Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 240 - 259)



  240. £500 million?
  (Mr Roberts) Yes.

  241. At the moment it is £81 million?
  (Mr Roberts) Yes.

  242. Ultimately it will go up to £500 million?
  (Mr Roberts) They are two different types of modelling. I will bring Mr Sweetman in, if I may, in a second. The net avoided cost model, which is the one that Postcomm have talked about and the Report has talked about, is a model which looks at the cost of the USO in a steady state before liberalisation, by looking at routes which are costing us money to provide. The entry pricing model looks at what happens after liberalisation and then looks at the cost of arriving at it. Correct?
  (Mr Sweetman) That is right. There are a whole series of judgments that go into these models. You can pick any number between about £80 million and £500 million and it will not be until the changes happen in reality and we can look then at the accounts of that year in two, three, four years' time, will any of us know. We can have teams of economists arguing finer points but it is within that range.

  243. I do not understand why it can go up.
  (Mr Sweetman) It is not going to go up.

  244. The cost from a Lincolnshire sub post office sorting office to deliver to someone's door, why might it go up after liberalisation?
  (Mr Sweetman) It is not a question of it going up, it is a different set of assumptions. You put one set of assumptions into one model, a new set of assumptions into a different model and they come out with different answers so the range will be between 81 and 500. There is not an arithmetic transition between one and the other.

  245. What I am asking is which figure we should be using to assess the value of the Universal Service Obligation, the cost of it, in terms of getting these letters to that village house in the Outer Hebrides?
  (Sir John Bourn) I think you should start with what is happening actually and that is the £81 million. The other figure is, of course, it is fair to say, based on other assumptions but the cost of what is involved in doing it now is the fact of the matter.
  (Mr Roberts) Before any liberalisation.

  246. The NAO Report and the Postcomm Report also point out that being the person who owns the Universal Service Obligation is actually an asset as well as a liability.
  (Mr Roberts) Indeed.

  247. Why is it a problem to you? You seem to be screaming blue murder at the opening of competition, you seem to be very worried about it, as if this thing is going to jeopardise the Universal Service Obligation and yet the Universal Service Obligation is only going to cost you £100 million to maintain, so what is the problem?
  (Mr Roberts) I think, as Sir John has just said, if it is 81 now, the issue is what might it become if you then make the changes that liberalisation could bring. If, for example, we find that the profitable routes are affected by the changes then the amount of money that we make on those routes will no longer be available to fund the USO. The change to the USO will come from—Will you pursue it?
  (Mr Sweetman) Yes. There is a little more background and then we will come back to that. Later this year Postcomm are planning to review the nature, size, scope of the USO. One of our concerns is that in putting forward their competition proposals they are doing so in advance of deciding what the USO is. We might well have a problem, we have just been discussing whether it is £81 million or £500 million, but they are planning to review during the summer what the USO is. All this is speculation because we do not know what the future of the USO is and, therefore, we have concerns about whether anybody, including Postcomm, can actually say what they are protecting or not because they have not decided its definition yet.

  248. How bad could it get? What is the worst that could happen?
  (Mr Sweetman) I think, what is the worst that could happen? One of the issues is that we try and link the cost of the USO with efficiency. Even if we were perfectly efficient, if such a being existed in the world, we would still be exposed to cream skimming competition where people would come in to us, as a provider of a USO, at a uniform price and find imbalances between the cost of the service and a uniform price. Even if we were perfectly efficient, there would still be opportunities for competitors to come in and undercharge and, therefore, take away our source of balancing the higher cost routes.

  249. Let us just side track on that one about skimming off the most profitable bits. How come a competitor can get bulk post from, say, a Lincolnshire sub post office cheaper than you can? Why can you not undercut them?
  (Mr Sweetman) Because at the moment we have a uniform price as part of our USO methodology and, again, it will not be until later this year when Postcomm will decide what the future price control regime will be. At the moment we have no ability in a competitive world to chase down prices down to more cost reflective pricing and rebalance other prices in the less competitive areas where they would have to go up to be more cost reflective.

  250. If the German post were to undercut bulk 4,000 plus letter deliveries, the next element to be liberalised, you are saying you have a minimum price below which you cannot go?
  (Mr Sweetman) Correct. We have a uniform price to everybody who is accessing that service. One of the things we are hoping to negotiate with Postcomm during the price control discussions will be the ability to rebalance prices.

  251. How come the German post can offer British Gas a price cheaper than you are offering to all your other customers? Surely you should bring the price of all your big customers down to the same price of the German post? Why can they do it cheaper when they have only got one client?
  (Mr Sweetman) Indeed. Under our licence conditions, if we offered a lower price to British Gas we would have to offer the identical price to all comparable posters.

  252. Why is that a problem?
  (Mr Sweetman) That is not a problem. I am speculating, these are not real numbers so excuse me. If we chase down our price by two, three, four pence an item, which may well be a more cost reflective price to British Gas and large posters, that would remove that amount of money from our ability to cross-subsidise the higher cost routes.

  253. That is the £81 million?
  (Mr Sweetman) No, no.

  254. Might it be £500 million?
  (Mr Sweetman) No, that is a different issue. One is a cost of the USO and the other is the contribution we get from our streams of commercial traffic.

  255. Which all should be profitable.
  (Mr Sweetman) It is the loss of margin which is the issue.

  256. Why do you think it is loss of margin, what is it funding? The only thing it is funding is the USO.
  (Mr Sweetman) No, no. It is funding the more expensive routes.

  257. They are all meant to be profitable. The only thing that is not profitable is the USO. Everything else is commercially viable.
  (Mr Sweetman) No.

  258. Not to external competitors but to you.
  (Mr Sweetman) I think you are getting mixed up between the two issues. One is the mix of costs that we have within our total cost base where some routes will cost 35 pence for a first class item, some £2 and some probably down at 10 pence. The great advantage in the USO as we define it is that you have this uniform pricing. If you take one slug of revenue out, unless there is an equal and opposite increase in revenue somewhere else in that uniform price regime we lose money and margin moves from ourselves to our competitors. That undermines the financing of the whole of Consignia.

  259. What proportion of your income is the 4,000 plus delivery?
  (Mr Sweetman) We have estimated, and have provided recently to Postcomm, that in volume terms it is 52 per cent of our volume from posting to 4,000 which represents about 40 per cent of our revenue.

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