POSTCOMM: OPENING THE POST
6 Postcomm's primary statutory duty is to ensure
the continued provision of a universal service at a uniform tariff.
Consignia is required to provide such a universal service under
the licence issued to the company by Postcomm
and it is at present the only postal operator which faces this
universal service requirement. The provision of a universal postal
service at a geographically uniform tariff has been included in
both statute and Consignia's licence because it makes an important
contribution to the United Kingdom economy. It means that individuals
and businesses can communicate relatively easily and cheaply,
ensuring a flow of information, payment and, in many cases goods,
around the economy. Postcomm's memorandum to the Committee emphasised
the benefits to customers of the uniform tariff requirement in
terms of convenience and simplicity.
7 As Postcomm confirmed to us, the cost of posting
a standard letter in the UK is relatively low. The cheapest 1st
Class tariff applies to items weighing up to 60 grams, whereas
in many other countries, such as the United States, the cheapest
rate applies only to items weighing up to 20 grams. Up to 60 grams,
the UK is cheaper than Germany, Italy, France and the Netherlands,
and between 20 and 60 grams the UK is also cheaper than the
United States. Surveys
of users of postal services commissioned by the National Audit
Office show that over 60 per cent of large business users
are either satisfied or very satisfied with Consignia's services,
and more than 75 per cent of domestic customers consider that
1st Class mail offers good or very good value for money.
Postcomm acknowledged that there was some evidence that customers
were prepared to pay more to have a better quality of service.
In our view, these are high satisfaction levels for a major service
8 Consignia is a company with significant commercial
advantages, including an extremely well-known brand in The Royal
Mail, and exemptions from VAT and parking restrictions.
Postcomm described it as a company with inherent strengths, having
an unrivalled knowledge of its industry, an immense degree of
customer loyalty, a largely committed workforce and an extensive
retail network. Postcomm added that until recently the company
had been amongst the best, if not the best, postal operator in
9 Consignia has, however, suffered from a series
of problems in recent years. It faces difficulties in recruiting
and retaining staff, especially around London and seasonally in
other parts of the country, such as coastal resorts.
It has suffered from deteriorating industrial relations, with
60,000 days lost to industrial action in 2000-01,
and has failed to meet its own quality of service targets.
The disruption in the rail network has added to problems although
these should not be permanent. Postcomm said that Consignia appeared
also to be suffering from inefficiency in that many of its postal
vans were running around half empty and that the major sorting
centres were probably only operating at 65 to 70 per cent efficiency.
Consignia agreed that the company had probably been overmanned
in the past and added that monopoly inevitably produced less pressure
for improved efficiency than competition, and that its analysis
of privatised postal operators in Germany and Holland had led
the company to seek reductions of 15 per cent in its cost base.
10 Postcomm have analysed Consignia's efficiency
and concluded that there is substantial scope for efficiency gains.
Postcomm commissioned advice from two firms of consultants, Frontier
Economics, who estimated potential efficiencies on the basis of
international experience of market liberalisation in the postal
and other industries, and WS Atkins, who estimated the potential
for efficiencies from a detailed analysis of the nature of Consignia's
mail operations. Both sets of consultants concluded that there
was considerable scope for ongoing efficiency improvements.
Their findings are set out in Figure 1.
Figure 1: Advice to Postcomm on potential efficiencies
that Consignia could achieve
Postcomm: Proposals for Promoting Effective Competition in UK
Postal Services (31 January 2002), Table A1-4, Efficiency profiles
Note: The differences in the estimates produced by Frontier Economics
and WS Atkins are a result of the different sources of evidence
they considered, and their focus on slightly different elements
of Consignia's business.
11 Consignia gave some reasons which it believed had constrained
the company in improving its financial and operational performance:
Consignia would have liked to invest more than
£1 billion in recent years on greater automation of its sorting
process, and in improving the quality and condition of its sorting
offices. This was in the context of profits totalling some £3.8
billion (in cash terms) made by the Post Office over the last
20 years, around 70 per cent of which (in cash terms) was paid
over to the Government.
Consignia's ability to deliver the mail effectively
depended on motivating a very large workforce, but many of these
were on low wages. As an example, the starting pay for a postman
or postwoman in London was £12,500 per annum. Its pay rates
had had to reflect public sector pay constraints even though the
company had been profitable and could have afforded to increase
Consignia had had only one increase in the price of
1st Class postage in the last five years representing
a fall in real terms of about 8 per cent, coupled with a slight
reduction in the price of 2nd Class post. In effect,
therefore, while salary costs rose broadly in line with inflation,
prices had not, and as a result, its profits had been £400
to £500 million lower than they would otherwise have been.
12 The company also faces external challenges. In Postcomm's view,
customers were looking for greater reliability, choice and innovation,
and postal services were facing competition from electronic alternatives.
At the same time, the overall volume of mail produced by the economy
had increased significantly, reflecting a close relationship between
the growth in mail traffic and the growth in Gross Domestic Product.
For example, some local delivery offices, which ten to fifteen
years ago might have received six or seven sacks per day, now
received forty. As a result, it now took longer to sort the mail.
13 The composition of the growing volume of mail has been changing,
with very rapid growth in bulk and advertising mail (almost 12
per cent per annum) and much slower growth in mail originated
by households. As a result, Consignia has relied increasingly
on the growing segment of the market for its revenue. The company
told us that it had established the revenue forecasts in its budgets
a year in advance on the assumption of continued growth of 12
per cent a year. Over the last 18 months, the growth in these
markets has started to fall off, to only 5 per cent a year, in
a way that Consignia considered to be unprecedented, resulting
in revenues £320 million less than budgeted. The company
told us that it had not been able to reduce its cost levels as
fast as the revenue levels had fallen short and that, in essence,
it had taken on too many staff because of its assumptions on mail
14 These changes have contributed to a rise in operating expenditure
of over 12 per cent, or just under £1 billion, in the last
financial year. Consignia
mentioned a series of other factors contributing to the increase
in costs, including a new agreement between European postal operators
on the pricing of international mail (which added £137 million),
a new productivity agreement with its main trade union (around
£100 million) and the ongoing costs of the Horizon IT project
for the Post Office Counters business (around £100 million).
A full breakdown of the increase in costs is given in Figure 2.
Consequently, Consignia lost £403 million in its last financial
year and by March 2002 was losing around £1.5 million a day.
These losses have arisen in spite of steady growth in operating
income, which rose by 7.9 per cent in 2000-01.
Figure 2: Increases in Consignia's costs between 1999-2000
|1999-00 Net Operating Costs (before exceptional items)
|Inflation on non-staff costs||
|Costs associated with growth in mail volumes of 2.7 per cent overall
|Investment in mails staff efficiency initiatives
|Investment in technology infrastructure
|International conveyance increases||
|2000-01 Net Operating Costs on a like-for-like basis (before exceptional items)
|New costs from acquisitions||
|2000-01 Total Net Operating Costs (before exceptional items)
|Increase 1999-00 to 2000-01||965
Supplementary memorandum from Consignia plc (Ev 51, Appendix 2)
15 Consignia has reacted to its financial position by announcing,
in March 2002, the first stage of a significant restructuring
of its businesses which is ultimately intended to reduce its cost
base by £1.2 billion. The first stage involves a restructuring
of the loss-making parcels division and a rationalisation of transport
operations. Consignia told us that it expected the first stage
to produce a reduction in its workforce (totalling over 200,000)
of around 15,000, and it estimated that the whole restructuring
programme would cut around 30,000 jobs.
Consignia acknowledged, however, that, beyond the expected impact
of their current restructuring proposals, the introduction of
competition could lead to up to 15,000 additional job losses,
making a possible 45,000 in total. Consignia noted that this was
a rough estimate based on its modelling of the impact of competition
and it assumed that the estimated loss of profits from competition
would have a similar impact on jobs as the already announced programme
of cost reductions. The additional 15,000 comprised two elements:
10,000 job losses, which it estimated as resulting from the European
Union's proposals for competition, and a further 5,000 job losses
as a result of the additional liberalisation proposed by Postcomm.
Consignia added, however, that these figures would apply only
if the company was not able to reduce its costs in any other way,
or increase its revenue, and that the losses would therefore be
unlikely to be that high.
Licence issued to Consignia, 23 March 2001 Back
Ev 54, Appendix 3, para 5b) Back
C&AG's Report, para 1.11 and Figure 6; Q47 Back
C&AG's Report, para 1.10; Qs 18, 68-69 Back
C&AG's Report, paras 2.10, 2.17; Q25 Back
Qs 1, 3 Back
Qs 29-31 Back
C&AG's Report, paras 1.16; Qs 535-536 Back
C&AG's Report, para 9 Back
Qs 125, 130 Back
Qs 218-219 Back
Postcomm, Proposals for Promoting Effective Competition in
UK Postal Services, 31 January 2002 Back
Qs 413, 511; Ev 19 Back
Qs 188, 459-460, 534 Back
Qs 207-208, 522 Back
Ev 53, Appendix 3, para 3a); Qs 181, 133, 29 Back
Qs 181, 451, 503-504 Back
Qs 333, 455 Back
Qs 48, 181, 489 Back
Qs 298-299 Back
Qs 190, 571-572, 194-196 Back