Examination of Witnesses (640-656)|
WEDNESDAY 11 JUNE 2003
GROUP PLC MR
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 proportionalitymore 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
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
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 transparencypublished
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 Postcommand
I am not saying it should be their duty to do itas 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
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.