Select Committee on Public Accounts Thirty-First Report


The Committee of Public Accounts has agreed to the following Report:



1 Postal services are a key part of the United Kingdom's economic infrastructure, providing a vital means of communication between citizens, business and government. The main characteristics of the postal services market in the United Kingdom have been a statutory monopoly and a universal service at a uniform tariff. The statutory monopoly comprised an area of the market of mail costing less than £1 and weighing less 350 grams reserved for the Post Office (now called Consignia[1]). The universal service consists of daily collections and deliveries everywhere in the country at the same price regardless of distance.

2 The postal service is facing a period of significant change, for statutory and external reasons. The Postal Services Act 2000 created a regulator, the Postal Services Commission (Postcomm), whose primary statutory duty is ensuring the provision of a universal service at a uniform tariff. Their other duties include the promotion of effective competition and the protection of customer interests. The Act replaced Consignia's monopoly with the issuing of licences to postal operators within the reserved area. Consignia received its licence in March 2001 and several other companies have since been licensed for tightly defined services. External challenges include more international competition, for example from the requirements of EU legislation and increasing competition from the use of e-mail.

3 On 24 January 2002, the Comptroller and Auditor General reported on the risks and opportunities facing Postcomm (Opening the Post: Postcomm and postal services - the risks and opportunities, HC 521 2001-02). Subsequently, Postcomm published their proposals for opening up the market, which they believed would introduce competition for around 30 per cent by value of the previously reserved area from April 2002.[2] We took evidence from Postcomm on 13 February on the Comptroller and Auditor General's Report and on their proposals, but this left some unanswered questions about the practicality of their proposals and the analysis that supported them. We therefore took evidence from Consignia on 25 March, shortly after the company announced a substantial re-structuring of its business including the loss of 15,000 jobs with the prospect of further reductions of a similar magnitude.

4 As a result of our consideration of this evidence, we make eight main points:

  • Consignia's problems have impacted on the quality of the universal postal service. The UK benefits from daily deliveries to all properties and relatively low prices. Consignia has, however, failed in recent years to meet its own standards of service and has suffered from a series of problems, including poor labour relations, inefficiency in some parts of its operations, constraints on investment and steeply rising costs. Revenues have risen from £6bn in 1995 to £8bn in 2001, although postage charges in the UK are relatively low and have fallen in real terms. In spite of these increased revenues, the company has become unprofitable and is cutting jobs and changing services to safeguard the future of the universal service.

  • Postcomm intend to encourage improvement by Consignia by rapidly opening the market to competition, but need to be cautious about the potential consequences of their proposals on the universal service. Increasing competition is a lever for improving efficiency and services, but Postcomm need to be aware of the risk of duplication in postal teams and of reductions in low profit services, and to demonstrate that rapid market opening would not damage Consignia's ability to deliver the universal service at a uniform tariff. With a lack of reliable management information from Consignia and uncertainties about the robustness of Postcomm's analysis, they should err on the side of caution.

  • Postcomm's proposals for the introduction of competition differ markedly from those of the European Commission. While Postcomm's proposals focus on the liberalisation of bulk mail, with full opening of the market by 2006, the European Commission expect to reduce the weight and price thresholds above which competition is permitted, with no date for full market opening. Postcomm's approach would mean that most European postal companies would have greater access to the UK postal market than Consignia does to their markets. It is important to ensure that the nature and pace of liberalisation in Britain versus the rest of Europe does not give rise to an uneven playing field and unfair competition. Postcomm should set out clearly why they consider that they should go further than the European Commission, and what extra benefits and risks arise from their own proposals.

  • It is not clear that Postcomm can assess the effect of competition until they have decided on the prices Consignia may charge in future. Consignia's ability to respond to competition, especially with the speed envisaged by Postcomm, depends on its ability to adjust its prices to cover its costs and match the prices charged by its competitors in the most profitable parts of the market. Uncertainty about how Consignia might be allowed by Postcomm to respond is also potentially damaging to potential competitors as well, who will also need a clearer view of the prices Consignia would be allowed to charge them for access to its network.

  • Consignia told us that it had already had a price freeze for a considerable period of time and that it might put a proposal forward to Postcomm for a price rise. Postcomm have not given any clear indication of what level of price limits they will set after March 2003, nor what form the price limit will take. In our view, it may prove necessary for Postcomm to allow prices to rise, given that post is a labour-intensive business, that wage rates tend to rise at least in line with inflation, and that the price of stamps in the United Kingdom is lower than that elsewhere in Europe.

  • Postcomm need to develop a greater understanding of how changes to the levels and types of service Consignia provides will affect its customers. They need to develop a greater understanding of changes in the level of service such as the loss of the second delivery or a delay in the first delivery. Consignia has been piloting changes to the service it provides with a view to improving its efficiency and ability to meet service standards. These changes, which would mean most customers receiving their mail after 9.30 AM, could prove damaging to some small businesses if the changes are insufficiently responsive to the needs of individual customers.

  • Postcomm have a very difficult task to perform. They have to increase competition, set the price for stamps and ensure the universal service. This task involves delicate management of a conflict of priorities that may be beyond them and which could even result in Consignia going out of business. They are operating in an institutional context quite different from that of other economic regulators. Consignia remains in the public sector and is owned by the same government department that appoints the members of Postcomm. Unlike other regulators, Postcomm have had discretion to introduce competition as they see fit. And Postcomm have had to address difficult issues surrounding the balance between social objectives such as protecting universal service, and economic objectives such as increasing competition.

  • For this unusual institutional framework to work well, or indeed at all, it is necessary for the parties involved to work together. On the evidence we have taken from both Consignia and Postcomm, however, they are at present locked into an adversarial and unconstructive relationship from which neither party can gain much. We look to both of them, as public sector bodies, to move away from this strained relationship and seek to work more cooperatively from now on.

5 Our more specific conclusions and recommendations are as follows:

Consignia's provision of a universal service and current performance

      (i)  Consignia's prices for standard mail are cheaper than postal services in most other large economies, and surveys reveal a high level of satisfaction with Consignia. The company has some inherent strengths, including a committed workforce, loyal customers and an extensive retail network. Consignia also delivers universal service at a geographically uniform rate. Postcomm need to ensure that these benefits are not sacrificed in opening up the market. There is evidence that these need not be sacrificed if competition is opened up in the right way.

      (ii)  Consignia has, in recent years, experienced a number of problems including poor labour relations, difficulties in meeting its quality standards and rapidly rising costs. Some of these can be attributed to constraints placed on its retention of funds for investment and on its ability to increase pay rates for its postmen and postwomen and to increase prices significantly. But there are also doubts about Consignia's efficiency, and, in opening up the market, Postcomm can reasonably look for improvement in Consignia's performance.

      (iii)  Consignia's profitability has fallen rapidly and the company is currently losing around £1.5 million a day, which if sustained would put the universal service at risk. Consignia said that it had been unable quickly to adjust its costs when the growth in bulk and advertising mail volumes slowed from 12 per cent to 5 per cent a year. A well run business should have recognised the risk of such events. This Committee has been critical before of Government-owned bodies placing too much reliance on ambitious targets, for instance in connection with the assumptions made on the number of visitors to the Millennium Dome.[3] The Department of Trade and Industry, as the Government's principal shareholder, approve Consignia's business plans and should seek to ensure that such plans apply risk management disciplines including the full range of possible scenarios for mail volumes.

      (iv)  Consignia has responded to its recent losses by announcing up to 15,000 job-losses, with possibly a further 15,000 depending on whether other financial savings can be made. The lack of clarity about future employment prospects in the industry does not inspire confidence in Consignia's planning arrangements and must be unsettling for the whole of Consignia's workforce. Consignia estimate that an additional 10 - 15,000 more jobs might be lost as a result of proposed increases in competition. In opening up the market Postcomm will need to be sensitive to the impact of uncertainty on the jobs of postal workers.

Postcomm's proposals for the introduction of competition

      (v)  Postcomm expect competition to develop slowly under their proposals, because competitors would not have Consignia's ability to deliver to every address in the country, which business mailers such as banks would require. But this analysis appears to overlook the possibility that new entrants would just deliver the low-cost mail, while transferring the most difficult and expensive mail to Consignia for delivery. Such an erosion of Consignia's most profitable business could have a major effect on its ability to sustain the universal service at uniform price.

      (vi)  In expecting competition to grow slowly, Postcomm also cite the international experience that incumbent postal companies have lost only small amounts of market share where competition has been introduced. The international precedents differ substantially from the UK market or Postcomm's proposals for opening up the market. In Sweden, where the market has been completely opened, prices for domestic users and small businesses have risen, and the incumbent company is now making losses. Postcomm need to be more explicit about the inferences they draw from overseas experience, and how they distinguish the wider lessons from market-specific factors in the countries concerned.

      (vii)  The Comptroller and Auditor General's Report emphasised the importance of robust analysis for managing the risks that Postcomm face in introducing competition. But while Postcomm estimate the net cost of providing universal service to be £81 million a year, Consignia's modelling, using a different approach, suggests that it could lose up to £750 million in profitable business from the current proposals for competition. And Postcomm and Consignia do not agree on the volume of business exposed to competition in the first stage of Postcomm's proposals for market opening. Greater effort needs to be applied on both sides to reaching a shared analysis of the impact of market opening on Consignia's ability to sustain the universal service.

      (viii)  Postcomm's ability to discharge their duties credibly depends on having a thorough knowledge and understanding of the industry. Postcomm have made use of expert consultants, but these are not a substitute for in-house expertise. Postcomm had no staff with direct experience of the postal industry when the Comptroller and Auditor General reported, and should seek to recruit such staff.

Postcomm's decisions on the prices Consignia may charge

      (ix)  The most significant form of competition is likely to be from firms entering the market to provide specific services, which would use Consignia to deliver mail to the addresses they cannot profitably serve themselves. The success of this form of competition depends on the price and terms set for access to Consignia's network. Too high a price for access to Consignia's network would deter potential competitors, while if the price is too low Consignia's viability may be threatened. Postcomm therefore need to obtain a better understanding of what would be a reasonable price for access to Consignia's operations and make clear how such access will be facilitated and on what kind of terms.

      (x)  Consignia's ability to respond to competition depends on whether it can re-balance its tariffs. In particular, Consignia argues that it could only compete in some markets by reducing the tariffs it charges and increasing other charges, such as to domestic customers, to compensate. It is unclear, however, whether Postcomm would allow such re-balancing within the requirement to provide a universal service at a uniform price, and within what timescale. The resulting uncertainty over Consignia's permitted responses to competition is damaging both to Consignia and potential entrants, and Postcomm should give clear guidance to the postal industry on this issue in advance of further market opening.

      (xi)  In the longer term, Consignia's financial performance and hence its viability as competition grows depends on the price controls applied by Postcomm. The price control regime may act as a further constraint on Consignia's ability to respond to competition, particularly if prices are set lower than necessary to finance the services its customers want. The fact that Postcomm have not yet made any final decisions on Consignia's future price controls is a further source of regulatory uncertainty.

Quality of Service

      (xii)  Consignia is considering abandoning its target of delivering mail to domestic customers before 9.30 AM, and under the oversight of Postwatch,[4] it is piloting different standards in a few areas. Consignia think this would help to achieve the efficiency gains it believes it needs. There is a risk that unless implemented sensitively, however, small businesses and people working from home could be disadvantaged. Before agreeing to changes of this nature, Postcomm, with Postwatch, should define and implement reasonably consistent standards of universal service across the range of postal customers.

      (xiii)   Consignia has failed over the last five years to meet its own target of delivering 92.5 per cent of 1st Class mail the next day, although its performance has been closer to this level in recent months and performance has varied substantially across the country. Postcomm, with Postwatch, should require Consignia to explain how and when it plans to eliminate areas of particularly poor performance. It should use the performance of successful universal service providers in overseas postal markets as a benchmark in determining what higher standard postal customers in the UK can reasonably expect.

      (xiv)  Postcomm recognise that to fine Consignia when it fails to meet its service targets would simply represent a transfer from one public sector body to another. They prefer the introduction of a compensation scheme, through which users of postal services who suffer from poor service, such as late or failed delivery of mail, receive payment from Consignia. Such a scheme has been under negotiation since March 2001, but Postcomm have not yet reached agreement with Consignia on the details of such a scheme. They should do so without further delay.

1   The title Consignia is used throughout this Report, except where the Report refers to the regulatory regime in place prior to the coming into force of the Postal Service Act 2000. Back

2   Ev 53, Appendix 3 Back

3   14th Report of the Committee of Public Accounts, The Millennium Dome (HC 516, Session 2001-02), para 6 Back

4   Postwatch are the representative body for consumers of postal services, created by the Postal Services Act 2000 Back

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