Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 140-159)

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

TUESDAY 16 APRIL 2002

  140. Can you give an approximation of the services you would be looking to offer under these new proposals?
  (Mr Carvell) The main service that we are seeking to offer is a two-day time-definite service. It is not a first-class service or a second-class service in Royal Mail terms; it lies between those two. Our customers have been telling us that they want something a bit faster and a bit more definite in terms of a guaranteed time delivery than the second-class service, at a price that is appropriate to second-class rather than being more expensive, as in the case of first-class. That is the main service area that we are concentrating on.

Linda Perham

  141. You have talked about Consignia delivering the last mile. With the services that you would like to offer in the future, would you always see you would rely on Consignia to some extent for distribution and delivery of mail?
  (Mr Carvell) The concept is that we would. We would like to think that long-term we will have, for ever, a great relationship with Royal Mail. However, in any commercial arrangement, any business-to-business relationship we will have a service level agreement with them, and doubtless we will have a price review process with them. If we can get the service levels at the right price for ever, then the relationship could be great. Clearly, if certain parts of the country are unable to offer a service level, or they come with price increases that we cannot sustain, then we may need to do something different. However, our intent, both in the interim licence and beyond, is to work in partnership with the Royal Mail for the foreseeable future; but with the proviso that if those two criteria cannot be met, we would obviously have the ability to say that in X, Y or Z area we will do it ourselves because they are not getting the service right and our customers are being let down—or they are pricing us out so that it is cheaper to do it ourselves.

  142. You can even see yourselves having to do doorstep deliveries, if it did not work out?
  (Mr Carvell) Potentially. I think there is a view—although I cannot speak for all our competitors—that if our friends the Royal Mail and ourselves and the other competitors cannot find a method to work together, then there is nothing to stop the competitors getting together and setting up their own pan-delivery network. I have to say that that is not preferable and would be the absolute last resort. It would be an absolute disaster for everyone if it got to that stage; but the competitors are big enough to do that, if they had to.
  (Mr Sibbick) We have our own business-to-business distribution network. We go to about 100,000 addresses every day, and will continue to do that. Where customers want us to take all of their mail—and that includes a proportion of the business-to-consumer mail—we would be in exactly the same position as Business Post and would expect to pass that to the Royal Mail, providing we can have sensible arrangements with them. My personal guess is that you are only likely to see some kind of rival delivery network if it were set up by somebody like DeutschePost, which has the resources and expertise to take on anything like that scale.

Sir Robert Smith

  143. How much of the business-to-consumer business is on a regional basis, where it would be tempting for somebody to do that? Obviously, a council only tends to want to correspond with people in its area, so it is a defined area, and it might well coincide roughly with a hospital wanting to reach patients. There is a temptation, though, for someone to say that it must make sense to use a lot of part-time, temporary people, and set up some kind of web, where a lot of the correspondence is not that urgent and they can undercut the final mile and do a package, saying "we will sort out this area for you".
  (Mr Carvell) I think Postcomm, in its latest proposals, offers the opportunity for unique services to be set up, be they on a geographical or niche basis. That option is there within the proposals. Hays DX does that now by sector.
  (Mr Ross) Commercially, from the point of view of running an operational business like ours, that concept of the local council mailshot is not something that happens day in and day out, at predictable, steady-volume levels. There is a different cost base associated with that type of business, which does not really fit the pattern of our business, which is trying to maintain a steady volume of activity and having the right resources on a daily basis.

  144. In the recent public debate, especially in regard to rural areas, the future maintenance of the Universal Service Obligation has arisen, and there is a perception that things will drop to that minimum, and that in one scenario Consignia would find itself unable to balance the books and then it would be under threat. What are your preferred means of maintaining the Universal Service Obligation under that scenario?
  (Mr Cockburn) The challenge to Consignia, particularly to the delivery part of Consignia, is to make it so attractive to the competitors to use that delivery structure that in that way you safeguard the Universal Service Obligation. If the business is determined to price it at a level that makes it very attractive for competitors to seriously contemplate alternative deliveries in the way we have discussed, then that is bad news for everybody, including Consignia. We are saying that the basis of pricing is fundamental to the whole basis of competition; it is at the heart of whether or not competition will be successful. Our view is that that basis of pricing should be fixed so as to fully recover the costs of that delivery, plus a contribution to the overheads at that level, plus a reasonable contribution to the profit and return capital. That should be the emphasis, and in that way Consignia ought to be able to come up with a price which should be better than any other alternative. If they go too far, the danger is that they will lose market share of delivery, and you could get a spiral of decline and put the USO under threat. The best safeguard is to get that right.

  145. Obviously, in all things you have to have to take a view if you do not get that right. How do you feel about what the European Union allows, which current British law does not, about a levy on the other operators to maintain the USO in the event it is becoming unaffordable?
  (Mr Carvell) So long as the price is fixed to fully recover the costs incurred at the delivery end, so that the competition is in the upstream operation, that is fair game because Business Post has to make its investments and so does Hays. So long as the delivery is not cross-subsidising and there is the fair recovery of costs incurred, this might lead to a model whereby the delivery operation requirement should be a separately organised business with its own costs fully and transparently reported, with its own basis of regulation. In that way you can make sure that there is a fair return and that there is a basis for investment; and everybody will benefit from that—the Royal Mail and its competitors.
  (Mr Sibbick) My own view is that a levy of that kind would not be necessary. I do not believe that the competition is going to take so much away from Consignia that it would be left unable to finance its Universal Service Obligation. I have two points, however: if we were so amazingly successful, we would be more than happy to put a little bit back into financing the Universal Service! On a serious point, one takes investment decisions and one moves forward on all of this. What you do not want is to have a big area of uncertainty as to whether in the future you will have to make some contribution. If that is likely to be a contingent liability, it would be helpful to know about that at the earliest possible stage so that at least we make the decisions that we have to take on the basis of knowledge.

Chairman

  146. We have been talking about consolidation and last mile delivery. What happens to the old red post boxes? Have you any views on the collection process? Do you see separate boxes?
  (Mr Carvell) I think it is all about timing, to be honest. We have to get cracking initially on the business market. That is the area being released, hopefully, through the Postcomm proposals. Therefore, the focus in the early period would be very much on the business community. Seventy-six per cent of all items moved are generated from the business community. That is primarily where Postcomm are allowing the release. At the front end, it is most definitely a business focus, and we should not get away from that. It is logical, as we move into phase 2, when we are allowed to look at different types of business—there is no reason why Business Post or Hays, or any other competitor, ultimately could not have postal boxes in the Post Officer Counters network, in supermarkets and in business addresses. As long as we have the ability to collect with security and integrity, there is nothing to stop us offering alternative services at the sharp end of the collection point for the consumer. In reality, it is a long way down the line, and it will be some years before you see a business postbox on every corner, from Hays or anything else for that matter, albeit if you go to America, you will see a FedEx box, and the consumer has a choice. If he has a P45 equivalent that he wants to get to LA tomorrow, he will use one box; if he is quite happy with a three or four-day service, he will use another. There is a price differential, and the consumer chooses. If you go to certain of the mainland continental countries, you will see the boxes next-door to each other. It can and will happen, but I would not hold your breath for the next few years.
  (Mr Sibbick) The nature of our business is such that you will not see Hays boxes on the streets, either now or in the foreseeable future, because we provide tailored collections for business customers, so it is not really an issue for us.

  Mr Hoyle: It is a bit like when we were told we would have the choice of different telephone boxes. In reality, there were a few in the cities, but everywhere in the rural areas there was no competition. I think we will see the same failure again.

  Chairman: The absence of choice in Mr Hoyle's constituency is a gain but for another one it is a loss.

Mr Berry

  147. I am struck by the fact that you have all been saying how important it is that Consignia is successful and is restored to commercial profitability and good health. Indeed, in the concluding paragraph in the Hays DX submission, we are told this: "If Consignia becomes so weakened by the unbalanced or injudicious introduction of competition, the damage to them as a whole—consumers and competitors alike—will prove irretrievable." Those are warm words from potential competitors, and I welcome them. You have explained why your business will depend on the health of Consignia, but it does not seem to me to sit very comfortably with the other view you put forward, namely that Postcomm's proposals are so much more preferable to the EU proposals. Unless you have information about the operation of Consignia that they do not have, they are telling us very bluntly that the Postcomm proposals pose a real threat to their commercial future, and that therefore they support the EU proposals.
  (Mr Carvell) That is not surprising. If you go back a bit, they have had almost two years to get ready for this. It has not suddenly happened this week or last week. This has been well and truly in the public eye for two years. They are going to add another four years, so that is six years to get themselves sorted out. With the EU you are talking about another four years again. Ten years is an awful long time to reorganise a business.
  (Mr Cockburn) It seems to me that the EU system is very much operationally driven. That may not be surprising as it is coming from the PTTs. From the customer's point of view, what is the most convenient way? The notion of imposing on the customer a requirement to sort out one weight from another, weighing everything and saying, "for this category of mail can I have choice?" is quite alien to the concept of customer responsiveness. I think that the Postcomm proposals are a very bold initiative and radical in pace, but in terms of the customer response, they are much clearer and much more customer-friendly than the EU proposals.

  148. If the EU proposals were to go ahead, if Postcomm said they had consulted and wanted to go along with the EU proposals, would you be in the market? In that environment, which is different, at what stage would you be entering into competition?
  (Mr Carvell) We are in the market now. We do international mail and do special delivery and parcels . The only bit that is missing is the famous letter. From that point of view, I guess we would be in the industry, but it would be a very long, drawn-out process. Our shareholders would clearly be bored by the whole longevity, and if it is eight years before we get any volume going, it is going to be a very difficult task to convince people to invest. We are in the mail now, and we would like to stay in it.
  (Mr Ross) We would have to be at the heavier end, obviously, and that creates the problem that Bill alluded to about asking people to segregate out their mail— "I can only give this to you" and "I cannot give that to you". It is not a customer-centric focused way of increasing competition.
  (Mr Sibbick) I wrote those words, so perhaps I ought to justify them. Under the European proposals, we, as a company, would not be too badly off. What we have moved our position towards is the value-added end of the market, and that is where we need to be. Under European law, special services—which are indeed the value-added services—are clearly distinct from the basic postal service and are not supposed to be reserved to the public sector operators. The problem would not be too bad for us, but more widely I think it would be very bad news for the postal market as a whole because it just leaves the whole future completely uncertain. In the short term it makes almost no difference whatsoever as to the amount of the market that is liberalised, and longer term, it is still up for grabs. I do think that this market needs as much certainty as it can get at this point in time. The point that I was trying to make in our submission is that this has been a very highly regulated market for a very long time, and if you suddenly took the brakes off, then I think you would create a vacuum that would suck in all sorts of rubbish. The market would sort it out eventually, but the customer would suffer in the short term. We feel that the orderly opening-up of the market is much preferable, both in the consumers' and competitors' interests, and in the interests of everyone who looks at this responsibly; and we do think that the Postcomm proposals provide precisely that.

Sir Robert Smith

  149. We heard evidence this morning that Consignia recognise that they have not got the figures they should have for an operation of their size. They told us that in 12 months' time they would have the kind of operational information that would make it a success. Quite rightly, Mr Carvell said that everyone has known for a bit longer than March about what is coming; but I get the sense that people have woken up and that there is a sense of change. You do not want to go down the European route in the long distant future, but how upset would you be about waiting that year and then basing everything on a more robust model that had the information so that you could make the orderly transition? How disappointing would that be for you?
  (Mr Cockburn) Hugely.
  (Mr Carvell) Yes, hugely. We have put a lot of effort in trying to get our interim licence, which is a very small-scale pilot. To be honest, we do need some pilots; we do need to get something moving through the Royal Mail, testing out the last mile and the way we work together. As with any R&D situation, you try and get something moving, sometimes in advance of the Big Bang. From that point of view, on the short-term interim basis we would love to see something moving. Of course, we would be disappointed; we have put a lot of effort in over the past year.
  (Mr Cockburn) I was on the board of Centrica at the time that its regulator opened up the gas market to competition. It is never the right time for it because the billing system was not right, or the customer centres. Everybody would have liked more time to prepare. In the end, the regulator did force the pace, and I have to say that the results on Centrica's performance were excellent. They provided a real catalyst to get over the change faster than people thought it would take. Looking back, with all the benefit of hindsight, it was right that it came in when it did. Adding another year, because it would have been operationally more convenient, would not have benefited the customers very much. I think this is the situation here: this provides a real catalyst for transformation and reform, and I think it should be welcome.
  (Mr Sibbick) I think it is unnecessary. The Postcomm proposals, particularly in phase 1, are not going to open up the market to such an extent that it will do serious damage. I think that waiting another year is unnecessary. You could argue that we have waited for such a long time, what is another year; but having come up with these proposals, I would urge that they stand as they are. I think that the risk to Universal Service is absolutely minimal in the early years.

Chairman

  150. Do you not see that you are dealing with a frightened monopoly which has never really got its act together for a long time, and therefore the longer it can put off the evil day, the more comforting the present situation is?
  (Mr Sibbick) Perhaps it is just that I have a greater confidence in them and a greater respect for them than they have for themselves. I think they will be very robust. They have all these years of experience. They have massive economies of scale. We know, from our own experience, that customers do not like segregating their mail into different routes because of the cost and inconvenience to them. It seems to me that the playing-field is tilted massively in their favour, even before you get on to the 17.5 per cent VAT advantages. I just think that they would be very, very robust.

  151. One of the problems for Consignia has been bad industrial relations, and faults on both sides. One of the drivers for the opposition to any form of liberalisation that goes faster than the speed of a glacier is the unions' worry that there will be job losses, diminution in working conditions, and a lack of recognition amongst competitors and competitor employers. What are your attitudes towards the trade unions? How do you organise your existing workforce? How are they represented by unions and, if they are, can you tell us who they are because we might want to write to them and ask them how they may view you as employers? How do you see that side of it? Let us face it, you might have 88,000 people doing the last mile delivery, but you are going to have a sizeable number of people engaged in what is a labour-intensive business. How do you envisage your terms and conditions of employment standing alongside those of the present Consignia wages and conditions?
  (Mr Cockburn) The whole essence of competition and choice is to grow the market. If we were only talking about substitution within a dying industry, then I do not think that would be very appealing for all of us. We think that there is a good future to grow this market through innovation, value for money, exceptional customer service, et cetera. The best protection to Royal Mail jobs, particularly in the delivery area, is to make it very attractive, not just for Royal Mail's customers but for Business Post customers, to use that delivery. That is the best protection for Royal Mail jobs, to welcome the innovation that comes from this.

  152. What about the men and women that will be working in consolidation, in your fast-speed delivery services, for example? Would they be faced with a diminution of what are, at the moment, fairly modest wages and conditions? What do you pay your people at the present moment?
  (Mr Carvell) We have a lot of people, but . . .

  153. Comparing like with like?
  (Mr Carvell) I think we are probably middle of the road.

  154. You mean you do not pay them as well as the Post Office, who are pretty poor payers?
  (Mr Carvell) We probably pay our people better than the Post Office. We have thousands of owner-drivers, and they are guys who run around in Business Post delivery vehicles in their uniforms and everything else; and they are actually self-employed, but they work exclusively for us. They are paid on a piece rate basis, on what they collect and what they deliver. They are some of the highest productive drivers in the history of driving and earn anything between £25,000 to £50,000 a year. These are guys driving white Sprinter vans. They have very high productivity and very high earnings, and they are very focused individuals, almost like entrepreneurs in the van.

  155. How many of them do you have?
  (Mr Carvell) There are 1,500 C&D drivers—collection and delivery drivers—and about 250 night drivers who move the high trunkers around the UK at night.

  156. Are they owner drivers as well?
  (Mr Carvell) No. They are employed by us. We think we are competitive. We keep an eye on the market and if we think we are slipping in certain parts of the country or it is more difficult to recruit we will lift the salary base.

Sir Robert Smith

  157. You have regional rates?
  (Mr Carvell) Yes, based on availability.
  (Mr Sibbick) We are also very similar. We have a lot of owner drivers. In a sense, the answer is that if we did not pay what it takes to attract the people we would not be able to attract them. We are not unionised but we have councils and channels for dialogue with our staff. I would echo what Bill Cockburn was saying and I would point as well to exactly the same arguments back in 1981, when the monopoly was reduced from covering all personally addressed correspondence to one pound. There were exactly the same fears that it would destroy the universal service in the rural areas and so on. What happened was it focused the Post Office then. For about 20 years, mail volumes grew at unprecedented rates. They had about 20 years of unbroken profitability and precisely the reverse of the dire predictions was what transpired. I am certain that, with the sensible, phased introduction of competition, you would find the same thing happening again now.

Chairman

  158. If I can be the devil's advocate, the workers in the Post Office are still abominably paid. They are barely getting 300 quid a week. They are a couple of years away from that. Their union does not seem to be very good at recruiting outside of the postal services. The telecoms section of it is not very good at getting folk outside of BT into the ranks. You are operating in this tightly organised, self-employed, probably no pension schemes, no sickness schemes; they are having to pay their own stamps. This is a rather different style of job and employment from that which is currently the experience of postal workers. Would that be right?
  (Mr Carvell) Using an example from Consignia—that is, Parcel Force—they have taken the model that we used which is a quasi-franchise, corporate structure with owner drivers and that is the one now they are trying to introduce.

  159. They are trying to sell that to the unions with not a great deal of success.
  (Mr Carvell) We have had 30 years to get it right, in fairness. It is a new concept for them. We have never lost a single day through industrial action in 30 years and it was our anniversary last year.


 
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