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Everyone is in difficulty about one principal point of the Bill: that is, the issue of ownership. There are different schools of thought with different strengths behind them, but no one is quite certain whether part- privatisation is the best way forward, whether the approach adopted for Railtrack or the BBC is the best way, or whether there might be considerable advantages in the status quo continuing, at least for a period.
My noble friend Lord Clarke has pointed out that the weekend polls showed only 20 per cent support for privatisation. I do not wish to spend time on that but public opinion in either direction could easily change if, for example, Royal Mail did not change and we were faced with significantly higher costs of postage. Such charges are not so readily accepted here as they are in European countries, including Holland,
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My amendment offers a breathing space and a way through this difficulty. We should have one more shot at moving Royal Mail along under its present ownership, and three years is the best estimate that I have been able to obtain of the time it would take to complete the job. I do not accept that the present management has failed—that has been repeated over and over again—and I do not accept that its business plan has been lacking. Royal Mail is now profitable; it employs 50,000 fewer people than it did at the outset with only one compulsory redundancy; it is building new revenue streams and by 2012 parcels will represent 50 per cent of revenue and 75 per cent of profit. I hope that my noble friend the Secretary of State will at least reassure us that under no circumstances will the parcels business be part of any sale.
Royal Mail has achieved that in the face of unfair competition. It could not have done so had the Communication Workers Union been as uncooperative as it has been painted. For a start, there is a long Royal Mail pay and modernisation agreement which was agreed in 2007. It is worth reading the introduction to that agreement, which in one sense says it all. It states:
“In order for Royal Mail to thrive as a business and to ensure that it remains able to compete effectively it is recognised that change is going to have to happen and at a scale and pace never experienced before.
Both Royal Mail and the CWU are jointly committed to working together to deliver that change by agreement, continuing to protect jobs (in line with our commitment in MTSF)”—
Both parties recognise that a fresh start is needed and are committed to moving away from the adversarial relationships that persist in too many parts of the business. This needs to be replaced by respect for different viewpoints and a determination to work together to find common sense solutions that are mutually beneficial. This agreement lays the basis for changing how we work to ensure a successful future for this business, its employees and how the business and the CWU will work together”.
That was an extremely good start, and indeed it must have worked for a time, but somewhere along the way there must have been a stumble. Maybe it is a matter of—in the old, trite phrase—it takes two to tango. But I will come back to that. First, I would like to address one or two other aspects.
On 24 February, Mr Crozier, chief executive of Royal Mail, gave evidence to the House of Commons Business and Enterprise Committee. On pages 40 and 41, Roger Berry MP asked:
“Why does Royal Mail Group so passionately believe that a minority shareholding is necessary?”.
“As part of Hooper we said that in our view it boiled down to three requirements: equity capital, the pension solution and the change in the way we were regulated and the fairness of it in the wider market”.
“To cut to the chase, you have referred to equity capital, not private equity capital”.
“We did not in our submission”,
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“Exactly. Increased Government equity would be a possibility, would it not?”,
“It is not for us to say from where it comes”.
I fully understand why Royal Mail would prefer equity capital. It is cheaper than borrowing, although it is a paradox that private enterprise itself so often eschews equity, usually because it diminishes the value of the present shareholdings. I sense that private equity capital carries with it clear potential risks for Royal Mail’s long-term future, a risk over which perhaps we would have little influence. It may well be significant that Royal Mail and Mr Crozier have never once raised the question of private equity capital.
As has been said, Deutsche Post does not seem to be at the table. TNT, which is always referred to, has an extremely bad reputation on trade unions and has recently announced a 5 per cent pay cut with certain threats attached. Its profits for the first quarter of this year have fallen by more than 50 per cent and its own unions have rejected the new pay agreement. The Financial Times updates what the noble Lord, Lord Clarke, said and has spoken to Robeco, one of the top 15 holders. Robeco told the Financial Times that the chances of doing a deal are small. The reasons given were price, relationships with government and unions.
I have grave doubts whether the Secretary of State will be able to strike a deal at 30 per cent, because one of the arguments advanced by one Robeco representative is that that would not give it sufficient power to bring about the change that is, in its opinion, required. I have mentioned the parcels issue, which is repeated in the Financial Times today. CVC is the remaining named applicant, though there may well be others we have not heard about. Has it got a record which provides us with what we need? It is a private equity company. Do private equity companies, and does CVC, invest for the long term? Am I right in saying that CVC has already sold off a large part of its mail investment? What future share sale or further buying rights would any private equity company seek?
Perhaps we, too, are overlooking the great differences between other European states and the United Kingdom in what, in this context, I will call downsizing legislation. EU experience, based on Eurogovernment requirements and Eurogovernmental financial contributions, will not be found in the United Kingdom. I wish my noble friend who was the general-secretary of the Confederation of Independent Trade Unions in Brussels was here, because he had to deal precisely with this issue when he was appointed essentially to run down his office. It took nearly two years. In one sense, this is easier, because the Government pick up a big proportion of the cost. But the benefits to workers make them more willing to go than they otherwise might be. There is nothing like it here at all. I ask the House to consider—to the extent that there is, inter alia, a union problem—whether it is really likely to help take Royal Mail forward if we parachute in a TNT or CVC Ross Kemp. I do not think so.
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So where are we? Earlier in my contribution I suggested that one more shot at moving Royal Mail along under present management was worth while. Again, I am encouraged by some of the evidence given by Mr Crozier to the Commons committee, one short extract of which is worth repeating. He said:
“Do we need to find ways to improve it”—
- “and bring people with us? Absolutely. When we look at it, what kind of expertise do we need going forward? Like all big companies, we need more and better project directors and in any situation like this people who are experienced at brining in the kind of technology that we are about to use. This is not a kind of NHS IT issue. The machinery and technology we need to bring in exists and works so the risk is not to do with the machinery and the kit itself; it is the management capability in installing it. Do we need increased numbers and better skills in HR? Yes, we do. We know that we need to improve and we have been doing it steadily over the past few years. Like any company, we need to bring in skills at all levels of the business”.
I challenge whether we need to do that by selling off shares in the company. I am for allowing him to try and do what he said. This amendment provides that without losing the Government’s goal if a last chance fails; rather it keeps semi-privatisation as a spur.
This is not just a challenge to Mr Crozier, although he needs to assess objectively how Royal Mail’s management style could improve. I guess that he and his senior managers should also get round their staff a bit more, perhaps, on appropriate occasions, with corresponding levels from the UCW.
4 pm
As an aside, when there were dreams about putting pay-as-you-earn on to computers, the board of the Inland Revenue and the union, the IRSF, moved the whole of Scotland’s PAYE operation and the staff to East Kilbride by using the approach I have suggested, and there was no serious opposition. It can be done.
I suspect that the union in this case, the CWU, will have to reassure us that it is ready, able and willing to continue modernisation. That means not just the executive committee but branches and members as well.
I conclude with a personal thought for the Secretary of State. His grandfather, Lord Morrison of Lambeth, has been referred to previously in these debates. Despite the age gap, he was a good friend of mine. He gave me a copy of his autobiography, which I had a look at at the weekend. Herbert had several paragraphs on nationalisation, but this Bill is the other side of that coin. Herbert wrote:
“In all nationalisation schemes, there is a moral question as well as an economic one”.
He explained that the Labour Party saw nationalisation as an end in itself and saw no need to carry out what we would call today a risk assessment. Have we carried out a risk assessment for this enterprise? If we have, I have not heard about it. I suggest that my noble friend the Secretary of State should reflect on his forebear’s wisdom.
The Secretary of State for Business, Enterprise and Regulatory Reform (Lord Mandelson): My Lords, I thank my noble friend Lord Christopher for his references to my grandfather. Indeed I have reflected on the approach that he took to public ownership and I suppose that in a sense I continue in his tradition by
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I shall, if I may, pick up just one or two points from the remarks made by one or two of my noble friends. I shall not be drawn on the references to TNT, as my noble friend Lord Clarke invited me to do, except to say that it gives a taste of what potential bidders are up against when they show an interest in this. However, I simply do not accept either the premise or the import of my noble friend’s remarks—although whether TNT is a suitable bidder will remain to be seen.
On the specific question concerning GLS, I can say that the Government’s focus is on finding the right strategic partner for Royal Mail to help it modernise its core business in the UK, not on selling GLS. My noble friend Lord Clarke argued that, contrary to everything that I have said during our debates in this House, it is the global recession which is responsible for the fall in mail volumes. I agree that economic conditions will have an impact on postal volumes, particularly courier services for businesses, but Hooper found in his analysis that the traditional link between letter volumes and GDP began to fall away in 2003. Volumes have been falling since then.
My noble friend also suggested that Royal Mail is now making more than its continental competitors. With respect, I think that he rather misses the point. Royal Mail’s margins are less than 1 per cent for its letters business. Deutsche Post and TNT are facing tougher market conditions but they remain more profitable than Royal Mail, with profit margins of 12 per cent and 14 per cent respectively, and even with the declines in profit levels recently reported.
Before turning to the detail of these amendments—there are very many of them and I will ask the forbearance of the House if I respond with some substantial reasoned argument in the light of the case that has been made against the Bill—I should remind the House of the objectives behind this legislation.
The legislation arises from the Hooper report, commissioned by the Government in line with our 2005 manifesto and urged on us at the time, incidentally, by the CWU. The Hooper report was not specifically about ownership. At its heart was the universal postal service and how to maintain it. That drives the entire report from start to finish. Hooper found a Royal Mail which was critical to our country but which was labouring under several huge burdens, including the decline in the number of items sent through the post due to the shift to new technologies and a substantial and volatile pension deficit. While the company had a modernisation plan, in reality chronic industrial relations and obstruction at local branch level by the CWU, as the noble Lord, Lord Christopher, has mentioned, have meant modernisation is too slow and too often bogged down in a draining attrition between union and management.
Hooper made his recommendation about a strategic partnership to help drive essential change—the most controversial aspect of his report which was as a result of his analysis, not at the outset of it. He did not begin there. Of course some people find it easier to agree
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The Government could have ignored Hooper’s findings and his recommendations. We could have found the nearest shelf, cleared a space, commented on the interesting nature of the report, patted Mr Hooper on the back and moved on. That response is not exactly without precedent, but what would have been the result? The Royal Mail we knew was in decline, with the universal letters delivery service under threat, put into the “too difficult” box because the Government of the day did not have the courage or the energy to take on the task. In the Government’s view that is simply not an alternative; it is a dereliction of duty. The Cabinet was not prepared to see that happen.
I might say, I did not seek this issue. Incidentally, I did not seek a quarrel with anyone. The subject came on to my watch after I returned to Government. Our postal service is too important, however, for me to accept the advice from one ardent critic of the Bill which was to leave well alone and “manage decline”. Our postal service and the public demand better than that.
That is why we are discussing this package of change today. We cannot turn the clock back. We cannot wish away the internet, direct debit or any of the other liberating advances in technology that have freed up time for hard-pressed people. There is no going back. Life has changed. This is about a Royal Mail for the 21st century. There will be no managing decline sought by this Government if we can possibly do anything about it.
Our goal is to put a publicly owned Royal Mail on a clear and swift path to modernisation and in so doing to secure the future of the universal postal service. That was our 2005 manifesto commitment, which said—perhaps it is as well to quote from it:
“Our ambition is to see a publicly owned Royal Mail fully restored to good health, providing customers with an excellent service and its employees with rewarding employment”.
In other words, there were two parts to our manifesto: commitment one, keeping Royal Mail in public ownership, which we are doing, and, secondly, to restore it to good health. Simply to leave it at public ownership without taking the further measures to restore it to good health would be irresponsible and an abdication by this Government in respect of our 2005 manifesto commitment.
As Hooper outlined, to deliver the modernisation it requires, Royal Mail needs commercial confidence to act freed from the perception of political interference and through constructive engagement with the workforce rather than the mutual suspicion that we have today; it needs expertise from a postal or other network operator with a sound commercial track record; and, finally, it needs access to fresh capital—hence the partnership approach for the company.
My noble friend Lord Clarke’s amendments reject our and Hooper’s partnership proposals and instead would provide for the dissolution of Royal Mail Holdings plc and its replacement with a company limited by
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Typically, the company limited by guarantee structure is used for smallish charitable bodies and membership organisations. We have some limited experience in a commercial environment, in Network Rail and Glas Cymru—Welsh Water—which are the usual examples used to illustrate the alternative to the Hooper recommendations. Neither Network Rail nor Welsh Water, unlike the Royal Mail, is in the public sector. They are private companies, and monopolies with fairly stable demand; all their earnings are determined by economic regulators, not by the choices of individual customers. They are run on a “not for dividend” basis and are accountable to a board of stakeholder members rather than to shareholders. Both those businesses rely heavily on contracting out the actual provision of services—in the case of Welsh Water it is 100 per cent. That is hardly right for Royal Mail.
Whatever the merits of Network Rail and Welsh Water as a model for the railway and water network, I do not believe that the model would work in the increasingly competitive and fast-changing environment of the postal market. A successful Royal Mail needs a different model that addresses each of the issues. First, where does the needed investment come from? Funding for Welsh Water and Network Rail comes from regulated charges, government grants and external debt, but Royal Mail could not rely on these for its funding needs. Royal Mail is not a monopoly, but operates in a competitive market place. As Hooper made clear, it faces competition not just from the postal sector but from the broader communications market. It cannot meet its investment needs by hiking up prices. Customers would just switch, increasingly, to alternatives. And Royal Mail cannot tolerate more debt. Although it has an extensive property portfolio, its existing debt is already secured on this. There are no further assets to offer as collateral. However, the proceeds from a new private sector partner for Royal Mail would fund modernisation.
The second issue that needs to be addressed is where the necessary experience to drive modernisation would come from under the alternative model being proposed. There needs to be a major step change in Royal Mail’s performance. Today’s constraints on progress need to be countered by effective management and significant change in the industrial relations environment and union practices. To get this, we
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4.15 pm
Thirdly, where would the impetus or the drive to modernise come from? I simply do not believe that a company limited by guarantee model would provide that impetus or that drive. Accountability to a group of stakeholders with disparate interests would not provide the strong and focused leadership that Royal Mail needs. That organisation needs to change and become more efficient, not stand still. “Stakeholders” would be no substitute for shareholders—the Government and a strategic partner—with capital at risk and a strong incentive to secure change. A company-limited by-guarantee model would depend instead on the regulator to drive change and improvement. Experience shows that effective regulation is vital but is not sufficient to drive necessary change in such a large and complex organisation.
My view is that this amendment’s proposition is led by politics first and what is necessary for Royal Mail a distant second. We can all vote for all sorts of nice-sounding structures, but the bottom line is: do they offer a convincing chance of delivering the very urgent modernisation which a Royal Mail remaining in public ownership requires? I suggest that the answer is no. I accept that the thinking behind the amendment is not opposed to collaboration between Royal Mail and any outsiders, as such, but on what basis would such a partner enter the business or be incentivised to drive the modernisation that the company needs?
The reality is that only a partner with an equity stake in the business will be motivated to help deliver the change needed in the timeframe required, because the business’s success would produce a return on its investment. I hope that your Lordships will understand why the Government, after due consideration and discussion last week that involved the Prime Minister, have concluded that the alternative approach outlined by the Bill’s opponents is unworkable and does not meet the challenges that Royal Mail faces. The best course for the Royal Mail to take is the one that this legislation sets out, as soon as the Bill is enacted and can be subsequently implemented.
The Government’s rejection of the other amendments in this group, which cover the commencement of Part 1 of the Bill, flows from the conclusion that we have reached and that I have now described. We cannot afford to take a wait-and-see approach by building in a three-year delay, as the amendments suggest; we have been waiting many years as it is. The evidence is clear that we must act as soon as market conditions and the bidding process allow. We want to see Royal Mail become a leader in the postal market, not spiral into decline. To do that, we must not build in any further delay.
Partnership offers a fresh start for Royal Mail. It is the best way to meet the requirements for transforming Royal Mail that Hooper highlighted and which the Government accept: commercial confidence, access to
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Lord Clarke of Hampstead: My Lords, how interesting those last few moments have been. Let us go back to the beginning, when the noble Lord, Lord Hunt, made it absolutely clear that we are discussing a Conservative Party policy. I am delighted that he still shows the same clear insight into the problem that he did in Committee. It is to his credit and that of the party he serves that they know what they are about; I wish that I could say the same for ours. The noble Lord, Lord Hunt, is looking for a guarantee of no U-turns. I do not know about those, but sometimes if you can make an argument that is better than the cobbled-together idea of selling off a valuable asset, it should be examined.
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