Competition in the postal services sector and the Universal Service Obligation - Business, Innovation and Skills Contents

Conclusions and recommendations

Cost of the Universal Service to Royal Mail, region by region

1.  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. (Paragraph 22)

2.  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. (Paragraph 23)

Universal Service Compensation Fund

3.  Cherry picking is a phrase often used in postal services to describe the easy, most profitable sections of mail services taken by Royal Mail's competitors. Cherry picking is available to Royal Mail competitors but, at the moment, affects only a very small percentage of Royal Mail's total business. This could change quickly, given the ambitions of some of Royal Mail's rivals in the market. Both Royal Mail and Ofcom need an evidence base upon which to gauge the potential threats to the sustainability of the USO in the event of a higher level of market penetration by other providers. We note the decision by Ofcom that, currently, the level of the threat does not justify intervention. We also note that Ofcom is mandated to monitor the situation. (Paragraph 39)

4.  Ofcom has the power to impose a General Universal Service Obligation on postal operators other than the Universal Service Designated Provider (Royal Mail), in order to protect the Universal Service. We have yet to be convinced that Ofcom could impose the General Universal Service Obligation within the predicted six to eight months. We recommend that Ofcom publish a more detailed timeline for its implementation and an assessment that the timescale is fast enough to avoid a failure in the Universal Service, even in the short term. (Paragraph 40)

5.  The alternative regulatory condition—the Universal Service Compensation Fund—involves a lengthy delay in implementation. To avoid such a delay, we recommend that the Secretary of State directs Ofcom to review the net cost of the Universal Service, in accordance with the Postal Services Act 2011. (Paragraph 41)

Views of the Universal Service-should it change?

6.  There has already been an extensive debate about the requirements of the Universal Service Obligation. The Committee strongly believes that it would be inappropriate to change the current requirements of the Universal Service Obligation. (Paragraph 45)

Price to customers

7.  We note that Royal Mail has again increased its prices this year. Royal Mail should not increase prices in an attempt either to increase its own profit levels or to protect the Universal Service Obligation, without continuing to increase the efficiency of its operations, thereby reducing its costs and enabling it to improve its standards of service. (Paragraph 49)

UK Bulk Mail

8.  The evidence that we received suggest that Royal Mail still has to match the technical innovations introduced by many of its competitors. These innovations more clearly match the expectations of consumers, as well as contributing to the efficiency of competing postal operators. (Paragraph 63)

Royal Mail's price structure for national average prices and zonal prices

9.  We support Ofcom's consultation on the level of zonal pricing set by Royal Mail. Any recommendations arising from that consultation must balance the need for Royal Mail to retain the freedom to set its prices, dependent on the cost of delivering in that area, with the benefits of retaining an open market and increasing competition. Royal Mail are free to set zonal pricing, but it should be based on actual costs of delivering to those zones, and not as a device to deter, or even stifle, competition. There is a fine balancing act to be set. Ofcom must set out the timetable for this consultation, and when a decision will be made. (Paragraph 68)

Labour costs

10.  We are opposed to a 'race to the bottom' of postal sector employees' wages, terms and conditions, and such a race should not be an inevitable result of greater competition in the sector. Indeed, Royal Mail's negotiations with the CWU have resulted in pay increases and job security. Our evidence suggests that, while Royal Mail's criticism of its rivals' treatment of their staff is not wholly proven, there are certainly examples of where the wages, terms and conditions offered by other companies in the sector fall short of the standards offered by Royal Mail, including what appears to have been a disproportionate use of zero-hours contracts by Whistl. (Paragraph 75)

11.  If standards of pay in the postal sector, as in other sectors, fall short, then the taxpayer is left to pick up the difference, because in-work state benefits will cost more. Furthermore, it is unacceptable that delivery of the Universal Service Obligation should require downward pressure on the terms and conditions of staff delivering that service. We recommend that Ofcom investigates the impact on customers and the service provided to customers of any downward pressure on terms and conditions of postal sector staff. We further recommend that the Government considers extending Ofcom's remit to include consideration of labour costs, conditions and standards in the postal sector. (Paragraph 76)

Ofcom and the regulatory framework

12.  We recognise that Ofcom has a difficult role in ensuring that the provision of a Universal Service is both financially sustainable and efficient. The sector is changing quickly, and Royal Mail has now moved from the public to the private sector. As competition increases, the statutory remit of Ofcom may need to change. Ofcom has to recognise its over-riding obligation to ensure the protection of the Universal Service Obligation and, if necessary, there should be changes in the regulatory framework to enable it to do so. (Paragraph 84)

13.  We recommend that Ofcom provides our successor Committee with quarterly updates on the state of the Universal Service, and highlights any potential middle-term effects on the Universal Service, and any action that it is proposing to take. (Paragraph 85)

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© Parliamentary copyright 2015
Prepared 12 March 2015