Examination of Witnesses (Questions 140-159)|
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.
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 downor 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 viewalthough
I cannot speak for all our competitorsthat 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 mailand that includes a proportion of the
business-to-consumer mailwe 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
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 thatthe Royal Mail and its
(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.
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
(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 businessthere 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
Chairman: The absence of choice in Mr Hoyle's
constituency is a gain but for another one it is a loss.
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 wholeconsumers and competitors alikewill 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 serviceswhich are indeed
the value-added servicesare 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
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.
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
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
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 driverscollection
and delivery driversand 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.
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 Consigniathat
is, Parcel Forcethey 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.