Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 126-139)

MR DAVID SIBBICK, MR PAUL CARVELL, MR ALEC ROSS AND MR BILL COCKBURN

TUESDAY 16 APRIL 2002

Chairman

  126. Mr Carvell, you have been selected to introduce your colleagues, but you are not necessarily the spokesman.

  (Mr Carvell) On my right is Bill Cockburn, former Chief Executive of Royal Mail, who is our Deputy Chairman, of Business Post Group, plc—Bill commenced with us in April; on my left is Alec Ross, the IT Director for Business Post, and on my far left is David Sibbick of Hays Group plc.

  127. We are very pleased that you could come along today because we are getting the voices, the interests of those who in some respects have something to fear—and there are some fears from yourselves, I would imagine. We would be interested to hear your experiences of working within a regulatory public service postal system. I know that you have not held interim licences for very long, but it might be helpful to the Committee if you could tell us how you have found operating under the licences. Has it been easy; have there been problems of definition; and do you think the licences are sufficiently wide in scope to provide customers with the choice of services that you think a postal service should provide? I direct the question to you, Mr Carvell, in the first instance, but I would like you all to answer appropriately, trying to avoid duplication, please.
  (Mr Carvell) For clarification, it might be useful to inform the Committee about the way the structure was organised to allow us to get the interim licence we have at the moment. Business Post and Hays applied for an interim licence to Postcomm and we had to complete a fairly heavyweight questionnaire, which was then followed by face-to-face meetings with public consultation. Whilst we got our licence at the end of November for commencement on 1 April of this year, we have not been able to move a single letter yet because we are still in negotiations with Consignia on the access price. The particular business model that we put forward within the licence application was to collect mail from existing Business Post customers and prospective customers from a number of locations around the UK, and that was limited in number within the licence. We would then collect, sort, move it through the night in our normal trunking network, as we have for our parcel business, and then deliver it into the Royal Mail's local delivery offices for the postmen to do the final mile. That was the business model that was created for the interim licence. Upon receipt of the licence, we commenced discussions with Consignia. It is fair to say that after 25 meetings we have now agreed most of the operating procedures that will allow us to physically inject the mail into local delivery offices for the postmen to do the final mile. That is the good news, but unfortunately at this stage we have not been able to resolve the unit price that we can deliver mail for; and without that price, we cannot give our customers a price. We are in a cleft stick situation at the moment. Whilst we have had tremendous enthusiasm from the market, and we have been inundated on a daily basis by the mail industry looking for choice and looking to try and use us, and whilst we have a waiting-list of customers, we cannot actually move a single letter yet because we still have to resolve the access pricing.

  128. How many of the meetings have been concerned with price, as distinct from procedures?
  (Mr Ross) We have covered everything from indicia, what goes on with letters and stamps and so on, right the way through to what size of vehicles can get into various offices and at what times of the day, and all the operating procedures around data. That includes the data we pass into Royal Mail concerning the traffic that we are giving to them to deliver on our behalf. The price really has been discussed on five, six or seven of the 25 meetings we have had, but it has always been there throughout because, of course, in order to calculate a price for anything, you have to know what is to be included in that price. We need to know what elements of service we require from them. It has always been there in the background, I suppose, in every meeting.

  129. Would you say that the Post Office has been delaying it? Is there a sense that they have not entered into the spirit of the concept of liberalisation?
  (Mr Ross) I think that their approach has changed quite significantly. Their position has not been exactly the same throughout the whole process. Originally, when we first started talking to them, there was an element of resistance, I suppose, and a hope that the competition would not happen, or would not happen for a very long time. There has been a progressively marked change over the months since we first started talking to them at the back end of November. There is now a much more constructive approach: "We know it is going to happen; how do we make it work?" It has not been a totally consistent position throughout.

  130. If you do reach the stage of total frustration—and I have to say that such an experience is not unique to the process of liberalisation when you are dealing with British public utilities, the old British Gas being a classic case of that—do you have any means of redress? Do you appeal to anyone to say, "the big boys are being nasty to us and will not let us play"? Can you go to the Regulator? Can you take it to judicial review?
  (Mr Carvell) It is not so much a threat, but it is a process that is available to us. Condition 9 allows us access at a fair price into the Royal Mail network at different stages, so that is there in writing. Seeking determination is available to us, in order that we can ask the Regulator to help us in our discussion.
  (Mr Sibbick) Would it be helpful if I said something, because we have had our licence rather longer—since 17 September last year—than UK Mail. It is a rather different licence. We have been operating time-critical business-to-business mail services for more than a quarter of a century now. Our licence enables us to provide a wider range of services for our existing customers. On access, we have not even asked Consignia for any kind of discount because for our particular purposes we do not need that. We have been in prolonged negotiations with them, and negotiations have been carried out in good faith; but we are still not there, even though there is no price issue. We are still very much regarded as the tail which is trying to wag the dog, and the dog has its service objectives, and they just find it all very difficult. We continue to negotiate but we are not there yet, as I said. The other aspect that you may find interesting is that we certainly met some customer resistance to changing their mail-room processes and mail production processes, on the basis of an interim licence. They have no idea how long it will last and they do not make such changes lightly. The interim nature of the licence has been something of an inhibition.

Mr Hoyle

  131. Obviously, there have been disputes between yourselves and Consignia about operations, but I just wonder what, if anything, has been the effect on Consignia with the threat of competition so far that you are applying?
  (Mr Carvell) So far? That is an interesting one. So far, one gets the impression from the appointment of Mr Leighton and all the press and everything else that is going on, that Consignia seems to be getting its act together, and wants to get its act together. That is in the interests of all of us, as we all have a mutual desire to see a very successful, profitable Royal Mail. The fact that that clearly is now in play is good news, and to my knowledge that has only happened quite recently. Perhaps the threat of competition has spurred a little bit of action. I do not see a fundamental change in the short time we have been negotiating with them.

  132. What changes do you see with the competition?
  (Mr Carvell) One thing that has become very clear to us is that there are two operations within the Royal Mail: there is the wholesale network, and there is the retail side of the business. We have noticed a lot more focus on the jewel in the crown, which is the wholesale delivery end of the business, the final mile delivery, the postman on the street, with all the integrity and respect that goes with the postman. I think we will see a lot more effort focused upon getting that a lot sharper than it has been. I think we will see them introducing a lot more services. We are launching a new service, which is a two-day service called Business Class, and when we discussed this with them recently, they said: "That is a good idea; we will have one of those too." I think we will see a lot more new services being launched by the Royal Mail, with more focus on the customer, because at the end of the day there are a lot of disenfranchised customers. Companies like ourselves only survive because of customer service. We are obviously going to see a lot more focus on the customer. The service level will improve. We operate at about 98 per cent day in, day out, for our customers. I am sure they will want to get to that higher level at some stage. I think there will be a tremendous range of increased services, service levels and customer focus, as we go through the next phases.

  133. It is interesting: you are coming up with the ideas, and they are perhaps copying your ideas to enhance the service. Do you regret the fact that you will not be able to compete in rural areas and manage to deliver letters there?
  (Mr Carvell) One of the key contents of our business model is that we will use the Royal Mail exclusively for our deliveries.

  134. Are you not upset that you cannot deliver them yourselves?
  (Mr Carvell) Yes, and it is doubtful whether any of our competitors at any point in the future will ever be able to replicate that last mile delivery. It could be world-class and is unique. With 88,000 people out there every day, it is highly unlikely anyone would be able to replicate that.

  135. You are saying that you want the best bits really.
  (Mr Carvell) We want a partnership with the best bits that we do, which is collecting, operating high velocity routes through the night, time-definite, and feeding in to the Royal Mail for the last mile. Put the two together and the customer will have a fabulous service.
  (Mr Cockburn) Obviously, in the national interest the Royal Mail delivery is a unique resource, which it would be, I think, stupid to replicate, simply because of the sheer size and also the reputation it has for trust and reliability. We want to use it. We want to ensure that the terms of access to it are the same—no better—than what Royal Mail itself would have. In that way, you get the basis of fair competition. The USO, which everybody is concerned about, is best protected by supporting the Royal Mail delivery and by having as much of the competition as possible channelling its mail into that so that the basis of the competition is the upstream relationship between customers at the posting end, up to the point of delivery. In that area, there is a lot of scope for innovation, new services and so on. The whole aim of this is to grow the market, to support the health of the postal industry at home, not to try to shrink it.
  (Mr Sibbick) First, I endorse absolutely what Paul Carvell says about the need to have a strong Consignia. As we see it, Consignia will remain absolutely dominant in this market for the next five or ten years. If they are not vibrant and successful, they will simply destroy the mail market as a whole; they would accelerate the e-substitution that is already taking place in the business-to-business sector particularly. The second point is that we specialise in business-to-business services, but within that we do provide universal service. We collect every day and deliver every day to firms of solicitors in Penzance, Wick and Inverness, and indeed all over the country. Within the business-to-business community we do provide a nationwide service, and have done for 25 years or so.

Sir Robert Smith

  136. Following on from what competition will improve, Mr Carvell said that it would improve the unique service of the final mile. The whole philosophy is that competition is driving the improvements, so why is it the bit that they have a monopoly on—and no-one is talking about it—that they are going to put effort into to make it better?
  (Mr Carvell) The current service delivery records indicate that they are not there yet, and they are a church mile from the kind of service that the parcel operators are giving their customers. There is a big gap to make up in terms of service. Clearly, you want 88,000 plus highly motivated people going out, with all the techniques and modern technology that will allow them to be very efficient and improve on that service level. I think that in fairness they are a long way from that, albeit they try their best.

Mrs Lawrence

  137. To follow up on the point about the final mile, have you done any studies? I am interested to know whether this will be a displacement or whether you have done studies that suggest business will be increased? Clearly, as far as Consignia is concerned, that would be an issue. Do you see a big growth in your area, aside from what Consignia are already doing, that could potentially offer more business for the last mile for Consignia, or is it purely displacement?
  (Mr Carvell) Bill made the point about trying to grow the whole postal market. Competition is, in a way, things like e-mail and substitution by other methods. We are trying to create an opportunity to reconfigure the whole of the mail industry, not just letters but all the ancillary industries surrounding it. In our view, from the studies we have seen, business mail, direct mail, business-to-business mail, is increasing at between 8-9 per cent per annum. Consumer-to-consumer, with the use of e-mail and text-messaging, is falling away, but business mail is increasing. Our view is that it is in all our interests to raise the profile of mail to allow more volume to go into the network; and therefore one would hope that as 88,000 people now are delivering mail for the last mile—postmen on the streets—there will be certainly no less in five years' time, because collectively we will have driven more volume through.
  (Mr Cockburn) The nature of our postal delivery, which is unique by international standards, despite some of the things that are in the press, is better than in most countries. By its nature, it is a fixed-cost operation. It benefits most from maximisation the more you put through it. The beneficiaries of that are not just the delivery teams, which keep their jobs, but the Royal Mail itself as a service provider. Competitors, like Business Post, can use this infrastructure. In one sense, the real competitor here is not Business Post versus Consignia, it is alternative means of communication; it is electronic mail and so on. We think that there is an enduring future for hard copy delivery, but the best basis for it to continue for customers is to rationalise it, modernise it, and collaborate in the way we are suggesting—not to duplicate and fragment.

  138. Presumably, as holders of the interim licence, you are in the longer term interested in competing more generally with Consignia?
  (Mr Carvell) Yes.

  139. Can we look at Postcomm's proposals versus the European directive? Are Postcomm's proposals more attractive to you? In what respect would you say their proposals stand in relation to the European directive?
  (Mr Carvell) Speaking as the CEO of a plc, with a shareholder community, if you like, my job is to put forward projects that can clearly demonstrate a return over a period of time. One of the issues about the interim licence, which David alluded to, is that it is very difficult to get major investment for a one-year interim licence. That was always understood in our discussions with Postcomm, so there was never any confusion about that. The latest Postcomm proposals give, as a minimum, seven years, and possibly beyond—hopefully, evergreen—which will allow us to put serious capital investment into these projects. Therefore, I will feel a lot more comfortable going to my board and asking for millions of pounds to invest with a 7-10 year horizon than with a one-year horizon. That is a very simple perspective about the extended licence, but maybe we should talk more about the threshold.
  (Mr Ross) There are two aspects of comparing the EU approach and Postcomm's approach. One is weight, and the other is the time-frame of the introduction of competition. As far as the weight is concerned, the vast majority of mail is in the "under 60 grammes" category, so the concept of coming down to 100 grammes to start with runs counter to where the majority of the mail lies; so it makes more sense to open up the market all the way through. The second area is something that Paul alluded to earlier on: customers want change. We are inundated with approaches from businesses particularly, asking us what services we are going to provide and when we are going to start. Change cannot come quickly enough as far as many of those people are concerned. A much delayed process, such as would be inherent in following the EU timetable, is not what the customers would want to see. I think the Postcomm approach is preferable.
  (Mr Sibbick) From Hays's perspective, the big difference between the Postcomm proposal and the European proposal is that the Postcomm proposal gives a clear end date of 2006. We know from everybody this morning that the one thing that is desperately needed now is certainty as to where the market is going. The European proposal pushes off complete liberalisation and pushes off the final stages until possibly 2009 or beyond. It does not give anybody any encouragement to invest; it does not put on post offices the pressure they need to change and modernise because there will always be a further period of grace. Certainty is probably the most important single issue.


 
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