Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

WEDNESDAY 13 FEBRUARY 2002

MR MARTIN STANLEY AND MR GRAHAM CORBETT CBE

Chairman

1.  Welcome to the Committee of Public Accounts. Today we are considering the Comptroller and Auditor General's Report on Opening the Post: Postcomm and Postal Services—the risks and opportunities. We are very pleased to welcome our two witnesses, Mr Martin Stanley, Chief Executive and Accounting Officer of Postcomm, and Mr Graham Corbett, the Chairman of Postcomm. I think both are attending their first hearings. You are even more welcome. You will, of course, have read closely the National Audit Office Report and if I may summarise some of the challenges. Here you have a unique situation of a company where there is only one shareholder, namely the Government, a company whose profits are in decline, and a Regulator who has two primary duties—to ensure universal service and at the same time to ensure more competition. That is why the National Audit Office is clearly worried about the tensions that are building up in this and why some people have suggested this could conceivably become another Railtrack unless we are very careful. Either Consignia becomes more and more efficient or, if it does not become more efficient and we put too much pressure on it, conceivably it goes out of business, which of course raises the question of whether the Government could ever allow it to go out of business or even lose a huge part of market share. My first question, Mr Stanley, is why do you believe Consignia will become more efficient?

  (Mr Stanley) We think that the problems faced by Consignia over the last few years, which have been significant, and certainly the problems we have run into which are even more significant, have been exacerbated by the institutional arrangements, and the management and workforce will only change if they face a real danger that they will lose business to competitors. It is too easy if the company has a monopoly and it is owned by the taxpayer and has recourse to the taxpayer to stay as it is.
  (Mr Corbett) If I could just add to that perhaps, Chairman. We see Consignia as being a company with enormous strengths. It has an unrivalled knowledge of its industry, it has an immense degree of customer loyalty, it has a very largely committed workforce, and it has a retail network which most retailers would give their eye teeth to be given access to. We think what they lack is the self confidence and the stimulus to bring all these assets together and we can think of nothing better than competition to act as the spur to enable that to happen.

2.  Okay, so your basic contention is that competition will force Consignia to become more efficient, but is this realistic so long as Consignia is not subject to the pressures from shareholders and the financial markets that operate on an ordinary company?

  (Mr Stanley) I think whenever you speak to senior managers, middle managers or the workforce of the company, they echo what Mr Corbett has just said about wanting to do a better job and they say this company will never change until we see competitors walking down the same streets delivering mail against us. It is a fairly constant theme from them.

3.  So you do not think that the point I put to you is going to affect the ability of this company to respond to the competitive pressure that you are putting it under?

  (Mr Stanley) The postal service in the United Kingdom has been extremely effective in the past. Ten years ago it was amongst the best in the world, if not the best in the world. There is nothing about public ownership that means it cannot be a very successful business, but in recent years it has lost its way, partly in response to a changing environment—the threat of e-mail, greater competition from courier and overnight express services, probably greater demands from customers—but there is no reason why they should not respond. They have got huge strengths, huge advantages, but they really need a stimulus.

4.  Let us assume for a moment that what you hope is going to happen does not happen and Consignia does not become more efficient and that the sort of competition that you are going to bring in leads to large losses threatening the universal service. In this case what, if any, alternatives do you see to the current way in which Consignia is overseen and regulated?

  (Mr Stanley) I do not share your presumption of what would necessarily follow from increased competition. Even if Consignia does not respond to competition, it will inevitably come in quite slowly. This is a company that delivers 80 million items each night. Competition cannot take a huge share of that market overnight. So competition will grow slowly even if Consignia do not respond and there will be certainly no imminent threat to the universal service. There will be financial problems for the company and the shareholder will have to consider what action to take, but in the scenario you laid out it is essentially a problem for the shareholder, what to do with a company that is admittedly providing a poor service and, rather perversely, losing jobs by refusing to change.

5.  Let us go into a bit more detail now. We talk in loose terms about effective competition. This refers to a point made in paragraph 2.5. When will you know when effective competition has been established, for example in terms of lower prices and market share of new entrants?

  (Mr Stanley) The short answer is that there will be effective competition in whatever part of the market we are looking at when customers are aware that they have a choice. Not necessarily exercising a choice; they need to be aware that a choice is available. It is as simple as that. I do not think there is a simple market share test. It is not a question of prices going up or prices going down. If customers know that if they are not happy with Consignia they can go somewhere else, that is the nub of competition, put simply.

6.  Let us take up the point of view from Consignia. There has already been quite a rigorous response to your proposals. This is a point raised in paragraphs 2.27 to 2.29. How can you successfully defend decisions to liberalise the market further if Consignia challenge you—and this could conceivably go all the way to the courts—on the basis that you are threatening their very viability and hence you are in breach of your primary statutory duty to ensure the continued provision of the universal service?

  (Mr Stanley) Consignia can challenge us in the courts under judicial review if we have carried out our functions in an unfair way, put simply, if we had failed to consult—

7.  Do not get too bogged down in that point because that is an extreme case. I want to press you on this point. You are opening up competition and they are saying that you are liberalising the market in such a way that you are in breach of your own duty. Let us forget Consignia; what is your defence to that?

  (Mr Stanley) If they accept we have acted properly and balanced the two and if they accept that we have looked at the risks to which the NAO drew attention, if they accept that and accept we have acted legally correctly, they could still argue that in practice they are running into trouble with financing the universal service and, if so, we would need to look at why that was the case. If it were the case (and that is the most likely scenario) that they have failed to respond to competition, we would have to say, "You need to respond to competition. You have enormous advantages and great financial strength."

8.  Other colleagues can continue on that point about the universal service. If we look at Paragraph 17 for a moment, you will see that competitors may be constrained by the anti-competitive actions of Consignia such as selective price reductions. What are you doing to ensure that there is a level playing field for the competitors you are trying to bring into this market?

  (Mr Corbett) One of the very important things here is ensuring not only that we provide the opportunity to open the market up, but that it is a genuine opportunity. One of the lessons that we have learned from international experience is in several cases, despite the apparent opening up of the market, the extent of the incursion of new competition has been very very limited. We do believe that it is very important to, first of all, provide market segments for new entrants which make commercial sense, which is why we have gone for the bulk market because it provides real competitors with a real opportunity of going after them and, secondly, we will need to keep a very watchful eye on anti-competitive behaviour by Consignia because the lesson from many other countries is that the effects of competition have been either negated or delayed by anti-competitive actions.

9.  And the lesson from other countries is that they have all retained 90 per cent of market share. I think we can assume that Consignia is going to try and act in this way. They are going to fight to protect their market share. What I want to press you on is what types of action you could then take? What will you then do and how will you intervene to ensure that the new people you were bringing in had a fair chance?

  (Mr Corbett) In the Consignia licence, which we granted last March, we included provisions in Article 11 to provide us with the right to take action in the event of anti-competitive behaviour by Consignia. One of the very crucial lessons, for example in Sweden, where Swedish Post was extremely successful in keeping competition out for a number of years and was able to jack up its domestic prices, was that they did not have the regulatory framework in place to prevent those things happening. We do have the provisions of the licence. We have the will to make certain that we will operate in accordance with those provisions and it is our responsibility to make certain we do so.

10.  Let's look at Figure 7 on Page 16. You will see there that Consignia have not delivered more than 91.5 per cent of First Class mail the next day. Last year the figure was 89 per cent. This is a figure that Consignia themselves set, this figure of 91.5 per cent, and they have failed to meet it. What do you think would be an acceptable figure? What are you doing to ensure that Consignia improves its performance?

  (Mr Stanley) We have consulted Postwatch, the consumer body, and talked to Consignia itself before granting the licence. The licence imposes a requirement to reach 92.5 per cent by the next financial year. We think that is for the moment about right. It is what, as you pointed out, Consignia always said they could do and the consumer body think that is right and we think that is about right. They are moving reasonably well towards it. The latest figures we have are that from April to June this year for First Class stamp post it was pretty awful at 86.5 but they are now up to 90.7 in the second quarter of the year.

11.  You can fine them but this fine will fall on the customer or the taxpayer, so what else can you do to apply pressure on them?

  (Mr Stanley) We are working on a new compensation scheme. We think if we can with the help of Postwatch—and it has gone out to consultation—produce a compensation scheme that in a sense both penalises the company and recompenses the customer for poor service quality, that will be much more effective. The money will at least leave Consignia's coffers and reach the hands of your constituents, which must be better than fining.

12.  There has been a bit of publicity recently about Consignia going back on delivering mail in the morning and that sort of thing. There have been rival claims made. Obviously there is a lot of public interest in this. The public want to get their mail every day and some time before lunchtime.

  (Mr Stanley) Absolutely.

13.  How are you going to respond to proposed service changes like this?

  (Mr Stanley) Consignia have not yet come to us asking for any service changes whatsoever. What they are doing, having talked to Postwatch, is carrying out a few pilots as to whether they could somehow manage to deliver domestic mail a little later in the day, deliver business mail a little earlier in the day, and at the same time cut costs and increase reliability. That is quite an interesting and complex mixture. Whether they will be able to do it or not we do not know but the aim is to have everybody happy in a sense, especially if they can get reliability right so people will not be getting 90 per cent of their mail or 85 per cent of their mail early in the morning, they may get it a little later but it will be a lot more reliable. Whether (a) they will be able to do it and (b) the public will accept that, we just do not know. Postwatch think it reasonable to let them have a go anyway.
  (Mr Corbett) Those changes could not be incorporated on a nationwide basis without the approval of both Postwatch and ourselves.

14.  A last question to sum up. You say that you justify increased competition because the universal service is an opportunity not a burden, that anybody will be able to come in, that they are not going to be able to cherry pick because all their customers are going to want to deliver everywhere in the country. In this market roughly 80 per cent is business to domestic, which is often junk mail—let us be honest about it and call a spade a spade. Ten per cent is domestic to domestic and ten per cent is business to business. That is your defence; people are not going to come in and ruin Consignia's universal service. Could rivals in fact avoid delivering mail directed to remote farm houses, say, by transferring it to Consignia to deliver?

  (Mr Stanley) This might be quite an attractive outcome. It would make a lot of sense for other operators to come in, perhaps be better at collecting and sorting mail and transporting it around the country, perhaps adding value added services and tracking and all that sort of stuff, perhaps ensuring it is delivered on the right day, but having a contract with Royal Mail to deliver the final mile. Royal Mail will then keep all the final business which is really attractive to them if we can get the price right, attractive for the other operators and very attractive for customers. That might well be the way forward.

  Chairman: Thank you very much for those answers. Nick Gibb?

Mr Gibb

15.  Why was the statutory instrument withdrawn which would reduce the monopoly from £1 to 50 pence? Was that at your instigation?

  (Mr Stanley) That was before we existed.

16.  I understood there was some collusion by the Government with the Post Office Regulator, who had some influence in getting that statutory instrument withdrawn.

  (Mr Stanley) My recollection is that this happened in 1999. The Statutory Order was to reduce the monopoly from 350 grams to 100 grams. There was some opposition and they decided to withdraw the Order. In doing so they said, "Anyway, we are about to produce a White Paper that year which will create arrangements for that." I think that is the history of it.

17.  Would you recommend reducing the monopoly from £1 to 50 pence?

  (Mr Stanley) In our document just produced a week or two ago we see no great harm in it but we do not think it will significantly open the market, the reason being that all the high profit, high value business is already open to competition. If it costs more than £1 it is competed for. Below that you can only make very, very slender profits on each item, a penny a letter, and you need huge volumes. The only way to get huge volumes is to go down to zero grams.

18.  There is some evidence in this Report that customers are prepared to pay more than 27 pence to have a better quality service.

  (Mr Stanley) Indeed that may well be the case.

19.  Why do you not recommend reducing the monopoly down to 40 pence so that people can buy a premium service for 20 gram letters?

  (Mr Stanley) Again we looked at a number of different ways of opening the market and that would have been one but it would not have been very effective. You need to go down to zero pence for people to be willing to set up the volume business that you need.


 
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