Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

TUESDAY 11 DECEMBER 2001

MR JOHN ROBERTS, MS MARISA CASSONI, MR JERRY COPE AND MR PAUL RICH

Chairman

  1. Good afternoon, Mr Roberts. Perhaps you could introduce your colleagues and we will get started.
  (Mr Roberts) Thank you, Chairman. On my far right is Paul Rich, who is the Group Managing Director, Post Office Limited, the network of post offices. On my right is Marisa Cassoni, who is the Group Finance Director. On my left is Jerry Cope, who is the Group Managing Director, Mail Services.

  2. I think we will just get right into it here. This is the first time that you have been before the Committee in this Parliament, Mr Roberts. I think it was our intention to see you in the course of the year but we felt with the announcement of the half year post tax loss of £281 million that it might be useful to talk to you now and get a wee bit of a handle on what may or may not be a worsening situation, so we can start tracking it. I think when we saw you last the loss was only half of that and at that time you probably had reasons for it. Could you perhaps talk us through the reasons why the figures are so disappointing?
  (Mr Roberts) Yes. I think the last time we came the Committee's report made the point that you were concerned about sustainability of profits in Consignia and I think we agreed at the time. We have been going through an enormous amount of change since we became a plc. We have certainly been attempting to catch up on some of the under-investment that happened in the 1990s and some of those costs are flowing through. We have also had the costs of something like £85 million each year for the Horizon project, which again we debated very fully at this Committee, and we have had continuing unprofitability in Parcelforce. The biggest change that we have seen this year has been quite a dramatic slowing down in the growth of the mails business. Last year we were growing at something like six per cent overall in terms of volume, this year that has dropped to about three per cent and as a result our revenue in the mails business is something like £160 million below the levels that we expected it to be. I think those factors together have accounted for the operating loss of £100 million. We have also had to impair under the relatively new accounting standards our parcels assets because of the continuing lack of profitability in Parcelforce and that was the bulk of the below the line figure which then, together, amounted to the £281 million loss that you mentioned.

  3. Are you still making contributions to the Treasury? Is that dependent on you?
  (Mr Roberts) It is dependent upon us. What happened, as you will well remember, was we went through the period when we were contributing, certainly in the late 1990s, something like a million pounds a day to the Treasury. As we moved into the White Paper on the Post Office and then the Act, the dividend regime changed. We now have a regime which is based on 40 per cent of post tax profits going to the Treasury. That means that in the past two years, dividends would have amounted to about £244 million. They are due to be about £70 million this year. Together that is a perfectly acceptable regime. I do not think any of us would query about the level of dividend being set at that point. What we have raised with Government is going through the kind of changes we are at the moment whether it is appropriate for us to continue to pay that dividend at this time while we are not profitable. Certainly I do not think we can complain about the level at which the dividend has been set since the Act went through.

  4. You were going to increase prices, the price of a stamp in October, you have suspended that. Are there any other price rises in the pipeline that you anticipate?
  (Mr Roberts) We are looking very hard at price at the moment. We have had one price increase in the last five years. Currently our prices for first class mail are running about five per cent below the rate of inflation and for second class mail something like 12 per cent below the rate of inflation. We have been trying to keep prices stable for a long time and the last price increase about two years ago was the first one we had had for some time. In the normal course, we would have been wanting to put forward a price proposal this year but, as you mentioned, the other big factor in our lives now, of course, is that since the Act was passed we have also had the regulator. Under the terms of the licence which the regulator has issued to us, which we negotiated with him, for the basic first and second class mail we have to make a case to him for any increase to him via Postwatch—our consumer body—and the view that we were getting back informally when we were discussing this in the autumn was that it was going to be very difficult for the regulator to agree to any kind of price increase in advance of understanding the levels of efficiency that we are operating at. The regulator is currently going through the detailed efficiency studies that are part of his remit and I think those will be completed early next year. Certainly we see price as part of the mix of solving the issues we have got at the moment. I have to say that all of us have also been very conscious that the service has not been as good as it should be and we have been trying to weigh up the balance between getting service right and then maybe looking at price increases as opposed to just putting the price increase at a time when people may be unhappy with the service anyway because the last thing we want to do is to put more pressure on the volumes which, as I said a few minutes ago, are already under pressure from the general economic situation.

  5. How much money do you think the failure to secure an increase in the price of a stamp is going to cost you in this financial year?
  (Mr Roberts) In this financial year it is £96 million.

  6. Were you surprised when you had to withdraw the increase?
  (Mr Roberts) I think we were disappointed. One of the things that concerns me is that we are operating a Government model which I think is unique, certainly in the postal world, in the sense that we have got the full panoply of regulation without being a privatised company and the regulator, quite rightly—and this is what he has been asked to do in the Act—from the day that he took over has wanted to impose what he judges is the absolutely right form of regulation. It has meant, also, that basically it is much more difficult to debate a price increase in advance of him getting stuck into, as I said, his efficiency studies and then setting out a price regime, the kind of RPI minus X pricing regime that we are familiar with from other utilities. So I think we are disappointed because we are trying to go through this change, as I say, not as a privatised industry but still as a Government owned corporation with some slightly more freedoms than we had two or three years ago but at the same time the form of regulation is that which would apply to any privatised industry.

  7. You are also planning to secure savings, I think, in the region of £1.2 billion by April of the year after next. How are you going to go about doing that?
  (Mr Roberts) A lot of it will be to do with trying to make our costs more flexible and changing working arrangements. It falls into four or five main areas. The first is looking at the way we deliver mail and the way we organise the delivery of mail. The second is looking at some fairly radical changes to our parcels operation, which have already begun, in particular trying to involve far more what we call man and van, in other words franchising some of the parcel routes either to our own staff to run their own vehicles or, as we do already in a small way, using external delivery people under our livery to come in and do that. The benefit of that is the costs become much more variable, you use the people when you need them, you do not have full-time staff permanently on the payroll whether there is work there to do or not. We are looking at all our transport arrangements. This has been stimulated in particular by the performance of the railways since the Hatfield crash and we have taken the opportunity to look at rail, road and air. We are looking at outsourcing some of the non-core activities and producing public-private partnerships, which we have already done for our catering organisation, and we are looking at the internal restructuring of all the normal things that you would expect us to be looking at: the size of group headquarters, headcount within the administration, all of those things. Together those amount to just over a billion pounds and, as you say, we are planning it over about the next 15 to 18 months so that we hit the financial year after next with that kind of reduction in the cost base. We have set it at that level because that is the degree to which we believe we are currently more expensive than some of our competitors.

  8. Some of the savings that you envisage securing, have you now only got the freedom to do this? Why have you taken so long to do what seemed fairly obvious things in a number of respects?
  (Mr Roberts) I think that in some cases we have been negotiating them with the unions, particularly in Parcelforce. In others, when for example rail was performing at the level it should have been, which was 95 per cent timekeeping, we were reasonably happy with that happening. We did not have the pressures on cost base that we have at the moment because the revenues were higher. It is really the state of the finances which have forced us probably slightly more quickly than otherwise we would have done to tackle some of these things.

  9. That is not a very good excuse, is it?
  (Mr Roberts) It is not meant to be an excuse at all, Chairman.

  10. The fact that you were making plenty of money meant that you did not have to introduce what are really necessary savings and new practices, that is what you are telling me, is it not?
  (Mr Roberts) No. We would not have done this at the time because if we were making a profit, if our customers were happy, and we were running at what we then thought was a reasonable level of cost, because we were making profits, and you will remember at some stages we were making profits of almost £600 million in the year, I think that is one situation.

  11. But not in Parcelforce: that was always a drain, was it not?
  (Mr Roberts) Not in Parcelforce. What we had to do in Parcelforce, again, you will remember, is before we got to this point we had to get some investment into the company so at least we were operating on a similar basis to those people we were competing with. Having done that in terms of creating a central hub, creating the technology to track and trace parcels, what we have also found is that we have got to go further than we probably originally anticipated in actually getting this flexibility, variability, into the labour cost in a way that we started to do but we had to speed it up. We would have been doing this anyway but probably not at the rate that we now have to do it against the background of those finances.

Mr Hoyle

  12. Can I just take you back to the question the Chairman raised with you about the price of stamps and your disappointment that you did not get the price increase. Is that not the old British Rail mentality: whenever they thought they were losing money they put the price of tickets up and all you did was drive more people away from using trains? Would it not be the same to say that less people would use the service and you would become even less competitive? You have got to get away from these old ideas.
  (Mr Roberts) I thought I actually made that point, Mr Hoyle, by going on to say one of the things we were trying to balance was that we did realise at the time that our service just was not good enough and while I was disappointed in the sense of the finances, one of the things that we had to put into our calculations when we withdrew that application was whether we were actually going to have an impact which was going to be worse in the light of putting prices up rather than focusing on trying to get the service right.

  13. Would you not have been better thinking that before you put the application in then?
  (Mr Roberts) It is a balance, is it not? It is a balance of judgment.

  14. You shut the gate when the horse had bolted.
  (Mr Roberts) Yes, but at the same time if we had not had a price increase—We have had one price increase in five years, that is not exactly somebody using price at every opportunity just to get out of issues by putting the price up. We are running at some way below the rate of inflation and that, again, I agree, is not a very strong argument to say you have got to have a price increase but those were the factors that were involved.

  15. Most people in fairness have actually reduced prices rather than have been thinking of increasing them.
  (Mr Roberts) As have we on second class mail.

  16. As we have not noticed on first class mail, if you would let me finish. We have not seen a reduction in first class mail.
  (Mr Roberts) If we reduce price on first class mail at the moment we would probably be in a worse financial state than we are now.

  17. Even though more people might use it?
  (Mr Roberts) Yes, except that the trend is more people are not using us at the moment.

  18. How do you know the trend if you have not tried it?
  (Mr Roberts) The trend without that is that we are seeing a 50 per cent reduction in the growth of mail being posted. I agree if you try to reduce it you may get some impact. What we actually found when we reduced the price of second class mail was that we did not get a massive increase in the use of second class mail, we got a small increase. I think overall while we thought that was right at the time, there is not any evidence on the one example that we have used that it naturally stimulates a great deal of use. I think, too, that against the background of a 50 per cent reduction that we have seen in volume of growth year on year, if we had done that it probably would have been overtaken by the impact of the economy and we would have wasted the money that we would have had if we kept the rates at the same level.

Chairman

  19. What is the advantage of having first class mail when the service is not very good, you might just as well expect the worst and buy a second class stamp?
  (Mr Cope) The first class is actually getting better, it has been consistently over 90 per cent for the last four or five months. It is a better performance but still not good enough. The reason why we have first and second class mail is to utilise our machinery and equipment and buildings for 16, 17, 18 hours a day, so we can process first class mail at night and second class mail the following morning. It leads to a better, cheaper unit cost service.


 
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