Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 560 - 578)



  560. They would haul you out and you would collapse.
  (Mr Roberts) As we said earlier on, if you have competition in such a way that the uniform price cannot be maintained then you would have to look at a completely different pricing mechanism. It may be just changing the price so that you have different prices for different products, it could be done on a route basis, it could be done on a geographic basis, it could be done on a zonal basis. You then start again, I think, Mr Davidson, you have a completely different basis for charging for mail services throughout the whole country.

  561. Is there any evidence that alternatives have seriously been considered or are we entering into a competition environment without these alternatives having been explored and without any ideas of what might come as a result?
  (Mr Sweetman) I am not aware that these quite radical alternatives have been explored in any detail. I think from our commercial point of view, the greater complexity in the pricing structures the bigger barrier that is to customers and customer service. I think we tend to simplicity, the simpler end of the tariff structures rather than the complex end. I think the danger is that if competition comes in and competes on price we would look to be able to respond. At the moment we do not have the mechanism to respond. If we were to respond we would chase business prices down and to maintain our financing we would have to have if I say equal and opposite but balanced by efficiency changes to other sectors which are not competing.

  562. Can I just clarify. If you get full business freedom, commercial freedom, you would presumably want flexibility to pay differential wage rates in order to ensure that you have a regular supply of reasonably educated labour in areas like London?
  (Mr Roberts) We have discussed this in areas where we have the greatest difficulty in recruiting people. Again, with the union we are testing at the moment ways in which we can look at differential rates but not to the extent of the whole country. We are looking at those areas where we have the greatest recruitment problems.

  563. You would want the flexibility to pay different rates when you need it?
  (Mr Roberts) Yes.

  564. Can I just come back to the question of the European Union and harmonisation. Just looking at the table in the original booklet the international comparisons show different price rates. Can you just clarify for me whether or not having different domestic prices gives any particular post office a competitive advantage either in the international mail or in competing on somebody else's pitch? I get all sorts of junk mail posted in Holland which I presume must be cheaper than posting it in the UK. Is not the logic of that surely that the EU must harmonise postal costs?
  (Mr Roberts) The EU is trying to work towards that. The agreement I was trying to describe to Mr Rendel earlier on was one step towards it. The problem is, as you know, because we are the cheapest postal service in Europe, and at the moment what the EU is doing is saying that we must pay each of us, whichever way mail is going, a proportion of the domestic rate. If you are in Germany and you have a pretty high domestic rate then the bit we pay them is a lot higher than the bit they pay us when German mail is coming into this country. So we are quite some way from harmonisation but the EU is slowly working its way towards that type of approach although we are some way off it. You are absolutely right, it does give people an advantage when they are posting international mail out into a country like the UK.

  565. Can I just be clear on that. It is cheaper to post from Germany to the UK than to post within the UK?
  (Mr Roberts) It is cheaper to post from Germany to the UK than from the UK to Germany in the sense that—

  566. That is not the point that I am making. If I am a publisher of a magazine and I want to circulate to 20,000 people in the UK, am I cheaper posting it from the UK or taking it to Germany in some way and posting it from there?
  (Mr Roberts) There are certainly some countries where you could take mail as an international publisher, and more often than not this is advertising mail which is produced on a disk, you print and publish it in that country and because of the rates we charge them coming into this country then it is easier for them to do it that way because that will give them a rate at their far end knowing what we charge them for delivery. In some cases that will be cheaper than the rate that we can give them for bulk mail within the UK. That sort of arbitraging has been going on for some time within Europe and the Commission is trying to put a stop to some of it, but some of it will continue because of the way those international rates move.

  567. The way the Commission would seek to put a stop to that is by harmonising charges?
  (Mr Roberts) Yes.

  568. Presumably the logic of a common currency would be a common postal rate across Europe?
  (Mr Roberts) It could well be. Again, as I say, we are some way from that at the moment. At the moment what they are looking at is a percentage of the costs of the country that is sending to try and get at exactly the point you are raising.

  Chairman: Thank you, Mr Davidson. I am afraid at this stage you cannot quite escape because there are just a very few questions I would like to put to you on behalf of Members. There is still some confusion about these redundancies. Indeed, the Financial Times, which has been attending our hearing, was also confused and relayed its confusion to one of our Members. I put this question to you so we can finally clear this up. We do not want the Financial Times to get this wrong.

  Mr Davidson: They are still here, are they? They are excused from my slur earlier on.


  569. You told us that the 15 per cent reduction in costs which you are seeking to achieve will require 30,000 redundancies.
  (Mr Roberts) Up to.

  570. You also told us that you have calculated that on certain assumptions in the EU proposals that could cost up to £500 million over the next five years and that the Postcomm proposals could add £250 million to that and that a cost of £750 million would equate to a further 15,000 job losses.
  (Mr Roberts) I was pro rating that in answer to Mr Davies' question to the 30,000 that we have looked at to the 1.2 billion.

  571. Does this mean that 30,000 redundancies could increase to 40,000 or even 45,000 over the next five years as a result of competition?
  (Mr Roberts) If competition came in and merely affected labour and we were not able to reduce our costs in any other way or increase our revenue, and therefore that hit became on the 70 per cent of our costs which are labour, it will inevitably have a big impact on jobs.

  572. It could lead to that figure of 45,000 but from what you are saying it is unlikely, that you will be taking other steps to rectify the situation?
  (Mr Roberts) Chairman, that is absolutely right.

  573. Thank you. A question from Mr David Rendel, which I think you have answered but anyway I will put it to you. If Parcelforce is fully integrated into the Royal Mail as they propose and presumably comes under the Universal Service Obligation it will be possible for them to concentrate more on profitable express delivery services and knock out what are currently non-profitable deliveries. That is correct, is it not?
  (Mr Roberts) That is correct, yes.

  574. You made that point. A question from Nick Gibb now. When Mr Martin Stanley was in front of us he said why, for instance, he was criticising you for not being more innovative than you have been and why have you never offered London a same day delivery service for £1, which is a suggestion that he put. Why have you not come up with these sort of bright ideas?
  (Mr Roberts) We have looked at that before. We are looking at it again now within the M25. In the past we could not get the economics to work. The deliveries that had been set up by couriers were, we felt, a lot cheaper than us, they were doing it very cheaply on bikes and in small buildings. We could not get the economics to work and we decided that there was not sufficient revenue in it to actually divert the effort from all the other things that we were doing, it was as simple as that. It was a commercial decision based on the fact that we really did not think we were going to get the returns out of it that would warrant putting money into it.

  575. Okay. The Postcomm document, if you look at it. I do not know whether you have got it with you. If you look on page 40, paragraph 4.18, they challenge Consignia's view of the cost of the Universal Service Obligation post-liberalisation and they argue on the basis of the consultant's analysis that cost reduction and innovation, etc., should enable sufficient profits to be made even on some sort of 30 per cent loss of bulk mail market share, and then at 4.18 "Andersen's analysis concludes that, given reasonable assumptions, in the short to medium term, the financial viability of Consignia is likely to be more sensitive to the achievement or non-achievement of projected cost efficiencies than the effects of competition on volumes. Hence, if efficiencies are achieved, Consignia can withstand greater volume loss from competition than would otherwise be the case." Do you want to comment on that?
  (Mr Roberts) At the moment we are waiting to receive the full version, the final version, of the Andersen's Report but from the bits that we have seen so far we do have some concerns about the way they have done the financial modelling and we certainly do not accept that at the moment. I gather from Postcomm today that they themselves have only just had the final copy of the Andersen's Report. We hope to have that and to be able to look at it before we make our response before their deadline of April 12th. Certainly at first sight, unless you want to add anything, Stuart, we do not accept that.
  (Mr Sweetman) There are basic flaws in their argument.

  576. We have been going for a long time and I will not ask you to amplify that. Now a question that was worrying me. You have got the infrastructure to run the universal service. Should you not be able to see off competitors? I think the problem that you have got is will you only be able to see off competitors if, just as they can cherry pick with their prices and offer different prices for different services, you are allowed to offer different prices for different services so that you would be allowed to deliver a letter, say, in London for five pence or something? That is what you are basically saying, is it?
  (Mr Roberts) Yes, it is. We are back to the whole debate about the uniform price again. Yes, you are quite correct.

  577. Okay. That is a very important thing that you want to say to us.
  (Mr Roberts) Yes.

  578. On these questions that you have been having put to you about the price of the stamp, it is true that the NAO Report showed that most customers were fairly indifferent to the price but you would be likely to lose some business, would you not? You have not talked about this at all but I think you should really comment on that.
  (Mr Roberts) Fine. Whenever there is a price increase there is a small amount of deterrence, in other words people who take their business away will use some kind of alternative. We believe that a 1p, 1p price increase, for example, ought to generate around about £170 million to the company after those elements of deterrence. It is difficult to predict because when you have got a price increase which is the best part of five years away from the last one, the deterrent effect that you might have had five years ago may be quite different from what you have got today. The best assumption that we can make is that we would expect to lose some elements of traffic but not a great deal. We found in the past, if the past is any guide, that in general there is a small dip when people decide that they will not send as much for a little while but then it tends to pick up again, so we do not lose a great deal when we do introduce a price increase.

  Chairman: I think we have had a very full hearing, Mr Roberts, you have been here for over three hours. We are very grateful to you. I think it has been very important to get the two sides of the story, both from the regulator and from yourself. You have been very calm under considerable pressure. We are very grateful to you and your colleagues. We have now got to wrestle with a report which will add light to this debate. We will not get involved in the policy issues but will try to give what we all want, which is greater competition, greater service delivery and ensuring that you become once again a profitable company. Thank you very much.

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