2 The Universal Service Obligation
The ability to receive the same standard of service
at the same cost in rural areas is of fundamental importance to
residents and, in particular, businesses in rural communities.
The USO is a good example of how 'rural proofing' of policies
can work. It protects rural areas and effectively spreads costs
across all areas so that all areas experience the same service.
[The Welsh
Local Government Association, Rural Forum][13]
Definition of the Universal Postal
Service
8. Royal Mail has always provided a 'Universal Postal
Service' (also known as the Universal Service). The legislation
that empowered the Government to privatise Royal Mail—the
Postal Services Act 2011—also named Royal Mail as the Universal
Service Provider. Section 31 of the Act included the following:
· To
abolish the criminal offence of conveying certain letters without
a licence, which had been contained in the Postal Services Act
2000;
· Ofcom
to take over regulatory responsibility for postal services, from
Postcomm;
· Royal
Mail's and the Post Office's historic pensions liabilities to
be transferred to the Government;
· Royal
Mail Group and the Post Office to became separate entities;
· The
Government put in place plans to offer shares in the Royal Mail
Group before April 2014, and to move the Post Office into a mutual
structure before 2015.[14]
9. Section 31 of the 2011 Act describes the "minimum
requirements" of the Universal Services, which include:
· at
least one delivery of letters every Monday to Saturday, and at
least one delivery of other postal packets every Monday to Friday;
· a service
of conveying postal packets from one place to another by post
at affordable, geographically uniform prices throughout the UK;
· a registered
item service at affordable, geographically uniform prices throughout
the UK.[15]
10. Royal Mail's own website provides more details
on the Universal Service requirements, set out in the 2011 Act:
· At
least one delivery of letters every Monday to Saturday to every
address in the UK;
· At least
one collection of letters every Monday to Saturday from every
access point in the UK that is used to receive letters and postal
packets for onward transmission;
· Postal
services at an affordable, uniform tariff across the UK;
· A registered
items service at an affordable public tariff;
· An insured
items service at an affordable public tariff;
· A free-of-charge
postal service to blind or partially sighted people;
· Free
carriage of legislative petitions and addresses;
· Postal
Packets up to 20kg.[16]
WHO USES THE UNIVERSAL POSTAL SERVICE
(UPS)?
11. The PostalGroup—an organisation of three
companies: Mail Matters Direct Ltd; Regional Mail Services Ltd;
and PostalSort Ltd—highlighted the importance of customers
when considering the Universal Postal Service:
We feel it's important that the focus of the
inquiry should be on the customers of the postal services and
specifically on how the industry should look in the future if
it is to provide products and services that will complement the
needs of the country. A free flowing delivery network will allow
the UK to take advantage of the country's competence in e-commerce.
An industry that is dogged by infighting will only stifle its
potential.[17]
Customers are not only residential users, sending
personal letters, presents, birthday cards and Christmas cards.
Customers of the UPS are also businesses that send communications
to their customers, including direct mailing, banking and financial
mailing. The Federation of Small Businesses described its members'
use of postal services:
The last survey conducted by the FSB on how members
use postal services showed that they are used for: ordering goods,
mail shots and publicity, delivering goods and services, information
for employees, delivering supplies, sending invoices, sending
parcels and paying suppliers, among others.[18]
12. TechUK—representing over 850 companies
and technologies, the majority of which are small and medium-sized
businesses—stressed the need for such businesses to be taken
into account:
It is small and medium businesses which commercially
underpin the USO and make it viable, as opposed to residential
users. The Select Committee's focus should be ensuring the requirements
of such businesses are met and the Royal Mail service to them
is secure.[19]
The Mail Users' Association, whose members "generate
more than 10% of annual postal traffic in the UK",[20]
wrote of business Super Users:
Super Users of mail regularly spend in
excess of £1 million a week on mailing activities, and as
such form the backbone of the UK's postal system in terms of contribution.
One MUA member has quoted a spend in 2013 with Royal Mail of £83
million, and another as delivering annualised postal volumes in
excess of 640 million items into the network. Members would therefore
argue that the future of the universal service is inextricably
linked to the needs and wants of these mailers, and they have
a vital contribution to make in informing debate on the wider
issue of how best to sustain the universal service in the long
term.[21]
THE UNIVERSAL SERVICE AND CONSTITUENT
PARTS OF THE UNITED KINGDOM
13. We received several submissions from interested
parties in Scotland, Northern Ireland, and Wales about the importance
of the Universal Service to them, due to the high percentage of
rural addresses in those areas. The Scottish Chambers of Commerce
(SCC), representing a network of 11,000 businesses throughout
Scotland, wrote:
It is imperative that all businesses in Scotland
have access to a universal service with regards to mail. While
SCC supports competition, it is essential that this is not conducted
in a way which could threaten the continuation of the universal
service and therefore add unfair cost burdens to businesses in
rural areas throughout Scotland.[22]
The Northern Ireland Chamber of Commerce and Industry
wrote that: "the one-price-goes-anywhere universal service
has particular significance for Northern Ireland given the high
percentage of rural addresses and the fact that it is the only
region to be entirely served by air and sea".[23]
14. The Welsh Local Government Association made the
point about how the USO is subsidised geographically:
The ability to receive the same standard of service
at the same cost in rural areas is of fundamental importance to
residents and, in particular, businesses in rural communities.
The USO is a good example of how 'rural proofing' of policies
can work. It protects rural areas and effectively spreads costs
across all areas so that all areas experience the same service.[24]
Regional differences, in respect of rural and urban
populations, highlight the cross-subsiding nature of the Universal
Service, to ensure the provision of the same service for all in
the whole of the United Kingdom.
Cost of the Universal Service
Obligation to Royal Mail
15. The USO comes at a cost. The Social Market Foundation
argued that the USO was sustainable as it was cross-subsidised,
both geographically and by product:
The USO is currently funded by Royal Mail. Whilst
the costs of delivering across the UK vary substantially, from
the cheaper, more densely populated urban areas to the more expensive,
sparsely populated areas, retail prices must be the same, regardless
of where mail is being sent within the UK. The USO is effectively
funded through some customers paying more to subsidise others.
This cross-subsidy occurs both by geography and product type.
But the financing of the USO is likely to come under substantial
pressure in the future.[25]
16. However, the Social Market Foundation noted the
cost of the USO to Royal Mail was difficult to quantify :
There is little transparency over the actual
cost of the USO, and therefore how much cost is being imposed
on different groups of consumers or businesses. This makes the
sustainability of the current model hard to assess; and without
fully understanding where the costs fall also makes it difficult
for policy-makers to make well-informed choices about potential
measures to ensure sustainability, both now and in the future.[26]
17. Richard Hooper—the author of three reports
on the future of the postal services sector in 2008 and 2010[27]
and currently an adviser to the CEO of Royal Mail—based
his assessment of the costs of the USO on the following definition:
The USO is also defined by Ofcom as that set
of products which are inside the USO, for example parcels up to
20kg. It is better in my view to look at the USO as a total network
embracing 'first mile' and 'last mile' with a strong element of
fixed costs irrespective of volume. Your postman or postwoman
has to deliver to your house or flat or business six days a week
whether he or she has one letter for you or twenty.[28]
This definition was used by Moya Greene, the CEO
of Royal Mail, when she estimated the cost to be £7.2 billion.[29]
However, Ed Richards, the then CEO of Ofcom, offered a different
method of calculating the cost of the USO:
We have taken a different approach to it. That
is the cost of the whole network, but of what goes over that network
of that £7.2 billion, only 20% is USO defined—80% of
what is carried over the network is not. When one then asks what
costs should be associated with which area, the numbers are quite
different. For example, in the Royal Mail's own regulatory financial
statements, which it has to submit to us, the allocation from
the USO, or the cost of the USO, is not £7.2 billion but
£2.7 billion. They are very different numbers.[30]
18. Ed Richards went on to describe the profits that
Royal Mail makes from the Universal Service Obligation:
The audited 2013-14 regulatory financial statement
from Royal Mail to us—so audited externally—reports
an operating profit of £484 million on universal service
mail after transformation costs, which are one-off costs. If you
omit transformation costs, the operating profit on the universal
service was £556 million, so half a billion pounds of profit
on the universal service in the audited regulatory accounts for
2013-14.[31]
Ofcom's written evidence also highlights VAT benefits
and economies of scale and scope for any Universal Service Provider:
It has economies of scale and scope in relation
to its historical position as the Universal Service Provider and
potentially benefits in relation to brand recognition and trust.
Royal Mail also does not have to charge VAT for any of its universal
service or access products and this gives it an advantage over
its competitors for VAT exempt business customers (such as banks
and other financial institutions and charities) and for consumers
and small businesses.[32]
19. We invited Royal Mail to explain the discrepancy
between its figure of £7.2 billion and Ofcom's figure of
£2.7 billion. Royal Mail's supplementary evidence stated
that:
Both figures are taken from Royal Mail's 2013-14
Audited Regulatory Accounts.[33]
Both numbers, £2.7bn and £7.2bn, are calculated in line
with the Regulatory Accounting Guidelines specified by Ofcom,
which Royal Mail must abide by. An explanation of what each figure
represents is as follows:
This figure represents the cost of maintaining
a network that is capable of delivering the Universal Service,
is the appropriate cost measure to focus on when considering 'the
cost of the Universal Service'. This view is also held by Ofcom,
as it uses the margin earned on this £7.2bn cost when assessing
the financial sustainability of the Universal Service.
Ofcom defines the costs associated with the Universal
Service network as the 'Reported Business'. The 'Reported Business',
as defined by Ofcom, includes:
"The costs and revenues of both regulated
and unregulated products that depend on the core universal service
activities for their efficient provision. This includes all universal
service products, [and non USO] retail bulk mail products
and access products".
The £2.7bn figure is the proportion of the
£7.2bn 'Reported Business' cost, which is allocated to Universal
Service products that are delivered through Royal Mail's
network.
Importantly this figure does not represent
the full cost of running a network capable of delivering the Universal
Service.[34]
COST OF THE UNIVERSAL SERVICE TO
ROYAL MAIL, REGION BY REGION
20. We also asked Royal Mail for a more detailed
analysis of the cost of the Universal Service, broken down into
geographical areas across the United Kingdom, region by region.
Royal Mail replied with the following evidence:
Royal Mail's Universal Service network is designed
and run to serve the whole of the UK with a uniform service specification
as efficiently as possible and maximising economies of scale.
Much of its cost is comprised of national overheads which cannot
be meaningfully broken down into regional costs. For example,
the overnight road and air transport costs that allow Royal Mail
to deliver the First Class service cover the whole of the UK.
Royal Mail is required, by Ofcom, to maintain
a zonal costing model. This model assesses the variation
in cost of delivering mail in 4 zones (London, Urban, Suburban,
and Rural). It does not calculate cost by geographic region.
This model only considers downstream cost which
may vary by zone. It therefore does not include key elements
of the £7.2bn 'Reported Business' cost base that enable the
end-to-end universal service. For example, central overheads,
collection, sortation and distribution of mail around the country
are not covered by the model. The results from this model are
therefore not well suited to assessing an accurate regional cost
of the universal service.
However, taking this model as an indication of
delivery costs only, it shows that rural deliveries have a significantly
higher cost than suburban or urban deliveries, as may be expected.
Sustaining the Universal Service network relies on revenues from
some areas of the country contributing to its overall costs.
Also, as Ofcom disclosed, London is the most
costly area for Royal Mail to deliver according to the zonal costing
model. This is due to factors including the higher costs attributed
in the model to property in London, as well as higher wages paid
to staff in the capital.
21. This supplementary evidence did not help us to
understand the regional variations in the cost of the Universal
Service, but did corroborate the evidence we heard in a different
Inquiry. In our Inquiry into the Implications of Scottish Independence
on Business, Higher Education and Research, and Postal Services,
in June 2013, the then Company Secretary, Royal Mail, Jonathan Millidge, answered a question about
the cost of delivering mail in Scotland:
There are networks that go between Scotland and
England and Wales and Northern Ireland and so on and we do not
disaggregate those. We have an obligation to deliver mail at a
uniform price everywhere across the UK. We do not separate out
the cost for Scotland in doing that. […] We have 10,000 post
boxes in Scotland that we collect from, for example, and 6,174
delivery routes. It is true that it is more expensive to deliver
in rural areas than it is to deliver in urban areas. There are
massive rural areas in Wales, for example, and also in England
and Northern Ireland. So I could not give you a breakdown of what
it is in Scotland. We do deliver about three times as much mail
in Scotland as is posted in Scotland. So Scotland is a net importer
of mail and that mail obviously then is delivered throughout the
16 postcodes that make up Scotland. But I am afraid I cannot say
what the profitability of Scotland is.[35]
22. Given the fundamental importance of the USO,
we were concerned to note that Royal Mail were unable to provide
a regional breakdown of the cost of the Universal Service Obligation
(USO). In addition, given the responsibility of Ofcom to protect
the USO, we were surprised to learn that there is no consensus
between Royal Mail and Ofcom over what constitutes the cost, revenues
and profits of the USO. We recommend that both Royal Mail and
Ofcom should, as a matter of urgency, agree a set of financial
metrics against which the costs should be measured. If necessary,
this should be carried out by the National Audit Office (NAO)
or a mutually-agreed body of experts.
23. We recommend that Royal Mail—the Designated
Universal Service Provider—using these figures, provides
a geographical analysis of where the Universal Service is profitable
and where it is not. Such detailed analysis and financial monitoring
of the Universal Service would provide the evidence to assess
the long-term sustainability of the Universal Service. This breakdown
of costs should be included in Royal Mail's Audited Regulatory
Accounts. If Royal Mail declines to provide these figures, we
recommend that the Government should consider extending the remit
of Ofcom, to enable Ofcom to enforce this requirement.
13 Welsh LGA - Rural Forum (USO 24) para 3 Back
14
Postal Services Act 2011, Section 31 Back
15
Postal Services Act 2011, Section 31 Back
16
Royal Mail Universal Service Obligation, accessed 5 March
2015 Back
17
ThePostalGroup (USO 38) page 4 Back
18
Federation of Small Businesses (USO 12) para 5 Back
19
techUK (USO 30) page 3 Back
20
Mail Users' Association (USO 23) para 1.1 Back
21
Mail Users' Association (USO 23) para 3.1 Back
22
Scottish Chambers of Commerce (USO 32) para 2 Back
23
Northern Ireland Chamber of Commerce and Industry (USO 36) page
1 Back
24
Welsh Local Government Association - Rural Forum (USO 24) para
3 Back
25
The Social Market Foundation (USO 19) para 3 Back
26
The Social Market Foundation (USO 19) para 8 Back
27
The challenges and opportunities facing UK postal services,
May 2008; Modernise or Decline, Cm 7529, 16 December
2008; and Saving the Royal Mail's universal postal service
in the digital age, Cm 7939, September 2010 Back
28
Richard Hooper (USO 06) para 2 Back
29
Q22 Back
30
Q155 Back
31
Q156 Back
32
Ofcom (USO 29) page 2 Back
33
Royal Mail Group Limited Regulatory Financial Statements 2013-14,
June 2014 Back
34
Royal Mail (USO 56) para 1 Back
35
BIS Committee, The Implications of Scottish Independence on
Business; Higher Education and Research; and Postal Services,
HC 378-1, June 2013, Q72 Back
| 
