Select Committee on Trade and Industry Minutes of Evidence


Examination of witnesses (Questions 244-259)

MR DOUGLAS ALEXANDER, MR DEREK DAVIS AND MR MARK HIGSON

TUESDAY 7 MAY 2002

Chairman

  244. Good morning, Mr Alexander. I am not sure if it is accidental that we are meeting in the Thatcher Room this morning to discuss the Government as shareholder of the Post Office, but I think we will leave that to others to draw conclusions on. What we would like to explore with you this morning is the relationship between the DTI and Consignia as the sole shareholder because some of us are not really very clear. We read in the FT and other papers about shareholder revolts, we read about shareholders of other companies expressing views as to the salaries which should be paid—a whole range of issues—and we get the impression that the Government in its new role is perhaps not as proactive as some shareholders in other organisations might be, but to what extent do you feel that you should intervene as the sole shareholder in the affairs of Consignia? Are there parameters that you have been set as the Government? Have you agreed on this far and no further, then we come in with heavy boots on or is it to be always the right hand or can we mix metaphors like that?

  (Mr Alexander) First of all, can I thank you for the opportunity to give evidence before the Committee and perhaps it would be appropriate if I introduced my two colleagues. I have Derek Davis, the Director of the Business Relations Group within the DTI, who has special responsibility for postal services, and also Mark Higson who is a Director of Postal Services in the Department of Trade and Industry. To try and answer your point, Mr Chairman, there was really a new regime put in place as a result of the Postal Services Act 2000 and there has been a degree of independence between the Post Office and the Government for 30 years, but there was a recognition at that point, not least in the light of views of not only management, but also trade unions and many others, that there should be a greater degree of commercial freedom given to the Post Office, that a more appropriate relationship would reflect a greater degree of commercial freedom. That was informed in part by frustrations within management as to the ability to explore what were seen as development opportunities in the liberalising marketplace within Europe and across the world and also, I think, a concern to ensure that management were given the opportunity to manage the business effectively in terms of the opportunities that were available to them. So really I think the new environment post and the implementation of the Postal Services Act 2000 in which some of the old criticisms suggested that ministers were determined to micro-manage the business has now given way to some observations to the contrary, and I think in fact what we are aiming for is an appropriate relationship which reflects the reality of commercial freedom whereby management are able to run the business effectively and, on the other hand, recognising that the Government retains a clear role as shareholder in terms of the Postal Services Act.

  245. Could I perhaps ask Mr Higson a question here? Mr Higson, you are the Director of Postal Services. How long have you been in this job?
  (Mr Higson) Nearly two years.

  246. So you had the same job with the same name before the single shareholder status and afterwards. Is that right?
  (Mr Higson) Yes.

  247. Has the job changed much in that time?
  (Mr Higson) I have basically come in to run the shareholder relationship, so although I have experience of other nationalised industries, I do not have experience of running the old regime of the Post Office.

  248. How long was there a single shareholder status enjoyed by the Government? When did that start?
  (Mr Higson) We formally came into place at the end of March last year, but the Government effectively operated an arm's length shareholder relationship, anticipating that for the period before.

  249. So you had been in under, as it were, the new regime de facto and de jure?
  (Mr Higson) That is correct, yes.

Linda Perham

  250. Minister, it was confirmed in evidence by Consignia to the Public Accounts Committee that a significant proportion of Consignia's recent losses arose from its over-estimate of the growth in bulk and advertising mail volumes. Presumably, as sole shareholder, you approved their business plans. Did the Department have any misgivings about the projected growth in revenue or did it try to get Consignia to consider alternative methods with slower growth rates?
  (Mr Alexander) Yes, in essence, the business plan, as I recollect, anticipated growth in mail volumes of approximately 5 per cent and in fact mail volumes have grown by approximately 2 per cent which in part accounts for some of the difficulties that the company is facing at the moment. It is certainly the case that the Government approved the company's business plans over the last few years, although in fact that particular business plan pre-dated my arrival in the Department, but actually at the time that the Government approved that business plan, it muted serious concerns with some aspects of the plan and indeed questioned some of the assumptions on which the plan was actually based, although, as I say, that pre-dates my arrival in the Department.

  251. So if you had misgivings over it, what action could you or should you have taken?
  (Mr Alexander) Well, part of the challenge, consistent with the commercial freedom we have just been discussing, is to make clear to the management where there are concerns on the part of the owners, but actually to then make sure that management are judged by the capacity to deliver against the targets that they have set for themselves in the profitability of the business. I think one of the changes that we see over time will be a clearer transparency and recognition that the targets which are set— management will be held accountable by the Government as to whether they succeed or whether they fail in terms of meeting those targets.

  252. I am just not clear about your status as sole shareholder, how much you can push them if you feel they are going wrong, whether you can make suggestions to say, "We have misgivings and we think that perhaps you can try something else", but at the end of the day what can you actually do if they say, "Well, yes, okay, Minister," or to the Head of Postal Services, "we accept that you have misgivings, but because of the way things are set up, we will actually still go ahead and you will judge us on our results"?
  (Mr Alexander) To return to the specific example, as I say, it pre-dates my arrival, but my understanding though is that concerns were raised in terms of the anticipated rate of growth of the market. Some of the evidence that was brought to bear by management at that time reflected the fact that previously they had been correct in their estimation of the growth of the volume of the market. There had been a measure, as I understand, being used in terms of a particular proportion of GDP and the fact that mail volume kept pace with that and they prayed that in evidence in discussions with the Department in saying, "We have managed to succeed previously in anticipating the growth of volumes in the market". Obviously we expect management to recognise their responsibilities in terms of managing the business, but there is a significant transformation taking place across the business at the moment frankly, as you have heard in evidence before this Committee, relating to the fact that the quality of the management information that has been given to date has not been strong. Whilst, as John Roberts in his evidence made clear, the results and accounts have been sufficient to be audited, I think there is a separate issue in terms of the degree to which they could be used effectively in making those management decisions. In part, that is why we took steps last year around the same time as these discussions were taking place to actually strengthen the Board. One of the earliest appointments in doing that was Marisa Cassoni who was appointed as Finance Director and who is spending considerable force and a lot of time since her appointment trying to bottom-out the quality of the management information that is available and that has significantly broadened implications not just for the Government in terms of its position as shareholder, but it also affects the quality of the information that is made available to other stakeholders, for example, to Postcomm, but I think we are certainly alive to the issue of ensuring that the quality of information provided to us as shareholder is as robust as we can manage. It is a challenge for every business to seek to strengthen the management information that is available, so on that basis we have in place a process of work to try and strengthen the quality of information that is brought not just to our attention, but to others, in part reflecting the significant change that is taking place within the company from what was effectively a nationalised industry in which the quality of information within what really were discrete business units within the organisation was nothing like as strong as is required by the present position.

Chairman

  253. Is that not a criticism of the DTI, that if it was run as a nationalised industry and not just a state corporation, and there is a difference, and I thought from 1969 or so it had been run as a state corporation, that in fact the people who were responsible for overseeing it within the Department of Trade and Industry and its predecessor departments were asking the wrong questions and that this comes at a time when there were other state enterprises, for example, British Nuclear Fuels, who have undergone similar metamorphosis, though not quite as dramatic. Surely within the DTI this begs questions about the joined-up nature of departmental government, let alone inter-departmental government when it comes to profit centres, effectiveness of return on investment and the like, and that really we have been getting short-changed by ministers and civil servants for a long time in this area?
  (Mr Alexander) I think the change towards the strategic planning arrangements that were put in place by the Postal Services Act was a recognition of the need for different and distinct management information on which we would be able to scrutinise the conduct not least of the Board in terms of achieving those profit targets, but I think there was a recognition that there needed to be a strengthening of management information. There is a whole stream of work being taken forward by the Finance Director and indeed Allan Leighton, as Chairman, to ensure that information is available. I do think the information that was required, and I accept the point you make of course in terms of stakeholder information, but the information that was required was of a different nature from that which is now required, not least as is clear in terms of discussions that are taking place with Postcomm at the moment and, in that sense, there is a process of work on improving the quality of information available within the company at this stage, but frankly there is still a way to go.

  254. Really what I am trying to grope towards is that in the past the attitude was that by the comparatively transparent bookkeeping standards that the old Post Office applied in comparison with other state corporations, so long as it was making what was notionally a profit, nobody really bothered and so long as the Treasury got its haul, they were not fussy either. Is that rather a crude perhaps, but neat summation of it?
  (Mr Alexander) I think it is partially correct, certainly if you look at the broad numbers in terms of profitability, somewhere in the region of £20 million year on year in terms of Post Office Counters and if you look at the Royal Mail, which again was a historic figure, a profitable part of the business, and thirdly what had been the long-enduring difficulties for Parcel Force. There was a significant change that was required and I would really make two observations. First of all, I think in terms of previous governments there perhaps was not the attention to the quality of the management information systems which there might have been after the point at which the Heseltine proposals fell down. It seems to me that some of your observations are fair in the sense that the Post Office was continuing to make money and there were contributions being made to the Exchequer and, in that sense, I think there was a period of drift when apparently some of our foreign competitors were making significant advances both in terms of investment within the business, but also the quality of information that they could bring to bear in forming those decisions. I think in terms of the Labour Government post-1997—not least because there was a need quickly, as I think was reflected in this Committee's Report in 1998, to meet the challenge of introducing a greater degree of commercial freedom—there was a great deal of focus on the appropriate structure to the marketplace and what were the Government's arrangements that needed to be put in place. Certainly in terms of the initial review that was taken immediately on coming to power in 1997, that was reflected in the White Paper and a great deal of work taken through to the Postal Services Act 2000 and I think it would be fair to say that that was a major focus of the Department's work from1997 onwards.

Dr Kumar

  255. Minister, how confident are you that Consignia are going to deliver a good financial structure which calculates the real costs of different businesses and addresses the problems of excess costs? Would you say you are confident it is going to deliver and, if it does not, what will you do about it in those circumstances?
  (Mr Alexander) Well, there is a process of change under way in the organisation at the moment. I think in terms of effecting significant change within the organisation, the appointment of Allan Leighton as Chairman marks a significant advance to the organisation, recognising the particular challenges it faces in a liberalising marketplace and in the face of growing competition. I think that one of the clearest challenges that we have set, the Secretary of State for Trade and Industry and myself, for Allan Leighton is to make sure, first of all, that there is a gripping of the issue of costs where clearly you saw a position where with a turnover of approximately £8 billion in a very significant and complex organisation, you have seen costs not controlled adequately, not least in part because, as the Chairman observed, top-line numbers for a period disguised the fact that the cost base was not being gripped seriously. Allan is determined and resolute in his ambition to address that particular challenge, but at the same time making sure that he has available to him in terms of the decisions that are taken at Board level the quality of information necessary to make the best strategic choices. Another reason I would make in terms of, in part, why I think we have seen some of the difficulties that we have in recent years over Consignia, is frankly that there was a strategy which was to some extent anticipated in the terms of the Report of this Committee in 1998 which said that the Post Office was in danger of being left behind by its international competitors. Now, there were, therefore, acquisitions which took place and a strategic objective would be effectively a complete distribution company which involved international acquisitions and I think we have made clear to Allan Leighton that his principal challenge is to make sure that actually the market in which Consignia is operating, the domestic market, we have a strong and robust company capable of course of discharging its universal service operations in terms of its licence, but also returning to profitability.

  256. So you are confident that it is going to do that?
  (Mr Alexander) As I say, I am confident that we are taking steps that will be necessary to strengthen not just the leadership of the company, but also the financial results of the company because there are a range of issues where work needs to be taken forward and frankly the company has experienced very considerable difficulties which I do not underestimate before the Committee.

Chairman

  257. From what you seem to be saying, the priority is to get the books right and to show a profit. Would that be a simplification of it?
  (Mr Alexander) I think we would be keen to see the universal service obligation and service standards made as part of that description, but yes, I think focusing on the core business of Consignia would be probably the principal challenge that Allan Leighton is advancing at this stage.

  258. Is increasing the price of the stamp to inflate the revenue and, therefore, perhaps create profits an attractive way of doing that?
  (Mr Alexander) Clearly consistent with the changes I have described in terms of the Postal Services Act, the responsibility for determining whether stamp prices rise rests with Postcomm and it would be for Consignia, and obviously Allan will have a key role to play in that in determining whether an application should be put in for the prices to rise. It is certainly the case that, by comparative standards, the price of our first and second-class stamps is more than in many of our European countries and the determination of whether prices will actually rise or fall will first of all depend on whether or not an application is put in by Consignia and then by the determination of the regulator.

  259. So you, as the shareholder, the protector of the public interest, have no views on this subject?
  (Mr Alexander) Well, we have put in place a mechanism whereby if Consignia seeks a rise in the price of stamps, then a determination can be reached; and in that sense it returns to the point that we were making previously in terms of the quality of information to be able to make a case which is convincing to the regulator and which will clearly affect the decision that the regulator reaches; but one element of the package that was put in place as a result of the Postal Services Act 2000 was that it would not rest with ministers to decide whether to raise or cut the price of stamps, but actually it would be a decision taken by the regulator.


 
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