Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 500 - 519)



  500. You will not have those again this year?
  (Mr Roberts) No.

  501. So you are expecting to be profitable without making any change?
  (Mr Roberts) No because what has happened then is that the mail market has collapsed and the revenues from—

  502. Let me take you on to that one. As I understand it, when you say the mail market has collapsed, you do not mean the mail market has gone down, you simply mean that the increase in the mail market is not as big as it was before.
  (Mr Roberts) The expectation we have for growth in revenue has been cut by about 50 per cent. A year ago we were growing in the main advertising market at about 12 per cent, this year we are growing at something like five. That has impacted on the revenues that we thought we were going to have when we set budgets a year ago, and of course you set the level of cost to make a profit, we have not been able to reduce the cost levels as fast as the revenue levels have gone down which is one of the fundamental issues.

  503. You took on more staff because you expected the amount of mail to go up by a certain amount. You have taken on rather too much staff given that the mail has not gone up by quite so much.
  (Mr Roberts) Yes.

  504. Hopefully it will go up again next year by which time your staff will be where you expect them to be so if you do not increase your staff this year by next year you will be back making a profit again?
  (Mr Roberts) Exactly. What we have said is we will expect with the business as a whole—mail, parcels and Post Office Limited—to be back in profit in probably about two years' time because a lot of the changes we have made today in parcels, those will result in exceptional costs over the next year while we pay for redundancy. When we have got through all of that change we believe that we will get back into profit within a three year period. The Chairman has said this morning it is very much a three year recovery plan.

  505. It looks like you will get back into profit even in one year with such changes.
  (Mr Roberts) There will be a lot of exceptional costs for 30,000 redundancies.

  506. If you did not make all the redundancies you would not have those exceptional costs.
  (Mr Roberts) No but we are making the redundances because we need to get the cost base down permanently and to refocus the whole of our parcel business.

  507. Let me take you on to trials, if I may, because that affects me directly as my constituency is one of the trial areas. A lot of small business men do work from home and they are very concerned about the changes which are going to affect them and will not affect small businesses in other parts of the country. What are you going to do about the fact that some people in Newbury make go bankrupt simply because you have changed it on a trial basis and by the time you decide the trial is not working and go back by that time they will have lost their jobs?
  (Mr Roberts) I am not sure it is as bad as that, is it? If we are delivering mail an hour later or an hour and a half later, I am not sure that is going to create people going bankrupt. Really I cannot see that you can claim that.

  508. It puts them at a competitive disadvantage from other companies running the same sort of business in other parts of the country.
  (Mr Roberts) I think I would dispute that, I really would. I am not sure an extra hour or an hour and a half is going to make that much difference. I do think this is not something which has been dreamt up in a novel way here, it is something that works throughout the whole of the rest of Europe. I am not aware at all that when these changes were brought in, now some considerable years back in many other places, that it resulted in the fairly catastrophic changes that you are talking about.

  509. Let me take you on to the extra investment. You said I think that had you had the money you would have invested about a billion dollars more. My understanding is the Government took off about two billion pounds in dividends during that period. That was the figure in the statement.
  (Mr Roberts) Yes.

  510. The money was clearly there had the Government chosen to use it for investment during the last seven or eight years. What would you have used the money for and if it had been done would you have expected it still to be in profit now?
  (Mr Roberts) I think on the last point, it is very difficult to forecast that, yes we would have hoped to have been. I would not have forecast a few years ago what has happened to the mail market over the last year or so. We would have invested it in a combination of automation, particularly in automation for what we call flat sorting, these kind of documents, which are quite difficult to sort. We would have invested it certainly in bricks and mortar because many of the delivery offices that we work through now are quite small, they sort of bust in terms of size and space. We would have invested it probably in technology internally in terms of the customer facing systems that we are now just starting on, customer contact systems, which are quite expensive pieces of technology which are very important for understanding the market and customers overall.

  511. This whole problem has arisen because of a failure to invest which I accept is not your fault, you were not allowed to do so. The money was there and the country did not invest in it so now you are making a loss and you have to face up to some horrendous changes.
  (Mr Roberts) I would not say for one moment that was the whole problem. It was certainly something which for any normal business would have been a major factor. It was a major factor in Parcelforce because there was no investment and across the rest of the company. There were other issues, as we have talked about this afternoon, in cultural, industrial relations, all of which had to be changed as well.

  Chairman: Thank you, Mr Rendel.

Mr Williams

  512. I will not take my full 15 minutes because so much has been asked already. I find it puzzling about this concept of the subsidy. It tells us in the report that 86 per cent of all mail delivered in the United Kingdom is for business customers, is that correct?
  (Mr Roberts) That is correct.

  513. So if you did not have a single private customer, non-business customer, you would still have to have basically the same network?
  (Mr Roberts) Yes.

  514. With the same costs?
  (Mr Roberts) But it is not business to business.

  515. No, I understand that. When the Gas Board wants to send me a bill, it is they who want to send me the bill, I am not saying to them "please send it to me", they are sending it to me. So if I happen to live in the Outer Hebrides I am not being subsidised as you con all these poor people in the rural areas that they are being subsidised, the subsidy is on most of the business mail that is coming into the rural areas.
  (Mr Roberts) The subsidy in many ways is for the poster, the person who pays the price of the stamp.

  516. Exactly right. So in effect it would be the exact opposite of what is generally supposed to be the situation with rural clients. The individual customer is a minor element in your cost, the major recipient in so far as there is a cross-subsidy is business which is cross-subsidising itself because it is urban based mainly, it is sending out to all parts of the country and, therefore, the myth of the rural subsidy should be exploded because we, the poor individual customers, are a marginal cost, are we not?
  (Mr Roberts) If you are the recipient, yes.

  517. Even as far as we are sending, to a large extent we are the marginal cost.
  (Mr Roberts) Whoever pays the price of the stamp is paying an average price and they are paying an average price calculated on the average cost across every route. If you were sending a letter from one end of the city to another and that was all we ever did—

  518. I understand all that. All I am trying to get at is this: we do tend to perpetuate a myth about who is subsidising who and who are the main beneficiaries of the universal postal system. The main beneficiaries of the universal postal system are businesses. I think that point needs to be borne in mind. I am a bit puzzled by one or two things I have seen but nothing fundamental. There is this strange arrangement that you have—we have a Treasury official here—on the way in which you pay your dividend and so on. The report does say that you have a target dividend which you have to pay as you would have to pay any shareholder but unusually you have a floor, a 90 per cent floor, of the anticipated dividends. In paragraph 3.31 it is commented by the NAO that it is highly unusual for a shareholder to direct a company's management to pay a guaranteed minimum dividend and in this case it works out at 36 per cent of the post-tax profit. Perhaps I could ask the Treasury that. Why is this an unusual arrangement? If it is reasonable, why is it that no-one else does it, or hardly anyone else does it?
  (Mr Glicksman) I think the answer is that Consignia is a rather unusual animal in that it is a company that is in the public sector and it is not subject to the normal market pressures that a private sector company would be subject to which would require it to provide a degree of stability in its dividend payment to its shareholders. This arrangement was introduced in order to provide a substitute for the normal market pressures that would exist on a private company.

  519. In that case why then not allow them to increase costs in accordance with RPI since they are a labour intensive industry? Can I ask you this question. I assume your workforce expect understandably at least to be compensated for RPI each year?
  (Mr Roberts) Yes, they do.

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