Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 223-239)

MR BILLY HAYS, MR ROGER DARLINGTON, MR PETER SKYTE AND MR JOHN LOVELADY

TUESDAY 16 APRIL 2002

Chairman

  223. Good afternoon, gentlemen, almost good evening. Welcome. Perhaps, Mr Hays, you could introduce your colleagues and then we will begin?

  (Mr Hays) Thank you, Chairman. My name is Billy Hays, I am the General Secretary of the Communication Workers' Union, which represents over 150,000 people working in the Post Office, also called Consignia—we prefer the Post Office. Roger Darlington, on my left, is a Research Director in CWU. Peter Skyte, on my right, is the National Secretary of the Communication Managers' Association within Amicus. John Lovelady is the Head of Research for CMA.

  224. Thank you. The position which we seemed to have arrived at to date from what we have heard, is that Consignia, even when it was the Post Office, knew there was going to be liberalisation.
  (Mr Hays) Yes.

  225. They were aware that it was coming over a timescale which now has been shortened, which has changed from weight to volume. There is a regulatory process, the regulator is independent, and both unions signed up to the concept of a commercial Post Office, a PLC, with a regulator. Did you not help to dig the hole you are now finding yourselves in and is it not a bit late in the day to start complaining when the independent regulator independently takes a view which does not agree with yours?
  (Mr Hays) Well, I think the first thing obviously is we were not to know what the nature of the competition was and the manner of the competition. That is one of the things in terms of Postcomm's approach, they have taken a completely contrary view than the European Commission is proposing. Yes, we did campaign for commercial freedom because we knew that was in the context that we had campaigned against the privatisation of the Post Office under the previous Conservative Government and we campaigned for greater commercial freedom to allow the Post Office to expand. We see the primary role of Postcomm as protection of the universal service and where appropriate—and I am quoting from the Act now—to introduce competition. What seems to have happened, the competition alone almost is a way of sorting out the Post Office's particular problems at a common time. We face at the moment in the Post Office tremendous problems but also tremendous opportunities. To listen to a lot of people talk about the Post Office you would think they were talking about an industry that is in decline, a market that is in decline. One of the reasons why the market is being opened up both in Europe, and obviously the Postcomm's proposals, is that even though we are in a dip at the moment in terms of mail volume growth, the industry is expanding phenomenally. Mail volume growth has grown greater than GDP and has done for the last ten years. Even in the current period what has caused part of the crisis the Post Office face, is that we were anticipating a six per cent growth in mail, part of the crisis is that it is not six per cent growth, it is three per cent growth. We are in an industry that is expanding phenomenally. Twenty years ago there were 21 million address points in the UK, there are now 27 million. We are in an industry that is expanding. In terms of did we dig the hole, to use your metaphor, Chairman, certainly we picked the field, we did not know what the shovel was going to look like and we did not think the hole was going to be that big.

  226. I think the metaphor is one that has been put very well. Anyway, we have got away from level playing fields.
  (Mr Hays) Okay.

  227. Can I just ask one other question, and I am being a wee bit of a devil's advocate here.
  (Mr Hays) Yes.

  228. You have had difficult industrial relations, and I think we are all pleased at the way the corner seems to be being turned, if I can be as cautious as that.
  (Mr Hays) Yes.

  229. Things are on the mend. There is talk about job losses, and some of my colleagues will talk about that in a minute. One of the things the liberalisation does suggest is that there will be competition for business and as a consequence of that perhaps fewer people will be required.
  (Mr Hays) Yes.

  230. On the other hand, the work will have to be done by people employed by somebody else other than Consignia, Post Office, call it what you will. That is an opportunity for you to recruit new members. Why have you done so appallingly in trying to recruit people in Hays DX and in UK Mail in the past? Neither of them are union shops. You are very well organised within what might be the soft market of the nationalised industry. Why have you not been more successful in recruiting folk outside? Surely what has got to be done by somebody is they have to have a union to look after their pay and conditions. Is it the fact that you recognise you are no use at recruiting outwith the Post Office and you are frightened to death of your membership falling and it is that? We have been told there is not a material difference in the amount of wages they get, although the conditions may be inferior in terms of final pension and things of that nature. Pensions probably do not exist and there are probably a lot of them who are self-employed status. These are things that good unions could have addressed. Why is it you are not able to do that?
  (Mr Hays) I have been in the job seven months, Chairman . . .

  231. But the organisation you represent . . .
  (Mr Hays) I will come on to that point. I have been in the job for seven months and certainly as General Secretary I intend to make sure we do recruit in those areas. We recognise there will be competition. Deutsche Poste, for example, has two sites, one at the end of my street—I do not know whether there is any significance in that—and one not far from our office in Wimbledon. We are in talks with companies that are eating into Royal Mail's market. I think part of the reason relates to the history of the GPO, where we all come from. Certainly we intend to make sure we unionise and organise in those areas. In terms of the job losses, some of the job losses are related to the finances of the industry which maybe we will touch on later but certainly there does need to be a restructuring. The UK postal service is the only postal service in the world that has a two delivery a day structure. It was the union, not management, it was the union which said that this was not sustainable in the long term. It was myself when I was a national officer for delivery staff who advocated what is called a specification, who advocated moving from the two delivery structure to a more imaginative structure. One of the things that a lot of big volume mail users want is not so much the time of delivery but the reliability of the delivery. So, yes, we recognise that. In advocating those changes that we advocated in 1995—as I say it was advocated by myself and supported by our union's membership—we recognised that we needed to change and, yes, there will be some impact on jobs but far better to have a reliable service than to have one that is erratic at the moment and that is what we are trying to address in the talks with the Post Office.

Linda Perham

  232. You did just mention the financial situation, Mr Hays. 70 per cent of the costs of Consignia are labour and I do not need to tell you they propose huge job losses. Given that, what else could Consignia do other than make lots of people redundant to save costs?
  (Mr Hays) One of the things they could certainly do is raise the price of the postage stamp. We have the lowest postal charges in Europe, apart from Spain. Since 1988 we have seen real price reductions of 13 per cent below the rate of inflation—we put this in our submission to Postcomm—so real price reductions. Certainly a price rise, a price rise we have advocated of two pence as a minimum, would give somewhere in the region of £400 million worth of revenue to the business. As Allan Leighton said, it costs 28 pence to deliver a letter and yet we charge the public 27 pence, so certainly a price rise. Restructuring, yes, we are in talks with management at the moment in terms of delivering the restructuring. A substantial part of Consignia's costs—I will say Consignia—is delivery operation. Something like 80,000 people deliver letters. One of the problems we have with the current delivery structure, 98 per cent of mail arrives the next day and is available for first delivery and only two per cent is on the second delivery. In terms of cost, obviously a heavy part of that cost is the second delivery cost and that is one of the reasons why we have advocated a restructuring of delivering which would provide, one, a more reliable service and, two, could potentially—and these are the discussions we are having with the Post Office at the moment—expand the services in the areas where they need to be expanded. For example, in London there is no same day courier service. The Post Office used to provide one many, many years ago, it does not now. In the 1960s there were three deliveries a day in London, that may not be financially viable but the point is that customers want a reliable service and, yes, in providing some more of those niche services, if I can put it that way, that would involve some cost reductions, ie head count reductions, yes.
  (Mr Skyte) Can I add to that. There are also some decisions that are awaited from Government which have an impact on the finances, not so much in the Royal Mail area but the Post Office network area and in particular decisions on the universal bank and the financing of the social network and the rural network which would have implications, also, for Consignia's finances.

  233. You made those suggestions but given that you accept there will be job cuts of some magnitude, are you confident they will be achieved through natural wastage or do you fear there will be compulsory redundancies?
  (Mr Hays) I think obviously the union would not countenance the idea that any members would be made compulsorily redundant but we are working with the employer on this point. We saw two or three weeks ago now the restructuring of the parcels arm of the Post Office so it is not one price rise and that will solve all the world's problems. We are restructuring the parcels business which involves a significant reduction of our members' jobs and, as I have said before, delivery restructuring. There are a number of other initiatives the Post Office has taken. We are working with the Post Office. The problem with Postcomm's proposals is exactly the wrong time these proposals have come when we are working with the business dealing with this £1.2 billion reduction in cost.

Sir Robert Smith

  234. Have you held any talks with your colleagues in mainland Europe who are working in privatised operations already who have been exposed to competition? What lessons could Consignia learn from their experience?
  (Mr Hays) I will ask Roger to come in on this in a moment. At the moment, the Post Office has got tremendous problems, but let us not forget—three years is a long time perhaps—18 years ago the Post Office was a world beater in Europe and provided a service with six days a week delivery, seven days a week collections. No other European country provided a similar service. Perhaps Roger wants to come in on that point.
  (Mr Darlington) The short answer, Sir Robert, is yes, we are very closely connected with all the other postal unions in Europe and indeed worldwide through an international trade secretariat called Union Network International, which is headquartered in Nyon just outside Geneva. We have paid particular attention to those countries which have already either partially or wholly liberalised. For example, Germany, which, as you have heard, has partially liberalised, is actually using the price-weight threshold unlike Postcomm. It has gone down to 200 grammes. It was not proposing to go beyond that but the Government has deliberately suspended any further reductions precisely to move at the same time as other EU partners. Experience from our trade union colleagues there is that the competitors are using part-time labour on a local basis, typically housewives, students, retired people, paid very low wages with no protection whatsoever. We are very familiar with the situation in Sweden. You have heard a lot about it, you have heard there is in fact very little competition. The largest competitor is actually Citymail which for the moment is majority-owed by the British Post Office. We have visited them and talked to them. They are not making any money at the moment, so it is not a good advertisement for competition. Neither is Swedish Post at the moment, which again is not a terribly good advertisement for competition. The experience we have had does not encourage us to believe that the benefits of competition are as overwhelmingly attractive as Postcomm is suggesting. Therefore it is not surprising we have concerns. In the case of Germany, staffing has been reduced by 20 per cent, in the case of Sweden it has been reduced by 30 per cent, in the case of New Zealand it has been reduced by 40 per cent, so when we are told that we should welcome this with open arms, you will forgive us for being slightly suspect.
  (Mr Skyte) I was at a meeting yesterday with unions from across all of Europe which cover postal services; in fact I have had two in the last couple of months. A lot of the evidence we have put into our submission to Postcomm comes from that experience, in particular drawing upon Sweden which is probably the only real model there is in Europe, but also wider than that. We have looked at what has happened in New Zealand and a lot of our evidence comes from there. The difficulty in trying to weigh up the European route as proposed by the European Commission and governments as compared to the UK route, is that the UK route is a leap in the dark, it is a leap of faith, and it really represents hope over experience because there is no experience. The difficulty is that it has been done on the basis of assumptions and calculations which we have heard about from Andersen's. We tried to get hold of those figures. Something may be on the website but the figures are not, and the figures are the key to it. It is a bit like having the football results without the scores. The figures are what everybody is interested in; the figures are key to it. We have not been able to get hold of them. Compared with elsewhere there is no real model to go on and the UK is really going to be a leap of faith in comparison with what other administrations, governments and regulators have done.

Mr Hoyle

  235. Mr Hays talked about success and Royal Mail being a world leader, the envy of the world. What do you put the failure down to; the present situation?
  (Mr Hays) Like all failure, it is a combination of things, is it not? There has been I think a failure in management, there has been a failure in the unions in terms of not recognising the changes that were on the horizon. In terms of the union/management interface, we did recognise something needed to be done. We could not go on in the way we had in terms of industrial relations problems, and under Lord Sawyer both the unions and the management sat down to try and sort out the problems, and we have had six months virtually strike-free in terms of local industrial disputes although we do have a bit of a problem at the moment on pay but it is on its way to getting sorted. The question of price rises certainly is an issue. There was the question of the Post Office having to bear the cost of the Horizon project, something in the region of £600 million. There was the forecasting of 6 per cent growth and it turning out to be 3 per cent growth. So there has been a combination of things which has led us to where we are now. I do not want to sound complacent because we recognise there is a need for change, and we are certainly embracing that change, but our concern with Postcomm's proposals is that they seem to have one route for that change, and that is if you open up the market, it will wake everybody up, so to speak. As my colleague, Peter, has said, the problem with their proposals is that it is a bit like squeezing the toothpaste out of the tube, once it is out, there is no going back. Once we have no monopoly in the UK in 2006, there is no going back, it is a completely liberalised market and that will damage the Post Office's finances greatly. So I think it is a combination of things, I do not think it is any one thing. I do not know whether any of my colleagues have anything to add on that.
  (Mr Darlington) I think we wasted most of the 1990s arguing about who should own the Post Office, and while we were arguing about ownership most other postal administrations were changing the context in which they operated, introducing more commercial disciplines. One of the ironies in the history of the British postal service is that we were one of the first to be separated from government, we were one of the first to be separated from telecoms, but we have been one of the last to introduce the commercial freedoms, and we have done it at just the point at which the historic high growth rates of postal volumes have significantly slowed down.

  236. Just for the record, I am a member of MSF. I think I ought to put that on the record.
  (Mr Skyte) There was also the uncertainty about the whole framework for the Post Office as it then was. We heard earlier in the evidence from Postcomm about the inability to invest, and they quoted some figures about capital machinery and so on. The best mail centres are leading edge but a lot of them are not that way. I am also new to the Post Office, I have only been here nine months, and I am trying to get out and about, and some of the major mail centres I have visited do not have the most up-to-date sorting equipment. Our view would be that the Post Office in the past has been used as a public piggy-bank by the Treasury, and it has not been able to invest over the long term and it is even more difficult now, and you can see that both on the Royal Mail side and on the Post Office network side where for the next five years we need to invest about £2 billion. If you go into any local post office, they are not exactly the most welcoming places in the world. There is so much which could be done to improve the revenue side, the income, if better use were made of some of those post offices; the largest retail estate in Europe. It could provide great benefits and community benefits but most of them are dingy and dowdy and they need investment and they are being starved of that.

Mr Berry

  237. I am also a member of the MSF, it is a very large trade union. Under the European Directive it is possible or likely that there will be full liberalisation by 2009. What the Postcomm proposals do, of course, is bring that to 2006. My question is what difference will the three years make? Do you believe that with the extra three years Consignia will have the opportunity of being able to deal with competition more effectively and if so why?
  (Mr Hays) Okay. My colleagues want to come in on this point. It is almost a methodology answer actually in terms of Postcomm's proposals. The key difference is that there is a review period under the European Commission proposal of 2006. It is a leap of faith, Postcomm's proposals, in terms of the liberalisation of markets. Of course it is interesting hearing the discussion about the backgrounds in terms of other utilities, if we can call the Post Office a utility. There are a couple of differences in terms of utilities and how you regulate utilities. I am interested in what is happening in California, for example, where the whole question of regulation, there is a big debate opening up about it is not one size fits all when you talk about regulation. One of our concerns about Postcomm's proposals is that they seem to be fixed on a model which says liberalisation is a method to price reduction. The key thing, Mr Berry, in answer to your question, is that there is no review period. If markets are being damaged in Europe with the gradual liberalisation of the European markets, there is a review period in 2006. Under Postcomm's proposals there is no review period. It is this leap of faith. As the proposals stand at the moment in 2006 there will be complete market liberalisation. Do you want to come in on that, Peter?
  (Mr Skyte) It could even be before that, could it not?
  (Mr Hays) Yes.
  (Mr Skyte) I think the key to it, in trying to match the two different routes up, is we are not opposed to competition, that is important to understand, but it is how competition is introduced and how quickly it is introduced. It ought to be a catalyst and not a cherry picker's charter. The difficulty is that under the UK route it will produce competition in a certain way and competition must provide benefits to all users, small as well as large, rural as well as urban and domestic as well as business. Clearly the proposals of the UK route are going to be aimed at bulk mailers and big business users, not even that big, I mean the 4,000 threshold, the CMA section of Amicus, which has 15,000 members, we will be over that 4,000 threshold in terms of mailings. You do not have to be a very big organisation to be over it. We think there will also be, and we have heard this talked about both by Postcomm and Consignia, a shift because in order for Consignia to compete it will have to reduce its prices in one area of the business and to increase in other areas. It goes under the business bingo lingo of rebalancing the tariff. Postcomm are certainly talking about that, Consignia are talking about that. What that means essentially is that domestic users may have to pay more. Essentially that was the Swedish experience coupled with the VAT question. They did introduce VAT in Sweden which is why stamp prices went up quite substantially. That is the possible consequence. It is how and how quickly competition is introduced which is the key.

  Chairman: Can I just make the point here before Mr Darlington comes in, Mr Skyte, I think the impression we got from the regulator this afternoon was that there would not be the scope for a differentiated pricing along the Swedish lines in the United Kingdom. I asked him about that because I was concerned that we could end up going down that road. The impression I got from his reply, and the text will tell us, was that postalised pricing will remain a feature of the liberalised market, there will not be a shifting of burden from one group to another.

  Sir Robert Smith: No.

Chairman

  238. In the way that you have suggested. It may be that for some people there may be lower prices but there will not be prices which will be hiked up in order to fund it. That was not the impression that they sought to give us. I may be wrong.
  (Mr Skyte) The impression I got, Mr O'Neill, was that they were looking to have differential regional pricing, which is certainly in Sweden. Certainly in discussions I have had with them and Consignia they are talking about rebalancing the tariff, that is the phrase that is used. There is already a difference of pricing, in fact, this whole point about the mail sorts, and so on, they are discount schemes which do provide a reduction to large mailers already within the current regime. There is already a difference in the pricing. Our view is that will be exacerbated by the proposals.
  (Mr Darlington) I want to come in, if I may, Chair, to give a little bit more detail to Mr Berry about why we are so much more concerned about Postcomm's proposals than the European Commission's proposals. The answer is in two parts. It is partly because of the form of the competition that Postcomm is proposing and it is partly because of the timing. If we take the former, you have heard that they are proposing to use bulk mail and stage one will be to open up bulk mailings of 4,000 plus and that this will take place in stage one, which will be two years. In practice it will not be two years, the two competitors you have interviewed today told you that they are not actually supplying any service under their interim licences because they are still discussing the detail. Once Postcomm has considered all its proposals and reached a view and published it, it will be open for licences. It will have to have a consultative period on those licences. The licensees will have to negotiate access prices with Consignia. There is no way this competition will come in in less than six months so stage one will be 18 months. We will then be into stage two where we are told that bulk mailings of between 500 and 1,000 plus will be open but there will be an additional element that people will be allowed to consolidate. I think Consignia have drawn your attention to the fact that could effectively open up the whole market. The form in which Postcomm are proposing is much less controllable than the price and weight and could in effect be much more rapid. The second point is the timing, and particularly picking up what Billy Hays said about the lack of review. You were told by Postwatch this morning, Gregor McGregor said to you that the reason they were so relaxed about the proposals was because they were so gradual, they were so staged, there would be three review periods, three review processes. There will not. Postcomm's proposals allow for one review process and the review process is not to see whether it should be slowed down but to see whether it should be speeded up. By comparison the EU will not move to full liberalisation until it has had a full review which will take account not just of costs and revenues but also of impact on employment and service. When they are satisfied there will be no threat to the universal service they will move to the last stage of competition. It is for those reasons, because of the very different form and the much more rapid timing and the lack of any comprehensive and open ended review, that we are so much more worried about Postcomm's proposals.
  (Mr Skyte) Just one other thing to add, and this is the famous level playing field which is under the UK model, Deutsche Poste, TPG, the Dutch post office, and possibly La Poste and other administrations would be able to enter the UK market but as currently proposed Consignia would not be able in the same way to enter the German, Dutch and French markets. You will get an imbalance.

Mr Hoyle

  239. I just wonder with the proposals what assessments have you made of the competition? Where will it bite and where will it affect operations and job losses within Royal Mail?
  (Mr Hays) In terms of where it will bite, maybe Roger could pick up that point. How it will affect, I think the general point is that it is going to impact on Royal Mail's revenues quite quickly. I was surprised at the comments made earlier on today on the price rise and the refusal to allow a price rise of one pence after five years of no price rises. It is going to affect Consignia's finances. We are looking at a company here that has to make £1.2 billion worth of savings. Now by anybody's reckoning, as John Roberts at this Select Committee made mention of the potential of job losses, this will just exacerbate the situation. We are at a turning point really in terms of the relationship between the union and the management. We are at a point where we are addressing those issues but there is the question of a price rise and the issue of lack of investment in the Post Office. Since 1988 all governments, of whatever colour, until the Postal Services Act saw the Post Office almost as a milch cow, £2 billion, £2.5 billion according to some commentators, it is a lot of money being taken out of the industry in recent times. Postcomm's proposals will affect the revenue base of the company and correspondingly impact on job losses. Can I say in terms of the Government, what concerns us greatly is that the Government does not have a view. Okay, what we are dealing with here is a strange beast, a public company regulated by a regulator, but the Government is the shareholder. I do not know of any other organisation that is a private company that has a shareholder that does not take a view. We would want the Government to take a view, and maybe this Committee could take a view, because that is a great concern to us, that there is no view from the Government on these proposals. They certainly will affect the revenue base with a potential for greater job losses. The other thing about these proposals is that people may make light of the European Union but what has been good, if I can put it that way, is the way the European trade union movement and the postal sector have dealt with these proposals, we have got agreement to move forward on a pan-European basis on these proposals.
  (Mr Darlington) What we do know is that these proposals are directed at bulk mail and the parts of the market which will be targeted are the parts used by business customers, so they will not benefit residential customers. You heard from Allan Leighton this morning that the margins on most mail is incredibly small, and you have heard from lots of representatives that the amount of consumer mail, household to household mail, is very small, so it is precisely the most profitable and fastest growing section of the market which is up for grabs. The Post Office in its evidence to Postcomm have suggested that up to £250 million of profit could be at risk. The truth is, we do not know. Mr Hoyle, you asked Postcomm directly where else has this model of liberalisation been used, and you were told the obvious answer, nowhere. If you had also asked, whatever model you use, you are proposing eventually to get rid of the monopoly, where else is there no postal monopoly, you would have only got three examples. Finland, where nobody has actually entered the competitive market place, so in theory there is competition but in practice there is not. Sweden, where there is minimal competition, but who wants to go to the edge of Europe to compete against Sweden Post? There are a few local competitors, none of whom are making profits, and Swedish Post is not. And New Zealand, and Deutsche Post is not going to go to New Zealand to compete. The main competitor to New Zealand Post is Pete's Post, which you may not have heard of, it is not the biggest multinational in the world. So we simply do not know what is going to happen when you open up the fourth largest postal market in the world, on the edge of Europe where you have the biggest competitors in the world, because the Americans are not competitors in this respect, they are restricted. Therefore for Postcomm and Postwatch to be so relaxed and so laid back when we simply do not know, and to have a deterministic model which means there will be no review except mainly to push it forward rather than back, is playing with fire. It is treating postal customers as a whole and this great public service in a cavalier way.
  (Mr Skyte) I think there are two other impacts. One is that our assessment is that the basis on which Postcomm are approaching this in terms of opening up the market for the first phase is actually inaccurate. Under their proposals there is a threshold of 4,000, but it will open up more than they have calculated. Our view is that it will open up, instead of the 30 per cent by revenue, 40 per cent by revenue, and instead of 40 per cent, 50 per cent. One of the things we are skirting around—


 
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