Select Committee on Trade and Industry Minutes of Evidence


Examination of witnesses (Questions 260-279)

MR DOUGLAS ALEXANDER, MR DEREK DAVIS AND MR MARK HIGSON

TUESDAY 7 MAY 2002

  260. So you, as Minister, would be a spectator, you would have no power of veto, you would have no power to influence the matter whatever and you would not be consulted by the regulator before he took a decision?
  (Mr Alexander) Well, it is certainly the case that there is both at official level and ministerial level informal contact with the regulator and that recognises of course the influence of his role. I suppose the comparison I would draw would be the fact that I would regularly both informally and formally meet with David Edmonds, the Director General of Oftel, and in that sense, consistent with his responsibilities as an independent regulator, it is entirely appropriate that the Government maintains a dialogue with the regulator and so similarly of course there will be discussions and indeed I met Graham Corbett last week.

  261. But you do not have a power of veto? That is what you are saying?
  (Mr Alexander) The power actually rests with the regulator, consistent with the 2000 Act.

  Chairman: That is helpful for the record to get that right.

Mr Hammond

  262. You said just a few moments ago in response to a question from the Chairman that one of your objectives was to ensure the maintenance of the universal service obligation and to maintain services. Those are two different things. As competition bites and the nature of Royal Mail business changes, would you be prepared to see Royal Mail's operations reduce to the level of the licence, that is to say, one collection a day from each postbox and one delivery without any commitment to the timing of that delivery?
  (Mr Alexander) I think in terms of the comments that I made in response to the Chairman's question when he asked what were our ambitions, I said it would be appropriate to mention the service standards. We have put in place a mechanism in terms of the Postal Services Act 2000 to ensure that consumers' voices are heard. Indeed one of the major innovations of the 2000 Act was the fact that POUNC which, I think it would be fair to say, were felt not to be an overly powerful body in speaking up for the interests of the consumers, would see its role strengthened in the establishment of Postwatch and, therefore, it is the case that we have recognised the importance of service standards by ensuring that there is a body which can speak specifically for consumers' interests in these matters which is Postwatch and they clearly have views to give. Perhaps I am anticipating your questions, but I think it may underpin questions of a tailored delivery. Would that be correct, tailored delivery in terms of the whole of the second delivery?

  263. Well, perhaps the first question, to put it clearly, is: are you prepared to see Royal Mail's service reduced to the minimum level stipulated in Consignia's licence?
  (Mr Alexander) Well, I would argue that, consistent with the environment that is emerging, one of the principal strategic objectives of Consignia would be to ensure that the standards of service that it is able to offer its customers are superior to that of competitors. In that sense, I do not see your question as being isolated from the general issue of a set of standards. Of course, given the nature of Consignia's business, it will want to offer excellence in its service to customers and on that basis of course we would support that issue and we would like to see the quality of service that is offered improving and we believe that competition has a role to play in providing the kind of discipline for innovation, for cost, for a range of other factors which will actually allow it over time to offer that quality of service.

  264. Of course you would like to see better services offered and we understand that, but are you prepared to accept that as a result of the competitive pressures being placed on Consignia at least in some parts of the country, they may be required to reduce the level of their operations to the minimum stipulated in the licence? Is that something you are prepared for and something you anticipate?
  (Mr Alexander) Well, I would make a couple of observations. Firstly, we regard it as being important to get hold of the cost base of the company because clearly what could impair the standards of service over the longer term would be if it was thought sustainable to have a business of Consignia's to be losing £1.5 million a day, so we do recognise the importance of management showing initiative and taking the decisions necessary and putting the organisation on a firm financial footing. In terms of what would be the service standards offered to customers, then clearly in terms of the licence that has been granted to Consignia by Postcomm, those are standards which are set out there and clearly there could be circumstances in which that licence could be breached, but that then would be a matter clearly for Postcomm to say in terms of the available remedies. With particular products being offered to the marketplace or indeed the services which are being offered we recognise as being operational issues for management, so when, for example, they say, "We want to run pilots to establish whether it is possible to reduce, for example, the second post", or recognising that it is perhaps possible for small businesses within the locality, then we think it is entirely appropriate that those pilots are taken forward to investigate what actually is the evidence.

  265. Well, we are not talking about a breach of the licence, but we are talking about a reduction of services to the minimum required in the licence and you are prepared to accept that?
  (Mr Alexander) I think it is quite clear that we regard service values as being an important element and it is in fact established that the regulator actually sets the standards in terms of the licence and, as shareholder, we actually clearly want the company to be both profitable and successful and one of the key drivers of that profitability and success will ultimately be the standard of service to the customer.

  266. If the result of competition was to make the delivery of the universal service uneconomic for Consignia, what would the Government's reaction to that be? What would the Government do?
  (Mr Alexander) Well, the principal duty of Postcomm, as established under the 2000 Act, is the maintenance of the universal service and it will, therefore, be one of the key determinants of the judgment that is reached by Postcomm to ensure that the manner in which competition is introduced does not result in a position whereby the universal service cannot be delivered.

  267. And if that were to happen, the Government will step in?
  (Mr Alexander) Well, it is clearly a matter for Postcomm at this stage to reach its deliberations, cognisant of its responsibilities and consistent with what I said to the Chairman and, having met Graham Corbett last week, one of the points I was keen to emphasise at that meeting was that he be alive to the reality of his responsibilities, which are to improve the standards of service to the customers with competition, but also recognising the foundation of course of what is his principal duty which is to retain the level of service.

Chairman

  268. Why did you say that? Let's face it, he goes to bed every night with that above his head, he wakes up every morning with that facing him, he goes to work and it is lying on his desk. Did you tell him because you thought he had forgotten?
  (Mr Alexander) No, I think it was entirely reasonable, given what I described as the role of the Government previously, in what was a broad-ranging discussion to be clear as to what I held to be a view that was an important one. We are in a position where clearly there is a great deal of—

  269. But you did not just say it as an alternative to "good morning". Are you suggesting that the proposals that he was bringing forward were worrying you in the way that they were worrying other people?
  (Mr Alexander) No, I think it would be fair to say that where I had a degree of concern was the apparent disparity of the evidence that was being brought to bear in those discussions between Consignia in terms of the management information that was being provided and the evidential basis for what were the original proposals that were announced at the end of January. I was keen to impart to him that it was necessary to ensure that there was a constructive and important dialogue not least between Consignia and indeed others and the regulator itself during this period of consultation to ensure that what will be significant decisions that are reached by the regulator reflect a common view in terms of the effect of those proposals because if we were to see a position whereby decisions were being reached without the evidential basis, then that obviously would not be something that anybody would welcome. In that sense, given the degree to which not least in the public domain there have been suggestions on, for example, the effect and scale of opening as anticipated in the first tranche of liberalisation by the regulator those numbers being disputed by Consignia, I think it is entirely appropriate to suggest that there needs to be a constructive and important dialogue between the regulator and those people providing the figures.

  270. Did you say the same to Consignia because I recall that after the regulator produced his findings there was hysterical stuff—45 pence for a letter to go from Islay to London? One does not always believe everything that The Mail on Sunday says and sometimes they are advised by other people, but the fingerprints of Consignia seem to be all over it. It did seem at one time that Consignia were running around like a headless chicken on this issue. Maybe it is different now that there is a head there in the shape of Allan Leighton, but are you even-handed in the way you deal with all of them?
  (Mr Alexander) I think you have made a fair observation. I assure the Committee that it is entirely coincidental with my appearance before the Committee today, but in the space of the last week I have met with Graham Corbett, with Allan Leighton and also with Gregor MacGregor of Postwatch, so I have covered all the bases in terms of discussions in the last few days. The sequence of meetings was first of all with Graham Corbett and, as I say, I was keen to impart to him the importance of making sure that there were constructive dialogues taken forward with Consignia. There was information, which he shared with me at that meeting, which he was still awaiting from Consignia, so I took the opportunity subsequently to Allan Leighton to make clear to him exactly the point that was made, that this involves both sides and it is very important that if there is further information which is within Consignia's gift, that is shared at the appropriate moment of making decisions which Postcomm is actually reaching. As I understand it, there has already been a formal submission given to the regulator by Consignia and there is a further presentation that Consignia anticipate making to the regulator itself, but I was keen, consistent with your view of being even-handed, to impart to the Chairman that it was important that in advance of that presentation to the commissioners, that where information is held which would usefully inform the deliberations of the commissioners, that be handed over with all speed.

  271. As a historian, you will be aware of the relationship between regulators and the regulated and the transmission of information has not always been that of full and frank exchanges.
  (Mr Alexander) No. I think that is a fair comment and again perhaps I could draw on my experience with the telecoms sector with my e-commerce hat on, which is to say that in some ways, from my limited experience of dealing with companies interacting with regulators, it would seem that one of the quickest ways to effect change is to see a change of leadership in terms of interaction with the regulator. I think in exactly the same way that on some of our discussions about broadband there had all too often been rather a sterile interchange between the company and the regulator and a great deal of effort put in place by some previous incumbents to try and stifle the regulator in their work, if you have the more forward-looking approach which recognises the reality that competition is coming and, therefore, to have a constructive engagement with the regulator is the way forward, I am glad to say I see that approach being reflected in the appointment of Allan Leighton.

  Sir Robert Smit

  272. When Mr Leighton spoke to us, he felt it would not be until the end of the year before they would have proper information to actually understand the business. Earlier you said that there was a need to improve information and that there is a long way to go. Do you think in a sense the regulator is operating in an information vacuum and it would be better if we were actually six months further on with the proper information available so that he could make a serious judgment of the issues?
  (Mr Alexander) I am of course aware of the evidence that Allan Leighton gave to you when he indicated that it would be about twelve months before he felt he could with confidence speak of the information in terms of its utility as a management tool. We certainly are keen, as always, to see that work carried on and I would pay due credit to Marisa Cassoni, as the new Finance Director, who has already undertaken a huge amount of work, but I think, for example, when you consider that this is an organisation that emerged with its establishment as a plc with 14 business units, I think there are reasonable questions to be asked of management in terms of their capacity to actually collect information, and when you speak to Allan Leighton in discussions with him, he says that actually there is a surfeit of information within this organisation and it is actually whether it is the right information or useful information that can actually allow the business to be managed effectively. To return to your substantive point about the regulator, I certainly think that is a matter on which the regulator will have to think long and hard in terms of the information available to him and I made clear in the discussions that I had with him that the evidential basis on which, for example, the Andersen model was being taken forward, clearly the quality of the information is of importance, but given his own position in terms of being clear as to the terms and responsibility, I am sure that is something he has given much thought to as the proposals are considered.

  273. In the light of that report, he seemed very reluctant to see any delay because of evidence. Do you think the public will understand that because surely we are on the one-way ratchet? One option is six months' delay in starting the ratchet to make sure it is on the short-plan basis, but even then as he is going down the road and then finds the evidence does not stack up, people will be concerned?
  (Mr Alexander) As I understand it, the regulator's concern is to avoid a situation where there is a perverse incentive on the company which is, "If we don't sort out our management information systems, we can delay the advent of the proposals". In terms of what discussions I have had with the regulator, I have made clear that where there were significant disparities in terms of the information being provided by Consignia to the regulator, it was important that those discussions take place now so that he could speak with confidence to the final proposals which actually emerged and, in that sense, it is a clear challenge for those parties involved to ensure that there is a constructive dialogue in the way that there clearly has not always been in the past to make sure that those discussions can take place on the basis of certain evidence.

  274. In your answer to Mr Hammond though, to the question he put to you about what the Government would do if the result of other competition was to make the universal service obligation uneconomic, you seemed to put all your faith in the fact that this was not going to be a problem that could ever come before you. Do you not feel though that the public would be more reassured if there was some kind of safety net there so that they did not feel that things were just being left to pure faith in that one way would work? When we met with the European Commission, they told us quite clearly that certainly it would be within the power of government to legislate to allow the regulator to levy other providers to ensure that the universal service obligation did not become uneconomic. What reason does the Government have for not allowing that?
  (Mr Alexander) I think, if I understand your question properly, there are really two issues. One is the terms of the Postal Services Act 2000 where there is not provision for the compensation scheme, although I understand that in terms of the European Directives of 1999, it would be possible for there to be a statutory instrument effecting a compensation scheme put in place. The view that was taken, I understand, by government at the time of the passage of the Postal Services Act 2000 was that power would not be necessary and whilst technically there is provision for a compensation scheme to be legislated for under the European Communities Act 1972, that is not something we are anticipating and it was not an issue that I was discussing with the regulator. I was making clear to the regulator that their responsibility was to ensure that they delivered an outcome which first of all, consistent with their primary duty, protected the universal service.

  275. But is there any reason you do not want this power to exist, if necessary?
  (Mr Alexander) Well, I would be very keen not least in the midst of a consultation undertaken by Postcomm not to suggest that somehow they could make decisions that they were not entirely confident about, sure in the knowledge that the Government would be prepared to step in with a compensatory levy on other parties or anything else. I would be much keener, and this was reflected in my conversation with the regulator, with Graham Corbett, to be clear to the regulator that we recognised that there are decisions to be reached by the regulator, but equally we are clear as to where the principal duty rests to uphold the universal service obligation as outlined in the Act, which is with Postcomm itself.

  276. Clearly for many of us with a rural constituency what is at the heart of this dispute between the regulator and the consumer on this information basis is the costs of providing the universal service obligation and the dispute really about whether rural deliveries are more expensive than urban ones. Is that something you would have a view on?
  (Mr Alexander) I am certainly sighted on the disparity which exists in terms of the NAO Report, Postcomm's own view and a far higher figure emerging from Consignia in terms of what would it cost, which is again why I sought to emphasise to the regulator that it was very important that there was a clear evidential basis for the decisions that are being reached. One of the difficulties, I think it is fair to say, and I think this was reflected in the evidence provided to the Committee by Marisa Cassoni, and please forgive me, this may be an impolitic point, but I cannot actually recollect whether it was to the PAC or to the Trade and Industry Select Committee, but she made clear that this is indeed a complex view actually to reach not least in terms of how you cut the costs, whether that is by geographies, whether you take a more traditional view which is that actually density of population, distance between delivery points and the weight of the mail is an appropriate metric to use, or alternatively you take the view of Postcomm, which I think is reflected in the view of the NAO which is actually that the principal cost accrues from handling. Now, in that sense, we have not commissioned independent work because we do not want to replicate and second-guess the work of the regulator while there is a process under way, but certainly we made clear that there were significant disparities between the view of Consignia and the published views of Postcomm at the end of January and that it was important that constructive discussions were taken forward on that view as well as others.

  277. Did you really think that before we go to the point of unleashing the competition, this has to be thrashed out to the point where there is a common understanding of the cost of rural services?
  (Mr Alexander) I have consistently urged the regulator in terms of the discussions that I have had to ensure that the commissioners are confident of the evidential basis on which they are offering proposals forward and, equally, consistent with what I just said to the Chairman, I have been clear to Consignia that given that the responsibility for upholding the universal service rests with Postcomm and they are reaching significant decisions, it is very important that there is a constructive and engaging dialogue between Consignia and Postcomm on this matter.

Richard Burden

  278. You have mentioned, Minister, that you met the regulator last week. Do you meet the regulator frequently?
  (Mr Alexander) Officials meet with Postcomm, and I think it probably depends how one defines "frequently", but it was not the first meeting we have had and we have met during my time in office, yes.

  279. So how many meetings have you had with the regulator?
  (Mr Alexander) Perhaps I could send you a letter. I do not know the exact number.[1]


1   Note by Witness: Since I took up my post, I have met with Graham Corbett on three occasions. Patricia Hewitt was also in attendance at one of these meetings. We have also both had several telephone conversations with the regulator. Back


 
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