Examination of Witnesses (Questions 126-139)|
TUESDAY 16 APRIL 2002
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, plcBill 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 fearand 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 frustrationand
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 thatdo 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
(Mr Sibbick) Would it be helpful if I said something,
because we have had our licence rather longersince 17 September
last yearthan 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.
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
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
(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
(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 sameno betterthan 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
(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 onand no-one is talking about itthat
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.
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 milepostmen on the streetsthere
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 suggestingnot
to duplicate and fragment.
138. Presumably, as holders of the interim licence,
you are in the longer term interested in competing more generally
(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 beyondhopefully, evergreenwhich 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
(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.