rose to call attention to the case for a government policy towards the Royal Mail which best reflects the national interest in all respects; and to move for Papers.

My Lords, at this early stage I ought to declare an interest. Normally when I speak about the Post Office, I simply say that I am a former postman and very proud of it, but I ought to expand on that. My association goes back to the age of 14 when I joined as a telegraph boy and went through until April last year. That is almost 60 years of continuous involvement with the Post Office as an employee, a union representative and a trustee of the pension schemes. I just wanted to put that on the record because my concern is not one in the normal political sense. It is driven by a desire to try to protect a very valuable public service that has served this nation of ours for so long.

May I say why I consider that questions should be put to the Government and answers provided—not just to the House but to the public the Post Office seeks to serve? The first question must be this: do the Government believe that the Post Office is a publicly owned organisation that has a responsibility and duty to provide an efficient service to every household and business in the United Kingdom?

When the Government announced their plans for the reform of the Post Office in July 1999, many interested people, myself included, thought that at long last after years of neglect, lack of investment and interference, efforts were going to be made to tackle some of the difficulties that the Post Office had been faced with for such a long time. The leaflet issued by the DTI at the time was informative. It set out a statement from the DTI and talked about,

"creating a world class service for the 21st century".

Some noble Lords will remember this wonderful document. The announcement was described as a "visionary statement" and the then Secretary of State said:

"We will maintain your existing postal services . . . We will improve postal services for all customers through greater choice, better quality and falling real prices . . . We will support a Post Office network which ensures you have access to public and private sector services . . . We aim to ensure the UK Post Office can compete in the fast-moving domestic and international postal market".

The Secretary of State went on to say that he would,

"establish clear and accountable relationships between the Government, the Post Office, the regulator and POUNC"— the Post Office Users National Council, later replaced by Postwatch. Any examination of what has happened since that visionary statement was made by Stephen Byers shows quite clearly that the vision has not been realised. Perhaps the débâcle of the costly and completely unnecessary creation and destruction of Consignia caused some blurring of the Government's vision.

When this House debated the Postal Services Bill in May 2000, I repeated what I said in my maiden speech in December 1998. My view then, and it is unchanged today, is that the freedoms referred to in the Bill—commercial freedom; freedom to borrow and invest; freedom to enter into acquisitions, joint ventures and strategic alliances; and freedom to allow the workforce to share the success of the Post Office—would have been possible without the need to create a plc. The evidence bears that out.

Any debate about the Post Office, Royal Mail, the Counters and Parcelforce Worldwide would be lacking in content if due recognition was not given to what has been achieved by implementing the strategic plan that has been executed by the Post Office board over the past few years. That achievement has been made at a cost of reduced numbers of deliveries, later deliveries and 33,000 jobs lost between March 2002 and March 2005. It is a record of achievement—it is also a record of job losses and reducing services.

The achievement was assisted by the limited changes in pricing policy which were late in coming and, in my view, are still inadequate. They are nowhere near the levels charged by most, if not all, other postal administrations in Europe. A situation of limited resource has resulted from decades of under-investment. The situation is compounded by the under-pricing for the service it has to provide for its competitors—those organisations that, as confidently predicted by not only myself but others, would cherry pick from business customers. They are allowed to collect and sort 4,000 items or more and then put them into the Royal Mail system. Not for them the collection from street pillar boxes; not for them the requirement to deliver a universal service to the 27 million addresses in this country, a figure which is likely to arise by another million by 2009. For the benefit of this cherry-picking, they pay 13p per item. We are told, and no doubt will be told again, that the whole question of tariffs and pricing is the responsibility of Postcomm, the regulator. I was going to quote its remit, but I see that time is racing by, so I shall simply say that Postcomm is supposed to look after the public interest and to provide an efficient service. It opts out of any suggestion that it should make recommendations about closures of offices, whether in rural or urban areas.

The approach by Postcomm, supported by the Government, is that Royal Mail directly subsidises its competitors, who make no contribution to the necessary support for the unprofitable parts of the business that arise from the universal service obligation. In effect, Royal Mail carries the cost of maintaining the infrastructure required for the obligation. At the same time it has to lose volume to the cherry pickers. My view, which is shared by many others, is that the regulator has misinterpreted its remit and seeks to undermine the Post Office and promote the interest of Royal Mail's competitors at the expense of Royal Mail.

I am not alone in my concern at the way that Postcomm operates. During the past couple of days I have learnt of the concern of the magazine industry, which I would not normally be in touch with. It is concerned about recent recommendations in connection with the posting known as Presstream 2, the service which will have its regulatory protection removed from price control from next April. This, in the industry's opinion, will lead to discrimination between one level of traffic and another, and Postcomm is directly responsible. Rather than bore the House with the details of these representations, I undertake to pass the papers to my noble friend the Minister.

So much could be said about the universal service obligation; suffice it to say that Royal Mail accepts the challenges that the obligation places upon it. It has demonstrated for more than 300 years its ability to fulfil that requirement. I suggest to my noble friend that it is time there was a proper review of the regulator. After five or more years of its operation, nothing can be lost in getting people together for a review.

On the major issue of liberalisation, I shall confine my remarks to asking my noble friend if he will comment on why the liberalisation of the postal service was advanced from the date contained in the European guidance and why major competitor nations in Europe have delayed introducing their own liberalisation. The Netherlands and Germany—very serious competitors—will not introduce liberalisation until next year, and the French will introduce it in 2009, if we are lucky. Perhaps they are waiting to see what happens here. Perhaps they will get the benefit of our early introduction, but I would like the Minister's views.

A large part of my life in the Post Office was spent dealing with industrial relations. I had intended to speak about the markedly improved industrial relations within Royal Mail and the Post Office as a whole, which I welcome perhaps more than most people here because I have been through some of the most difficult times of industrial relations in the Post Office. However, I see that my noble friend Lord Sawyer is listed to speak in this debate so I will confine my remarks at this point simply to say a sincere "thank you" to my noble friend for the hard work that he has put in with all parties to bring about this improved situation. The nation, not only the Post Office, owes him a debt of gratitude.

The pension fund deficit is serious and large. However, it is not a matter for rash and hurried decisions. For many years, I had the privilege of being a trustee of the Post Office's main scheme and the shared cost scheme that was introduced later. I am confident that the current trustees, together with the Post Office board and the Government, can produce a strategy that spans a number of years to provide a solution to the deficit problem. However, what will be required is a recognition of the payments that were made from the Post Office to the Treasury during the 1980s and 1990s of more than £2 billion—money that went directly to the Treasury from the Post Office's revenue. Certainly, the Government should extend the period of a nil dividend from the Post Office while the deficit remains. There is so much to be said about the relationship between the Government and the Post Office. Unfortunately, 15 minutes does not give me time to cover much of what I would like to share with the House.

The ownership of the Post Office has been the subject of much media comment and a lot of heart searching among the staff. I am sure that my noble friend the Minister knows that the question that I would like to pose to him now is serious. It concerns the appointment of the chairman of the Post Office, Mr Allan Leighton. Will my noble friend help to clear up a matter that has troubled me for some time? It concerns the method of selecting Mr Leighton for the job of chairman. Two years ago, I was told by a very reliable friend who witnessed what was going on that, when the shortlist was prepared and presented to the board, Mr Leighton's name was not on the list. The information that I received went further. It was said that a call was made from the DTI to the Post Office board to have Mr Leighton's name added to the list. The rest is history: he got the job. Is that factual? I do not expect a reply today, but I would like a reply in writing at some stage so that if my information is wrong at least that myth can be dispelled. If it is right, somebody should be saying something about what happened.

It is important to know a little more about the appointment of the chairman and about any assurances that were given to him about what he could do with the Post Office. That is a deliberate question. For some time now we have had a chairman of the Post Office who, at almost every opportunity, talks about how he wants to have a share-based scheme—shared ownership. I am worried. We have a government pledge that there will not be a sale of shares in the Post Office and the Labour Party conference decision was that no sale should take place. A Warwick agreement was made. There is a manifesto commitment that the Post Office will not be sold off and just before Christmas 210 Members of Parliament in the other place were signatories to the Early Day Motion opposing any form of share sales—195 of them were Labour MPs.

However, on 20 December we received the Trade and Industry Committee report on the Royal Mail after liberalisation. The report stated:

"Whatever view this Committee were to take on the full privatisation of the Royal Mail we recognise that this Government has a manifesto commitment to keep the company in the public sector".

The report also said that the explanations offered to the committee by the current management of Royal Mail were "far from complete" and that no coherent process for how shares would be transferred or traded had been presented to the committee. The report further concluded:

"We believe there are less controversial ways to this such as the current profit sharing scheme".

If the idea of sharing the success of the business is to be considered—and I believe that it should be—perhaps the idea of an overall productivity scheme, linked to savings, could be looked at. What I mean is that any productivity payments to staff should be an equal share of what could be allocated to staff after the annual results are made known, after recognition of pension fund deficit and reinvestment costs. Payments were made to staff last year. I believe that those payments could be linked to a savings scheme and put into a personal account, where staff could take their bonuses or share of the profits; they could leave those savings there with management adding interest. That would serve two purposes—it would save a complete drain immediately of the funds, and would give people an investment for the future.

With respect to the current chairman of the Post Office, I suggest that if he has difficulty in coming to terms with the decisions that have been taken, he should either keep quiet and avoid further controversy or, if he cannot do that, he should do the honourable thing and resign.

I have the greatest confidence that there is a good future for our world-renowned postal service. I understand that Sir George Bain is considering how the Post Office should evolve in the next few years. It is my hope that he will address the chronic underinvestment that has dogged the Royal Mail for so long. I suggest that he addresses the vexed problem of low pay attracting the wrong applicants for employment; why are postmen and postwomen paid £80 per week below average pay? He should look at ways in which to give post officer workers the status in the community that they had for so many years, and which many still have. He should make firm recommendations about recruitment and training and the taking up of references before staff are allowed to handle people's correspondence. I have not time to comment on what has happened in recent scams which have left the Post Office with a lot of egg on its face. Above all else, he should recommend that the parties—that is, the employer and the unions—sit down together to plan for the future together. They need to strain every sinew to meet the challenges of competition, liberalisation and to build for the future. The British public and business community deserve nothing less. I beg to move for Papers.

My Lords, I thank and congratulate the noble Lord, Lord Clarke of Hampstead, for initiating this timely debate, which follows the House of Commons Trade and Industry Committee report on Royal Mail after liberalisation. I pay tribute to the management and work force of Royal Mail, who work hard in a difficult industry to provide a service to every citizen of our country. We are not easy to satisfy, and their contributions should not be underestimated. Together they are to be congratulated on, among other achievements, the Mail Centre Efficiency Initiative and on a recent dramatic improvement in industrial relations.

However, Royal Mail faces a uniquely difficult period. Liberalisation of its market is being forced on it at a time when it is in almost the direst financial situation imaginable. On a net asset base of about £2 billion, it estimates that it has a deficit on its pension fund, according to the committee's report, of £4 billion, or about £70 for every member of our country's population, and that it needs more than £2 billion to modernise its infrastructure to enable it to face its post-liberalisation competitors. Will the Minister give us the Government's views on the estimate regarding the investment required in infrastructure by management, and can he explain the Government's own plans regarding the funding for that?

As for the pension fund deficit, I mentioned a figure of £4 billion, which was given by Royal Mail's management in evidence to the committee. However, at 31 March 2003, the deficit had been reported as £2.5 billion. Could the Minister explain how such a huge difference arose, incurred over a relatively short period, which it is hard to believe happened only because of a change of accounting standard? Given that it is hard to imagine that management will be able without the shareholders' support to develop a viable plan to eliminate that deficit and to fund the capital investment required, could he also explain the Government's plans on that? We note that dividends have been waived since 1999. It would be interesting to know from the Treasury's perspective to what extent the dividends waived have been replaced by the additional annual tax revenue from the pension fund following removal of ACT for pensions.

Royal Mail made a loss on operations of £110 million last year. Although it is apparent that this is being turned around, the committee's report refers to suggestions that price control be reopened as a way of increasing profit, to help tackle the pension fund deficit. In that this would presumably mean an increase in the price of a postage stamp, would it not represent commercial suicide in view of liberalisation, which would simply lead to a loss of business to competitors, exacerbated by falling volumes? The current annual funding of £150 million provided by Government is due to end in 2008. What are the Government's intentions to fill that particular gap?

We are told there is evidence that the approach of liberalisation created an incentive for efficiencies and improvements in quality of service. Doubtless this is true, but surely suggesting that the value of such improvements in the short term will make a material impression on the mountain of funding required to put the business on a sound footing is just a trifle optimistic. The Government's plan appears to be to resolve the current funding crisis over a period of many years out of retained profits, by which time a good number of the employees will presumably be expecting to draw their pensions. Furthermore, competitors will have reaped the advantage that Royal Mail's antiquated sorting technology has given them. In short, it will be too little, too late.

The final elimination of Royal Mail's monopoly for packages under 50 grams apparently took place at the start of this month, three years earlier than required by the EU directive, as the noble Lord, Lord Clarke, has mentioned. The committee was rightly sceptical about the reasons, saying:

"we regard Postcomm's choice of dates for the move to full liberalisation in the UK postal services market to be an untimely one".

We are told that business post is subsidising private post to the tune of 8p for second-class post and 5p for first-class post. Given that a high proportion of business users can reclaim VAT, Royal Mail's VAT exemption, combined with the fact that it is anyway the more lucrative part of the business, might be expected to mean that business post will be the area where competitors focus their attack. Will this result either in price control being lifted dramatically on private post, as Royal Mail is forced to rely on it as an increased proportion of its overall under-50-gram business; or, especially given the concerns I have just expressed, will competition restrict scope for this, with the universal service obligation being jeopardised?

As the noble Lord mentioned, concerns have been voiced by the magazine industry, first, that Postcomm's recommendation to remove Royal Mail's second-class and magazine delivery service from price control from 1 April will effectively expose the magazine industry to ransom by what is likely to remain, in this area at least, a monopoly nationwide delivery service; and, secondly, that what is termed "pricing in proportion", representing a move from weight-based to size-based pricing, recently approved by Postcomm, may lead to cost increases of up to 50 per cent for some magazine titles, which might not be mitigated by the so-called mitigation scheme put in place by Royal Mail because the thresholds have been set too high. Will the Minister comment on these points?

The universal service obligation is a vital part of Royal Mail's service to the nation. The latest annual report says that Royal Mail is making losses of over £200 million on nearly 90 per cent of its price-controlled volumes, which it has to provide under the universal service obligation. However, the committee's report says:

"Royal Mail later confirmed that in 2004/05 profits from the universal service area were in the region of £400 million".

How are these two statements reconciled?

The national network of post office branches contains about 14,500 post offices, of which about 8,000 are rural branches. It is widely accepted on all political sides that the network of post offices provides a valuable service to the community, especially in deprived areas where its value is measured in more than mere financial terms. This network has been savagely and, some have suggested, rather thoughtlessly cut. There were over 18,000 post offices as recently as 5 years ago. There are serious concerns about rural closures. Concerns have also been raised by the CWU about the urban closure programme; about the suitability of the companies to whom certain offices, especially in north-west London, will be franchised; and about the transparency of the franchising process as a whole. How can the Minister comfort us that it has been undertaken with due care and attention?

There are periodically reports of proposals to issue shares to employees. Can the Minister tell us where these plans have got to and what percentage of the equity is being considered for the giveaway? The committee reports that the explanations offered to it were,

"far from complete and no coherent process for how these shares would be transferred or traded has been given".

If a plan exists, that would appear to be inappropriately evasive.

Once again, I thank the noble Lord, Lord Clarke of Hampstead, for initiating this debate and I look forward to the Minister's responses to the points that I and he have raised and to those which other noble Lords will raise.

My Lords, as has just been mentioned, one of the areas where there are the strongest concerns amongst ordinary people about the future of the Post Office is in rural Britain.

In many of our villages and market towns, post offices are an essential part of the fabric of the local community. They are seen as a trusted source of advice on, and provision of, a whole range of government services. Apart from anything else they provide crucial access to cash and banking services for those who are financially excluded or for those who still depend on the post office for their benefits or pensions. Furthermore, they produce a significant economic boost to their community. Countryside Agency research has shown that a shop attached to a post office can on average expect to receive a 25 per cent higher turnover as a direct result of the post office being there. Meanwhile, neighbouring shops get a 15 per cent boost to their turnover because of the footfall created by post offices.

However, a village post office and shop does more than provide vital services for locals. They often represent the only focal point for day-to-day social intercourse within a community. While the church and village hall—if they exist—obviously host specific occasions, these are often narrow in their appeal: the young go to discos, for instance, while the old might go to whist drives. But it is only in the local post office and shop that old Mrs Smith can meet and chat to young Master Jones in an unstructured but secure setting. The fact that old Mrs Smith and young Master Jones might both be without transport and are therefore totally dependent on the post office and its shop also helps bind them together.

Country people feel very strongly about their post offices. I asked a lot of people at the last countryside march if there was any reason apart from hunting that had brought them to London, and post office closures was the most frequent answer. Indeed, it was soon after this that the Government introduced their £150 million per annum support that is now due to last until 2008. At the same time the Post Office introduced its commitment to prevent avoidable rural post office closures. Unfortunately, this latter commitment is due to lapse in March this year. However, neither of these two lifelines has prevented rural post offices closing, but they have slowed the annual closure rate down from 360 per annum five years ago, to 97 last year. So we should not delude ourselves. For the foreseeable future rural post offices will continue to close and this closure rate will almost certainly accelerate when the £150 million per annum ends in 2008. No one could expect such a large sum to continue after that.

Postcomm research has found that almost all rural post office branches cost more to run than the revenue they bring in. Those that do not are in the larger towns. However, the benefits to local people in 80 per cent of rural branches are greater than their costs, even if those branches are making a loss for Post Office Ltd. This, of course, means that in 20 per cent of branches—that is, some 1,100 post offices—the benefits to locals do not outweigh the costs of operating them. It is likely that these branches will not survive in the long run unless the local communities can galvanise some local self-help.

Meanwhile, in the UK, Post Office Ltd is using its window of opportunity and the extra funding it is getting, very well it seems to me. It has created a rural strategy team to help run and measure a whole range of pilot schemes to show others how it is possible to sustain the rural network. For example, it has a "core and outreach" scheme which is running several satellite operations involving a sub-postmaster from a larger village going out to surrounding settlements, for a few hours a week, and offering all the services of the core branch. He can do this by using a village hall, pub or even a church.

In other instances, mobile post offices have been used. For example, the Cumbria mobile travels around 500 miles a week serving 36 isolated communities. Post offices have also combined with other services to reduce fixed costs. For instance, in Dyfed and Norfolk they have combined with the local police force. In Cornwall, where over 25 per cent of wage earners are self-employed, Post Office Ltd has combined with Business Link to offer business support services along with normal post office services. In the "pub is the hub" initiative you can now find a post office, a village shop and even Internet café facilities and training in pubs. Post offices can also now be found in almost any type of shop, including in one case a fish and chip shop, but also elsewhere in hotels, churches, libraries, tea rooms or even the opticians; and long may it continue.

In conclusion I would like to make the following points. First, rural post offices fulfil a valuable social and economic role and should continue to receive government support, albeit at a reduced rate, after 2008. It is the most vulnerable members of our communities who will be affected by any future rationalisation, such as older people, those without access to a car, the unemployed and those on a low income. Postcomm research on post office networks abroad showed that many countries find it necessary to adopt special approaches to secure postal and other services in rural areas. Secondly, the current commitment to prevent avoidable rural post office closures is due to lapse in March 2006. I suggest that this should not happen until a strategy for the future of the rural network has been fully developed and publicly consulted on, so that there is a plan to go forward based on sensible criteria. The criteria could be related to population size, distance from other outlets or where particularly vulnerable groups predominate; but we must have a plan before we pull the rug.

Thirdly, the provision of postal services should continue to be encouraged alongside other services in rural areas, and post office regulations must remain flexible to accommodate that. Government funding and support should continue to encourage a climate for such entrepreneurial activity by giving business rate relief, pump-priming capital grants and, crucially, sponsoring advisers and consultants to help entrepreneurs and rural communities. Communities need to be able to develop the range of services that best suit them. Many successful and long-lasting community post offices already exist, assisted by the Rural Shops Alliance and the Plunkett Foundation, among others. Those organisations will continue to need help.

Fourthly, it was no surprise to me, looking at the research in other countries, that the main strategy adopted in most of them has been to develop banking and financial services. One of the main problems with rural post offices recently has been the muddled signals given out about the availability of card accounts and other financial services. There was never any real commitment from Government to promote that service. Customers and sub-postmasters were given conflicting signals. Some postmasters were told to tell their clients that card accounts were not available; others were told the opposite. As a result it has not been a success, and a great opportunity has been lost. However, it is not too late. Every UK post office should be able to provide financial services such as bank accounts, bill payment, savings accounts, insurance, business banking, money transfer, bureaux de change and cash machines—and maybe even credit cards, loans and investment services. All those things happen to varying degrees abroad, and there are after all more post offices in our countryside than all the banks and building societies put together. The Government have recognised the importance of the rural post office network, but they need to see it through to the end with that little bit of extra commitment if the money already spent is not to be wasted.

My Lords, I echo the thanks of other noble Lords for a further opportunity to discuss the Post Office and to contribute on issues regarding Royal Mail and the Post Office. My background is in heavy industry which, like Royal Mail, has experienced many significant changes over many years. In the steel industry we referred to it as survival.

As a customer—and that is all I am, a customer—I have nothing but praise for the people who work in both the Royal Mail and the Post Office. I share many of the views expressed by the noble Lord, Lord Cameron of Dillington, about village post offices. I live in a village of some 7,000 people and the post office is a vital and important part of the community. It is efficient, the people are helpful and it provides a service that is second to none. I would really despair at the thought of a possible closure of that village post office.

We must bear in mind that a debate is going on in the country over an important issue: ordinary people, councillors and planners are extremely concerned about the demise of high street shopping and all the problems that that brings. In our village the postal delivery is first class—brilliant, in fact. Postie Mary is special. She is not the best-paid person but the best you can get. So this is a debate worth having and I very much share the concerns expressed by my noble friend Lord Clarke of Hampstead.

What security do the employees have regarding future pension arrangements? Can my noble friend the Minister assure me and, more importantly, the employees that current members of the final salary scheme are and will be safeguarded? We all know that pensions are a difficult issue in the country as a whole—difficult for employees. I do not know whether they are quite as difficult for the chairmen and chief executives of companies which get into difficulties. In many cases of companies faced with difficulties the situation is terrible for the employees. Schemes are being closed down. Pensions are being moved into money purchase schemes, as many noble Lords know well. As I understand the situation, the pension deficit in the Post Office, which has been referred to by noble Lords, is both serious and significant.

Perhaps I may pause here, for again I am advised that for some 12 years until 2001 the main pension scheme had a surplus funding level and, in accordance with the rules, the employer took a contribution holiday, as many other companies do, and therefore paid nothing for many years. I say that to seek fairness and justice for the future, because many companies' employees continued paying their full contributions to their pension scheme.

Pensions for me and for many other noble Lords here are regarded as "deferred pay". Indeed, what do employers say when they meet for negotiations on annual wage rounds? They reminded me on many occasions, "Don't forget your future pensions, dear friend"—well, they did not call me "dear friend". They would say, "It's not a bad package, you know". So a current cause of concern, among many others, is that if the funding is to come from revenue, even on a staged basis, then reinvestment may well suffer and, of course, low pay—because it is relatively low—will continue to be the norm for Post Office workers. Again, I must point out that that is not the case for the chairman and those around him.

This is a worrying and difficult period for those who are employed by, and manage, the Post Office. I, for one, support the CWU, their union, which has stated:

"We support a publicly-owned, publicly-accountable, fully-integrated, national postal service run in the interests of users and not the private postal operators".

I sincerely hope that the Minister and the Government—my Government—agree with those views.

My Lords, I join my colleagues in congratulating my noble friend on securing this debate. Indeed, it is welcome that it is he who introduced it, given his long experience of the postal services. However, it is unfortunate that we are probably going to end up debating both postal services and post offices. It might have been better if we had been able to separate the two, and I want to devote most of my time to the postal services.

Since 1997 the Government have adopted a novel and pragmatic approach. It was imaginative to establish the Royal Mail or Consignia—the names are almost interchangeable but I think that noble Lords know what I am talking about—as a company with the Government as the main shareholder. There were public service requirements, which were going to be overseen by a regulator, and, since then, the Euro directive has been introduced.

It should also be made clear that it takes a certain level of incompetence by management to run a monopoly at a loss in a capitalist society. That was basically the story of the Post Office. It made surpluses perhaps two or three years out of every four. There may have been some sleight of hand, with a bit taken back by the Treasury, but the fact is that there was a record of doubtful management competence, financial carelessness, a failure to realise assets that were no longer necessary to the business and a failure to invest in the business.

Not that long ago, there were no machines available in the postal services in Britain to sort A4 envelopes. From the volume of business that we get, we know the number of envelopes that come in that size. No one in the Post Office had woken up to this change in the size of envelopes, in much the same way as they missed out on the opportunity of Internet service providers and, for that matter, emergency or very fast mail delivery services. Even now, the range of products offered by the Royal Mail is woefully narrow. Indeed, if an individual retailer at a post office were to be dependent solely on the services provided by the Royal Mail, he would make virtually no money at all.

So I think that, on the one hand, we have to strip away a lot of the cosy nonsense that surrounds the Post Office case and, at the same time, recognise that it is a vital part of our economy on which we are dependent for a number of services, both economic and social. At the same time, however, we have to recognise that the Euro directive is something with which we have to live. Liberalisation will be a fact, and it is a question of when it is introduced.

I take the view that the sooner liberalisation is introduced in a realistic way, the better because, more than anything else, that will be the stimulus to the sclerotic levels of management that still prevail in large parts of our postal services. The fact is that, as my noble friend said, most of the mail will be collected by the postal services at a charge—a charge agreed, albeit reluctantly but none the less agreed, after long negotiations by the Royal Mail. Equally, the last-mile delivery will still be the responsibility of the postal services, and it is the sorting processes in the middle which are the most vulnerable. Those are the ones—the inside jobs, as they used to be known—where, frankly, most needs to be done. It may be argued that foreign companies with deep pockets are able to invest in that area of sorting and activities of that nature and that they might be able to provide cheaper and better postal services.

The passage of two or three years, which is what we would have saved had the postal directive not been introduced in the way that it was, probably would not have made very much difference because of the glacial speed at which areas of postal management move. They need—to use Corporal Jones's colourful expression—"a touch of the cold steel", and they need it sooner rather than later. I disagree with my colleagues on that, and remember over the years the regulated industries—particularly regulated monopolies—crying "foul" whenever a regulator chose to do something. I well remember the British Gas management behaving in exactly the same way as Mr Leighton and his colleagues when change was introduced at a more rapid speed than was anticipated or which the management felt comfortable with.

In many respects what we are seeing in the Post Office is what we saw in the other utilities when they were confronted with change. The challenges that the Post Office management will have to address will not be blurred by issues of share ownership and the like. Those are irrelevancies. Let us face it—I return to my earlier point—it takes a particular type of skill to have a monopoly, run it at a loss and have staff who are poorly paid. One of the major challenges is to increase the pay and improve the conditions of postal workers, and we must improve their pension arrangements.

A publicly owned Post Office can enjoy a certain privileged position on pensions. I hope that we can move towards enhancing the depleted funds of the pension scheme fairly quickly. While in some parts of the country far too many postal jobs are casual, in the area that I was privileged to represent in another place, postal jobs were important jobs. They were comparatively well paid and seen as jobs for life. Even though the wages were not brilliant—the area that I represented had fairly low levels of pay—there was always the promise of the index-linked final salary pension scheme that kept many people in the job and attracted many of the loyal workers who put in 30 to 40 years of service. I am referring to the town of Alloa, which is about 40 miles from Edinburgh. In Edinburgh turnover in the postal service is very high because unemployment is very low.

We have challenges to meet. It is not a seamless labour market across the whole of the postal service, but it is a seamless service in so far as we have universal obligations of service and price. I should like to think that the task is not beyond the capabilities of the management and unions. It is amazing what has been achieved in a relatively short period in a number of areas, which gives me a degree of confidence and optimism, which some of my colleagues have yet to display. I hope that the Minister can reassure us when he responds to the debate.

My Lords, I am grateful to my noble friend Lord Clarke of Hampstead for sponsoring the debate. This is the first of two debates today on trying to improve public services. The issues are about change and competition, but this debate has a strong European dimension. I shall follow a vein similar to that of the noble Lord, Lord O'Neill, and I share a good number of the points that he made. The European Union has been opening up postal services to competition to improve European postal services and develop single markets as far back as the mid-1990s. We cannot ignore that. We must come to terms with it and recognise that the current directives require even more changes and competition in the future.

Each member state is tackling this in its own way. The Swedish postal system has been fully privatised since the mid-1990s. Anyone who has been to Sweden will know that it is a typical Scandinavian operation. It is efficient, clean and customer oriented, but highly expensive. The Finns, the Dutch and the Germans have followed with variations on the privatisation theme. At the other end of the spectrum is the French model, now with question marks over its sustainability in the longer term. It is interesting that they are pushing to wait until 2009 before they get around to introducing the current directives.

There is also a big question mark over what will happen to the new accession countries' postal services over the coming years. I suspect that the structure and ownership of the enlarged European Union postal services will look quite different in 10 to 15 years' time, especially with the increasing pace of technological change.

I strongly support the efforts of the noble Lord, Lord Clarke of Hampstead, to get the Government to commit to a strategic policy for the Royal Mail that will stand the test of time. I trust that it will take fully into account the realities of what is happening in Europe, the regulator's existence and their role as part of that process.

As we enter this review period, will the Minister throw a little more light on to the role of Sir George Bain as adviser to the Secretary of State for Trade and Industry? As I understand it, he will not be producing reports, or a final report for the Secretary of State, to be published. How will his findings emerge? How will we get access to what he is analysing and recommending? When is his task likely to be finished?

My knowledge of the postal services is minimal compared to many of today's contributors—I look particularly at the noble Lord, Lord Dearing. My deeper interest was first stimulated through the European Union legislative scrutiny in this House. In 2000, we looked at the proposed EU directives for further liberalisation, and at a number of European postal services, particularly our own. We found, much to our regret, that UK services had deteriorated dramatically since last looked at by this House in 1996. Indeed, Post Office management itself accepted that it was widely missing its performance targets, that millions of items of its customers' business were going astray, and that it was defending a second postal delivery at midday, when most recipients had gone to work hours earlier. That, of course, has subsequently changed. There have been many other substantial changes, flowing from the Postal Services Act 2000 in particular.

It cannot be denied that the new management team's renewal plan, while it has been controversial, has financially turned the business around, and greatly improved service performance from its level at the turn of the millennium. Nevertheless, the Post Office faces a number of serious challenges. Previous speakers have enumerated most of them, so I will not repeat them. However, notwithstanding recent improvements, there will be a continuing and major challenge facing us on industrial relations. Like the noble Lord, Lord Clarke of Hampstead, I pay tribute to my noble friend Lord Sawyer for his tireless efforts in bringing some harmony and partnership into the fraught and unstable relationships which existed two or three years ago.

All of us here want to see the postal services not only overcome the current challenges facing them, but to flourish and grow on a sustainable basis; not just at home in the UK, but into Europe. Make no mistake, European competitors certainly have designs and ambitions for growth in the UK, which we should not ignore. That means efforts to build better industrial relations and trust must increase if we are to be successful. It can be done.

I depart marginally from the main thrust of the debate, and speak as a partnership director—a non-executive director—on the board of a public/private partnership, NATS Ltd. I invite the Secretary of State, Sir George Bain, the postal unions and Royal Mail senior management to visit NATS, and see how our organisation is transforming itself and its industrial relations.

The PPP was formed in 2001, after a vigorous campaign of opposition from the unions in the industry, fully supported by all their members. The union density then was extraordinarily high—over 90 per cent—and I am happy to report that it is still at that level. The Government own the majority of the shares in the company, which is where I will pick up the point on which there may be disagreement with the noble Lord, Lord O'Neill. The shares are non-marketable and the staff were offered a 5 per cent stake, which is held in a tax-free trust fund. At present, the shares can be cashed only when the employee retires or resigns. The unions originally opposed the share concept, but virtually all staff took the opportunity of getting their hands on them.

For the first two years after the PPP was formed, industrial relations were, without question, fraught and were not helped by the airline industry's near-collapse after 9/11 in the USA. But bit by bit, faced by very similar challenges to those of the postal services, confidence has been built up between all the parties. Safety continues to be paramount for NATS. The average delay per flight is now lower, notwithstanding a near 5 per cent per annum increase in air traffic. NATS's charges to the airlines have not gone up; they have gone down and are to be further reduced. Previous losses have been turned into modest profits in 2005, the net debt is being reduced and the first small dividend was declared last year. While non-marketable, the shares are independently revalued for Inland Revenue purposes twice a year. They have been on an upward swing from more than 80p to more than 110p. NATS is also in the early stages of implementing a £1 billion investment programme to upgrade the ageing technology infrastructure, long starved of funds by previous governments of all persuasions. For the first time ever, the unions are entering into a three-year pay agreement, a generous one that they never had under their former employers, the government and the CAA. It is my guess that fairly soon they will be seeking a greater percentage of shares for the staff. For the unions and for the staff that will mean greater involvement, more commitment, a stronger voice in the organisation and more influence over their own futures.

I am not advocating that one size fits all structures, nor am I claiming that all is perfect in NATS—far from it—but I do suggest that that reasonably successful model should be examined. There is a structure for dealing with non-marketable shares and those elements could be looked at and might be worth cherry picking, in the phrase of the noble Lord, Lord Clarke. If we were to couple that with the saving proposal on how we dealt with the dividends with which he opened his speech, maybe we could then find an opportunity whereby employees of the Post Office and its management could use that element to try to persuade building societies that Post Office employees should have an opportunity to get on the housing ladder, as they are well below the level of house ownership in the UK. That is the kind of challenge that the industrial relations set-up should be facing, and it would give real, lasting benefits for the future.

My Lords, I am grateful to the noble Lord, Lord Clarke of Hampstead, for initiating this debate and for giving it a focus on the public interest. That is helpful to me because, as a former chairman of the Post Office, I draw a Post Office pension and I have to declare an interest; but I had better concentrate on the public interest, rather than my own. I shall focus on two points; first, how we are going to earn our living in the world and how the Royal Mail can contribute to that; and, secondly, the social interest of having a genuine, national, pervasive network of post offices.

On earning our living in the world, I am not making this point in any political way, but the last year in which we had a surplus on our balance of payments on trade and services was 1997. Every year since then, there has been a deficit, and every year the deficit has increased. In 2004—the latest year for which I have figures—it was £40 billion. Looking ahead, I worry. China and India have only just begun to take their place in world markets and North Sea oil will not last for ever. I worry for our future and any opportunity to develop a world-class industry or service that can contribute to earning our living is welcome. I have little doubt that that challenges us to increase our efficiency and that what the Government had in mind in going down the liberalisation route was to give the spur of competition to the Royal Mail group to increase its efficiency. I note that, in providing this spur, they are acting two years in advance of Germany and three years in advance of what is likely to happen in France, Italy and Spain.

In doing that, we are opening up our market and giving a powerful invitation to others to come and seek to take their share of the biggest cherry that has been opened up in the mail world. I look at the competitors and their financial strength compared with our position. I turn to Deutsche Post. Of its financial strength, a financial commentator said words to the effect that it had cash burning a hole in its pocket. It spent £3.4 billion on acquiring the British company Exel in a year in which it had already spent £1 billion on another acquisition. I have looked at its balance sheet; it is awesome. I have no doubt that that balance sheet has been assisted by its ability to charge two to three times the price of a first or second class letter in this country. On its mail business, it seems to be earning the remarkably good return of 15 per cent before interest and tax. That is very nice if you can get it. No wonder it has the financial strength that is behind it as it comes into our market. Similarly, the Dutch are powerfully equipped. My concern is not that there has been market liberalisation, but that the Royal Mail can compete fairly and strongly with the other companies that are quickly coming into the market. I understand that last year direct stream access achieved a level four times that which Postcomm was predicting when it made its first consultation report. It is happening.

The Royal Mail's problem is that it has to increase its efficiency, but to do that it needs investment. It is massively underinvested compared with the Dutch and the Germans. That is reflected in its efficiency. It is a handicap. But with a balance sheet with a deficiency of £2 billion, where will the cash come from to do that and to develop an overseas business? Postcomm sees a glide path to eliminating the deficiency over the next four or five years. But the Royal Mail Group board is saying that action is needed now and there are formidable words to shareholders in the half-yearly account on its decision to continue trading, based on the assumption that the Government will address the balance sheet issue. It matters to us as a nation that we have an efficient business because overseas companies will contribute to the efficiency of the market, but their profits will be repatriated and that will not help our balance of payments problem.

I turn to the Royal Mail's overseas business. It has one: General Logistics Systems. It is not much talked about, but it has shown that, given a fair due, the Royal Mail can compete and earn money. My reading of its half-year accounts is that this year this overseas business will have a turnover of around £1 billion and a profit of between £80 million and £100 million. If we are concerned about earning our living in the world, the Royal Mail should be in a position to invest in that business and to engage in other partnerships to develop a real success—that nobody knows about. I believe that there is a workforce and a top management that can deliver. There is an issue about the Government being alongside the Royal Mail in ensuring that it has a balance sheet that enables it to compete fairly.

I turn to the Post Office. I agree with the noble Lord, Lord O'Neill, that we need two debates rather than one. The noble Lord, Lord Cameron, has spoken very informatively on the Post Office and I would like to see a debate on it. There is a major public interest in having a national post office network. I shall make three points.

First, 40 per cent of the business went when the DWP changed its policy on the payment of benefits. There is one big bit of business left; it is called the Post Office Card Accounts, which people can use to draw on their social security benefits, if they so choose. Reference has been made to muddled messages to post offices and people about that account. I hear messages about how difficult it can be to open such an account. If the DWP ends those accounts, that will be another nail in the coffin of the post office network. It will be an added threat to the viability of the 7,000 post offices which depend on that £150 million of business. The loss of that business also means a reduced footfall in the shop and another blow to the future of a truly national network of post offices. I should like the Government to think very carefully and give some assurance that there will be a continuation of this form of payment of social security. People want it and I would say to the Government that we are here to serve the public.

Secondly, reference has been made to the payment of £150 million per year by the Government to enable these offices to continue. Perhaps I may say that in spite of that post offices make a loss of £100 million a year. It seems odd to me that the Government should be finding that £150 million by withdrawing shareholder money from the balance sheet, especially now that we know there is a £2 billion deficit. I wonder what would be said of a private sector company that did that. I think the Government need to recognise that this is a payment for a social purpose and that it should be funded by the state.

My third point picks up the reference to the review that is taking place on the future of the network. I understand that the Royal Mail has put proposals—I have not seen them—to the Government. I urge the Government to realise that there is a major social issue here, which is for them every bit as much as it is for the Royal Mail. I know that the Royal Mail has been very imaginative over the past two or three years in developing its services. It needs the Government to come forward with policies in the public interest to enable it to continue to serve. I hope that we shall have a debate on that before long.

To conclude, we have a business with workers and management who can deliver. The question is: will the Government give them the tools to do the job?

My Lords, I respectfully remind the House that this is a time-limited debate. We are running over and we have virtually no margin left.

My Lords, I thank my noble friend Lord Clarke of Hampstead for initiating this debate. This is a good time to have it and my noble friend's passion and wisdom on the subject is something that we should all be thankful for.

I was involved approximately five years ago in preparing a report on industrial relations in the Royal Mail and have been involved intermittently since that time. In 2000 there were real problems with unofficial strikes and disputes, which sapped public confidence and lost huge amounts of revenue. The days lost through strikes peaked at 85,000 in 2003; in 2005 it was 4,300 days. Therefore, there was a drop of 95 per cent. The question is: have industrial relations improved? Well, there are some grounds for optimism outside those statistics. First, the Royal Mail received favourable publicity in recent months for its 2 per cent reduction in sickness absence, which is good. That has apparently saved the company millions of pounds, which it should. The company's own regular employee surveys show that employees' assessment of their own management has improved. Furthermore, the company's safety performance seems at last to have turned a corner for the better. Although much remains to be done on these industries, they are all moving in the right direction. They are below many of the other sectors that we would be involved in, but they are going in the right direction.

I can certainly inform the House that, since we wrote our initial report in 2000, there have been times when management and unions have worked together in a more effective way. That has produced benefits. One particular example is worth mentioning. The Royal Mail was investigated by the Equal Opportunities Commission a few years ago, and the issue of bullying and harassment at work has been jointly recognised and tackled by the Royal Mail and the unions. There have been some improvements to date on reported incidents. To help eliminate this problem there has been encouragement for the establishment of local groups to tackle these and related issues by members of the workforce, the unions and the Royal Mail working together on the issues in their locality. These groups are called dignity and respect at work groups, which simply would not have been able to operate in the environment and culture that existed within the Royal Mail a few years ago.

That is not a unique example. A joint safety steering group has been established to try to form a consensus on the practical measures needed on how to make improvements in safety performance that will last. Furthermore, and perhaps most importantly, in the past few months, the national officers of the CWU (the main union) and senior members of the Royal Mail's management team have jointly reviewed the strategic plans that the business feels it must address with the arrival of the competition that has been talked about in this debate. Major changes in investment and working practices will have to be faced by all the parties. To date, this has been done in a constructive and sensitive manner that again would not have been possible a few years ago. As the Government are the sole shareholder in the Royal Mail, I believe that it is proper to ask the Government how they might help to ensure that the Royal Mail and the unions can fulfil their obligations to the rest of us by helping to promote good industrial relations.

I mentioned a moment ago that discussions between the Royal Mail and the CWU were taking place around the strategic plans. There would be obvious and great public benefit if these discussions bore real fruit and changed the culture of industrial relations at the Royal Mail. But, obviously, there are many difficult operational and employment changes to be contemplated and implemented on which it will be difficult enough to come to a common conclusion. In particular, the major union, the CWU, will need to adapt to change and refocus what its role should be so that it can effectively influence—and not just challenge—the Royal Mail's thinking on these sorts of issues.

Furthermore, both the trade union and management leadership are learning, but need to continue learning, about new behaviours to take employees with them in this to benefit all who want the Royal Mail to be successful in the new competitive environment that we are now in. This amounts to big change from the past for both parties. Both need help and encouragement. The union needs help and encouragement and the people who lead the union need to be supported. The Government need to understand how difficult it is for unions sometimes to make change in these kinds of environments. There is always a fear—I think you hear it around the table—that both sides will revert to type and to behaviours of the past. We have to avoid that. The Government should place their emphasis not so much on the kind of headlines and debates we read about, but how they might genuinely understand what is going on in the Royal Mail and help and support the changes that are taking place. That would be helpful.

Indeed, the Government could help both sides by avoiding what I would call unresolved distractions. Obviously, there are issues of pensions deficits and capital investment that need to be resolved, but there are other issues; for example, that of employee ownership. While it remains unresolved apparently—we do not know what, if anything, is really being suggested—the ability to reach any kind of consensus on this issue detracts from the positive things that we try to do in the industrial relations field. It certainly takes the attention of the union leaders away from the issues that the union ought to be concentrating on.

I have only a brief word to say on ownership. It is informed by the review carried out by Job Ownership Limited, the only independent, and, thus in my mind, objective review of this issue—Royal Mail employee ownership—that has been undertaken. The report from Job Ownership Limited was published last year and is interesting and informative. I shall quote only one paragraph:

"An employee stakeholding—whether in the form of individual or collective ownership—won't be enough on its own to create the harmonious, productive industrial relations and employee engagement that the main stakeholders all want to achieve. Research evidence shows that this impact is only achieved when a meaningful equity share is coupled"—

I emphasise "coupled"—

"with far-reaching employee involvement and participation. Successful implementation of ownership restructuring will require an intensive, long-term communication, awareness and education programme among staff and management".

If we could learn from the suggestion made by my noble friend Lord Brooke of Alverthorpe, that is the sort of thing that we should be emphasising. It is about employee involvement, participation, communication and awareness. It is not about political rhetoric or newspaper headlines; it is about something much deeper and more fundamental than that. I hope that the Government will help the parties to concentrate on that, because that is what is needed.

Many issues are of public interest—the post office network, the universal service obligation, value for money pricing—but my main interest in participating in this debate is not to discuss any of those things but to help the House to understand that as we enter the world of postal liberalisation, some progress has been made on industrial relations at the Royal Mail that needs to be sustained and nurtured in the interests of all members of the public and business customers. If the Government can support the real, concrete developments that are occurring there on the industrial relations agenda, they will be doing us all a service.

My Lords, I must first declare an interest. I am a member of Amicus, which represents the Royal Mail managers. I must tell my noble friend Lord Clarke of Hampstead how indebted we are to him for initiating this debate. It involves an awful lot of expertise. I follow my noble friend Lord Sawyer, who has been involved in industrial relations and played a vital role in developing them. Those who speak after me have knowledge of the Post Office—no one can have more knowledge than the noble Lord, Lord Dearing. We met many times when I was on the Select Committee in the other place. I only wish that some of the things that were said then had been implemented and that the Government had not been quite so greedy in taking back many of the Post Office's profits, instead of using them for investment. The Royal Mail would then be in a better position to compete in the liberalisation that is coming today. But we are not at that stage.

I was also interested to hear from my noble friend Lord Brooke about NATS, because the two of us, along with others in the House, played a major role in setting up a non-profit operating company. I am pleased that it is working so well and that it is now gaining the confidence of the employees. I am sure that my noble friend has had a large part to play in that.

That does not get us away from the problems that Royal Mail faces. It is right that today we have been concentrating on the fact that while competitors are coming into the market, the universal service obligation rests with the Royal Mail. We must ensure that the universal service is protected and continues. It is right to refer to places where liberalisation and privatisation have taken place. Sweden is one, but a very expensive service operates there. Another is New Zealand, which is a far more recent example, but which no one could say has been a complete success by any means.

As was said by the Select Committee in its report in December, to ask the Royal Mail to prepare for competition at a time of great uncertainty does not seem common sense, to say the least. What are we talking about? We are going for liberalisation when there has been underinvestment and the Royal Mail faces uncertainty about stamp increases and the position of the pension fund, as has been referred to, which of course bothers all employees. They are bothered by the huge hole: not only how it has come about but what will be done to remedy it in future. The Government ought to make a commitment to get the pension fund back on a more equitable footing.

Why have we done this when, as has been said, other countries have until 2009 to do it? What are we doing to try to get liberalisation in other countries brought forward? That would create a more equal footing for the Royal Mail to compete on. That is essential. We know that it is coming—as has been said, we cannot resist it—but we know that 2009 is a long way away for other countries. We are suffering the consequences now. Companies such as La Poste or Deutsche Post can now compete in this country, with the terrible effect that that may have on our universal service. It is wrong that we allow that to happen now, while they can shelter behind their frontiers with closed walls to our going into their markets. To have a level playing field, we should press for an earlier liberalisation of the whole of Europe so that we can have fair competition.

One concern in the Post Office in the past has been that when there have been rises in the price of stamps, they have often been far too late and the benefits have not been taken. I know that discussion has been taking place with Postcomm about whether there should be easier ways or an agreed formula for rises, rather than their being too little too late so that we start from behind.

Are the Government still contemplating—I hope not—putting VAT on postal services? That would be extremely unfair to the ordinary user, especially people on low incomes who need low stamp charges so that they can afford to send post. Are we going down that route—it does help those who are registered for VAT, but it does not help the ordinary customer? I hope that we will not follow that line.

On share options, especially as the Government have said that they will not privatise, I think that it would be far better to consider profit sharing. However, if we are going down the route of share options, what discussions has the Minister had with the Royal Mail and what is the Government's thinking? It has not been clear how that would come about, where they would be transferred from or how they would be traded. Would they be on the open market, which could lead to a form of privatisation; or would they remain within the company, so that the employee would get the benefit if he retired or left the company? I understand from my noble friend Lord Brooke that that happens in the case of NATS. We need more information on that and I hope that the Minister will be able to help us.

What is happening with Postcomm? It is being asked stringently to monitor and set standards for private operators. What is being done about that? Is that going ahead?

Finally, if we do not follow that policy, we will have creeping privatisation, destroy a service that is respected by most people and destroy a loyal employee base.

My Lords, I thank my noble friend Lord Clarke for initiating this debate. Like him, I, too, declare an interest. I joined the GPO, as it was called in those days, in 1958 as a telecom apprentice, which is most of my background. But I can remember on one or two occasions sitting at the negotiating table opposite the noble Lord, Lord Dearing. So there is a strange sense of déjà vu—"all over again", as a football commentator once said. I also was the joint general secretary, together with a certain Mr Johnson who now is in charge of the Department of Trade and Industry. This is an interesting debate for me, but it is very important for the country.

Royal Mail is now entering the uncharted waters of a new, very challenging and competitive environment earlier than most of Europe, as we have heard many times in this debate. One might argue with my noble friend Lord O'Neill—he has come back now—about the nature of Royal Mail management. He accused it of being sclerotic: I hope that it does not have a fatal heart attack, although probably it needs to improve. You could argue about how full or how empty the glass is, but you cannot deny that over the past few years there has been a turnaround from a £1 million per day loss to a £537 million profit in 2004, which took place against a backdrop of 33,000 fewer workers. As my noble friend Lord Sawyer reminded us, change has taken place. There have been improvements, which we should acknowledge.

I listened carefully to my noble friend Lord O'Neill who talked about welcoming liberalisation and a realistic introduction, which is important. It needs to be realistic. There is a crucial debate between Postcomm, which has made an assessment of increases in the price of a stamp over the next few years and how much productivity achievement is possible—I do not know which is right—and the Post Office, which says that the price of a first-class stamp should increase from 30p to 39p over the next four years, and it still would be one of the lowest prices in Europe. I ask the Minister to look at that because it is part of the key to more investment.

The Post Office faces huge challenges. We have to resolve the pension deficit. The point has been made that even when looking at the full spectrum of Post Office workers, they are not necessarily the highest paid workers in the country by any means. Certainly, the final salary pension scheme was an attractive part of that package and needs to be sustained. One way or another, the Government, with the Post Office, have to find the solution to that problem.

As has already been said, in this competitive environment we face big challenges, which are not theoretical. There is a challenge in competition from Deutsche Post and TNT, which are serious competitors moving into this marketplace. As the noble Lord, Lord Dearing, graphically described, they are very well placed to do it. We need huge investment. It is sad that the Post Office now talks about the need to invest £2 billion. You might ask why that was not done many years ago and why it is so late in the day. The fact and the reality is that that has to be done. Ageing equipment has to be replaced through an investment in new technology. The Post Office has to fully engage all staff in the business in the next round of modernisation.

I agree with the noble Lord, Lord Cameron, and the noble Lord, Lord Dearing, who referred to the importance of sub-post offices and crown offices, and made the point that we probably need a debate on that. In relation to the offices, the integrity of mail is perhaps something that we tend to take for granted until it breaks down. Recently, in north London, there was a case of a Crown office being disposed of to a private company, which took a while to investigate. The private company had been registered for about only two weeks and had assets of about £2. Does the Minister feel that that is a satisfactory situation?

Just before Christmas, the management—if you could call it that—of an unlicensed company, Mail Logistics, made £2 million from just dumping mail, operating in an area which is completely unlicensed and unchecked by Postcomm. The directors were gaoled. I notice that they cannot be company directors for only one year, which seems a marginal punishment given the amount of mail they dumped and the millions of pounds that were involved.

I want to comment on the postal service as a whole. I remember a song many years ago by a Canadian singer, Joni Mitchell, with the words,

"you don't know what you've got

Till it's gone".

I sometimes think that that is the same for the Post Office and the universal service. We have a stupendous asset, which is the envy, probably, of the rest of the world. We have to be careful that we do not put it at risk. Some people might say that it is already at risk. So this next period is vital. I agree with my noble friend Lord Sawyer on the need to build a partnership approach and a new era in industrial relations in the Post Office. It has improved and it needs to improve further if it is to surmount the challenge of competition and new technology.

I do not know the perfect way forward. There appear to be two schemes on offer. My noble friend Lord Clarke informed us about profit sharing and my noble friend Lord Brooke told us about the advantages of the employee share ownership scheme. I agree with my noble friend Lord Sawyer that uncertainty does not help and is a distraction. There probably is not a perfect solution, but I concur with my noble friend Lord Clarke that the profit sharing and productivity scheme could be an alternative way forward. But the Government should encourage, with the Royal Mail, a consensus solution. The success of Royal Mail needs the partnership approach. It also needs a Government who are prepared to recognise the size of the challenge and, if necessary, to direct Postcomm.

My Lords, I, too, thank my noble friend Lord Clarke for setting down this subject for debate. Like others, I preface my comments with a declaration of interest. I am a non-executive director of Royal Mail Holdings board. Royal Mail Holdings is the parent company of, among others, Royal Mail letters, Parcelforce Worldwide, Post Office Ltd and General Logistics Systems, which is the Royal Mail's very successful European parcels business.

I should like to set out for your Lordships some of the issues which face Royal Mail and some of the ways in which these issues are being tackled. It is common knowledge to Members of this House—it has been mentioned already—that Royal Mail has gone from, in 2002, losing £1 million per day to, in 2005, recording a profit of £537 million. During that time, quality-of-service levels have improved dramatically with around 94 per cent of first-class mail arriving on the day after posting. Changes to logistics and transportation arrangements and the move to single-day delivery have bedded down. Our people have been rewarded for the extra effort that is demanded of them: the working week has decreased from six to five days and, in 2005, every employee received a share-in-success payment of £1,074. A total of £218 million was paid out by the group, making it one of the largest profit-share payments in UK corporate history.

The use by Royal Mail of temporary and casual staff has reduced dramatically. That action, together with our entitlement, which we vigorously pursue, to conduct criminal record checks on all job applicants enables us to have confidence in the maintenance of the mail's integrity. Industrial relations have improved with industrial action at its lowest for many years. I join with others in thanking my noble friend Lord Sawyer for his sterling and patient efforts in that regard.

However, significant challenges remain. We are constrained by the regulator while at the same time we face free market competition. We have a history of years of under investment in machinery and infrastructure, Post Office Limited is financially a loss-making business, and our pension fund account deficit at £4 billion almost equals the annual income of a small nation. These are big and important issues which require careful and learned consideration if we are to maintain a public mail service with a high-quality, secure and reliable reputation. I will take the issues one at a time.

On 1 January 2006 the market was opened up to competition. The regulator lays upon us a duty to provide a universal service: deliveries to everyone, everywhere, every day. We heartily agree with the universal service obligation, but do not believe it should include as it does now some bulk mail services which are available only to business customers. Price rises are controlled by the regulator. Jolly good, some will say. But to put it in context, posting a letter in the UK is cheaper than most of the rest of Europe. In Italy, for example, it would cost the equivalent of £1.11. But prices should more nearly reflect costs and currently the only profit made from letters comes from business and bulk mail. If we are to have an even chance in the open market, we must invest and modernise. At the moment Royal Mail sorts only around 50 per cent of its mail automatically, as against 90 per cent by our competitors. We are looking at ways of electronically tagging the mail so that if something goes missing, we will know exactly where from. We have calculated that £2.2 billion of investment is required if we are to remain not only competitive, but also commercially viable in a fully liberalised market.

Now then, what about Post Office Limited? A great deal of heat is generated whenever the problems of the Post Office are raised—understandably so. For many people the Post Office has been a link to their income, their friends and neighbours, and a place seen as supportive and helpful. Following the loss of the benefits payments, business managers and employees alike have worked enormously hard to bring in new business. We are pushing on financial products, some of which are proving more successful than others. But the competition from high street banks not constrained by the requirement to support such a large branch network is very fierce. Post Office Limited currently has 14,402 branches while our competitors range between supporting 600 and 2,000.

Government actions threaten us on two fronts. The first is their proposal to set up 70 high street offices to vet and interview applicants for passports. This would dig into the £12 million net contribution this business currently brings in. Secondly, the Department for Work and Pensions has notified us that the current Post Office account card will cease when the contract ends in 2010-11. It is simply not possible to maintain the service politically demanded while at the same time being deprived of the wherewithal to underwrite the cost of that service.

Finally, while I am at the doom-and-gloom end of the subject, we have the pension account deficit. Our profitable period running up to 2005 enabled us to make a significant contribution to the pension fund, but the sums of money are so huge and the historical background so long that a political solution is required here. We do not want to close the scheme as so many others have done, but the figures speak for themselves and something has to give.

Despite these major challenges, I and my fellow board members remain upbeat about the future. Moving the company from an old-fashioned command and control style to one which is fit for 21st-century purpose is more than possible and is an exciting prospect. Indeed, from the point of view of the UK public it is essential that we meet this challenge. However, such a cultural shift will come about only with the commitment of the workforce—managers and workers alike. More training for all our people is essential, as is the creation of an atmosphere where everyone feels part of the action and where everyone feels respected and valued. We need to encourage more flexible patterns of working and to recognise the diverse needs of others. Part-time working must not be viewed as a less than full-time commitment and such opportunities would increase the participation of women who may have other responsibilities.

Such modernisation of the infrastructure and working relationships is essential to the future of Royal Mail. The sums of money required to set the ship on a steady course are anything but small, and we do not underestimate the difficulties. But we cannot stay as we are and thrive. New financial arrangements must be made which will enable the collective experience and commitment of the board to take the company forward.

My Lords, I am sure everyone is glad that my noble and long-time personal friend Lord Clarke has brought forward this debate. It was not my original intention to speak but, as my noble friend Lady Pitkeathley who is currently on the Woolsack will confirm since we all share an office, he talks almost as much about the Post Office as he does about Arsenal Football Club every week. Nothing happens that we do not hear about.

What really disturbs me about what is happening was set out in an article that appeared in the Financial Times a little before Christmas, to which I shall return. I am even more concerned now, having listened to the remarks of the noble Lord, Lord Dearing. He really has put his finger on issues which have not been touched at all—I do not mean just here, but anywhere. We seem to be interpreting "liberalisation" in a way which, in my opinion, lacks any clear indication of what is the goal we are after. I simply do not know where it is we hope that we are going. The way we are interpreting liberalisation and a universal service suggests that they are in fact incompatible.

I have read the last Postcomm report. Unusually, while it gives the period it covers, the document is not dated so we do not know when it was issued and it does not give its terms of reference. Whether what it says is in accord with the short version given to the House by my noble friend Lord Clarke, I am not sure, but to me it reads like a very odd document. The virtue is competition, competition, competition. A few more doses of it and we will all live in a postal paradise. That is what the report says. To be frank, I do not believe it. What first sprang to my mind was the bizarre regulation-directed performance on liberalising the telephone directory service. We ended up with a dozen or more companies, all giving us directory inquiries less well and more expensively.

I find it hard to believe that we can deliver a modern postal service as cheaply as we are today and I shall indicate one or two reasons for that. While we should not attack competition or the private sector, we need to think about how we use those in the operations we are seeking to liberalise, to use the current word. We assume that we use words like "privatisation" and "competition" on the basis that everyone understands them. They have a common meaning and purpose, so we can just go ahead and use them. But it is not like that. Perhaps it is a ludicrous comparison, but while you can have competition in having your hair cut, I do not see how you can have competition in providing probation services. They are totally different operations. If we want the probation service to work better, we have to say, "We want to do this in a different way. We want it to be more efficient and less costly". What we cannot say is that we will get Tesco to do it for us.

I am far from certain that Postcomm has thought this through. There is no indication of where it wants to get us to. Here we are with pretty much the cheapest service in Europe—the first in the field. What was the reason for the rush into liberalisation? It has not been explained. Its own reported survey shows that nine out of 10 users said the Post Office was important to people, and 96 per cent said that they trusted the Post Office. Where on earth did the pressure come from? We are taking some very serious risks and we are even being foolhardy.

I do not wish to be patronising but there is merit in some of the arguments of my noble friend Lord O'Neill. Management could not have been the only answer—it was not the only answer—to the position the Post Office was in. We would not have such a cheap postal service if that was the case. In the current situation, why is it that 14 people want a bit of the action? If the Post Office had had the capital to make the investments to produce the economies of scale which presumably these other companies are able to make, 14 people would not be looking for the work. They are looking for it because it is a cash cow and they are able to get it on the cheap. There are some fairly aggressive dogs out there.

Perhaps I can read three short extracts from the Financial Times article of 29 December. The first is a quotation from Nick Wells, the chief executive of TNT Mail. He said:

"The UK is a very important market for us. Mail volumes are in decline in Holland and we've got to expand internationally. The UK is the second largest market in Europe, it's very strategically important for us; it's critical that we're successful in it".

The article goes on to say—and perhaps my noble friend Lord O'Neill did not see this—that:

"TNT intends to take on Royal Mail head-on with a new end-to-end service. 'We do have a stated ambition to create an alternative final . . . delivery'" service. So much for "universal" if it does so, but I doubt that he is talking about Brixton, the Welsh valleys, the Scottish Highlands or rural East Anglia. That means that the service will effectively have to be subsidised by the Post Office.

Alex Batchelor, the Royal Mail's director of marketing, said:

"Does bypass [end-to-end delivery] potentially pose a much more dangerous risk longer term than access? Answer, yes".

None of this is being dealt with at all and I hope that the Government will begin to address it. I shall pose one or two questions to the Minister later.

I think that the noble Lord, Lord Hoyle, mentioned the question of VAT. This is an extraordinary situation. They want a level playing field on VAT. They say that if it is 5 per cent for each, it will come out with no consequence. But that is 1.5p off the present stamp and nearly 2p off the proposed new one. What an extraordinary way to produce a more valuable consumer service.

Perhaps I may ask my noble friend one or two questions. What authority do the Government have in directing what Postcomm is doing? Is it so independent that it can do anything, or have we got some control? Are the Government content with the way that Postcomm is performing and the outcomes? What is the ultimate goal that we hope to see? Do the voters know what that goal is and do they know what is happening from the 1st of this month? It may not lose an election, but the Post Office will affect votes at the election.

My Lords, I join other speakers in thanking the noble Lord, Lord Clarke of Hampstead, for introducing this important debate. Perhaps I can start by reminding your Lordships what his Motion actually says. It is intended,

"To call attention to the case for a Government policy towards the Royal Mail which best reflects the national interest in all respects".

Implicit in what a number of noble Lords have said is that over the past 20 years or so governments of both political persuasions have not had a policy towards the Royal Mail which best reflects the national interest in all respects. Indeed, some might say that they have not had one that reflects the national interest in virtually any respect.

It would probably be common ground historically—taking the Post Office itself first—that there has been a significant failure by governments of both persuasions to invest in the Post Office network, which has resulted in the closure of more than 7,000 branches. There are considerable fears that this will lead to further closures of both rural sub-post offices and urban post offices, as a number of noble Lords have mentioned. There is little doubt that the Royal Mail has been starved of significant investment, which has had serious consequences for its ability to compete effectively.

I know the Minister will guarantee the universal service obligation, but there are fears, as a result of this lack of investment, whether the Royal Mail under the current structure has the long-term ability to deliver mail to every household and business at uniform prices. There is considerable concern about that.

A number of noble Lords have touched on the fairly grim economic circumstances facing the Royal Mail. First, as we all know, the monopoly in delivery of mail ended on 1 January 2006 and so the company is now facing competition in a fully liberalised market. It is contemplating investment totalling, I think, approximately £1.2 billion in modernisation, but, as noble Lords have indicated, this is primarily to be paid for by significant price increases for consumers which the regulator, Postcomm, has indicated it is prepared to approve. The devastating position of the pension fund, which at the last count had a deficit of approximately £4.25 billion, has also been mentioned.

We are aware that the freedoms available to competitors to raise funds for investment capital are not available to the Royal Mail because it needs permission from the Treasury and the DTI to borrow. Such borrowings count against the public sector borrowing requirement and therefore the Royal Mail is competing with other public sector priorities.

I suspect that business mail—which makes up approximately 90 per cent of the mail carried by the Royal Mail—is now subsidising the universal service obligation. Royal Mail's competitors want to win a substantial share of the business mail, as the noble Lord, Lord Christopher, indicated earlier, and any loss of that market share by the Royal Mail could endanger its ability to meet the universal service obligation.

I do not think that any noble Lord has touched on the next issue, unless it was when I was not in my place. Serious conflicts of interest are inherent in the new arrangements for the mail delivery system. That is because the DTI, which the Minister represents here today, has an obligation to promote the overall health of the mail market. Secondly, it owns the main operator. Thirdly, it is responsible for setting the regulatory framework. Fourthly, it appoints the regulator. So there is a structural difficulty there as we move into the liberalised world that started on 1 January.

There is another built-in disincentive, of course, because the Royal Mail has no incentive to maintain unprofitable but socially important post offices, but has a positive interest in preventing them from winning new business from the new mail delivery companies. Again, there is a structural difficulty there.

It will be widely accepted in all parts of your Lordships' House that the following four principles need to be implemented by the Government if they are to fulfil the objectives of the Motion of the noble Lord, Lord Clarke of Hampstead. First, it is clear that the Royal Mail must have the freedom to make investment decisions to give it the best chance of succeeding in the new liberalised market. There can be no doubt about that. Secondly, the universal service obligation must be guaranteed as a vital public service. I know the Minister will say that he does guarantee it. Thirdly—and this is implicit in what almost all noble Lords have indicated, certainly from the other side of the Chamber—the staff of Royal Mail must be given the opportunity to share in the success of the company, in whatever way that can be structured. Fourthly—taking up the point made by the noble Lord, Lord Christopher, about what the voters want—there is absolutely no doubt that the voters want a reversal of the decline in the Post Office network, both rurally and in urban areas, and they want branches to be improved and enhanced. I think that the four principles I have set out would be consistent with what noble Lords right across the Chamber would want.

The Government can say they are prepared to make the funds available to implement those four principles. Few people would doubt that an investment fund of at least £2 billion will be necessary for the Post Office network when the money runs out in 2008. That will provide the necessary structure for the sub-post office network and maintain the training necessary to enable them to be used as shop fronts for a variety of public bodies and to give them the freedom to win new business as collection and deposit points, not only for Royal Mail but other delivery companies. Individual sub-post offices need to be given the freedom to enter into agreements with private sector companies for bill payment and other services. That is what needs to happen; the Government have to provide the money to do that or look at innovative ways of raising funding from Royal Mail itself.

There are a number of ideas around and I should like to float a couple. First, the Post Office could be separated from the Royal Mail Group. Post Office Limited would then be retained in the public sector, giving post offices the chance to develop the new business opportunities I have articulated. Secondly, the Government could look at a shared ownership model for Royal Mail, with 51 per cent of the shares to be divided between the Government and Royal Mail staff, issuing shares to staff and small investors and selling the remaining shares to the market. The funds raised from that sale could provide the investment in the Post Office network and for the modernisation of the Royal Mail Group.

The Government have a choice: they either provide the money for the objectives I set out, which I think would be universally agreed by all Members of your Lordships' House, or they have to use Royal Mail for some form of innovative financing package to raise the money. But they cannot do nothing.

My Lords, along with other noble Lords, I thank the noble Lord, Lord Clarke of Hampstead, for introducing the debate, which he did so excellently, from his vast experience. It enabled other noble Lords, all with experience of their own, to contribute.

I take note of what the noble Lord, Lord McKenzie of Luton, said. We have all run over the time allocated for speeches. I know that I am only just starting—

I did not, my Lords.

No, my Lords, the noble Lord, Lord Razzall, most certainly did not, but he was about the only one. Doing so means that the Minister has less time in which to respond. So I shall refer to the points that other noble Lords have made and suggest that one reads them and then make one or two other points myself. I hope that that will give the Minister as long as he needs.

The noble Lord, Lord Cameron of Dillington, spoke beautifully about rural post offices, as did others. Anyone wanting to know more can read it in Hansard. The noble Lord, Lord Brookman, spoke very movingly about how the pension problem affects individuals working in the Royal Mail. Others touched on pensions and one could certainly read what was said with interest. The noble Lord, Lord O'Neill of Clackmannan, blamed quite a lot of the problem on management and said they should have seen it coming. However, people did not disagree with him totally, and his speech is certainly worth reading.

The noble Lord, Lord Brooke of Alverthorpe, made the interesting suggestion that something like NATS might be the answer. The noble Lord, Lord Dearing, pointed out the world problem—we are competing in India and China. He made the valuable point that the one thing we must keep for rural post offices is the Post Office card account. However, the noble Baroness, Lady Prosser, said that if the underwriting is not there, that would make it impossible. There is enough there for the Government to take away and see what has to be done.

I speak as someone who ran a mail order business for 18 years. It was very successful, enabling me to go into Germany and Australia. I give grateful thanks to the enterprise and co-operation of all those who worked at Royal Mail. I was once told that 11 postmen were working as a result of the work that we gave them.

This debate is very timely; the Trade and Industry Committee's Royal Mail after Liberalisation report has only just come out, and this is the first time anyone has had a chance to think about what it said will happen to Royal Mail after liberalisation. The debate is also timely because there will be plenty of competition from service providers. Other forms of communication are becoming increasingly popular and as no one else has mentioned them, I thought I might.

The committee and Royal Mail made a fleeting reference to e-mail as a competitor to "through the letterbox" mail services, but none at all to the impact of fax. Yet fax is cheaper and swifter for ordinary mail that does not include bulky enclosures. You can save money on your stationery and do not even have to buy an envelope. I confess that in my office, if it is possible to send a fax, we do. It is cheaper. As a result of Royal Mail's problems, the price of postage will have to go up; I understand that it is much lower than the rest of the world, but people in this country have been trained to pay a certain price, and they will try and do things cheaper if they can.

Despite the much trumpeted improvement in the postal delivery services, in the west end, where my office is, we get one delivery a day and are lucky if it has come by midday. People running a professional office, like that of a solicitor or doctor, need to be able to deal with mail before they go home for the evening.

E-mail has advantages in cost and speed. Just before I started to write this speech—before I went away for eight days and had to finish it at two o'clock this morning—I had to write to eight colleagues at once. I sent one e-mail at no cost, but it would have cost £2.40 if I had sent the letters by post. Competition has won the day and it is not for the Royal Mail. I do not believe there is any way that Royal Mail or, for that matter, new entrants into the market will ever be able to compete even if, as the noble Lord, Lord O'Neill of Clackmannan, said, they should have seen this coming. They may have done, but ultimately, what does one do?

The Conservative Party supports the liberalisation of the postal services market, but the timing has to be right. The money needed for the pension fund and the new investment makes it rather difficult.

I shall miss out quite a bit regarding what has been said because I am determined that the Minister shall be able to speak as long as he needs to. He has to answer the questions; all I have to do is highlight them and say how interesting it was to hear them.

The capital investment in the Post Office is terrible. The Post Office has been starved of the money needed to make sure that the infrastructure was ready for competition. If it liberalises, how can it compete with very old machines, where everything has to be hand sorted and is very labour-intensive? Cutting back on essential capital expenditure is short-sighted and counter-productive to say the least.

I am going to miss out another bit, not because it is not important but because I do not want to run over my time. I know that the noble Lord, Lord Sainsbury, is nodding in agreement.

Buried in Royal Mail's briefing note is the phrase:

"We have been exploring options around Royal Mail's balance sheet with our shareholder".

As the representative of the solitary shareholder, will the Minister tell us what those options are? That would be really interesting, although I do not expect him to tell us the conclusions.

I am sorry that this sounds so jumbled, but I want to miss out the bits that are not so important.

The other matter apart from investment is the yawning gap in the pension fund, which other noble Lords have mentioned—no less than a staggering £4 billion. The Royal Mail admits that:

"The deficit is too large for Royal mail to trade itself out of through normal price increases over a reasonable period", so is it proposed that this deficit should be funded by the customers by what will be abnormal price increases, in a sort of 12 to 20-year hire purchase scheme? That would immediately reduce the competitiveness of Royal Mail over its new rivals who will not be carrying this millstone into the new market place.

The Committee's report says:

"We asked Royal Mail who they thought was responsible for the deficit . . . but they refused to be drawn".

Well, I do not have to be so coy. The guilty party is none other than the usual suspect—the Treasury. The Treasury, under several governments—I make that clear so that the Minister will not attack me—has treated the Royal Mail as a sort of milch cow from which a form of stealth tax could be extracted without the need to consider investment or the pension fund as a priority. The Treasury took many pension holidays when times were good and got better dividends. The same Treasury, this time under our present Chancellor, looted the pension fund in its annual £5 billion raid. The answer is obvious. As this money was milched from the Post Office in the first place, and did not go to the customers sending letters around the country, the Treasury should pay it. Can you imagine what would happen to a company on the FTSE 100 which had the cheek to tell its customers that they would have to pay more for goods because the shareholders had given themselves the pension money as dividends?

The question of privatisation was briefly discussed and discarded. I must agree that it is wiser that way because who would want to take shares in a company right now which has a massive £4 billion debt to its employees, has to use clapped-out machinery and is open to competition from outsiders who do not have the burden of having to provide a universal service to the remotest part of the country at an affordable standard price?

I have had 10 minutes. When the clock says "nine", that is the beginning of the 10th minute, so I shall not say any more other than to thank the noble Lord, Lord Clarke, again for allowing us all to make these points. I wish I had been able to say it all because I recommended that everyone should read everyone else's speeches. I would like to have read all my suggestions, but I will no doubt discuss them with the Minister in due course.

My Lords, I first thank the noble Baroness for giving me the time to respond to this extremely interesting debate and congratulate the noble Lord on securing this debate on the Royal Mail. The noble Lord has spoken eloquently and knowledgeably about the issues affecting Royal Mail and I am grateful for the opportunity to respond. I have also been involved with the Post Office for many years—not as long as the noble Lords, Lord Clarke and Lord Young—but for 25 years, since I sat on the Carter committee that reviewed the performance of the Post Office 25 years ago. I also have a great affection for what is a great British institution. Looking back, what strikes me most is that, over that period—and it continues today—there is a constant need for the Post Office to adapt and change to the new circumstances in which it finds itself.

The Government are entirely in agreement with the noble Lord, Lord Clarke, that the Royal Mail should serve the national interest. Royal Mail's "pipeline" is a vital part of the nation's communications network. It enables businesses to communicate with each other and with their customers and enables social users to send letters, cards and parcels from one end of the country to the other. The noble Lord raised the basic issue of the objectives of the Government for the Royal Mail. The Government's stated ambition for the Royal Mail is for a publicly owned company fully restored to good health, providing customers with an excellent service and its staff with rewarding employment. The Government's primary policy interest is to ensure the provision of the universal postal service—a daily delivery, every working day, at an affordable uniform price to every address in the country. We all want that to take place in the context of the needs of people in the 21st century. Since July 1999, when we brought forward a White Paper entitled Post Office Reform: A World Class Service for the 21st century, the Post Office has made very good progress. In 2001–02, the company was showing a pre-tax loss of £1.2 billion including a £318 million loss on its operations. The company was losing over £1 million every working day and its costs needed to be brought under control. Nobody could have disputed that restructuring and reform of Royal Mail was needed.

In 2002, Allan Leighton, the chairman of Royal Mail, then known as Consignia, announced a three-year renewal plan to restructure its postal services. The aim of this plan was to reduce costs, wipe out these losses and return the business to profit by April 2005. I am pleased to say that Royal Mail has returned to profitability and the management has got to grips with costs and reduced overheads. In 2004–05, the company's profit from operations was £537 million. The latest figures, published in mid-November, for the half year to 30 September 2005 show that the Royal Mail Group made an operating profit of £159.3 million. These interim results show a 20.5 per cent improvement on the previous year.

Nobody should underestimate Royal Mail's achievement. It is not in a dire condition, as the noble Lord, Lord De Mauley said, although it faces big challenges. The chairman, board, management and workforce should all be congratulated on their efforts to turn the company around.

Not only is the company's financial performance improving, the company is also showing its best performance yet in terms of quality of service. Figures for the first half of 2005–06 showed that 93.9 per cent of first-class letters were delivered the next day. It is a performance that not only beats the company's target, but also beats any performance that Royal Mail has ever achieved in the past. A recent Postwatch survey showed that between the end of September and the end of October last year, 95 per cent of first-class letters in the survey were delivered the next day. That is an enormous improvement on the performance two years ago. We welcome these figures. Royal Mail, and, in particular, the dedicated postmen and women up and down the country who have put in a lot of hard work to achieve them are to be congratulated.

As has been mentioned in this debate, industrial relations in the Royal Mail have also shown a great improvement in recent years. The number of days lost in the letters business through industrial action in 2004 and 2005 respectively was 7,541 and 4,283. That compares with nearly 85,000 in 2003. This has been achieved at a time of huge change in the structure of the business. The unions and management have both contributed to this improvement—as has the input from others such as the noble Lord, Lord Sawyer, who has made a valuable contribution with his independent reports on the state of industrial relations in the company.

In addition, in recent years, the union has realised its ambition of £300 per week for employees and a five-day working week. I was pleased that the noble Baroness, Lady Prosser, explained what progress has been made. I also agree with the noble Lord, Lord Sawyer, that the unions and management need to develop ways of handling change in the future, because much change has to take place.

While the Royal Mail has turned around its performance, it still faces many challenges and must modernise and radically reform itself if it is to compete head to head with other means of communication and its European rivals. For example, in common with many other companies, Royal Mail faces a pension deficit of £4 billion—a point raised by the noble Lord, Lord Clarke. The pension deficit has arisen because of market changes in the value of the pension fund assets—equities—the life expectancy of members of the scheme; and the way in which pensions are reported on company balance sheets.

Less than five years ago the pension fund was more than £700 million. What we have seen take place in the Post Office mirrors what has happened in other public companies which badly underestimated the needs for pensions and took pension holidays. We consider that the costs involved in tackling the deficit are inherent costs of the business and as such should be reflected in prices. That was made clear in our response to Postcomm, regarding its recent consultation on the next price control and this has been reflected in Postcomm's final price proposals.

Another challenge that the Royal Mail faces is that mail volumes have decreased recently by 1.2 per cent. As the noble Baroness, Lady Miller, also pointed out, the company will continue to face the challenges of e-substitution and increased competition both in the UK and overseas.

Today's debate has raised all of these key challenges, so let me try to deal with the specific points one by one. The noble Lord, Lord Clarke, raised the question of market opening. The Government believe that competition will encourage Royal Mail to continue to improve its products, quality of service and operational efficiency. I was pleased that my noble friend Lord O'Neill reinforced this point. I would say to the noble Lords, Lord Dearing and Lord Hoyle, that of course there is never any best time for competition or opening of markets. I am sure that the noble Lord, Lord Dearing, with all his experience of the DTI, will have heard many times the argument why it is not the best time for competition; but it usually turns out that if you do not take those opportunities, competition never comes.

The decision to open the market from 1 January 2006 was taken by Postcomm. The noble Lord, Lord Christopher, raised some questions about that decision. Postcomm's duties and functions are set out in the Postal Services Act 2000; its primary duty is to ensure provision of the universal service, and decisions must be taken against that background. The decision to open the market followed a full public consultation and was supported by, among others, Royal Mail management. Postcomm believes that the decision it has taken is in the best interests of UK consumers. The Government's manifesto said it would look at the impact of liberalisation, and it will do so, but only once the market has been opened and there is an impact to assess. There is no timetable for the review, but we will monitor the market now that it has been opened.

I should point out in this context that other member states, notably Finland and Sweden, already have fully opened postal markets. The Dutch have said that their market will open from 2007, and the Germans have indicated the same. The Government will continue to press for full liberalisation across the rest of Europe, to happen as early as possible to ensure a level playing field.

Another major theme, which the noble Lord, Lord Dearing, raised, is the whole question of productivity and the investment that is needed to achieve it. The Government recognise that Royal Mail has fallen behind its competitors in terms of mechanisation and productivity. In particular, the Dutch and the German postal service operators do considerably better. For example, the number of letters delivered per Royal Mail full-time equivalent employee in 2003 was 117,000, compared with 130,000 in Deutsche Post and 156,000 in TPG. Another important figure is that the percentage of letters walk-sorted—that is, for a postman's round—by machine for Royal Mail is 50 per cent, compared with 90 per cent to 95 per cent for Deutsche Post and TPG.

Postcomm has also recognised the need for investment and its final proposals for the next price control make provision for £1.2 billion of capital expenditure over the next four years. In that context, the noble Lord, Lord Dearing, also raised the question of funding of the Post Office and the extent to which the Government have provided it with funds. The Government have made very substantial funds available to the company in recent years. In December 2002, we put in place facilities totalling more than £1 billion to help the company to implement its renewal plan for the letters businesses. In 1999, we made available some £500 million to enable the Royal Mail to acquire German Parcel, which has now been transformed along with other acquisitions into the Royal Mail group subsidiary, General Logistics Systems, which made a profit of £43 million in the first half of the financial year—up from £23 million in the corresponding period last year—and is expected to have profits close to £100 million by the year end. So when efficient management is brought to bear, we can compete very well.

Comparisons have been made about the level of funding that has been available to Royal Mail's European competitors, in particular with the part-privatised Deutsche Post and TPG. The Government have made funds available of over £3 billion since 1999 to Royal Mail to support the restructuring of the mails business; investment in acquisitions; and the modernisation and restructuring of the post office network. There has been a lot of speculation in the media recently about the Government investing a large sum of money in the business. I should say that the Government have not agreed to inject £2 billion into Royal Mail, despite some of the reports saying that we have. But what we have said is that for the shareholder to invest in the company, Royal Mail would need to put an investment case to the Government in exactly the same way as a private sector company would approach its shareholder. The impact of Postcomm's final proposals for the regulatory settlement is being assessed, and future investment must be on a commercial basis. The Government also have to assess the affordability of any investment against other government priorities.

I turn to what noble Lords have said, quite rightly, is a different and major debating issue—the issue of the social network and urban reinvention. The issue was raised by the noble Lords, Lord De Mauley and Lord Cameron, and is an enormously important subject. Of course, it is not only the letters side of the business that faces the challenge of change, as noble Lords have said. The future of the post office network is also a matter of national concern and because of the social impact of the network, Government have quite a different interest here.

The world has changed beyond recognition in recent years. If the post office network is to survive and thrive it needs to change significantly. The Government want a post office network that can prosper on the basis of today's and future needs, not on those of 20 or 30 years ago. But in doing so, we also have to face up to present reality. Major sectors of the network are losing very substantial amounts, including the rural network, the directly managed "Crown" offices and the deprived urban area network. Clearly the status quo is not sustainable. Several important steps to restructure and revitalise the Post Office have already been taken but, once again, massive challenges remain.

Decisive action in the form of the urban reinvention programme was taken to restructure the urban network. This saw almost 2,500 office closures while ensuring that, nationally, 99.3 per cent of people in urban areas still live within a mile of their nearest post office. We now need to address the issues facing the social network of sub-post offices in rural and urban deprived areas. It is no longer clear that the needs of those communities or the most disadvantaged are best served by the present traditional, costly and inflexible network structure.

The social network payment of £150 million a year from the Government was introduced in 2003–04 as a transitional measure against the background of the migration to direct payment of benefits. It was intended to provide a financial breathing space in which Post Office Ltd would develop new products to replace lost income from traditional business and would identify more cost-effective ways of delivering its services.

It is becoming increasingly urgent that we find innovative and more cost-effective ways of delivering post office services to rural and many urban deprived communities. We cannot ignore the fact that large numbers of rural offices have very low levels of utilisation, with some 1,600 offices averaging fewer than 100 customer visits a week. The 800 smallest rural offices average 23 customer visits a week, generating average losses of more than £6 per customer visit. The next smallest 800 offices, averaging 85 customer visits a week, generate average losses of £2.50 per customer visit. By any standard, that is neither a sensible nor sustainable use of financial resources for either Government or Post Office Ltd. Even in the busiest rural offices, each transaction is loss-making on average. We now need to focus much more clearly on provision of post office services, not post offices themselves, and find innovative methods of delivering them.

Post Office Ltd is, therefore, running a series of pilot trials of alternative, innovative means of delivering services to rural communities. There are four of these main outreach options: a full service offered by the postmaster/mistress or a fully trained employee using either kit permanently at a site or portable kit as required; a partnered operation, which is a basic service, with access to cash, bill payments, stamps, weighing and leaving parcels being provided by another retailer alongside their main business, such as a petrol station or pub, but supervised by the core sub-postmaster who provides the site with the products required; a home service; and a mobile service. In all of the pilots, the service hours have been set at levels much more commensurate to the level of business generated in that community to eliminate the wastefulness of long opening hours with little or no custom. This is where our efforts and those of the Post Office should be directed, because we can give people a much better service that is economically viable for the future.

I should like to touch on the subject of privatisation and employee shares, which a number of noble Lords raised. The Secretary of State for Trade and Industry has made it clear that the Government will not privatise Royal Mail. The Government's ambition is for a publicly owned Royal Mail fully restored to good health, providing customers with excellent service and its employees with rewarding employment. In this context I assure the noble Lord, Lord Brooke, that we are not ruling out options that could increase workers' involvement, including an employee stake. We think this is at least worthy of examination in the context of a publicly owned business where employee shares cannot transfer to non-employees. I should also add that the Government have not yet received any firm proposals from the company about an employee share scheme, and therefore we have not drawn up a detailed policy response to it.

I shall address the comments made by my noble friend Lord Clarke about the appointment of Allan Leighton as chairman. I think his comments are totally inaccurate. As the chairman of Royal Mail is appointed by the Secretary of State, my department oversaw the process, which was conducted in a manner totally consistent with the Office of the Commissioner for Public Appointments guidelines. The post was advertised and Allan Leighton applied in the normal way, along with others. He was shortlisted, and the scrutiny panel considered him to be the strongest candidate. This recommendation was accepted by Ministers, and I think history has shown that it was the right appointment to make. I should also add that there is nothing in Allan Leighton's terms of engagement that relate to any future privatisation or part-privatisation of the Royal Mail.

The noble Lord, Lord Brooke, raised the role of Sir George Bain, who is giving ongoing advice and support to the Secretary of State. It is not envisaged that the work he is doing will necessarily be drawn together in any single report.

I shall deal with a final couple of points. The noble Lord, Lord De Mauley, raised the question of the increase in the pension deficit, which went from £2.5 billion to £4 billion. This was due to the application of FRS17, which has much more stringent requirements for the actuarial valuation. That is why the increase was so dramatic. My noble friend Lord Clarke raised the question of whether the Government will forgo dividends. The Government agreed to do so during the renewal plan period, and this was thought appropriate, given Royal Mail's poor financial position. A decision on future dividend policy is yet to be made. Future policy will be linked to the outcome of price control and resolving the balance-sheet issues the company is facing. Like all shareholders, the Government wish to see a return on their investment in the form of dividends, although this is not our only measure of shareholder value.

I have found today's debate extremely useful. The standard of contributions has been particularly high. In turn, I hope I have been able to offer some greater insights into the Government's policy towards Royal Mail, and also to convince your Lordships that the national interest lies at the heart of it.

My Lords, in the three minutes left before I am advised this debate has to conclude, I want to thank all noble Lords who have taken part in what I consider to be an important and interesting debate. My colleagues on this side of the House will understand if I do not refer to their individual contributions, but simply say how grateful I am to them. I will be saying something about one of those speeches, though, if my time does not run out.

I thank the noble Lord, Lord De Mauley, for the way he was able to put the case for the magazine publishers that I had to cut out of my original speech. That will be helpful for them, and will be helpful for me to go back to it when I read the debate. The noble Baroness, Lady Miller, is a great friend of the Post Office. I well remember the millionth packet she posted from her company, and the silver salver that was presented to staff at the time. It still resides on the windowsill of my old office—or the office I would have if I were still doing that job.

I would like to go back to the days when we had 18 deliveries a week—even though they would stop when we went to the Arsenal on a Saturday afternoon when I had to deliver up Finchley Road, where the noble Baroness lives—and six collections a day, but those days have gone, and I accept the need for change. I found the description given by the noble Lord, Lord Cameron, of the social needs of our rural communities very moving. It set the scene for a number of other speakers. I will not list them all, but many speakers in this debate have mentioned this important issue. I am delighted that this House takes seriously the need to maintain the social fabric in communities. Politics aside, we have a system in this country we should be proud of, and we should do our best to maintain it.

I was pleased to hear the wise words of the noble Lord, Lord Dearing, the only other post office worker in this debate—the noble Lord, Lord Young, was a telecoms man. The words of the noble Lord, Lord Dearing, are always wise, although they were not accepted as such when we were on the other side of the table trying to get an extra half per cent on our pay claims. I am sure the points he has raised have given food for thought.

I shall mention just one person on this side of the House, and that is the noble Lord, Lord O'Neill. I do not know whether it was offensive or I am being over-sensitive, but to describe Post Office managers in the past as not being competent, and then to pray in aid the change, is a bit unfair. No Post Office chief executive or chairman ever had the scope they have had since Allan Leighton came on the scene. No one else cut the deliveries down to one a day. The noble Baroness, Lady Miller, mentioned that by the time you get the mail now, it is time to go home. And he talks about change. I was part of the working projects on automated letter-facing, mechanisation, and optical character recognition. Many things were developed by technicians in the Post Office research department that were foreseeing the future, and other countries have benefited from them. It would be unfair to draw any distinction about what happened in those days, because the money was not there to continue with that research.

In conclusion, thanks again to everyone who has taken part in this debate. I beg leave to withdraw the Motion for Papers.

Motion for Papers, by leave, withdrawn.