Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 320 - 339)

MONDAY 25 MARCH 2002

MR JOHN ROBERTS CBE, MARISA CASSONI AND MR STUART SWEETMAN

  320. Do you think the National Audit Office is correct when they say in paragraph 23 of their conclusion of this report, which is on page eight, "The incentive on Consignia's management to secure efficiencies is relatively weak in the absence of pressure from private sector shareholders and the stock market, and is further weakened by the knowledge that efficiency gains would give Postcomm room to introduce more competition and to set tougher price controls."
  (Mr Roberts) I think it is weaker.

  321. Weaker than?
  (Mr Roberts) Weaker than the example of if you were subject to normal shareholders and everything else. There is no doubt that the situation in a nationalised industry is inevitably different when you have a political shareholder than if you have private shareholders. I think the more we do, the great danger is that the regulator might say "right, we will take all these efficiencies but we are still going to set the sort of targets that we have got in mind" and you sort of press it maybe too far. Yes, I do think in general that that conclusion is fair.

  322. If you do not like the Postcomm proposal, how would you go about addressing the problem? Would you think that the EU Directive would more than adequately address that problem?
  (Mr Roberts) I think that the new Directive would go some way to that. I want to stress what I have said throughout, that we are in any case trying to drive efficiency within the organisation even without Postcomm. I think the impact of liberalisation is something that we have said right from the beginning of competition and liberalisation will act as a spur for the organisation to change. I think the argument then becomes how much do you do and how quickly do you do it. Do you get diminishing returns if you actually put that in too fast or too heavily?

  323. One of the things that Postcomm say is a problem is the structure and the way you are owned and regulated in that all roads lead to the Government in the sense that the Government appoints your directors, sets your financial targets and so on, and it also appoints the members of Postcomm. Is that a problem, do you think?
  (Mr Roberts) I have not seen it as a problem. If you look at some of the debates that we have been talking about this afternoon between ourselves and Postcomm, I do not think that we perceive that as a difficulty. We have tended to deal with Postcomm, and they are set up and appointed as with Postwatch, and there are some fairly vigorous debates going on between us. I do not think we are conscious that both of us have been appointed by the same master, as it were. No, I do not think that is right.

  Chairman: That is really a policy issue, that is the structure that we have got and this Committee will not get involved in debates as to whether the structure as set down by the Government is right.

Mr Osborne

  324. I take my warning from the Chairman. The Universal Service Obligation, Postcomm suggests it is possibly a competitive advantage rather than a burden. Would you accept that?
  (Mr Roberts) Yes, I think it can be.
  (Mr Sweetman) I suppose one of the important things in any commercial business is the value of your brand, the image in the eyes of your customers, the degree to which you can extend it. If at the heart of a business there is a genuine warmth towards the organisation, which I think there is, notwithstanding some of our performance, then we should harness that and if that is supported by other organisations seeking corporate social responsibility we have a starter pack. I think we should exploit it and it should add to our brand values that we can then commercially exploit. In that respect I think it is an advantage. I think the speculation earlier about what the financial cost is is a balance against that but I think it is our commercial responsibility to exploit every asset we have got. On the whole, if we can get the 50-odd million people in this country feeling warmly towards us and our brands, and that is because we are knocking on their door every day, then that is good news.

  325. I would have thought if you were talking to a business who wants to do bulk mailing, it is a huge advantage to be able to say "I can deliver to all the people you want to send this letter to".
  (Mr Sweetman) Yes, I think that is absolutely right. If you take our largest posters, the big banks, financial institutions, the big consumer organisations like Centrica as well, they absolutely need to be able to reach every one of their millions of customers and we can do that. With the use of technology our competitors will be able to come along and say "we will apply this technology" and it is rather like you see in the telecom industry where you can switch between providers based on the nature of your call, there is technology in the postal world where you can switch mail, "we will give you that, you take that". That is very, very easy to do. If it is chasing the odd million pound extra margin these big customers will seek ways of doing that and the new entrants into the market will seek ways of providing that and that is the new reality ahead of us if Postcomm get their way.

  326. Is it not a bit of an Aunt Sally to say that all this threatening competition is going to endanger your service customer, which is the postman coming down your path delivering your letter, when in fact actually that is the great advantage that you have?
  (Mr Roberts) I think it is both. Yes, it is a great advantage and, as Stuart has just said, it is something that we want to try and develop. Again, we are back to the way in which regulation, liberalisation is introduced. If it is introduced in a way where there was a great deal of cream skimming, if our finances were put at risk, then at that point you do endanger, no matter how good you might be at all the brand values that we have talked about, the ability to fund the USO. I think that has been central not only to the argument here with Postcomm but certainly central to all the European arguments as people have gone through how do you introduce liberalisation throughout Europe. It is interesting that the European arguments have gone through, for example, this idea of liberalising bulk mail and have then decided in the end to go down the route that is liberalising by price and weight.

  327. Can I talk to you about new technology. One of the things that you pray in aid and this report comments on is the arrival of things like the Internet, e-mail and so on. Can I ask you, why did you not as a company get involved in the Internet? Why did you not set yourself up rather like British Telecom, who is a major provider of Internet services? If you had distributed a few million CDs a couple of years ago you would have sewn up the entire e-mail market.
  (Mr Roberts) First of all, we got involved in what was called hybrid mail, which was printed mail, electronic at one end and physical at the other. We took a view at that time that it was going to be very difficult for us as a non-technology, non-capital intensive business to (a) have the funds or (b) probably have the capability to take on people like British Telecom and computer companies who were getting into this area. It was very much about trying to stick to the thing that was core to your business and not being able to make that shift which, of course, cost an enormous amount of money for many people. You still wonder about the amount of money and returns being generated in some of the areas, even though e-mail has grown enormously. A lot of the e-mail is inter company, or intra company e-mail, although it is growing enormously now between customers who compete with us.

  328. If your business is written communication from one person to another, which is your core business, do you not think it was a great mistake not to jump on the biggest change in communication since the development of the printing press?
  (Mr Roberts) I think you can say now maybe it was, but remember in the same period our physical mail has also been growing and it is only in the last 18 months that we have seen that growth tail off. The sheer volume of expenditure, and remember it was probably in a period when we were constrained from investment anyway, that you would have had to put into that to get anywhere near getting off the ground would have probably been beyond us as a company.

  Mr Osborne: My time is up.

  Chairman: I have got to remind colleagues that questions of policy, the structure of Consignia and questions like that are really matters for our sister Committee, the Trade and Industry Select Committee. This afternoon we are trying to probe ever deeper into Postcomm's proposals, that is what the National Audit Office Report is about. We will continue on that basis. Mr Brian Jenkins.

Mr Jenkins

  329. It would help if I ask one or two questions which sound particularly naive but I am trying to put this structure into context. I understand in America, the USA, they have a system which is cheaper to use than our system, is that true?
  (Mr Roberts) Yes.

  330. They send letters across America and their wage rates are a lot higher than ours so I assume their costs are a lot higher but they send a lot more mail than we do.
  (Mr Roberts) Yes and they have also a rather different three year pricing structure with the rate commission which means that they cannot increase their prices more than once every three years. You tend to get a curve of year one they make a profit, year two they just about breakeven, year three they make a larger loss. The American system of dealing with their post office always strikes me as very different from ours and not relating price to cost other than every three years.

  331. They seem to manage to deliver letters and they deliver letters at a lower cost and they seem to deliver a lot more mail. Our mail has gone up, has it not? In fact, last year I think I got figures the mail went up by 1.9 per cent.
  (Mr Roberts) Yes.

  332. Which was very, very good. The operating income rose by 7.9 per cent which was excellent. Your operating costs rose by 12.4, why?
  (Mr Roberts) In that particular year there were a number of factors. One was that there was a new international agreement for international mail which cost us about another £137 million in that year which was a new cost. It was the year in which we put in the agreement with the union which had up front costs of just over £100 million which was designed to give us productivity and working practice change as we went through the succeeding years. There were a number of changes, Mr Jenkins, of that type which were adding to our costs in that one year. That was a step change of cost in that year.

  333. So when Postcomm says effectively they could not find out, the reason they could not find out why it went up by 12.4 is quite simple, they did not ask you?
  (Mr Roberts) As far as I am aware.
  (Ms Cassoni) I think they did ask us and I think we did provide them with the information.
  (Mr Roberts) The information has been readily available ever since we completed the report and accounts for that year.

  334. Postcomm were misleading us then when they gave us the facts and said "We do not know why it went up to 12.4 per cent"?
  (Ms Cassoni) We have provided them with an analysis of the difference between our costs over that 12 to 18 month period.

  335. I find that very interesting because according to the minutes of the meeting they did state they did not know so they were misleading this Committee?
  (Ms Cassoni) All we can say is we gave them to them. How they interpreted them or whether they understood them is a matter for them.

  336. One of the answers Mr Sweetman gave was with regard to the universal postal system and he said the regulator's duty is to protect the system which I find amazing. I am not sure how they can do that. Is it possible for the regulator to protect the system because surely you can make or break the system as a company? It is in your hands, is it not?
  (Mr Roberts) I think the regulator is supposed to undertake financial calculations to enable the Commission to come to a judgment about whether we are in a financial position to maintain the Universal Service Obligation. I believe that is the way it is supposed to work.

  337. As far as I understand, you cannot do that without cross-subsidy?
  (Mr Roberts) Our view and the whole history of the way we have done it is to cross-subsidise those routes on which we make money with those where we do not make money in order to have a uniform price right across the whole network.

  338. To maintain the universal system you must be prepared to ward off competitors, if necessary putting barriers to entry in by reducing pricing to specific clients so you can maintain the business even operating on a marginal cost system?
  (Mr Roberts) Barriers to entry? If we are to maintain a uniform price, which is what we are asked to do in the Postal Service Act, then if we stay with that price and we are attacked by competitors and as a result of that we are not able to finance that uniform price or whatever, then in certain routes the only way we can compete is by actually reducing the price. The moment you reduce the price you do not have a uniform price.

  339. We have got a problem, have we not? It is a bit of a nonsense, you cannot win.
  (Mr Roberts) I do have days when I think that, yes.


 
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