Examination of Witnesses (Questions 1
TUESDAY 11 DECEMBER 2001
1. Good afternoon, Mr Roberts. Perhaps you could
introduce your colleagues and we will get started.
(Mr Roberts) Thank you, Chairman. On my far right
is Paul Rich, who is the Group Managing Director, Post Office
Limited, the network of post offices. On my right is Marisa Cassoni,
who is the Group Finance Director. On my left is Jerry Cope, who
is the Group Managing Director, Mail Services.
2. I think we will just get right into it here.
This is the first time that you have been before the Committee
in this Parliament, Mr Roberts. I think it was our intention to
see you in the course of the year but we felt with the announcement
of the half year post tax loss of £281 million that it might
be useful to talk to you now and get a wee bit of a handle on
what may or may not be a worsening situation, so we can start
tracking it. I think when we saw you last the loss was only half
of that and at that time you probably had reasons for it. Could
you perhaps talk us through the reasons why the figures are so
(Mr Roberts) Yes. I think the last time we came the
Committee's report made the point that you were concerned about
sustainability of profits in Consignia and I think we agreed at
the time. We have been going through an enormous amount of change
since we became a plc. We have certainly been attempting to catch
up on some of the under-investment that happened in the 1990s
and some of those costs are flowing through. We have also had
the costs of something like £85 million each year for the
Horizon project, which again we debated very fully at this Committee,
and we have had continuing unprofitability in Parcelforce. The
biggest change that we have seen this year has been quite a dramatic
slowing down in the growth of the mails business. Last year we
were growing at something like six per cent overall in terms of
volume, this year that has dropped to about three per cent and
as a result our revenue in the mails business is something like
£160 million below the levels that we expected it to be.
I think those factors together have accounted for the operating
loss of £100 million. We have also had to impair under the
relatively new accounting standards our parcels assets because
of the continuing lack of profitability in Parcelforce and that
was the bulk of the below the line figure which then, together,
amounted to the £281 million loss that you mentioned.
3. Are you still making contributions to the
Treasury? Is that dependent on you?
(Mr Roberts) It is dependent upon us. What happened,
as you will well remember, was we went through the period when
we were contributing, certainly in the late 1990s, something like
a million pounds a day to the Treasury. As we moved into the White
Paper on the Post Office and then the Act, the dividend regime
changed. We now have a regime which is based on 40 per cent of
post tax profits going to the Treasury. That means that in the
past two years, dividends would have amounted to about £244
million. They are due to be about £70 million this year.
Together that is a perfectly acceptable regime. I do not think
any of us would query about the level of dividend being set at
that point. What we have raised with Government is going through
the kind of changes we are at the moment whether it is appropriate
for us to continue to pay that dividend at this time while we
are not profitable. Certainly I do not think we can complain about
the level at which the dividend has been set since the Act went
4. You were going to increase prices, the price
of a stamp in October, you have suspended that. Are there any
other price rises in the pipeline that you anticipate?
(Mr Roberts) We are looking very hard at price at
the moment. We have had one price increase in the last five years.
Currently our prices for first class mail are running about five
per cent below the rate of inflation and for second class mail
something like 12 per cent below the rate of inflation. We have
been trying to keep prices stable for a long time and the last
price increase about two years ago was the first one we had had
for some time. In the normal course, we would have been wanting
to put forward a price proposal this year but, as you mentioned,
the other big factor in our lives now, of course, is that since
the Act was passed we have also had the regulator. Under the terms
of the licence which the regulator has issued to us, which we
negotiated with him, for the basic first and second class mail
we have to make a case to him for any increase to him via Postwatchour
consumer bodyand the view that we were getting back informally
when we were discussing this in the autumn was that it was going
to be very difficult for the regulator to agree to any kind of
price increase in advance of understanding the levels of efficiency
that we are operating at. The regulator is currently going through
the detailed efficiency studies that are part of his remit and
I think those will be completed early next year. Certainly we
see price as part of the mix of solving the issues we have got
at the moment. I have to say that all of us have also been very
conscious that the service has not been as good as it should be
and we have been trying to weigh up the balance between getting
service right and then maybe looking at price increases as opposed
to just putting the price increase at a time when people may be
unhappy with the service anyway because the last thing we want
to do is to put more pressure on the volumes which, as I said
a few minutes ago, are already under pressure from the general
5. How much money do you think the failure to
secure an increase in the price of a stamp is going to cost you
in this financial year?
(Mr Roberts) In this financial year it is £96
6. Were you surprised when you had to withdraw
(Mr Roberts) I think we were disappointed. One of
the things that concerns me is that we are operating a Government
model which I think is unique, certainly in the postal world,
in the sense that we have got the full panoply of regulation without
being a privatised company and the regulator, quite rightlyand
this is what he has been asked to do in the Actfrom the
day that he took over has wanted to impose what he judges is the
absolutely right form of regulation. It has meant, also, that
basically it is much more difficult to debate a price increase
in advance of him getting stuck into, as I said, his efficiency
studies and then setting out a price regime, the kind of RPI minus
X pricing regime that we are familiar with from other utilities.
So I think we are disappointed because we are trying to go through
this change, as I say, not as a privatised industry but still
as a Government owned corporation with some slightly more freedoms
than we had two or three years ago but at the same time the form
of regulation is that which would apply to any privatised industry.
7. You are also planning to secure savings,
I think, in the region of £1.2 billion by April of the year
after next. How are you going to go about doing that?
(Mr Roberts) A lot of it will be to do with trying
to make our costs more flexible and changing working arrangements.
It falls into four or five main areas. The first is looking at
the way we deliver mail and the way we organise the delivery of
mail. The second is looking at some fairly radical changes to
our parcels operation, which have already begun, in particular
trying to involve far more what we call man and van, in other
words franchising some of the parcel routes either to our own
staff to run their own vehicles or, as we do already in a small
way, using external delivery people under our livery to come in
and do that. The benefit of that is the costs become much more
variable, you use the people when you need them, you do not have
full-time staff permanently on the payroll whether there is work
there to do or not. We are looking at all our transport arrangements.
This has been stimulated in particular by the performance of the
railways since the Hatfield crash and we have taken the opportunity
to look at rail, road and air. We are looking at outsourcing some
of the non-core activities and producing public-private partnerships,
which we have already done for our catering organisation, and
we are looking at the internal restructuring of all the normal
things that you would expect us to be looking at: the size of
group headquarters, headcount within the administration, all of
those things. Together those amount to just over a billion pounds
and, as you say, we are planning it over about the next 15 to
18 months so that we hit the financial year after next with that
kind of reduction in the cost base. We have set it at that level
because that is the degree to which we believe we are currently
more expensive than some of our competitors.
8. Some of the savings that you envisage securing,
have you now only got the freedom to do this? Why have you taken
so long to do what seemed fairly obvious things in a number of
(Mr Roberts) I think that in some cases we have been
negotiating them with the unions, particularly in Parcelforce.
In others, when for example rail was performing at the level it
should have been, which was 95 per cent timekeeping, we were reasonably
happy with that happening. We did not have the pressures on cost
base that we have at the moment because the revenues were higher.
It is really the state of the finances which have forced us probably
slightly more quickly than otherwise we would have done to tackle
some of these things.
9. That is not a very good excuse, is it?
(Mr Roberts) It is not meant to be an excuse at all,
10. The fact that you were making plenty of
money meant that you did not have to introduce what are really
necessary savings and new practices, that is what you are telling
me, is it not?
(Mr Roberts) No. We would not have done this at the
time because if we were making a profit, if our customers were
happy, and we were running at what we then thought was a reasonable
level of cost, because we were making profits, and you will remember
at some stages we were making profits of almost £600 million
in the year, I think that is one situation.
11. But not in Parcelforce: that was always
a drain, was it not?
(Mr Roberts) Not in Parcelforce. What we had to do
in Parcelforce, again, you will remember, is before we got to
this point we had to get some investment into the company so at
least we were operating on a similar basis to those people we
were competing with. Having done that in terms of creating a central
hub, creating the technology to track and trace parcels, what
we have also found is that we have got to go further than we probably
originally anticipated in actually getting this flexibility, variability,
into the labour cost in a way that we started to do but we had
to speed it up. We would have been doing this anyway but probably
not at the rate that we now have to do it against the background
of those finances.
12. Can I just take you back to the question
the Chairman raised with you about the price of stamps and your
disappointment that you did not get the price increase. Is that
not the old British Rail mentality: whenever they thought they
were losing money they put the price of tickets up and all you
did was drive more people away from using trains? Would it not
be the same to say that less people would use the service and
you would become even less competitive? You have got to get away
from these old ideas.
(Mr Roberts) I thought I actually made that point,
Mr Hoyle, by going on to say one of the things we were trying
to balance was that we did realise at the time that our service
just was not good enough and while I was disappointed in the sense
of the finances, one of the things that we had to put into our
calculations when we withdrew that application was whether we
were actually going to have an impact which was going to be worse
in the light of putting prices up rather than focusing on trying
to get the service right.
13. Would you not have been better thinking
that before you put the application in then?
(Mr Roberts) It is a balance, is it not? It is a balance
14. You shut the gate when the horse had bolted.
(Mr Roberts) Yes, but at the same time if we had not
had a price increaseWe have had one price increase in five
years, that is not exactly somebody using price at every opportunity
just to get out of issues by putting the price up. We are running
at some way below the rate of inflation and that, again, I agree,
is not a very strong argument to say you have got to have a price
increase but those were the factors that were involved.
15. Most people in fairness have actually reduced
prices rather than have been thinking of increasing them.
(Mr Roberts) As have we on second class mail.
16. As we have not noticed on first class mail,
if you would let me finish. We have not seen a reduction in first
(Mr Roberts) If we reduce price on first class mail
at the moment we would probably be in a worse financial state
than we are now.
17. Even though more people might use it?
(Mr Roberts) Yes, except that the trend is more people
are not using us at the moment.
18. How do you know the trend if you have not
(Mr Roberts) The trend without that is that we are
seeing a 50 per cent reduction in the growth of mail being posted.
I agree if you try to reduce it you may get some impact. What
we actually found when we reduced the price of second class mail
was that we did not get a massive increase in the use of second
class mail, we got a small increase. I think overall while we
thought that was right at the time, there is not any evidence
on the one example that we have used that it naturally stimulates
a great deal of use. I think, too, that against the background
of a 50 per cent reduction that we have seen in volume of growth
year on year, if we had done that it probably would have been
overtaken by the impact of the economy and we would have wasted
the money that we would have had if we kept the rates at the same
19. What is the advantage of having first class
mail when the service is not very good, you might just as well
expect the worst and buy a second class stamp?
(Mr Cope) The first class is actually getting better,
it has been consistently over 90 per cent for the last four or
five months. It is a better performance but still not good enough.
The reason why we have first and second class mail is to utilise
our machinery and equipment and buildings for 16, 17, 18 hours
a day, so we can process first class mail at night and second
class mail the following morning. It leads to a better, cheaper
unit cost service.