Select Committee on Constitution Minutes of Evidence

Examination of Witnesses (640-656)



  640. So, following on from that, what would you be looking to Parliament to do that it is not presently doing? One aspect, you are saying, is some degree of regularity of accountability, but by whom? By an existing departmental select committee or a separate committee of Parliament?
  (Mr Agar) Given that the Postal Services Act puts an obligation on the regulator to make particular reports, there should be a mechanism appropriate to something like the DTI Select Committee to scrutinise those reports and to hold the regulator accountable for what is in them. That is a mechanism which is currently not available.

  641. If we can move on to the appeals mechanism, would you like to say a bit more about that because I understand that your present criticism would be that what is available is limited and judicial review is a slow and expensive process? You would like to see greater flexibility?
  (Mr Agar) We have a relatively short licence compared to many regulated industries. It only has some 20 conditions in it. However, amongst those 20 conditions Postcomm has no less than 19 powers of direction and determination to direct us to do things or to implement things. For those sorts of issues the only recourse we have is to judicial review and, given the people in the room, judicial review, as you know, is not an appeal of first resort. This process leads us into almost a cold war diplomacy with the regulator because the only ultimate recourse if you are unhappy with the situation is a highly confrontational legal one which is not even an appeal on the merits in any event. I think that this over-dependence that our system has on judicial review as a substitute for an appeal leads to more confrontation in the regulatory relationship than would otherwise be the case. We have no equivalent of ACAS (Advisory, Conciliation and Arbitration Service) for our regulatory relationship.

  642. Would you like to expand on, from your point of view, what would be the ideal situation? We have got the annex here in terms of the Norton Rose recommendations. Would you like to develop that? What would be the advantage from your point of view? What would be the principal arguments for implementing that sort of process?
  (Mr Duncan) Stephen has mentioned the issue of judicial review, or the Competition Commission have been referred to as another option, but what the regulator is setting out here is a proposal whereby, if there are issues that arise that are of significance, and I emphasise the word "significance", and in the document we are talking about issues of merit, then what we are looking at is some mechanism, some appeal, where we can take the issue to this appeal body and basically say, "The regulator has gone down this route. We have no real means of challenging this decision". The determinations and directions which Stephen has already mentioned allow Postcomm to go down that route. We believe this is incorrect. We believe there are other issues which need to be looked at in a wider context. If I could put an example of that, Postcomm's primary duty is the Universal Service Obligation and that is set out in their documentation and obviously is in the Postal Services Act. In one of their papers they state that the duty of the Universal Service is provided within Royal Mail's licence so Royal Mail has the obligation to provide the Universal Service. When they then talk about promoting effective competition they say that the conditions within Royal Mail's licence allow for other operators to access that infrastructure and they say that it gives them the powers to impose on Royal Mail the terms and conditions of access in terms of access to Royal Mail's sortation, processing and delivery network; And so we have no means of appealing that process other than going down the route of judicial review, because obviously the Competition Commission is very much focused on price. What we are saying is that there should be a mechanism whereby on big ticket issues there is an appeal mechanism and we would see some tribunal somewhere, perhaps within the Competition Commission, to focus on that issue.

  643. If one wishes to reform the appeals process, what that implies is something perhaps in relation to decision-making itself because you are appealing from something that has already been decided. Does that therefore imply a prior problem, that there is inadequate consultation before a decision is taken?
  (Mr Agar) Consultation is a difficult issue and it has been an issue which has been at the heart of much disagreement among Postwatch, Postcomm and, I would have to say, ourselves. There clearly needs to be full public consultation on issues that have a substantial effect on the market, but we would take a different approach to Postwatch. I have to say that sometimes there has been almost too much consultation on some issues. For example, Postcomm's powers are such that we cannot alter the terms and conditions of one of our services to even the smallest extent without their agreement unless we can show that it is for the benefit of the customer. This has resulted in delays of six, seven, eight, nine months to try and effect even the smallest change to our terms and conditions. As a result particularly of the public dispute over the price control earlier in the year, when Postwatch were very public in saying that six weeks was not sufficient consultation for an issue of such magnitude (and there are two sides to that story), Postcomm have now become unduly sensitised to the consultation issue such that the most minor changes that the company requests now require three, sometimes, four months' consultation. If I can illustrate that, we wish to make a minor change to the Business Response Service, which is a very minor product. We have been told that there has to be three months' consultation, but in fact it should be four because you cannot have meaningful consultation in August. Once you then add on to the four months the time the regulator needs before they consult, the time they need having consulted, we are finding that for the smallest business decisions we are looking at timescales of nine months. Given that Postcomm's vision is to encourage innovation in the postal market, it is very difficult for us to reconcile that with the fact that the slightest change we want to make to a very de minimis service requires so long. There has to be proportionality—more consultation for big issues where there is a real political dimension, such as the scope of the Universal Service Obligation or perhaps price control, but equally well there has to be a realisation that some issues are actually quite small in the commercial world and if we are to react quickly to market developments we can do without nine-month periods of consultation. It is what is appropriate for our business.

  644. So would that be the extent of change that you would like to see because I am trying to get a perspective on the problems and your solutions to them? You said earlier that you were facing something of a cold war diplomacy, so I am trying to see what the position would be if there was at least a target.
  (Mr Agar) What we have suggested to Postcomm, and I believe that they are supportive of and I have no problems with working with them in a positive fashion, is trying to develop public criteria for what constitutes a small issue where a month's consultation is more than sufficient because it would only be of interest to technical people involved in a particular industry and what are big ticket public issues with a public dimension that should require at least three months' consultation and have those criteria available in advance.

Lord Holme of Cheltenham

  645. Reading the report in The Independent on Sunday which prophesied in some detail what Mr Leighton would say to us this afternoon, and sadly he is not here to say it but you have said some of it, it is quite apparent that relationships are not good between Royal Mail and Postcomm and I want to ask you two questions springing from that. First, in terms of regulatee/regulator relationships what duties do you think there are on both parties to make sure that the regulatory relationship works in an optimum manner? The second question is related to that. Is the nub of your present disagreement with Postcomm not so much a systemic one but that you feel, as the main object of their regulation, that they have not got the balance right between your Universal Postal Service obligation, the social obligation, and the general premise of improving competition in the delivery of the mail? It is a substantive issue but it relates to the question of how you as well as they manage the relationship between you.

  (Mr Agar) Would you mind if I answered your second question first? There is a systemic issue which is not the fault of either the regulator or the regulator's company which is that, while most regulated industries in the United Kingdom tend to pass through a period of privatisation, restructuring and then regulation and liberalisation, we are absolutely unique in having started with regulation and liberalisation without having passed through restructuring or privatisation. This has resulted, I think, in inherent tensions both within the company and within the relationship which are simply a reflection of that fact. That is unfortunate but we are where we are. With regard to the Universal Service definition and the broader political questions and our feeling about whether Postcomm have taken those into account sufficiently, let me say this. Postcomm published proposals for liberalisation of the postal market last year stretching ahead some five years into the future. They are only now consulting on what the scope of the Universal Service should be in this country. I would suggest that it would be more logical to consult and determine what the Universal Service should be and then determine what competition the market can accept and at what pace in order to protect that Universal Service. We feel strongly that the primary objective has really been about introducing effective competition and that the Universal Service is taken as, "Trust us, we are a regulator, it will be all right, honestly". I think more work should have been done up front to determine what the Universal Service is and then we should have looked at how we choose competition and whether it should be protective of the Universal Service. I honestly believe that has not been done. In terms of the duties of both parties in order to make the relationship work, I think it is something like a marriage. Both parties have to work at it to get the best out of it. The framework and the tensions both within the relationship and, if I am honest, within Royal Mail itself which is a publicly owned, inefficient company which is only slowly coming to grips with the realisation of being a regulated company, are such that it is very easy to flip over to judicial review and Competition Commission references, or at least the rhetoric of that. In that situation it is perhaps now more beholden on us than ever to try and develop a pragmatic, reasonable relationship with Postcomm to take these things forward without constantly having to fight our regulatory battles through the press. In a sense that is the problem with not having any proper accountability on the appeals procedure because the company clearly feels that it has to go to the appeal court of public opinion because no other appeal court is evident.

  646. You do not feel that your own proposal for a quicker, easier appeal mechanism, which would therefore presumably become almost automatic if it is quicker and easier, so why not go to appeal, would make the parties retreat further from getting a real, well-planned consultative relationship such as the one you have just outlined?
  (Mr Agar) I do not think it should. It may do in the early days but once people realised that they had to be reasonable and pragmatic and to take relationships forward, I believe that that would follow quite quickly. At the moment the regulator is in the position that unless we are prepared to go to court what they say goes. That is a relationship of power imbalance such that it encourages confrontational behaviour on both sides.
  (Mr Duncan) We have mentioned the primacy of the Universal Service. Just to give you an example, and I am appreciative of how difficult it is, a number of reports have been submitted on what is the cost of the Universal Service and from three different people you get a benefit, which is in one of the papers which came from Postwatch, of £450 million to the Royal Mail, a piece of work that was done by Postcomm which said potentially anything up to an £81 million cost, and Royal Mail's view, which is based on a different approach taking into account the impact of competition, which comes out at about £1.2 billion. Ignoring these approaches, the fact that you have got differences between plus £450 million and minus £1.2 billion on the same issue demonstrates the difficulty of this whole thing. Just to pick up a further point, which is about the transition that Royal Mail went through, which Mr Agar mentioned, all the other sectors when they have this transitional period have a relatively benign start period and they have no massive step changes to go through. Royal Mail did not have that. It actually had these step changes from day one and that was one of the issues that we wanted to bring out in our discussions with Postcomm at the issuing of the licence.


  647. On the point you were making of the relationship being in effect a marriage, to coin a phrase, there are at least three in this marriage and I wonder what sorts of problems that threw up from your point of view.

  (Mr Agar) By three I take it you mean Postwatch as opposed to DTI because one could argue that there are four in the marriage.

  648. Indeed, yes.
  (Mr Agar) I think Postwatch's position is quite clear. They believe that there should only be one regulator and it should be Postwatch. The fact that we have two bodies which have some overlapping duties towards consumers has resulted in, from our perception, the two bodies almost trying to outdo each other in their degree of toughness in standing up to each other and ourselves, which I think has damaged our relationship with both of them, but even more I think it has severely damaged the relationship between them. I have always thought it far more likely that one of our regulators would judicially review the other before we would ever judicially review either of them. I think it has been a recipe for disaster.

  Chairman: We may want to come back to the fourth part of the marriage in terms of the Department because of the particular position, of course, in which Royal Mail finds itself.

Baroness Gould of Potternewton

  649. My Lord Chairman has asked the question I was going to ask but I wonder whether I can follow it through. Is it a particular problem that you face because of the fact that the Royal Mail is Government-owned in a sense? What sort of directions do you take from the ministry? Does that mean that because of that you have a different relationship with the regulator because you are unique in all of this? That is my first question. The other one is to go back to the answer that you have just given about Postcomm and Postwatch. You say that maybe there should be one, but they have quite distinct and differing roles. How would you see it working if in fact there were just one regulatory body? Where would you see the consumer element fitting into that?

  (Mr Agar) I am honestly not sure I would say that there should only be one regulatory body but I believe that there should be absolute clarity of scope and purpose between them. The fact that Postwatch, which is a consumer body, commissioned research into the cost of the Universal Service Obligation demonstrates a clear intention to be involved in regulatory economics rather than consumer protection. I believe it is more to do with the way in which the organisations came into being than about regulatory ambition. I do not think there is anything in having two regulators that is inherently difficult for us to cope with and I can see the point about a separate consumer interest, but there must be absolute clarity about who is responsible for what and I do not believe we have that at the moment. Turning to the DTI, clearly any company would take account of and make sure that shareholders were completely informed about what is going on and we have only the one shareholder. My personal experience is that DTI have been rather hands-off with the Royal Mail. We provide them with business performance information, we take them through our strategic plan, which is, I can add, the same strategic plan that we give to the regulator so there is complete transparency in that regard, and I think we have a Chairman who, if he thought the Government was interfering with the workings of the company, would be the first to stand up for the independence of the company, so I have been quite impressed myself with the degree of independence in the relationship.


  650. If I can come back to what I mentioned at the beginning, the different levels of accountability in terms of the points you highlighted, and we have already discussed one, the accountability to Parliament, and the other is the appeals mechanism, the first dimension was about transparency in terms of being open. You make the point in relation to the regulators that you would like to see in effect greater transparency—published minutes, for example. Would you like to expand on that? What difference do you think it would make from your point of view?

  (Mr Agar) It is not just from our point of view but particularly from the point of view of competitiveness and potential competitors in the market because it is not always apparent to us why Postcomm adopts particular positions in the light of the evidence that is provided to them. If I can give a real example, we have a product that some of you may be aware of called Special Delivery. It is a guaranteed next-day product. In the first two years of regulation this was a product which was price controlled to the extent that we could put it up by RPI so it was basically frozen but we could put it up for inflation. In the public hearing Postcomm had into price control last autumn, which I attended, there were comments from competitors that they thought this product was far too cheap in the market and the fact that its very cheapness was damaging to the effective competition in the time-certain next-day market. We agreed. Our own research indicated that the main problem in selling the product was that it was too cheap and that customers therefore did not regard it as having the value associated with higher priced products. Therefore, we were in the position where we thought it should be not more price controlled but price controlled to a more liberal extent. The competition was saying that it is too cheap; it is impeding competition in this market. Postcomm's decision was actually to increase the degree of price control on that product and, instead of allowing it go up by RPI, to put it into the general basket of RPI minus X for controlled services. It was not apparent how they reached that decision given the clear and (we thought) unanimous view that that should to be the case. I am sure that both ourselves and they would have liked to understand the thought processes which led to that sort of decision.

  651. So you would like to see greater openness on the part of the regulator. Clearly, by the very nature of regulators, they are appointed to have an arm's length relationship with the regulated bodies as well as with the Government. What sort of contact do you have with the regulators, to give the Committee some idea of the nature of the contact, and how does that relate to the sort of contact you would like to have?
  (Mr Agar) I would say by way of example that I would probably talk to a director in Postcomm once or twice a week. We endeavour to have and we are starting to set up monthly relationship meetings, which we have not done previously, and clearly we meet frequently to deal with various issues as they arise. In terms of actual discourse between us, the relationship is fairly good and probably improving. I should add that in my position, and I have been doing this job for several months, what I have agreed with Postcomm is that we will do more of that because a lot of the issues we have between us stem from not having enough early communication and that is something I hope to improve.

  652. So it is good and it is improving?
  (Mr Agar) On a personal level the working relationship I would say is very good.

  653. And on an institutional level?
  (Mr Agar) I think there is a feeling that the challenge that Royal Mail faces in the next few years is absolutely enormous. If we can turn this company back into profitability it will probably be one of the biggest commercial turnrounds in UK history. In that context we are finding some of their decisions perplexing. For example, you may be aware of their proposals for third party access to our network which they published a few weeks ago. They are now proposing that our first weight step letters be put into our network at a price which on their figures is below cost. We find the idea that we are being asked to take letters at a loss at a time when we are trying to turn the company round and get back into profitability to be completely mystifying. I think that causes institutional clashes because I think Royal Mail sees Postcomm—and I am not saying it should be their duty to do it—as not being at all supportive of trying to turn the company round. There is a feeling that they should take more account of the economic position in which the company finds itself.
  (Mr Duncan) The other thing is that there is quite a degree of ad hoc-ery, shall we say. We have mentioned USO and not identifying what the products are. We have just had a price control and that price control effectively sets out revenues that the Royal Mail needs in order to demonstrate that it is an efficient operator. That has been signed up to by the board of Royal Mail, that the licence was modified, and then, less than two months after this had been agreed, we had this access price issue that in anybody's mind takes away potentially lots of revenue because the type of prices being put forward by Postcomm are certainly outwith what was set out in price control. Postcomm would say that their position is basically neutral but there is no detail about how that sort of decision was arrived at of being broadly neutral.

  654. So from your point of view as far as this is a problem, is it the absence of systematic contact and lack of transparency that is the problem? Would changing that go a long way to solving what you see as the problem?
  (Mr Agar) The key problem for us really is accountability at the end of the day rather than lack of transparency. Lack of transparency is an aggravation to the relationship. Probably all regulators and regulatees have a relationship with tensions in it, but I think our relationship, given our particular difficulties and being in the public sector, will always have more conflict in it than perhaps would otherwise be the case.

  655. If what you are saying is that it is a question of accountability, accountability to whom?
  (Mr Agar) I would say to Parliament, and indeed to the public who have to use the service.

  656. So with a regulator that then answered to Parliament, from your point of view do you see Parliament as a means through which you could feed in your concerns?
  (Mr Agar) I do not wish to appear magnanimous but we have many competitors and potential competitors who also wish to register their concerns about what the regulator does in the industry. Clearly Royal Mail would like to do that and I am sure other companies would.

  Chairman: Thank you both very much indeed. That has been extremely helpful. May I thank you also for the paper that you put in as the basis for that.

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