Conclusions and recommendations
Timing of liberalisation
1. The
evidence that liberalisation delivers an improved service for
customers is compelling. However, we regard Postcomm's choice
of dates for the move to full liberalisation in the UK postal
services market to be an untimely one—not because we believe
that Royal Mail will be unfairly disadvantaged against other operators,
as we have faith in the competitive strength of the Royal Mail,
but because Royal Mail has also been asked to prepare for competition
at a time of great commercial uncertainty. Postcomm is reviewing
the price Royal Mail can charge for its regulated services and
the company also faces huge challenges in addressing its pensions
deficit and investment needs. Although the review process is now
nearing conclusion, we believe that the difficulties for Royal
Mail have already been caused. (Paragraph 21)
2. An increasing number
of EU Member States are committing to full liberalisation before
2009. The DTI told us that the "Government continues to press
for full liberalisation across Europe to happen as soon as possible".
We strongly support the Government in this approach and we recommend
that they continue to push this point to provide Royal Mail with
the level playing field it requires. (Paragraph 22)
Maximising the benefits of liberalisation
3. Postcomm
already informally collects evidence of quality of service targets,
and performance against those targets, for each EU national postal
operator. We believe that this information should form the basis
of a formal set of EU-wide statistics which should be produced
in an independent, consistent and robust manner. (Paragraph 39)
4. Few of our witnesses
disputed that the arrival of liberalisation had served as a catalyst
to drive through positive changes in Royal Mail. These changes
have benefited users, the Royal Mail and shareholder, (the Government)
alike. We are aware that data on Royal Mail's quality of service
are already published and that Postwatch and Postcomm have started
discussions with other licensees to ensure that similar data for
them is published. We recommend that comparable quality of service
and complaints data should be published to inform users of the
comparative merits of all postal service operators in the UK.
(Paragraph 40)
5. We believe that
Postcomm has to remain vigilant that the quality of such statistics
is not compromised by the licensee that provides them. One way
this could be achieved would be to require new operators to have
their quality statistics independently audited by an appropriate
body, such as Postcomm, or the Office of Fair Trading, to be decided
by the Secretary of State. (Paragraph 41)
Royal Mail's VAT exemption
6. We
do not want to see stamp prices increase owing to the imposition
of VAT on postal services, because of the impact on those users
who are not registered for VAT, especially, but not exclusively,
private individuals. We understand Royal Mail's competitors' arguments
of unfairness because of Royal Mail's VAT exemption, but also
note that it has the unique requirement, and costs, of a universal
service obligation. Moreover, we are sceptical that the UK Government
would be able to secure derogation in the EU for a lower than
normal rate. (Paragraph 52)
Definition of the Universal Service Obligation
7. The
definition of the products which should be included in a universal
service is particularly vague in the EU Postal Services Directive
and Postal Services Act 2000. What is encompassed in the UK's
universal service is a matter for negotiation between Postcomm
and Royal Mail but we believe that the products included in the
universal service should not be unchanging, especially as postal
services will evolve over time. (Paragraph 76)
8. We recommend that
Postcomm should continue to monitor and review the products included
in the universal service, taking account of users' changing needs
and the new types of postal service products offered to the market.
The universal service is rightly valued as a public service, especially
in remote rural areas. Therefore, Postcomm should also have regard
to the views of the Secretary of State, and, through him, of the
Government, on what the definition of a universal service in the
UK should be. In particular, we emphasise that a 'universal service'
is not worthy of the name if it allows for any geographical exemptions.
(Paragraph 77)
9. The majority of
our witnesses told us that opening up the UK postal services market
to competition would pose no immediate threat to the universal
service and we agree with this. However, the regulator must remain
vigilant to ensure that greater competition in the postal services
market does not come at the cost of the universal service. This
is, after all, the regulator's statutory duty. (Paragraph 78)
10. It is too soon
to tell if falling mail volumes are a temporary blip or a change
in trend. Unfortunately, due to its choice of timing, the regulator
cannot wait to find out before setting the price controls. However,
we note with confidence that in its amended price control proposals,
Postcomm has allowed for the possibility of an automatic price
adjustment should mail volumes fall short of its forecasts. (Paragraph
79)
11. We are also happy
that there is a further 'safety net' possibility of a universal
service compensation fund which would require other operators
to contribute to the costs of providing a universal service, if
it were in jeopardy. However, in our opinion the fund would almost
inevitably come too late. Therefore, we recommend that a mechanism
for an early price control review be put in place by Postcomm
as soon as is reasonably practicable to avoid the universal service
being jeopardised in the first place. (Paragraph 80)
Review of Price Controls
12. We
welcome Postcomm's amended price control proposals, which we understand
are based on an agreement between Royal Mail and Postcomm. We
note that there has to be a further three month consultation period
but look forward to the adoption of proposals broadly in line
with the current agreement. (Paragraph 121)
13. We agree with
Postcomm that RPI-X is the best available methodology to use to
set Royal Mail's future postage service price caps as it has proved
successful for price setting with other incumbent monopolists
in the past. In its amended proposals, published on 7 December
2005, Postcomm agreed with Royal Mail on a value for X of three
percent, as it originally proposed. (Paragraph 90)
Pension Fund deficit
14. We
agree with Mr Leighton, Chairman of Royal Mail, that the pension
fund deficit is "such a big hole that it has got to be dealt
with in some way, shape or form" but there has been insufficient
time during this inquiry to investigate the pension fund deficit
in sufficient detail to come to firm conclusions about the responsibility
for the deficit. For example, we were unable to ascertain with
any degree of certainty the reliability and robustness of Royal
Mail's estimate of its future pension cost liabilities. We may
wish to return to the question of the Royal Mail's pension fund
deficit at some point in the future, once Postcomm's price control
proposals have been enacted. (Paragraph 107)
15. Postcomm has acknowledged
the extent of Royal Mail's pension fund deficit and has made an
allowance in its revised price proposals of an average £320
million per annum. We understand Postcomm's acceptance that at
least some of the pension fund deficit should be funded by users
through higher postage prices. However, we consider that in principle
the pension fund deficit should also be funded by the other main
stakeholders: the shareholder, through a continued commitment
to take nil-dividends; and Royal Mail itself through greater management
efficiencies; and through improved management of the pension fund.
(Paragraph 108)
Capital investment
16. Postcomm,
in its initial proposals for the price controls, had already taken
account of Royal Mail's need to make pension fund contributions
and invest in new capital operations. Postcomm believed that these
should be paid for by the consumer, and through some efficiency
gains by Royal Mail, and in its original price control proposals
allowed Royal Mail an investment of £0.8 billion for new
capital operations. In its revised proposals, Postcomm has acknowledged
that this figure was underestimated and has agreed a new total
of £1.2 billion. We approve of this increase but do not believe
that the customer should be the only stakeholder made to pay.
(Paragraph 119)
17. The lack of investment
in Royal Mail's infrastructure has been due to decisions made
by Royal Mail's management and in particular its shareholder over
the last twenty years. The Government, as the lone shareholder,
has received over £2,300 million in dividends (or—prior
to 2001—the External Financing Limit) from Royal Mail since
1984. However, these dividends have been waived since 1999. We
recommend that the Government extends the current period of nil-dividend,
not only to ease Royal Mail's pensions deficit as previously recommended,
but to enable Royal Mail also to invest in its network. (Paragraph
120)
18. The CWU does not
believe that the existing mechanisms for re-opening the price
control in the event of price shocks or other unforeseen events,
which Postcomm is proposing should be retained, are fit-for-purpose.
In particular, it is concerned that in Postcomm's price control
proposals the scope for capital investment will depend entirely
on whether Royal Mail is able to make a profit, and any fall in
profit would stop much-needed investment. We recommend that a
robust mechanism, similar to that in our earlier recommendation
for protecting the universal service, should be put in place to
allow for the re-opening of the price control sufficiently quickly
to address any problems which could develop in this area. (Paragraph
118)
Future ownership of Royal Mail
19. Whatever
view this Committee were to take on the full privatisation of
the Royal Mail at this time—either as a solution to the
pension fund deficit or with the longer term aim of increasing
investment to enable it to compete with the new companies that
will enter the UK market following full liberalisation on 1 January
2006—we recognise that this Government has a manifesto commitment
to keep the company in the public sector. (Paragraph 130)
20. It would be consistent
with this commitment, however, for a part of Royal Mail's equity
to be separated from the current shareholder in the future as
a tool to motivate Royal Mail's workforce. However, the explanations
offered to us by Royal Mail's current management are far from
complete and no coherent process for how these shares would be
transferred or traded has been given. If Royal Mail's management
still wish to pursue commercial ways of motivating their employees
we believe there are less controversial ways to do this such as
the current profit sharing scheme. We are sure that we will be
revisiting the subject of Royal Mail's ownership in the future,
as well as its pension fund deficits. (Paragraph 131)
The DTI
21. We
are disappointed that the DTI has failed to provide supplementary
information, which the Minister had agreed to send us in his oral
evidence, in good time. This has made the task of completing our
Report unnecessarily difficult and we hope that this will not
set a precedent for future inquiries. (Paragraph 51)
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