Business, Skills and Innovation CommitteeWritten evidence submitted by the National Federation of SubPostmasters

1. Executive Summary

1.1 Subpostmasters provide vital access to and advice and information on Royal Mail services to the public and small business.

1.2 The separation of Post Office Ltd (POL) and Royal Mail is the first known example in the world of a national mail operator being separated from its retail arm.

1.3 The NFSP warned the government that the success of this separation was predicated upon substantial income from additional government work at post offices.

1.4 The government has completely failed to deliver on its pledge to make more central and local government services available at post offices.

1.5 Instead, post offices are highly and increasingly dependent on income from Royal Mail services for their survival.

1.6 Since separation, subpostmasters are already experiencing a more aggressive attitude from Royal Mail towards post offices.

1.7 The NFSP fears that a privatised Royal Mail will seek to further reduce costs and increase profits by renegotiating its business agreement with POL.

1.8 POL and the post office network will be unable to survive independently from Royal Mail Group. The NFSP is therefore calling for the government to halt the privatisation of Royal Mail; and to retain an ongoing stake in the company to defend the interests of our post offices.

2. Introduction

2.1 The National Federation of SubPostmasters (NFSP) is the membership organisation which represents the UK’s subpostmasters. Subpostmasters are independent business people who act as agents to POL and run sub post offices, which make up 97% of the national post office network.

2.2 This is our written submission to the House of Commons Business, Innovation and Skills Committee’s inquiry on Royal Mail privatisation.

2.3 While the areas of interest and concern on this subject are many and varied, space constraints mean that this submission will focus primarily on the main area of interest to the NFSP—the impact on post offices of Royal Mail privatisation.

3. Relationship between Post Offices and Royal Mail

3.1 Post offices and Royal Mail have been closely linked throughout the Post Office’s 370 year history. The two services are heavily inter-dependent, and in the public mind are often indistinguishable.

3.2 Until their separation in April 2012, POL and Royal Mail were both independent, government-owned companies within Royal Mail Group.

3.3. Post offices are the ‘shop front’ for Royal Mail, providing access to mail services and playing a crucial role in the delivery of the universal postal service. In total 90 different Royal Mail products, stamps and services are available at post offices.1

3.4 Subpostmasters provide an unrivalled specialisation in mail services, offering advice and information to customers as well as access to Royal Mail services. They are paid varying rates for a range of transactions which include postage sales and handling pre-paid mail.

3.5 In additional to mail, government, financial and other services, the UK’s post offices provide a well-documented social and economic service to their customers and local communities. The former postal services regulator Postcomm calculated this social value at up to £10bn and concluded that post offices provide “a major social net benefit to the UK population.”2

4. Separation of POL and Royal Mail

4.1 The government announced its intention to separate POL and Royal Mail in 2010. POL was to remain in public ownership, with the possibility of later being transferred to mutual ownership; while Royal Mail was to be privatised.

4.2 The proposals became law with the passing of the Postal Services Act in 2011. This is the first known example in the world of a national mail operator being separated from its retail arm.

4.3 The two separate companies currently operate under Royal Mail Holdings plc, although we understand that this remaining link is due to be terminated upon the privatisation of Royal Mail.

4.4 The NFSP accepted these changes on the explicit understanding that POL and the UK’s post offices would have a secure future outside of Royal Mail Group. This would be achieved through a combination of a robust, long-term business agreement between POL and Royal Mail; and significant new income through government and financial services.

4.5 While accepting these changes, the NFSP warned the government’s approach was without international precedent and contained a high degree of risk. We also made clear that substantial income from additional government work was an essential pre-requisite for the Post Office to be able to survive as an independent entity outside of Royal Mail Group.3

5. Post Offices and Mail Services

5.1 In its 2010 strategy paper on the Post Office, the government claims that falling mail volumes mean that postal services “will not be a growth area for the Post Office”; while government and financial services offer “real growth potential”4. However, these assumptions are belied by the reality experienced by post offices.

5.2 While income for post offices from government and financial services remains low (see section 8), NFSP research shows that post offices are highly reliant on mail services. Mail transactions are overwhelmingly the single biggest contributor to subpostmasters’ income, responsible on average for a third of all pay5. For some post offices the proportion of income from mails services can be considerably higher.

5.3 This reliance is increasing, with a survey in 2009 showing that mail transactions brought in 28% of subpostmasters’ pay.6

5.4 In 2012–13, mail revenue brought in £409m to POL, a 4.3% increase on the previous year and accounting for 33% of all POL revenue.7

5.5 POL estimates that mail transactions account for more than half of all customer visits to post offices.8

5.6 In addition to transaction-related income, a payment from Royal Mail allows POL to pay subpostmasters approximately £100m a year for providing Royal Mail with bricks and mortar access points. This pay is received by subpostmasters with traditional Post Office contracts via the fixed (or ‘core tier’) element of their pay.

6. Threats to Post Offices from Royal Mail Privatization

6.1 A 10-year Inter-Business Agreement (IBA) was signed between POL and Royal Mail in January 2012, shortly before the separation of the two companies. This was intended to ensure that POL would remain Royal Mail’s exclusive retail outlet; and that the public and businesses could continue to access Royal Mail services at post offices for the next decade.

6.2 While the NFSP welcomed the IBA, we understand that the contract contains break-points at five and eight years, when arrangements can be reviewed.

6.3 The Chief Executive of Royal Mail may claim it is “unthinkable”9 that POL and Royal Mail won’t have an ongoing relationship; but this provides no reassurance on payment rates for or exclusivity of Royal Mail services at post offices.

6.4 The NFSP has very real concerns that the new owners of a privatised Royal Mail will seek to dilute, renegotiate or tear up the agreement in pursuit of reduced costs and increased profit. This would have a highly detrimental impact on the finances both of POL and of individual post offices.

6.5 In the year since the separation of the two businesses, but with Royal Mail still in government ownership, subpostmasters have already experienced a more aggressive attitude from Royal Mail towards post offices. We understand that price increases for parcels introduced by Royal Mail on 2 April 2013 have proved to be profitable to Royal Mail; but have cost POL £10m in revenue, and have lost individual post offices many vital mail customers and thousands of pounds each in income.

6.6 The NFSP believes that were Royal Mail and POL still integrated within Royal Mail Group, outcomes such as these would have been addressed before any decision was reached, with any adverse impact on post offices being a full and equal consideration in any final decision.

6.7 In addition, subpostmasters are reporting an increased incidence of ‘poaching’, with Royal Mail approaching business customers and offering incentives for them to transact directly with Royal Mail rather than through local post offices.

6.8 Furthermore, several commentators have cited the likelihood of a privatised Royal Mail seeking to amend the terms of the Universal Service Obligation which it is required to meet, to help reduce costs and increase profits. This could include the removal of the First Class mail service and replacing First and Second Class with a two-day service; reducing the quality of service target for First Class mail; or reducing the number of collection and delivery days from the existing six day service.

6.9 In addition to widespread concerns about the impact any such changes would have on business and residential customers, the NFSP has also expressed strong concerns about the potentially damaging impact which such changes would have on use of mail services and therefore on revenue for post offices.10

7. Mailwork Post Offices

7.1 Around 800 post offices also provide premises, facilities and supervision for Royal Mail delivery staff. Subpostmasters running these ‘mailwork’ post offices, which are overwhelmingly located in rural areas, are particularly reliant on income from Royal Mail to sustain their businesses. These subpostmasters receive payments related to the number of postmen and women they supervise. This pay is typically around 25% of a mailwork office’s total post office income. The NFSP is concerned that a privatised Royal Mail may wish to review these arrangements, and renegotiate or terminate them in the name of cost savings, resulting in the probable closure of these post offices.

8. Government and Financial Services at Post Offices

8.1 To achieve a full picture of the threat facing the UK’s post offices as a result of Royal Mail privatisation, post offices’ growing dependence on mail services must be placed in the wider context of the complete failure of other services to generate additional income for post offices; and the escalating crisis in income which subpostmasters face.

8.2 In 2010 the government announced plans to use post offices as the ‘front office for government’, offering the public face-to-face access to a full range of central and local government identity, information and payment services.

8.3 The NFSP fully supports the concept of creating a ‘front office for government’ at post offices. We believe that making far more central and local government services available at post offices will provide cost savings for government; improve access for customers; and deliver vital new income for post offices. As detailed in section 4 of this response, we made clear that the realisation of these proposals was an essential pre-requisite to a successful separation of POL and Royal Mail.

8.4 However, the government has failed to deliver on its pledge. POL income from government services has collapsed from £576m in 2004–0511 to what POL claims to be £164m in 2012–1312. However, the NFSP believes that the £164m includes income from the Post Office card account, which in 2004–05 was counted as financial services revenue rather than government services revenue. If the same criteria were employed for the 2012–13 accounts as were used in 2004–05, income from government services is likely to be as low as £120m.

8.5 No new major government services have been awarded to post offices since May 2010. The few new services which have been introduced are one-off transactions available only in a small number of post offices.

8.6 NFSP research13 shows that the overwhelming majority of UK subpostmasters are making no income at all from these services:

94% earn nothing from ID checking services. Average earnings: less than £10/month.*

77% earn nothing from Passport Check & Send. Average earnings: £76/month.*

59% earn nothing from DVLA transactions. Average earnings: £234/month.*

96% earn nothing from biometric identity services. Average earnings: £116/month.*

87% earn nothing from payment services. Average earnings: £1/month.*

*For those with any earnings

8.7 Meanwhile, other government services—benefit cheques (or ‘Green Giros’) and National Savings & Investments products—have recently been withdrawn from post offices.

8.8 POL was re-awarded the contract for DVLA services in November 2012—but as a result of the procurement process, there has been a very significant drop in the income the Post Office receives from the DVLA. Subpostmasters are now earning around 50% of the previous rate (ie payments detailed in 8.6 above) for DVLA transactions.

8.9 Furthermore, progress on offering a comprehensive range of local authority services through post offices has also been very limited.

8.10 This failure comes despite the fact that the public wants to use these services at post offices. Research shows that 89% of people say it is important there is an option of face-to-face access to a full range of government services; 73% say post offices are the most appropriate type of premises for offering this.14

8.11 The government has stated that alongside government services, financial services are a major area where the Post Office can increase its income.15

8.12 POL has provided a range of Post Office-branded financial services products in partnership with the Bank of Ireland since 2004. But the Bank of Ireland financial services products—including vehicle insurance, life assurance and credit cards—are not providing any revenue to the vast majority of subpostmasters.

8.13 Recent NFSP research16 shows that across the UK, no monthly income at all was earned by:

97% of subpostmasters for Post Office Credit Cards.

97% of subpostmasters for Post Office Home Insurance.

91% of subpostmasters for Post Office Car & Van Insurance.

99% of subpostmasters for Post Office Life Assurance.

8.14 POL remains a heavily loss-making company. Its operating profit of £94m in 2012–13 is only achieved through a £210m subsidy payment by the government; its reported £33m increase in profit on the previous year achieved through a direct combination of a £30m increase in the government subsidy and a reduction of £5m in subpostmasters’ remuneration.17

8.15 As a result, another of the government’s key objectives for separating POL and Royal Mail—the mutualisation of POL—now looks increasingly unlikely to be achieved. It is widely agreed that any mutualisation is predicated upon POL being financially sustainable. Achieving this goal looks less likely then ever; and Royal Mail privatisation, and the attendant threat of a renegotiation of Royal Mail’s business relationship with POL, can only serve to exacerbate this already bleak outlook.

8.16 The failure of new services, coupled with the loss of existing services; cuts to pay; rapidly rising operating costs; and increased competition from digital communication channels, have resulted in a collapse in subpostmasters’ incomes.

8.17 NFSP research18 shows that:

51% of subpostmasters say their post office pay has decreased over the last year (only 8% report an increase).

Subpostmasters’ average personal drawings from their post office pay were £753 a month in 2012, a 36% real terms drop over the past six years.

And 24% of subpostmasters take nothing in personal drawings from their post office pay; surviving instead on savings, pensions, their spouse/partner’s income or income from their retail business.

8.18 This situation is not sustainable. In view of the complete failure to deliver new services and new income to post offices, the NFSP is concerned that Royal Mail privatisation, and the changes to Royal Mail’s business relationship with post offices which could ensue, will make an already dire situation even worse.

8.19 This is an issue of pressing significance for the government as when subpostmasters no longer earn enough to run their businesses, post offices close.

9. Conclusions

9.1 The government has completely failed to deliver a secure future to POL and to post offices outside of Royal Mail Group. Government and financial services are not yielding any significant income for subpostmasters, who in turn are struggling to make a living from their post offices. Post Office mutualisation is increasingly less likely to be achieved.

9.2 As a result, the NFSP believes that the government must halt the sale of Royal Mail, at least until it can be unequivocally demonstrated that POL and the UK’s post offices have a viable and sustainable future outside of Royal Mail Group. If this cannot be achieved, POL should be reintegrated into Royal Mail Group.

9.3 We also believe that the government must retain an ongoing stake in Royal Mail. This would ensure that the company meets its obligations to the nation as an essential part of the UK’s national infrastructure and as a key service provider. In addition, with regard to the post office network, an ongoing government stake in Royal Mail would help ensure that post offices’ interests remain reflected and represented within Royal Mail’s decision-making; and that the business agreement between the two companies is policed and where necessary defended.

9.4 The NFSP’s opposition to the Royal Mail sale is not ideological; but based on grave concerns about the likely impact on our post offices. Many post offices are already operating on the very edge of viability and cannot sustain any further loss of services or reductions in pay.

9.5 Unless the government is willing to reconsider its position on Royal Mail, it is clear that POL as an independent company; the UK’s post offices; and the millions of people and small businesses who rely on them, all face a highly uncertain future.

August 2013