Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 100-119)



Mr Hoyle

  100. 70 per cent?
  (Mr Carr) No. One of the major factors was the introduction of VAT on the price of stamps. At the moment we do not believe that is likely to happen here but it always could.


  101. But VAT accounts for, what—23 per cent?
  (Mr Carr) Yes, or is it 22?

  102. It is of that order but there is still another 47 per cent to go.
  (Mr Carr) Absolutely, but we have not studied Sweden in that depth.
  (Mr McGregor) Chairman, I think it is important to see the Swedish experience in context. What happened was that, following the opening of the market place, a very successful competitor established itself primarily in the urban areas in Sweden and was developing a very successful business. Swedenpost chose to respond to this with anticompetitive, predatory pricing and there were not the same kind of pricing controls in place in the Swedish regulatory regime as we have in the UK regime. That enabled Swedenpost to cut the price of essentially its business mail to the point where it put the competitor out of business but, in order to recover revenues, it put up the price of its domestic and social mail to the levels you have referred to. That cannot happen here in the UK because of the pricing controls that are in place in the licence.

Mr Hoyle

  103. What would be the impact on consumers of cutting services to the legal required minimum?
  (Mr Carr) You mean by reducing the—?

  104. Well, Royal Mail offer a lot more services that are way above the licence but, because of the competition that has been brought in—unfair competition thanks to yourselves supporting Postcomm—there will be difficulty in keeping the services that they have got?
  (Mr Carr) Firstly, I do not think it is unfair competition but—

  105. We will come back on that in a moment.
  (Mr Carr)—But the obligation, as you know, is that the service has to be provided to every home every day, a single delivery without a time limit on it, unless they choose to impose that on themselves. The impact, therefore, should be nil as far as the consumer is concerned simply because that Universal Service will continue to be provided anyway and it has to be by the terms of the licence.

  106. That is right, so what we are saying is fair competition; will the competitors have a Universal Obligation? The answer is no. Are we going at a different rate from Europe? The answer is yes. How can you justify that? I am baffled.
  (Mr Carr) What you have just said is incorrect. There is no reason why competitors coming in should not have a Universal Service Obligation providing the regulator chose to do that. At the moment we have a single licensed operator which is Consignia, or Royal Mail, and that is a situation which can change.

  107. So the rural services are being opened up?
  (Mr Carr) Going back to something said earlier, and I think it is perhaps worth making the point to you, every single product covers its direct costs—not all of its costs but its direct cost—and every service covers its direct cost. But where there is a variation, because all costs are not covered, the deficit is only 81 million out of 6 billion and that is not taking account of any of the benefits that accrue to Consignia being the Universal Service provider.

  108. What do you call "fair competition"? Having the profitable bits open to competition and the least profitable bits not open to competition? To me that is not fair competition, but you think it is.
  (Mr Carr) I think fair competition is where there is a very clear understanding of what services are being provided and that is being provided at a profit. Therefore anybody coming into that market has to compete on the same terms. What is missing from your argument and the argument of others is that John Roberts told you quite clearly that in terms of access pricing they would remove from the retail price those elements of the functions that are being performed by the potential competitor; therefore they still receive the same revenue except for that work which is being done by somebody else. Therefore their revenues will continue to be sustained for the work they have to do, even if that includes the final mile delivery. Revenues, therefore, will be generated to Consignia by competition and competitors coming in, even if they are using them for the final mile.

  109. But you still do not get round the fact that there will be no competition on rural services but it will be on the business services first which is the profitable part. Why not open up the whole market in the future like Europe to ensure that we go at the same pace and ensure that there will not be cherrypicking with the unfortunate ability for Consignia to cherrypick in those European services?
  (Mr Carr) One of the major problems for the European programme is firstly it does not open up very much at all until you get down below 50 grams—and I believe that is 2006—and furthermore there is no end date. All we are told is we might get an end date around 2009. You have had the Chairman and Chief Executive of Consignia sitting here and telling you that they want certainty as something to focus on, and the one thing that is not coming out of Europe is certainty.

Mr Burden

  110. Can I explore a bit more what you think about the economics of the rural versus urban delivery? In your evidence you make the point similar to the point that Postcomm has made that the cost is the number of times a piece of mail is handled rather than whether it is urban or rural—in other words, distance does not come into it. You heard Consignia earlier on say that it is not as simple as that, and it depends on the mix of urban and rural. In the answer your colleague just gave a few moments ago about experience in Scandinavia, a point was made that competition came in on the urban services. What is different?
  (Mr Carr) Before we give you the detail, the only difference in the cost base on all of the services, whether urban or rural, is a negative of £81 million out of £6 billion, so however you cut the cake, that is the figure you end up with as being the worst possible case.
  (Mr McGregor) We have examined this and I have to say we have looked at it very much on the basis of the data that Consignia itself has supplied. They were explaining to you some of the hesitations they have about their management systems and the kind of data that generates, but nonetheless both we and Postcomm need to take a view on the basis of Consignia's own data. Now, the traditional view around costs, particularly urban costs versus rural costs, is that there were three main cost drivers: one was the distance mail had to travel, the other was the density of the area of population being served with the thought that the lighter the density of the population the more expensive it would be to deliver mail, and the third was the weight of the item of mail. That traditional thinking has been challenged, not only by the work that Postcomm has done but also by Consignia itself of Consignia now recognises that handling is actually probably the major cost driver within the system, not the sole one but probably the major one, and they themselves also now believe that weight, which for 150 years has been one of the cornerstones of their pricing regime, is not now a cost driver and they have gone out to consultation on the idea that they might be wanting to price according to the size of a piece of mail. With the very major changes taking place in the traditional views around what constitutes a cost we, and I think probably everybody who tries to look at the cost data that is being generated in this debate, need to be rather cautious because we think that the analysis might well change and in a couple of years' time, driven by much better management data from Consignia, the calculations might look very different.

  111. Understanding your worries about the absence of end dates, if nobody really knows what the data is that is reliable at the moment and, taking your words, if what everybody needs to be is cautious, is it not ill advised to go full speed ahead?
  (Mr McGregor) But it is not full speed ahead and that is one of the reasons why we have welcomed the approach that Postcomm has come forward with which is a carefully staged approach which has three sets of safeguards built into it. There is a fairly small initial opening of the marketplace with the ability to review the effects of that both on the provision of the Universal Service and Consignia's finances in 12 months' time, followed by a second tranche of opening, again with the ability to review the effects that might have, to be followed then by a third and final tranche of opening also with the concept that Postcomm has referred to of being able to put in place an insurance net should the unforeseen consequences for the Universal Service emerge at the end of this process. That safety net would ensure that the basic tenet of the Universal Service, which is a delivery everywhere every day at a uniform tariff, could continue to be provided through cross-subsidies if necessary.

Sir Robert Smith

  112. Of course that safety net is not allowed under current legislation, so the first important thing for that safety net would be for the Government to allow that safety net if we are going to have confidence in it?
  (Mr McGregor) Yes, that is right. In fact, we were slightly surprised, since this is part of European legislation, that it was not repeated in domestic legislation.

  113. The reality surely is from the experience I raised earlier with Consignia of my constituent with telecom services, in the end when you do get competition and effective competition where there is not competition the Universal Service Obligation will be crucial because things will fall down to that level whereas currently because of the nature of the beast a lot of services have not been reduced yet to the bare minimum. Therefore, is it not crucial that the consultation on the Universal Service Obligation goes ahead and in a sense would it not have been better to have worked out exactly what it was that had been guaranteed before saying that it would be guaranteed?
  (Mr McGregor) I could not agree with you more. One of the areas where we have disagreed with Postcomm is their failure to properly define a Universal Service.

Mr Berry

  114. Mr Carr, in December you said that you had received complaints about the Universal Service not being provided in certain parts of the country and you recounted in some detail your attempts to investigate the South West and referred to the obstruction from Consignia, the Regulator not backing you up because you wanted to look at 14 postcodes and they said you could only look at four postcode areas. Have you looked at those four postcode areas? Have you done that work? Is there any outcome?
  (Mr Carr) Yes, we have done the work and I am pleased to say that there is an improvement in all the areas. It is still not totally satisfactory. I think Bognor Regis was the principal problem at the time and Slough was another. A huge effort has gone in from the management to ensure that the daily service is provided and that is being done on a much more regular basis than before. We have another project that is to be undertaken in the autumn across a number of postcodes just to verify this work.

  115. The other issue, if I may briefly refer to it, that we discussed was the question about consultation arrangements with consumers with yourselves in particular when it comes to relocating postal branches. I think we agreed that the current Code of Practice is not adequate and you talked about the changes you were hoping to "see rolled out very early in the New Year". We have heard this morning we have not yet got there and it is now April. Have you any idea when these new arrangements might be agreed between yourselves and Consignia?
  (Mr Carr) It is very much part and parcel of the network re-invention programme and reference has been made this morning to the closures in the urban districts. A great deal of progress was made. We have been in the final phases of this now for several weeks and this is what is worrying us. We are very happy with the approach that is being taken by Post Office Counters in terms of using the locational analysis systems to identify those areas where there is an over-provision or those areas where the locations are not ideal and it is the intention, as we understand it, that once those judgements have been made they will be referred to our regional teams to be able to make the same assessment and to check within the communities in which those post offices are located. That will be part of the process of making the judgment as to which post offices are to close and which are to be relocated. Therefore, we will be involved in that decision. The reason I hesitate about this is because the ink is still not on the paper, although that is the intention of both sides.

Linda Perham

  116. In your answer to Mrs Jackie Lawrence you were talking about the low price of stamps and you also talked about how the public do not post very many—ten0 items a year—and surveys have shown that the public would not be averse to it going up. Consignia apparently may be putting in for a price rise again of one penny on first and second class but you are not in favour of allowing a price rise on stamps, is that the case?
  (Mr Carr) No, we have never said that. In actual fact, when the price application is made it has to come to us simultaneously as to Postcomm and we have a period in which we then make our own judgments and advise Postcomm before they do their work. I can think of a number of instances, reasons, which are perhaps relevant now as to why they should not have a price increase but I think the point that we have always made is that the price increase should not be because of competition because we do not believe that to be the case. It also should not be in order to cover up the inefficiencies of the business. In other words, you have heard a number of references recently, usually with an indignant tone in the voice, that it costs 28p to deliver a 27p item. The only reason it costs 28p is because of the way in which the business has been managed, that is not the fault of the consumer, and therefore should the consumer pay more for that reason? We have heard that 1.2 billion is coming off the costs of the business, which is very welcome, and that equates to 6.6p on a letter. Once those costs are out then the cost of delivering that same item will be considerably less than it is today. For that reason they should not get a price increase but I can think of other reasons why they should, particularly those which are related to investment in improving services to the consumer.

  117. You would look at that situation. It is just that this document we have got from you talks about the efficiency argument which you have made. It says no increase in price is justified at the moment.
  (Mr Carr) That is under the current regime for all prices. There are only two conditions subject to them running an efficient business.

Mr Lansley

  118. Is one of your reasons then—just so I understand it correctly—for saying that they may not be justified in securing a price increase yet that they simply do not have sufficient information on which you can base a properly cost reflective price level for the Royal Mail and if they could demonstrate a level of cost then that would be a better basis on which to set a price level for them?
  (Mr Carr) Yes. If, genuinely, their ability to deliver the universal service or any of their other obligations under the licence is at risk then that is a case that justifies a price increase. At the moment, on the latest figures that we have, which I have to say are not very recent, the cash situation appears to be perfectly adequate. Now whether this will change in the near future with the high level of redundancy payments which will have to be made, and this changes the financial situation, I do not know. They cannot make an application for a price increase without providing the figures. We will be able to make that judgment when we receive the application.

  119. Can I just revert back. You were talking about network access charges, indeed we discussed those earlier. Consignia earlier this morning said that they had made recommendations, they had made proposals to Postcomm about access charges which were based on the retail price less the upstream cost of handling mail for collections and sorting. Does that seem to you to be the right approach? Have you made different approaches to Postcomm on this subject and would you share my view—I do not know if it is anybody else's—that access charges should be reflective in the direct and variable costs?
  (Mr Carr) Yes. Gregor, would you like to comment?
  (Mr McGregor) Yes. I think we will be with you on that. It is interesting to note the figure which has come out from Consignia's approach which is 20p, that is a 20p cost to use just a part of their distribution network whereas you can use the whole of the distribution network to send a second class letter for 19p. We think there is a bit of illogicality in the way that they have approached it and your approach, which is essentially a bottom up approach rather than a top down approach, will I think give much more reliable access pricing but again I think it is back to how far you can rely on the management data that they have got at the moment.

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