Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 180-199)



Linda Perham

  180. On the issue of consolidation, Consignia fears that if that is relaxed the market could be completely open to competition two years earlier in 2004 instead of 2006. Have you any view on that?
  (Mr Corbett) Clearly that was one of the factors that we took into account when we developed our proposals. It is the reason why certainly initially we would limit consolidators to being able to feed into Consignia's downstream operations and not to anyone else's. We were very conscious of the fact that the decision to relax that, whether it was in 2004 or at the time of total market opening in 2006, would be a very important one. We will want to see how the market develops because, yes, we also are conscious of the fact that a too rapid relaxation of that consolidation requirement could provide an opportunity for a much greater degree of market opening than we intended.

  181. Perhaps they are right to have fears about that change of date?
  (Mr Corbett) They have the same concerns that we have to ensure that we do not take that too fast.


  182. Could you give us an indication of what you see as the significance of the weight element? You rejected that as the route down which you ought to go but the European timetable still accommodates that. There is a suggestion that Consignia would be open to a double whammy in the sense that they would be open to volume driven liberalisation and at the same time they would have weight brought in as an added complication and difficulty, so we would be talking about an additional volume. How do you see this? Can they be protected from that? If they are going down one route, do they have to embrace the other European route at the same time?
  (Mr Corbett) It was certainly not our intention to in any way seek to exempt Consignia or UK postal services generally from the requirements built into the EU Directive. We regard those as being a platform which every Member State should comply with, the UK included. We do have a concern frankly that the market opening proposals within the EU Directive may prove to be fairly ineffective in encouraging competition. There are two reasons for that concern. One is that new entrants, if they are going to be prepared to make the investment in setting up an operation, need to be able to put together a commercially coherent offer to customers to carry their mail. If they are faced with the inability to carry mail below a threshold of 100 grams or subsequently 50 grams, that requires a separate sorting operation which clearly has to detract significantly from the ability to make a commercially sensible offer. Combined with that, economies of scale are an essential element of the dynamics of any postal operation. To be denied access to the lighter weights which account for 84 per cent of the volume below 100 grams and still for 70 per cent of the volume when it drops to 50 grams is, we believe, going to be a major inhibition to cost effective operation. We do question whether the price and weight reductions will have anything other than a quite marginal effect on the amount of business which competitors can take.

  183. If your proposals are ignored or not implemented, we will go ahead with the European model?
  (Mr Corbett) Yes.

  184. If your proposals are implemented, for a selected group of business customers, correspondence of all weights and sizes within the limits that you have chosen will be handled?
  (Mr Corbett) Yes, that is right.

  185. Will the other elements in the equation, the European elements, still be subject to . . . ?
  (Mr Corbett) Yes.

  186. This is the point I am making about the double whammy. You would have Consignia exposed on two fronts: what you would regard as the somewhat insubstantial European one and your own one as well. Is there any means whereby they could for example be protected from the European liberalisation element because they are going down the British road?
  (Mr Corbett) I would have to take advice on that.

  187. Have you not considered that?
  (Mr Corbett) It would require us to go into breach of the European Union Directive but more fundamentally we would not wish to see the United Kingdom trailing behind the European Directive in any significant respect.

  188. Do you not accept that one of the concerns which has been expressed by a number of people for good reason or ill is that Consignia is in a sufficiently debilitated state at the present moment that it could not accommodate the liberalisation proposals that you are suggesting, but it could probably, without too much difficulty, take on the weight and price provision? The idea of them taking on both might be more than is reasonable. Would you accept that as an argument?
  (Mr Corbett) One of the things we will be doing over the next few weeks is examining all the submissions that have been made to us in respect of our proposals. We will undoubtedly find within those representations arguments to the effect that accumulating our proposals with the EU proposals will prove too much of a burden for Consignia. Those are arguments which we are going to have to look at very closely and discuss extensively with the parties who are making them. We put forward our proposals in the belief that the accumulation of those two would be supportable because of the very small extent to which we believe that the EU proposals would change the dynamics of the market, but we are open to those arguments.

  189. You have not anticipated the possibility of a policy option being open to you of going to Europe and saying, "We would like a derogation in respect of the price and weighting provisions because we would prefer to go down the road of the volume customer in the first instance"?
  (Mr Corbett) No.

  190. Do you not think you might have considered that as a possible option or is that a negotiating position that you may well take up at a later stage?
  (Mr Corbett) Any such derogation would need to be negotiated not by us but by the government. We cannot see why the European Commission would be inclined to listen to it. I take what you say. We will take it away and think about it, but it has not thus far seemed to us to be a practical, worthwhile or even a necessary step.

Linda Perham

  191. I would like to ask you about the possible rise in the price of stamps. Last year, Consignia withdrew a request to raise the price of both first and second class stamps by a penny. There have been surveys, one of which has said that almost nine out of ten people would support a 2p price rise to save Post Office jobs. I think it has been your view that you want Consignia to increase mail centre efficiency and deliver quality rather than raise the price of stamps because of their financial problems. Do you have a view at the moment?
  (Mr Corbett) I think the right answer to your question is no, because we do not yet have the formal application which we know we will be receiving from Consignia and we will look at it at that stage. I would however like to make a comment about the survey finding that you refer to. The average household spends 56p a week on postage so the increase by ten per cent which adds 5p or maybe 6p a week to their weekly bill, not surprisingly, is not going to be a source of great concern to them. We would however have the greatest possible concern at making a suggestion which would add about ten per cent, about £1 million a day, to the cost of business, merely as a way of trying to avoid trouble on the Consignia front. If there is a justifiable argument for a cost increase, whether because of the investment case that Mr Stanley has already mentioned or otherwise, we are absolutely prepared to listen to them. When it was said that we rejected an application last year, that is not really true. What happened was that we pointed out to Consignia that they had been unable to support it properly and they withdrew it. We have never heard a price application and we are expecting to. In any event, we know that we have between now and the beginning of next year to put in place the first pricing regime which will follow the normal pattern that is familiar in regulated industries. All these matters are very much on the agenda.

Sir Robert Smith

  192. Obviously the theory behind the competition is that it brings innovation and efficiencies. Presumably, one of the concerns about competition is that even the large operator eventually decides that the area they have to concentrate on is to protect themselves in the area of competition and they concentrate their resources there. Hence the universal service obligation existing to ensure that there is some kind of minimum standard. One of the concerns is that for a lot of people they are getting more than the universal service guarantees at the moment. Do you see any operator—Consignia in particular—dropping its service to the universal standard in those areas where competition is not driving them to provide anything better?
  (Mr Corbett) You are absolutely right in describing the universal service obligation as being somewhat of a flaw and, for that reason, the quality service standards that are built into Consignia's licence go beyond the universal service obligation. Those are the standards to which Consignia is being held. For example, the standard for first class, following day delivery appears nowhere in the universal service obligation. That is derived entirely from our licence and I believe that it will be a fairly abject failure of our responsibility to the users of postal services for us to allow those standards to drop. We will be looking for a progressive improvement in quality service standards, and one of the things which we were extremely pleased to see in the Consignia response was their emphasis on the fact that when they are talking about price rises, they recognise that as a quid pro quo for the fact that they are going to have to be able to offer something on service standards as well.

  193. How do you respond to Postwatch's concern that they have expressed this morning? They have been right behind you on competition and in many other ways but they are concerned that you have left the consultation on universal service obligation until after the opening up of the market.
  (Mr Corbett) What we have done is put together a set of market opening proposals which take as their assumption that the universal service obligation will remain as defined by Consignia at the present time. The issue that we drew attention to in our market opening proposals was the extent to which the label of universal service was being applied to a number of special services like mail sorts, for which it is entirely unclear that the universal service label is making any effective contribution to what it is that is delivered. We merely want to note that at the present time it is very difficult to find a clear definition of the universal service beyond the very general language of the Act which talks about one delivery and collection a day and so on. We think it is right that that issue be explored. We think it is possible that at the end of that exploration and of the deliberations and consultations that follow it, there may be an argument for redefining universal service somewhat more narrowly. When we say that, we do not mean a narrow geographical definition. We mean a narrower definition of the range of services to which it applies. Consignia has some enormous number of differentiated services. That is the exercise that we want to carry out. It will be a lengthy operation and, rather in the same way as I am not wishing to wait until the financial information systems are perfect before we introduce market opening proposals, we saw no reason why it would be necessary to have completed that exercise, because the only thing it could do would be to, if anything, relax the definition.

  194. The worry hanging over those who are going to rely on the USO in the long run is that it might be a narrower range of services than they currently feel they are providing?
  (Mr Corbett) If we were to find that there were services within the universal service that ordinary individuals depended on, we would be highly unlikely to want to take them out. What we really want to do is to avoid lumbering the universal service with matters which are essentially negotiated on contractual terms between big users and Consignia.

Mrs Lawrence

  195. Can I seek clarification because you did not answer this when I asked earlier. In terms of universal service, the one delivery per day, does that involve putting it through somebody's letter box or potentially requiring the box, as in Germany and other places, at the end of their two mile long drive where they have to go and pick it up? Does it have to literally be to their premises as part of the universal service?
  (Mr Corbett) As defined at the present time, it does, yes.

Sir Robert Smith

  196. As long as they are accessible and safe.
  (Mr Corbett) Yes. If there was to be a move towards letter boxes at the ends of drives, that would be a major move which would probably require a change in the legislation.

Mr Hoyle

  197. Which of the postal administrations, governments or regulators have introduced competition in the form proposed by yourselves?
  (Mr Corbett) No one has introduced it in precisely the form proposed by ourselves. There are some who have liberated direct mail which is a substantial part of bulk mail but by no means the whole of it. There are others who have dropped the weight threshold so no, there is no one to whom we can point and say, "That is the model that we are using."

  198. Maybe they have all got it wrong and you have got it right; maybe you have got it wrong and they have got it right. Time will tell. Will Postcomm make public the study by Andersens on which the competition proposals appear to be based?
  (Mr Corbett) It is available with a number of numbers excised. It is on our website but a number of confidential numbers have had to be excised.

  199. The majority of it is there but sensitive information is not?
  (Mr Corbett) Yes.

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