Examination of Witnesses (Questions 1
WEDNESDAY 13 FEBRUARY 2002
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 Servicesthe
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 dutiesto
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 environmentthe
threat of e-mail, greater competition from courier and overnight
express services, probably greater demands from customersbut
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 youand this could conceivably go
all the way to the courtson 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
(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
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
(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
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
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 Postwatchand
it has gone out to consultationproduce 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
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 maillet 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.
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
(Mr Stanley) Indeed that may well be
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.