Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 40 - 59)

WEDNESDAY 13 FEBRUARY 2002

MR MARTIN STANLEY AND MR GRAHAM CORBETT CBE

Geraint Davies

40.  Mr Stanley, do you think Consignia is already facing significant competition?

  (Mr Stanley) For ordinary letters, no, but they face a not very obvious competition from other means of communication.

41.  Do you know how many e-mails there are per letter in the United States for instance?

  (Mr Stanley) I do not know that but it must be huge.

42.  30 times as many. So would you accept that the massive growth of e-mails in the United States, which obviously predates what we expect to see here, plus telephone communication, etcetera, represents massive competitive pressure on postal deliveries that Consignia needs to tackle before you load on all the problems of today?

  (Mr Stanley) I do but I do not think the managers and workforce quite see it the same way.

43.  I do not think that is the point. Can I refer you to Page 14 which shows that the massive majority of mail, as you know, is business mail—business to consumer and business to business. Would you accept that over a relatively short period of time a great proportion of that business mail is going to become electronic, further squeezing Consignia?

  (Mr Stanley) I would not accept that.

44.  You would not accept that the trends that we are seeing in the United States would be replicated here?

  (Mr Stanley) The United States has twice the volume of mail per head of the population than we do. They have a relatively low cost, especially given the size of the country, mail operation with total competition apart from the final mile, which is one of the reasons it is so effective. The only monopoly in the United States is for final delivery.

45.  You would accept that the growth of e-mail etc and other forms of communication is providing enormous competition pressure on Consignia?

  (Mr Stanley) It is providing competitive pressure but so did the phone, the fax and the telex.

46.  Why should I send a letter to you if I can e-mail you instantaneously?

  (Mr Stanley) Volumes keep rising. We are all sending fewer personal letters but the volume of business mail continues to rise. It is a very effective way of getting pictures in front of people and so on.

47.  Would you accept that the relative price of post in Britain is relatively low, as illustrated on page 16, figure six?

  (Mr Stanley) Compared with most countries, yes.

48.  Would you accept that your requirement of RPI minus X in terms of price fixing means that at a time whilst the revenue of the Post Office is going up as we see on page 18, from six to eight billion, the margins have been falling? One of the reasons for that is that they are not allowed to put prices up, even though they are relatively low.

  (Mr Stanley) I do not accept that. If you compare the 2001 accounts with the 2000 accounts, they show that mail volumes rose 1.9 per cent in the year. Operating income rose by 7.9 per cent and many a business would give its eye teeth for such a rise. Unfortunately, operating expenditure rose 12.4 per cent in one year.

49.  Why is that?

  (Mr Stanley) It is hard to get to the bottom of it.

50.  Your view is that Consignia has suddenly become structurally inefficient and is doing things worse than it did the previous year?

  (Mr Stanley) It does seem to have lost control of its costs, yes.

51.  Do you feel that, if the output of having massive price controls and universal provision and market access is to cut service in terms of the number of service deliveries and to cut the network Post Offices, the public should be given the choice? Either perhaps you should ease the price of post in order that that network is preserved and second delivery is maintained, or do you believe that you as the regulator should continue to insist there is no choice and what the public ends up with is a worse service and a lower network of Post Offices?

  (Mr Stanley) The difficulty is that Consignia's own figures, the work done for us by Frontier Economics and WS Atkins and a lot of information directly from Consignia's management work force suggest that there are costs in there of the order of approaching 30 per cent which could be taken out over a number of years. If those costs were to go—

52.  With the 30,000 jobs Consignia say they are going to cut, alongside slashing the network of Post Offices that people rely on, you are pressing forward with this at an enormous pace compared with our European counterparts to bring about these job cuts, reductions of services and the slashing of the postal network, are you not?

  (Mr Stanley) If the company is inefficient, the question is who should pay for it.

53.  The postman, by the sound of it.

  (Mr Corbett) You made an extremely important point about the balance between price control, quality of service and matters similar to quality. We are only just starting price control examination now. We have a holding operation until April 2003. In April 2003, we will be bringing in the longer term price control. If we were to conclude that a level of RPI minus X could only be achieved by sacrificing quality, we absolutely recognise that given the unit value of a postage stamp certainly most domestic users would prefer to go for quality, and that is a consideration that—

54.  In this report, it says that 73 per cent of the public think they get good value from the Post Office. 40 per cent do not know the price of a stamp and nine out of ten are very pleased with Post Offices and post boxes and the like. Are you saying that if the logical output of the RPI minus X plus the cherry picking competition is what Consignia are telling us, namely slashing the number of Post Offices and the second delivery and your market research shows, as mine does, that people would prefer to have a marginally higher price and to conserve their service, would you agree with that? Would you be open minded?

  (Mr Corbett) Of course we would take note of that but I do want to separate the question of the number of Post Offices which has very little to do with mail. Post Offices derive 25 per cent of their income from postal services. The other 75 per cent is the whole range of other things that they do. The impact of anything that we are suggesting on the Post Office network is—

55.  As I understand it from the performance and innovation unit, the costs borne by the benefit of switching to bank accounts in 2003 are of the order of £400 million which is about the amount you get on 2p on 20 billion units of mail, which is the annual mail. In theory, would you be amenable to the idea that some support could be forthcoming to the loss of revenue there, apart from the competitive access and universality, to the Post Office so that they are not crippled in the next couple of years by over-zealous regulation versus our European counterparts that you seem to be imposing?

  (Mr Stanley) I do not think legally we can do that. Our role is only to regulate the letter post. I do not think we could allow them to make excessive profits on letters to either subsidise Parcel Force or others. That is the way the Act has been drawn up.

56.  Do you feel any sympathy for Consignia's view that you as regulators are introducing a tightening of the market access etc much more quickly than our European competitors and this is unfair in terms of the speed of change needed to make structural adjustments, in particular given the background of e-mail and all the rest of it, and the legacy of the history? Furthermore, the fact that our European counterparts are now getting competitive access into our market place and we are not allowed to get access into their market place. Do you not think that is creating an unfair condition that leads to public costs?

  (Mr Stanley) We have heard Consignia's managers say that they are concerned about the conjunction of market opening and forthcoming price control and the pressure to increase service policy. They think it is a lot. We believe the pressure is sustainable and we think, in the long run, not too many years from now, we will have created a fantastic company which will grow volumes.

57.  Prematurely reacting in such an aggressive way will destroy Consignia rather than help it to become better.

  (Mr Stanley) We do not think that is what we will do. We have chosen a middle course which puts the right amount of pressure on.

58.  You said earlier that people in the company say there will be no change in that people wishing to walk down the street and posting letters. Do you accept that having two network infrastructures in itself must cost more than having one and somebody has to pay the cost inevitably? That will be the public.

  (Mr Stanley) We expect that Consignia will remain very much the dominant player in the United Kingdom, as has happened in every other liberalised market. We think they will provide a superb service and round the edges there will be competition. Competition will keep Consignia on its toes and with 90 per cent market share. Hopefully, we will have a postal service that we can be proud of.

59.  Is there not an inherent duplication in providing two, three or four networks of post?

  (Mr Corbett) Which is the duplication you have with supermarkets and petrol chains.


 
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