Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 80 - 99)



80.  It is waffle.

  (Mr Stanley) It was a short summary of a 127 page document which is available for everybody to read if they want to.

81.  I read this as a briefing from you and you have not answered the questions.

  (Mr Stanley) We were asked to keep it quite brief. The reason it will not damage the universal service is because there are cherries but there are very few. As soon as you start taking significant volume off the Royal Mail, you have to deliver to every house. That means delivering to council flats, farms, congested city centres, posh houses in the suburbs, everywhere. You cannot cherry pick.
  (Mr Corbett) I would re-emphasise the point which came out of our examination of the cost of a universal service, that the real cost is concentrated in that part of the mail which is not capable of being read by machines. That has a far bigger impact than any other single element of geography or anything else.

82.  As far as I am concerned, I need to be totally convinced that what you are recommending will not reduce the service rather than the opposite. Before we can proceed, in my view, we need to have some sort of confidence. If you look at paragraph 18 on page nine, it says, "If competition is most pronounced for the most profitable services, Consignia could be left with insufficient returns to cover its overhead costs, and hence to finance remaining services without across the board price increases that might further erode its competitive position . . ." What do you say to that?

  (Mr Stanley) It is basically the same argument. This was written in advance of our recent proposal document. We would have the easiest job in the world if we did not have these concerns. That is why we spent two years and quite a lot of consultancy money analysing this in great detail. The result is that we do not believe that this market is susceptible in practice to the major concerns which the NAO have identified. They are absolutely things we have to test. You are quite right. We must worry about the risks. We have assessed them; we have quantified them and we are avoiding them.

83.  In the next box it says: "Consignia estimates that 40 per cent of its costs are fixed and that it may in the short term find it difficult to reduce costs in response to losing some of its market share to competitors. If this proves to be the case, Consignia would become loss-making and hence unable to finance its services at current prices . . .". These are qualified auditors giving us this information. What would you suggest if this happens?

  (Mr Corbett) Consignia were telling us that their 40 per cent of fixed costs was absolutely unchangeable. We have been consistently sceptical about that. They suddenly come up with an answer that they are going to take £1.2 billion out of their cost base, 15 per cent. There is no such thing, I would suggest, as a fixed cost over a period of time. Consignia's own action has demonstrated that—

84.  The more you speak the more I am convinced that we have real problems here. In 5(b) in your report you say, ". . . especially in view of the relatively small cost of a postage stamp." A postage stamp is 27 pence. When was the last time it was increased?

  (Mr Stanley) About a year and a half ago.

85.  Consignia tell us that it costs 28 pence to deliver a letter.

  (Mr Corbett) Yes, too much.

86.  It is too much and we are the cheapest in Europe, almost the cheapest in the world.

  (Mr Stanley) Two things have happened. First, their costs rose 12.5 per cent in one year and I understand another five per cent since then. Consignia have recognised that problem and are going to take £1.2 billion of the costs out of the business. When they do that, they will be making profits and it will be a great company again.

87.  In the same report it tells us that Post Office profits have disappeared in the last two years. 600 million profit two years ago; 200 million loss this year. Why is that?

  (Mr Stanley) The losses, as we understand it—and in a sense you should be asking Consignia—

88.  You are making these recommendations based on two years of very bad trading. You should be able to tell us why they have traded badly over those two years.

  (Mr Stanley) We are experts on the mail part of the business, not necessarily the rest, but let me try and answer your question. We understand that there are very large losses in Parcel Force and in particular in the Crown Offices. They put a lot of money into the Way Forward Project which was supposed to increase productivity and did not.

89.  What about the Horizon Project?

  (Mr Stanley) That is not included in those figures that I mentioned.

90.  What do you mean by that?

  (Mr Stanley) The cost of Horizon was written off separately.

91.  That is not included in the 600 million?

  (Mr Stanley) The running costs of Horizon are.

92.  Say that again?

  (Mr Stanley) Horizon cost a huge amount of money.

93.  600 million, approximately.

  (Mr Stanley) That has been written off but that is not included in that 12.5 per cent increase I mentioned.

94.  Will it have any bearing on the profit?

  (Mr Stanley) No. It did lead to an exceptional loss but that was a different figure.

95.  Let us be pessimistic and realistic. If your proposals do irreparable damage to Consignia's statutory obligations to provide a universal service at a uniform tariff, how will you put the situation right?

  (Mr Stanley) They will not. We are absolutely clear that they will not. If they do run into serious problems financially, they are under a legal and a licence obligation to carry on delivering a universal service. The question is who pays for it. We have to look at the reason why they are running into financial trouble.

96.  Absolutely, but at the end of the day it will be argued that you were the ones who put them in this position. What will you do about it? You cannot just walk away from it like Railtrack have done and leave the government to pick up the pieces.

  (Mr Stanley) Let us assume that our analysis is totally wrong and everything we have been told over the last two years is wrong and, yes, there is a greater cost to the universal service than we have told the Committee. Then we have to consider who should pay the cost of the universal service. It will either have to be the taxpayer or the customer or the industry through some sort of compensation fund, which European law does allow. We would have to look at those three options, but it is extremely unlikely.

97.  I get the impression by reading the report that you seem to think that the Swedish experience supported your arguments in terms of liberalisation. Presumably you have gone into the Swedish scheme very deeply?

  (Mr Stanley) Quite deeply.

98.  What is the current level of profitability of the Swedish post?

  (Mr Stanley) Like Consignia, they have just dipped into loss recently.

99.  What has happened to the prices of Swedish post since liberalisation?

  (Mr Stanley) Business prices fell an awful lot. The regulator did not have the power to control the domestic price and that did rise. It is now at 36 pence.

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