a review are in cases where there has been a material adverse effect on POL or Royal Mail.’

Q104 Chair: I am intrigued by the "expert", but I think the underlying point is there is some sort of mechanism by which it could be altered.

Vince Cable: Clearly, but the mechanism, as I say, is that it presumes that both parties will agree and that it is in the self-interest of both parties to agree to it. I have said that there is a resolution mechanism and an arbitration mechanism if that is not achieved.

Q105 Chair: Whether this mechanism will survive three years in a privatised business, I just do not know.

Vince Cable: As I have said, I think, repeatedly, I have no reason to assume otherwise, because it is very much in the interests of the Royal Mail that it is sustained.

Q106 Katy Clark: The way that Royal Mail works at the moment is, effectively, cross-fertilisation or cross-subsidy between the profit-making areas in towns and cities, and what will be the loss-making areas in rural areas. We know that, as part of the Postal Services Act, private operators are now coming in-TNT in London-and delivering mail. They are able to cut costs by using zero-hours contracts and by having poorer standards of services. Do you not accept that there is going to be huge commercial pressure on Royal Mail over time to reduce the service, particularly in rural and loss-making areas, and that they are going to be lobbying Government to try to get the universal service reduced?

Vince Cable: They would have to lobby the regulator, in the first instance, rather than Government, and there is no reason to assume that that would be diminished. On your broader point, are you asking this specifically from a Scottish standpoint?

Q107 Katy Clark: It affects many parts of England. There are many rural parts of England as well.

Vince Cable: The terms of the licence will specify how that obligation is carried out. It goes back to Paul Blomfield’s question. There clearly is the USO at a high level, and, beneath that, there is the licence agreement, which the Royal Mail has with the regulator. It is the regulator’s job to impose that licence agreement, and there will be sanctions if it is breached. If the Royal Mail chooses to lobby for changes, they probably do that at the moment, but that is something that the regulator has to handle and resist if it breaches the principle of the USO.

Q108 Katy Clark: The point that I am making is that the framework that you have established is going to mean that Royal Mail is under huge commercial pressure to try to reduce the service in certain areas and, therefore, will be trying to get those minimum standards changed. Is that nothing something you accept? I know you say that the regulator and Parliament will not allow that to happen.

Vince Cable: The Royal Mail, under private ownership, is under no more commercial pressure than it is at the moment. The Royal Mail is under enormous pressure at the moment. It is under enormous pressure of competition and pressure to earn profits, which it does in a profoundly competitive market. That does not change simply because the owner has changed. The problem you are describing seems to be a perfectly valid one.

Q109 Katy Clark: You are bringing other competitors into the market. At the moment, there are only pilots.

Vince Cable: We are not bringing competitors into the market. There is a requirement under the regulatory regime of the European Commission that competitors come into the market. That has got nothing to do with private ownership. It is a genuine problem and you are quite right to point to it, but it has nothing to do with the privatisation.

Q110 Katy Clark: The point that I am asking, however, is whether you accept that there is going to be huge commercial pressure on Royal Mail to reduce the service.

Vince Cable: There is and has been strong commercial pressure. I do not think it has taken that form. There is pressure, of course, and that has impacted on the labour force, as we have seen, under public ownership. I would be surprised if the Royal Mail were to take the line that you take. The USO is there, embedded in law, and the licence agreement relating to the detail of service is a legal obligation of the Royal Mail, whether it is under public or private ownership, so the scope for eroding it is very limited.

Q111 Ann McKechin: Can I just clarify one small point, Secretary of State? I asked you earlier about whether you had obtained an independent valuation certificate in respect of the freehold property, and I indicated that you had in March this year. One of the companies you mentioned, I think, was BNP Paribas. I have checked subsequently and I note that BNP Paribas held a contract with Royal Mail in terms of property management in the South East of England. I would not describe that as independent if there is a contractual relationship between the company and Royal Mail-perfectly proper, but it is not the same as an independent valuation.

Vince Cable: There is an organisation called BNP Real Estate, and it may or may not be part of that organisation. They obviously have some parental connection. I was informed categorically that they were an independent valuer, but we can check that.

Q112 Ann McKechin: They seem to have a longstanding contractual relationship, so, if that is the case, then the valuation certificate that you have obtained for the freehold property is not a professional, independent valuation.

Vince Cable: You are questioning, Ann, and I do not know. I have been informed that they are. If I have been incorrectly informed, we will certainly acknowledge that and take the appropriate action.

Q113 Ann McKechin: I would be grateful if the Committee could get clarification. On a final point, as the Chair has mentioned, I notice on page 32, at paragraph 138 of the prospectus, it states that you would be unable to quantify what the impact would be of a yes vote on the Scottish independence referendum next year. As you will be aware, the SNP Scottish Government administration has indicated its intention that, should there be a yes vote, it would intend to renationalise the assets of Royal Mail in Scotland. I appreciate you cannot produce an exact quantity, but would it be fair to say that, if a privatised Royal Mail was released of its Universal Service Obligation in regard to Scotland, that would be a plus to them rather than a negative in terms of a likely profit level?

Vince Cable: I do not know what Mr Salmond’s intentions are in relation to the Universal Service Obligation. You quite correctly say that it would be very useful to have that information, and I was asked about it by the Scottish Select Committee. Putting it in very crude terms, the cost of the Universal Service Obligation in Scotland, on a pro-rata basis, is about £630 million. That assumes that Scotland and England have a comparable geography, which they do not. We do know that there is a premium for rural deliveries and a discount for urban deliveries, but you know better than I do whether the rural share in Scotland is higher than England. You can deduce something from that. I have asked Royal Mail if they can give us information about the cost of remoteness, which is clearly a big issue in Scotland. I suspect it is very substantial, and without going on a delivery route analysis in a great deal of detail, they are very reluctant to come up with ballpark figures. I am going to continue to pursue this, but I cannot give you a categorical number.

Q114 Ann McKechin: My understanding is that, for major private companies that are based in Scotland and have large mailings, much of their operations are carried out through delivery offices of the Royal Mail in England, given that, particularly in terms of those in the financial services sector, their customer base is primarily based in the rest of the UK. As income is normally generated from the point of where mail is delivered out from, rather than where it is received by, would that seem to suggest that the likely costs in Scotland far outweigh the profit that is being generated?

Vince Cable: It does suggest that the costs and benefits of this to Scotland under independence are quite complicated. I suspect that a separate Scottish Royal Mail back under public ownership, assuming the Universal Service Obligation, would involve a considerable net cost to Scotland, but I cannot prove it. The factors that you have just mentioned would have to be factored into the calculation.

Q115 Chair: Just before we conclude, can I ask a couple of questions about, in effect, the Chief Executive and the Directors, and remuneration? Can you tell us what the Chief Executive gets in the way of remuneration and benefits now, and whether you think that may increase under privatisation?

Vince Cable: I cannot give you the exact number. It is quite a complicated package. It is substantially less than her predecessor was paid. As you know, as a result of the reforms that Parliament approved and I have introduced this month, shareholders will now have a binding vote on the remuneration policy of the Royal Mail. As a leading shareholder, Government will have a substantial say in that. I would certainly expect that they would show proper restraint, particularly in view of the fact that there is pay restraint in their workforce. We would, however, exercise our views as a major minority shareholder, like any other shareholder in the country.

Q116 Chair: Would you expect her salary to go up post privatisation or stay the same?

Vince Cable: I would not expect it to go up as a consequence of privatisation. There is nothing in the Chief Executive’s package that rewards the share transfer. As I have said, we would expect her and others to exercise appropriate restraint. However, it is now and will be a private company, and they will have to form their own remuneration policy in the way of any other company.

Q117 Chair: Would you expect that remuneration policy to be consistent with other operators in the same area?

Vince Cable: Not necessarily. Of course, they are the universal service operator and a different category from many of their competitors. We would have to look at the remuneration policy in the round when they present it and we have to pass judgment on it as a shareholder.

Chair: Thank you, Minister. You have answered a lot of questions. You have tried to be very reassuring on a whole number of issues. It is fair to say that there is a degree of scepticism about some of the answers, but, to a certain extent, we will be clearer as this proceeds, maybe quite early on. As a Committee, we are, and have been for a very long time, concerned about the future of Royal Mail and the post office service, so we will be revisiting that and examining exactly how far the progress of Royal Mail has lived up to the comments that you have made today. Can I thank you very much for your contribution?

Vince Cable: Thank you.

Prepared 4th September 2014