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Lord De Mauley: I was hoping that the noble Lord, Lord Razzall, would open up a little more on who was responsible for his current appearance, but I was disappointed. I am afraid that we have serious reservations about the amendments in this group. As later amendments that we have tabled suggest, we are deeply concerned about the possibility of a levy being imposed on the
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Lord Carter of Barnes: I, too, was rather hoping that the noble Lord, Lord Razzall, would reveal all, but that is perhaps something to look forward to later. I thank the noble Lord, Lord Clarke, for again so clearly making the case for why there is a need for a change in the regulatory regime, why there is a need for the underpinning and support of the universal service obligation, and why there is a need to ensure that it is done on transparent terms, all of which the Government agree with. The Government’s concern for the provision of a strong universal postal service is absolutely at the heart of the Bill. It was at the heart, too, of both the first and the second Hooper reports. Indeed, on page 32 of the final report, Hooper lays out clearly the importance of the universal service obligation and makes it clear that that is the fundamental rationale for the sum total of his recommendations.
The Government’s view is that in the first instance the most effective safeguard for the universal service is for Royal Mail to modernise and become efficient on open and transparent terms, thereby enabling it to meet the costs of its universal service on a fair basis, but from within its own resources, and to reap the benefits from being the sole provider of the universal service as well as the transparently allocated costs. To that end, I rather agree with the noble Lord opposite that establishing a universal service fund today would be counterproductive. It could have the perverse effect either of weakening the incentives on Royal Mail to adapt to changes in the market or removing the need for us to have an accurate and transparent in-first-instance cost structure for such a universal service. At a time when by the Royal Mail’s own admission there is an urgent need for modernisation to invest and compete in the modern communications market, it would also be unfair on other service providers and customers who at this stage should not be penalised or required to contribute to a universal service fund which may simply exist as a means of capturing inefficiency.
As I said, the Hooper report’s proposals, which we are implementing in the Bill, are the right way forward to enable Royal Mail to get the balance right between modernisation and a fair cost structure, thereby maintaining the universal postal service for the foreseeable future. However, the Government also recognise the risk that falling letter volumes and the other structural market changes outlined in Hooper may accelerate, thereby eroding the ability even of an efficient Royal Mail to maintain the universal service at its own cost, which is why we are giving Ofcom the power to set up a universal service fund should a future need arise.
The noble Lord, Lord Hunt, asked earlier—I think in relation to Amendment 89G—for more details on how a so-called “sharing scheme” for financing a
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Amendments 89N and 89P, proposed by my noble friend Lord Clarke, would place Ofcom under a duty to review the financial burden of the universal service conditions by 1 March 2010. Clause 39 currently gives Ofcom the discretion to review the financial burden of the universal service, but does not impose a time limit.
Ofcom will undertake a full strategic review of the postal services market as soon as it has the powers to do so. It will take longer to complete these tasks properly and to consult on them than I fear my noble friend is allowing. So there will be a full initial market review. Clause 39 provides discretion to undertake a specific review of the net cost of the universal service at a later date, should that be needed.
The Government believe that the discretion proposed in Clause 39 is both necessary and important for Ofcom to regulate effectively. By that stage, Ofcom will have become the body which will be expert in the postal market. It will have been required to gather a robust evidence base through market review, assessment and clearer accounting separation. It will have a duty to protect the universal postal service. Ofcom will therefore be best placed to decide when exactly is the right time to review whether providing the universal postal service may constitute an unfair burden on a single universal service provider.
In addition, requiring a review of the financial burden of the universal service by the end of the financial year is, in practice, unrealistic. There would simply not be enough time for Ofcom to undertake this review between autumn 2009 and March 2010 alongside its initial market review. As recommended by the Hooper report, Ofcom will start working with Royal Mail as soon as it has powers to develop a shared understanding of its costs and the benefits of providing a universal service.
Let me now address Amendment 93B before turning to the amendments tabled by the noble Lord, Lord Razzall. This will enable me to respond fully to each of the noble Lords, first my noble friend Lord Clarke and then the noble Lord, Lord Razzall. This amendment would require contributions to be made from 1 April 2010, provided Ofcom has determined after such a review that contributions should be made. This would
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The noble Lord, Lord Razzall, has given notice that he wishes to oppose Clause 39 standing part of the Bill. We have explained previously the Government’s intention behind Clauses 39 and 40. We want to put the universal postal service first. We want to make sure we consider every risk to it, and plan as best we can for the future. But the universal service fund should only be used as a last resort. In this context, if a universal service fund were to be set up, it is by definition necessary to retain Clause 39. Ofcom must be able to review the extent, if any, of the financial burden for the universal postal provider of complying with its universal service obligations. Without the facility to be able to review the financial burden, Ofcom cannot decide whether to establish a universal service fund, nor how large it needs to be, nor who the contributors could or should be. If there is no or little financial burden, why require contributions to meet this burden? In addition, under the postal services directive, only the net costs of the universal service can be shared through a universal service fund. Without the power to have a review of the financial burden, not merely the costs, Ofcom will not be able to determine what the net costs are of the universal service.
Amendment 90, in practice, removes the discretion of Ofcom to require contributions for sharing the burden of the universal obligation, and instead imposes a duty to set up a universal service fund. Like the noble Lord, the Government are concerned to secure the provision of a strong universal postal service. As I explained earlier, and as noted by both the initial and final Hooper report, a universal service fund would be counterproductive in the present situation. The fund is intended to insure against future market changes which might make it impossible for a modernised and efficient Royal Mail to support the universal service.
I turn to Amendments 91 and 92, which I shall address together as it is together that their meaning is clear. The proposal in Amendments 91 and 92 is to require both providers of services within the scope of the universal service, and users of such services, to contribute to any universal service fund. The intention appears to be to ensure maximum subsidy to Royal Mail via the universal service fund at this point in time. Amendments 91 and 92 remove Ofcom’s discretion to decide that only providers, or only charges paid by
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I will now briefly discuss Amendment 93. The noble Lord proposes in Amendment 93 to ensure that all providers and users who can be asked to contribute to the universal service fund are actually required to do so. Amendment 93 would remove the ability for Ofcom to decide that only certain subcategories of users and providers within the scope of the universal service must contribute to the fund. As I have just said, the Bill provides a necessary flexibility for Ofcom, which needs to be able to determine the most appropriate way to ensure contributions to protect the universal postal service, while taking into account the needs of special interest groups of users and the need to be proportionate.
In conclusion, Clauses 39 and 40 give Ofcom the power to create a soundly based and proportionate universal service fund, should it be required in future. Ofcom, as the guardian of the universal postal service, will be best placed in future to determine whether a universal service fund is required and, if so, how contributions should be made. I realise that this is an important debate but, for the reasons that I have set out at some length, Clause 39 should stand part of the Bill, and I invite the noble Lord, Lord Razzall, not to move his amendments.
Lord Clarke of Hampstead: I thank the noble Lord, Lord Hoyle, again for his continuing support in defence of our wonderful Post Office. I do not want to get into the origins of the injury to the noble Lord, Lord Razzall. All that I can offer is sympathy and hope that whatever it is clears up.
The noble Lord mentioned that perhaps in the past the regulator has not been tough enough and the Government seem to have gone along with the idea of letting it do exactly what it likes. Anything in this section of the Bill that talks about control of a regulator to see that it is not imposing unfair competition is something that we will have to look at very carefully. On bulk mail deliveries, the Committee has heard me speak many times about the unfairness of the cherry picking that went on and was clearly prophesied, and I shall not go into that today. The noble Lord, Lord De Mauley, asked who was responsible. If the Committee has not heard me so far, I shall say again: the Labour Government in the Postal Services Act 2000 are responsible for the whole mess that we are in at the moment. It was an ill founded Act that gave the wrong base for the Post Office finances and imposed an unfair advantage to the Royal Mail’s competitors.
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I am delighted that the Minister can confirm, once again, that concern for public service is at the heart of the Bill. Good. He then went on to speak about the much needed modernisation, and I am delighted that he mentioned it because I had not talked about it earlier. Before we left last Wednesday, my final comment was to ask when someone would tell us what was meant by modernisation, such as how much it will cost, what the machines will cost and where they are. Those are questions that I have been asking since Second Reading—and most noble Lords know that I tried to stop the Bill ever having a Second Reading. But it did get one, and I have repeatedly asked those questions. Outside the Chamber, I have taken the opportunity to speak to the Minister, who tells me that it is in progress and we are going to get it.
For those people interested in the modernisation agreement, we are now three years into a five-year agreement agreed between the workforce as represented by the CWU and the Royal Mail. The modernisation programme has over 90 per cent penetration of achievement with two years still to run. When we are looking and talking about how quickly you could work things out, since that modernisation agreement started to take effect, instead of losing £1 million a day, as was the case at the beginning of that period, the Royal Mail is now showing a profit of £1 million. The signs are pretty good—and in response to Hooper’s proposal on modernisation we should stand back and say, “Well, it’s already working”. Agreements were made before pen was ever put to paper on the Hooper report. I listened very carefully to what the Minister said on the amendments tabled by the noble Lord, Lord Razzall, and they are deserving of very close attention before we come to Report. There are things that I could be attracted to if I have understood what the Minister said in his reply.
The noble Lord said that it was wrong to put a time limit as close as 2010. Would that not be a good test for Ofcom, to see whether it could do it? If it cannot do it in the time, it will have to admit failure and we will have to accept that, but we should have a target. I have been told so often by Ministers and the Government that it is imperative to get this right. Let us give Ofcom a test and tell it to get on with the review.
My noble friend has said a number of things that need a bit of study and understanding. We now know that we will be back here in a fortnight for Report, so there will be time for amendments, but for the moment, I beg leave to withdraw the amendment.
89Q: Clause 39, page 22, line 26, at end insert—
“( ) In applying the method of calculation specified in subsection (2) or in calculating the financial burden under subsection (3), OFCOM must conduct an independent efficiency benchmarking exercise and exclude from the costs any inefficiencies identified.”
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Lord Hunt of Wirral: This amendment returns to the question of the basis on which the levy is to be imposed. I very much welcome the noble Lord’s justification of Clause 39 and I am pleased to see the requirement for a separate, audited and transparent review of the financial burden, but this amendment would include a further safeguard on efficiency.
The imposition of a levy will obviously have a significant impact on the postal operators forced to subsidise Royal Mail under it. The Government have at least noted the potential for a levy actively to undermine competition in Clause 40, but I do not believe that they have satisfactorily addressed the possibility that it could also have the detrimental effect of subsidising inefficiency. If the costs used to calculate the financial burden are not adjusted to exclude ongoing inefficiencies the review will recommend a higher levy than is necessary, and one that would ensure that efficient private sector operators are forced to maintain the less than efficient practices of the universal service provider.
Ofcom has indicated its unwillingness to use unadjusted costs when calculating access costs under Clause 34. Instead, it envisages a glide path ensuring that incentives remain to encourage postal operators to move towards efficiency. Even greater stringency should apply in the case of a compulsory fee. I beg to move.
Lord Carter of Barnes: Amendment 89Q would require Ofcom to estimate from a benchmarking exercise the inefficiencies of the universal service provider and exclude it from the costs of complying with universal postal service obligations. The noble Lord understandably seeks to make sure that competitors are not unreasonably required to subsidise existing inefficiencies through the existence of a compensation fund. I tried to answer this question in part earlier, but let me restate that the Government fully agree with the noble Lord that the compensation fund should not subsidise inefficiencies. It is absolutely the Government’s intention that the fund should be used only as a last resort. It is there to protect the universal service if future market changes mean that an efficient and modernised Royal Mail is unable to do so fairly on its own.
In addition, Ofcom will be able to impose a compensation fund only if it determines that the burden sustained by Royal Mail is unfair—that is, if the costs of delivery outweigh the benefits. That is not a simple question of costs, as the costs are often, as we know, clearer—although not currently, it is sad to say—and the benefits are often more intangible. But it is clear that there are enormous benefits to being the universal service provider.
Finally, as I said in answer to the previous amendment, any compensation scheme will be required to be objective, proportionate and transparent, to avoid undue discrimination and to prevent or minimise any distortion of competition. Ofcom will also have to take into account the universal service cost calculation mechanism set out in annexe 1 to the postal services directive. That would require national regulatory authorities—Ofcom in this case—to consider all appropriate incentives for postal service providers to provide the universal service obligations cost-efficiently. I can reassure noble
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Lord Hunt of Wirral: While listening to the Minister, I was reminded of the need constantly to refer back to the excellent review by Richard Hooper and his team. Paragraph 103 states:
“We also believe that while Royal Mail’s competitors should be required to pay a fair price for the use of its delivery network, they should not be penalised for the company’s inefficiency”.
Richard Hooper’s recommendation was that an industry-based compensation fund should be rejected in current circumstances. I detected from what the Minister said that he agrees with the purpose behind the amendment but does not think that it needs to be in the Bill. I shall reflect carefully on the points that he has raised and in the mean time I beg leave to withdraw the amendment.
Clause 40 : Sharing of burden of universal service obligations
Amendments 90 to 93 not moved.
93A: Clause 40, page 23, line 34, at end insert—
“( ) Regulations under subsection (5) may only be made by affirmative resolution.”
Lord Hunt of Wirral: It will be helpful to move to the more general proposition on the levy. I believe that this amendment is fairly self-explanatory. I am not sure that it is perfect drafting but I hope that the Minister will see the point behind it. In essence, it would ensure that no levy is imposed on postal operators without the approval of Parliament.
As the Bill is drafted, Ofcom, as the Minister has just explained, can decide that there is a financial burden in providing the universal postal service and then impose a levy completely independently of even the Secretary of State, let alone Parliament. I have just quoted an extract from Richard Hooper’s review, which confirmed that under present circumstances there is no justification for a levy. There certainly can be no case for imposing one before the market assessment has been completed, so we are not talking about a provision that needs to be implemented any time soon. Indeed, one would hope that such a levy need never be introduced.
The Bill defines the USO on the basis of what is generally desirable from a postal service rather than limiting itself to those aspects of a postal service that the market does not supply on its own account. With the proper application of regulation to ensure postal operators do not cherry pick the most profitable parts of the universal postal service, there is no reason to
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Lord Carter of Barnes: I do not feel that I can comment on the quality of the drafting of the amendment. As I understand it, it seeks to restrict Ofcom’s powers to protect the universal service as circumstances develop. The noble Lord is absolutely correct that Hooper makes it clear in his report that in current circumstances there is no requirement for a compensation fund. Hooper also makes it clear, based on what we know now, that there should be no cross-subsidisation of the universal service until we have a credible and accurate strategic market review. In this instance, the noble Lord’s proposal would require Parliament to approve formally any proposals put forward by Ofcom before it could create such a fund, were we to find ourselves in a situation where the regulator, based on analysis, had judged it to be appropriate.
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