[Mr David Amess in the Chair]
Written evidence to be reported to the House
PS 01 Robert Messenger
PS 02 Age UK
PS 03 Federation of Small Businesses
PS 04 British Postal Museum & Archive
PS 05 Trustee of the Royal Mail Pension Plan
PS 06 National Federation of Occupational Pensioners
PS 08 Association of British Credit Unions Ltd
Welcome to this afternoon’s evidence session on this important Bill. Most witnesses have never experienced this and, because taking evidence is a recent innovation, the experience is new even for members of the Committee. For those who are giving evidence, Committee members are anxious to get evidence on the record from our four witnesses, so that we can consider and reflect on those comments during the Committee stage.
We will now hear oral evidence from the four witnesses. Starting from Jill Ainscough, will you introduce yourselves and make an opening statement for two or three minutes?
Ed Richards: I am Ed Richards, the chief executive of Ofcom, and we are looking forward to the responsibilities that will come our way if indeed, the Bill goes through Parliament. We think it is an interesting set of issues with an important set of social and economic objectives at its heart. We are just beginning to grapple with and understand some of the challenges that lie before us.
Nigel Stapleton: I am Nigel Stapleton. I have been chairman of Postcomm, in a part-time role, since January 2004. My second term comes to an end in January so I will not be around to turn the lights off at Postcomm, but clearly we are resolved to achieving a smooth and effective transition across to Ofcom and to trying to make sure that there is no delay in putting a lighter-touch regulatory regime in place.
Tim Brown: I am Tim Brown, and I have been the chief executive of Postcomm for two years. I have been in the mail and distribution industry for 18 years, and 11 of those were with Royal Mail. I am responsible for working with the team in terms of ensuring the transition across to Ofcom, as well as implementing and regulating mail in the interim.
Thank you very much. Mr Stapleton and Mr Brown, your use of the microphones was absolutely spot on. Can the other two witnesses speak up a little so that we do not have any issues with resonance? My script says that before calling the first Member to ask a question, I should remind all Members that questions should be limited to matters within the scope of the Bill. We must also stick strictly to the timings in the programme motion agreed by the Committee, which means that we will finish this first session at 5 o’clock.
Ed Richards: What we are anticipating doing is picking up the work that Postcomm has done, applying our own governance and views to it, and then completing that process once the transition has taken place next year after the passage of the Bill—if indeed, that is what happens. That is the end-to-end process as we see it. We are involved and have begun to think about that today. That is, of course, precisely the reason for our being here today and it is why we need to begin to work very closely with Postcomm between now and the conclusion of that process, which, obviously, is in the hands of Postcomm at the moment. We have only just begun to think about that process.
What I was getting at with that question is that, as currently drafted, Ofcom will make the first universal service order. My understanding is that the Secretary of State, when you present that to him, can remove services from the universal service order, but he cannot add services to the universal service order. Is that your understanding of the Bill as it is drafted?
Ed Richards: Yes. Our understanding is absolutely clear that the ultimate responsibility and decision-making power on the definition of the universal service, whether it grows or diminishes, is with the Secretary of State and with Parliament. Such decisions may be based on our recommendations, but that is where the ultimate responsibility will lie.
He may have the ultimate responsibility, but as you understand it, the Secretary of State cannot add services to the universal service order, he can only remove them. Is that right?
Ed Richards: I cannot honestly remember. The power of change is with the Secretary of State, so I assume that, if we were to propose to add services to the universal service order, it would be possible, but the debate tends to be the other way around. That decision-making power lies with Parliament and the Secretary of State, which is the crucial thing from our perspective as we go into the process.
I have a question for Mr Stapleton and Mr Brown. Could you describe your current relationship with the Royal Mail? We heard this morning from the chief executive and various union reps, and they all mentioned what they see as over-regulation. There was particular criticism from Royal Mail’s point of view about the access headroom regulations as they currently stand. Could you set the scene for hon. Members on how you see the current relationship and how that has developed over the past few years?
Nigel Stapleton: I will ask Tim Brown, who is chief executive, so, obviously, has much closer contact with Royal Mail than I do, to talk about the relationship.
I shall give the Committee a little bit of positioning on the subject of over-regulation. The mail market has changed tremendously since the current price regime was put in place in 2005. Postcomm, however, has not been sitting on its hands over that period. We published a strategy review in 2007, which said that the market is changing and the regulation should change with it. The fact is that we have been, in a sense, stopped from moving regulation forward for two reasons. First, the Hooper report was commissioned immediately after that strategy review was published, and it would have been inappropriate for a regulator to make fundamental changes to the regulatory regime given the scope of Hooper’s terms of reference. Immediately after that, the Postal Services Bill of 2009 was brought forward and Ofcom worked to develop the new regulatory regime, so we only started work on a change to the framework after that Bill fell in July ’09. Fifteen months later, we have brought forward the first phase of decisions for a lighter-touch regulatory regime. There is absolutely no difference of opinion between us and Royal Mail about the regulatory regime not being fit for purpose, but that does not reflect the fact that we have been oblivious to that.
Tim Brown: The relationship is difficult when there is a one-to-one regulator experience in that we only regulate Royal Mail in the mail delivery industry, which is one of the advantages of moving regulation across to Ofcom, because it has a much wider field to regulate. Our relationship has been described to me as being like a marriage, and in that sense it is very difficult. I think that, professionally, it has improved over the past two or three years, but we are a regulator and have to represent consumers and other customers as well as the universal service, so there are natural tensions between us—between the regulator and the regulated. That will continue but, on a working level, they are a lot better than they have been in the past.
Obviously, I will contain any questions to what is within the Bill, as you mentioned earlier, Mr Amess. One of the Bill’s big components is the whole-scale privatisation of Royal Mail. What are your views on that? Do you believe it is the best way forward for the organisation? If the Bill is enacted, do you believe there should be any restrictions on who could purchase Royal Mail? That is to all of you.
Nigel Stapleton: I have one example in terms of the logic for a different ownership structure. We made an announcement yesterday about the commission’s “minded to” decision to allow Royal Mail considerably higher price increases for next year to accelerate its modernisation programme. I think that, if Royal Mail had had a different shareholder, the shareholder would have stumped up the money for the modernisation programme rather than asking the customer to do so. We accept the constraints on Government funding, which are very obvious. We have agreed in principle to those further price changes, which will put up the price of bulk mail by 15% next year, recognising that, with the current ownership structure, Royal Mail has to go to its customers rather than to its shareholder to finance the much-needed modernisation that will secure the universal service. That is one very good example of why that part of the Bill has a lot of logic.
Ed Richards: We have never discussed it at Ofcom. There is no corporate or organisational view of it, to be honest. My own view is that it is absolutely the right thing to do for all the reasons that Nigel has given and also because it will set out and create much clearer incentives and make the prospect of effective independent regulation much more likely to succeed. I think that, over a period of years, the prospect of the USO being sustained as a result of improvements in efficiency and productivity is greater as a result of that.
Nigel Stapleton: I think that, in a situation in which Royal Mail is currently saying that the regulator is too hands-on, you can be pretty sure that regulation going forward will make sure that the owner properly respects their obligations in terms of providing the universal service. That is part of the regulatory structure. From my perspective, I believe the public should be reassured that, with the sort of regulatory regime envisaged, the universal service will be protected whoever the owner is.
Ed Richards: Quite a number, I think. The first is to agree with what Tim said earlier. I think that, over many years, experience tells you that single-company regulators find life really hard. It is not anybody’s fault; it just creates a situation that is very tough. We regulate a lot of very big and powerful companies, all of which you will be familiar with, so I will not name them all. One of the virtues of that is that I can have a difficult conversation with, or we can make a difficult or uncomfortable decision for, certain corporate interests one day, but we move on to something else the day after. It just makes the whole environment more manageable, and I would envisage our relationship with Royal Mail and, indeed, any other postal operators being of that nature. That is the first reason.
The second reason is that we have currently sufficient scale, as an organisation, and sufficient complexity and range of interesting issues to be able to attract very high quality people to work at Ofcom. That makes a huge difference when you are arguing detailed economic and legal issues with some of the most well-resourced companies not only in the UK and Europe, but in the world. If we cannot do that, and if any regulator cannot do that, you can forget it.
The third reason is that we know about network industries, and this is a network industry. We know about telecoms. We know about broadcasting. They are obviously different, but there are similarities in how you think about the underlying economics in particular.
The fourth reason why I hope we can bring something useful to the table is that, in all of the areas that we regulate at the moment, we have to blend and balance both economic regulatory objectives and social objectives. In broadcasting, we have to worry about the level of original production and standards on television and radio, while also thinking about the economics of advertising and pay television. In telecoms, we have to think about the underlying competition and what we can do to promote innovation, to reduce prices and to improve quality of service for, say, broadband, while at the same time we have to think about the USO and making sure that those networks are available to as many people across the UK as possible. That marriage of both the social objective and the economic objective is something that we are very comfortable with and very familiar with.
The Hooper report says that regulation can play a role in the modernisation of Royal Mail by creating incentives to improve the efficiency of its operations. To both Ed Richards and Postcomm, do you have any initial thoughts on how good regulation could be used to improve the efficiency of Royal Mail?
Tim Brown: On efficiency, the biggest thing that will improve or give incentive to Royal Mail is what is happening in the marketplace. In terms of the decline in volumes that happen in the marketplace, we believe that Royal Mail has to become more efficient. I know that Moya talked this morning about the plans that have been put in place over the past two years to drive that efficiency forward. That is probably the primary driver. If it comes down to the regulator, in a way the primary driver has failed, and the regulator has to put artificial measures in, as we have done in the past. That is a secondary driver.
Ed Richards: First, conventional market pressure, as Tim says, is fantastically important.
Secondly, there is the stability and predictability and opportunity created by regulation. The regulator makes a decision and then backs off, and the objective of the company is to beat it and to improve on it. There is a clear incentive to drive efficiency. If they do that, they keep the benefits and good luck to them.
Thirdly, which is pertinent to Mr Morrice’s question, all of those things are easier to do and will be more effective if you have private shareholders acting as a discipline and demanding those efficiencies in order to drive their profitability. If that is second-guessed by public ownership and second-guessed by political decision making—I am not giving a view as to whether that is right or wrong, but I can be clear from a regulatory perspective—that will dull those incentives, and we will be less effective in helping to deliver that underlying efficiency.
What I want to ask is, drawing upon your experience as regulators, whether it would provide greater clarity for a regulator if the Bill set out the criteria for access points, namely post offices, in the same way that it does for frequency of collection and delivery.
Tim Brown: Currently, we do not regulate post offices; we regulate access to postal services. We set criteria within the licence that Royal Mail operates with about what access it has to provide as a minimum. It is up to Royal Mail if it wishes to go further than that and how it goes beyond that, and that is already set within the licence. Therefore, any changes to that have to go through a discussion, a negotiation between the regulator and the regulated company.
Tim Brown: The only thing that I would observe is that I think that, as needs and behaviour change over time, the needs of access points will also change over time. Therefore, there has to be the ability to reflect changing customer behaviour in terms of what is access and what is needed. That may include bringing things in and making things with greater access, especially with the move to e-fulfilment and online shopping, and maybe changes elsewhere. The more that is written in stone, as it were, the harder it is to change to reflect customer-driven behaviour. That would be the only observation I would make.
Ed Richards: I very much agree with that. The underlying economics may well change and therefore the opportunity, or the changing conditions under which competition may or may not be appropriate, will shift over time. Flexibility to understand that from a technical and economic perspective, and not be boxed into a certain answer from the regulatory perspective, is extremely important. Otherwise, you are essentially pre-empting the economic analysis that determines where there is scope for competition or, indeed, where there may not be, in light of the need to ensure that the USO is sustainable.
Isn’t it the case, though, that on the continent, in places such as the Netherlands and Germany, you find legislation that puts down certain criteria for access points? It seems to work quite well on the continent.
Tim Brown: There are different situations in different countries. One thing about post is that it is not uniform across all of Europe or the world. So, in certain countries such as France, the number of post offices, particularly, is absolutely fixed. But in terms of access to postal services, it is less so. A lot of the innovation that Royal Mail has done is things like stamps online—you access your stamps through online services, not through post offices. A lot of the strategies are about widening access to the use of post and anything that does that has to be good.
I am interested in the transition that is going on between the two organisations, with the shift of regulatory power. How is it working thus far? Is Ofcom taking any learnings from Postcomm in light of the history over the past five years—the post office closure programme, consultations and so on—and the public aspect of dialogue that has taken place previously on the access to postal services, and how is Ofcom preparing for that?
Jill Ainscough: With regard to approaching the transition, we had a little practice about 18 months ago when a prior Bill was going to go through. That really got the teams working well together. This time, although we are very early into the integration process and we don’t expect to start the actual transition until July next year, we already have a very close working relationship with all of the Postcomm colleagues. In terms of the transition, the knowledge base of that will be preserved through the TUPE transfer of staff across to Ofcom. So we are very cognisant of keeping the corporate knowledge, history, experience and skills of the Postcomm colleagues.
Tim Brown: I think what’s absolutely essential is that any transformation does not delay the necessary change in regulation. That process has to continue and, as I’ve just stated, we are already working to make sure that that transition works well. Yes, we are responsible for regulation up to the point that we are not and the changes for 2011 that we announced yesterday—we are responsible and accountable for those. But what we start now for 2012 and beyond actually gets finished by Ofcom. What we are doing is ensuring we can work as closely as possible together to make sure that the learning techniques and so on are as close as possible, so there is no pause in that process. If there is a pause, the marketplace and the universal service will suffer, so it is absolutely front of mind to what we are doing.
Nigel Stapleton: Just for clarification, the responsibilities being transferred are entirely related to the regulation of letters, parcels and packets. The post office network is outwith our remit except for the fact that we do an advisory report once a year for the Secretary of State. I do not think that is being transferred anyway to Ofcom; it is being transferred to Post Office Ltd.
Mr Richards, you have mentioned how good regulation can stimulate a business, but the purpose of good regulation is not only to stimulate but to protect. Do you think that you will be provided with adequate resources that will allow you to deliver this quality of regulation, which stimulates and protects? How much of Postcomm’s budget will you receive, and how many staff will you deploy on postal issues compared with Postcomm?
Ed Richards: The first point to make is that I do not ever want to overclaim on the regulator’s role. We have this problem with some people where we have debates about performance measurement. We should be really clear about this. When innovation takes place, prices come down or more choice is offered, it is companies that are doing it. The regulator can help, and can play a modest and sometimes important role, but ultimately it is investors, companies and consumers who deliver those outcomes. I think it is important for people who run organisations such as mine not to overclaim about what they do and do not do.
In terms of the budget and resources we, like many other public organisations, have had a spending settlement that is demanding and challenging. We will meet that, and I am confident that when we get to the other side of the changes we are making we will still have a very strong capability in the organisation. In relation to the budget and resources for postal services, we expect that the full complement budget for Postcomm would be the starting point for a further discussion between ourselves and the Treasury, which no doubt will factor in some efficiency saving because of savings from back office. We would expect to take a significant proportion of the £10 million that is the full complement Postcomm budget and use that to deliver our responsibilities for post. I am sure that there will be savings, but I also expect to have a successful discussion with the Treasury to ensure that we have the resources to do the job properly.
A question for Ofcom: you mentioned earlier, Ed, that you have experience of working with a universal service obligation in the telecoms sector. I was wondering whether there are any specific lessons that you could bring from that experience to the postal service. Do you think there are any elements of the current universal service obligation as it stands in this area that might put off potential buyers or investors in this business?
Ed Richards: If I may take them the other way round, I honestly do not have an informed view about the second question. I just do not know. I think we are going into this—subject to parliamentary debate, obviously—knowing very clearly from the Bill about the primacy that is being given to the USO.
There are some important differences and one or two similarities with telecoms in particular. The similarities are that this is a very important social objective and that everybody regards it as very important. Parliament has been very clear about that and we know that we have to keep a very careful eye on it, and we do. The differences are that in telecoms we have been able to do that in the context of a market that has been growing and has grown consistently every year since we have been doing it. It is obviously slightly more challenging to think about a USO in the context where volumes and, potentially, revenues are declining. That is the fundamental difference. It has been more obvious that the scope for competitive entry is entirely consistent with the USO. Certainly, the traditional USO in telecoms has not been debated for 15 years. Clearly it is a topic of great interest in the postal sector.
I think what the public want to know is what will happen to the service at the end of the day and what your role will be in that. We have heard how the price of a stamp is going up very shortly and that once the Royal Mail is privatised, some aspects of its work will effectively be a privatised monopoly. While we have six days originally here, we also have the power to review. What will stop there being a huge pressure on Ofcom either to reduce the service by going down to five days or to increase the price? How will you ensure that that universal service obligation is the most important thing?
Nigel Stapleton: May I give a perspective on this? Moya Greene’s main theme to the Committee this morning was about modernisation and the future of the universal service depends first and foremost on modernisation. The impact of competition from other mail operators is demonstrated by the fact that today Royal Mail still handles 98% of the revenue on letters. A lot is said about access competition but Royal Mail still carries 99% of mail over the final mile, which is what is really important to the universal service. All that has gone to competition is upstream bulk haulage, which is a network that is totally separate from the retail network.
If Royal Mail had modernised at the 1.5% efficiency improvement that it committed to in 2005, it would have made £666 million profit last year, not the £166 million that it announced. That would mean that there would be no pressure to reduce the scope of the universal service if the business is modern and efficient. We accept that there is a major challenge in terms of dealing with reducing volumes. Hooper in 2008 said that Royal Mail had lost five times as much revenue to other media as it had lost to mail competitors. We have looked at that number two years later and it is now 10 times as much going to other media rather than to access operators.
So the two things that will determine whether the universal service is pressurised are the pace of modernisation and new product innovation by Royal Mail to put it in a better position versus other media. We have done some research with Consumer Focus that demonstrates how much customers really value mail. They do not use e-mail because they think it is better, they probably use it because they think it is cheaper but there is still a major commitment to mail as a communications medium and Royal Mail, as an efficient operator, can be a profitable provider of the universal service.
Given the difficulties with the market and the way it is going, if we are honest, it seems all the more necessary that we should have the provisions that protect the service. Otherwise, we are simply relying on the European directive. We might as well say that we will go with the five-day service. Do you not feel that there should be something to strengthen the legislation? To come back to the point about access points—I am not confusing that with the post office network, but talking about access points for Royal Mail services—it was for the very same reason that countries that have privatised their mail services thought it prudent to keep something about the number of access points in the initial legislation. For those reasons, we need something to make the role of Ofcom stronger in that regard.
Ed Richards: Our reading of the Bill is that we certainly would not be in a position to start making changes to the USO when that is placed at the heart of the objective for the Bill, and nor would we want to be in such a position. We can report on it and provide information and analysis and so forth, but significant changes of that kind need to be made by a Secretary of State. That feels right.
On other issues, you can of course build those things in, and we will work with whatever Parliament concludes. I have a general nervousness about where it is about implicitly making a judgment on the underlying economics. The more our freedom to assess that is fettered, the more difficult our job will be and the greater the possibility of unintended consequences, and I think that that point is illustrated by quite a lot of experience from other aspects of regulation.
What is best for us is the ability to say, “Right, let’s get really underneath this, really use the proposed new information-gathering powers, get a clear picture of what the underlying costs really are and then begin to understand what the best approach really is.” If we do that and discover that there are lines drawn in the sand that cannot be moved without further primary legislation, that obviously could create some significant difficulties.
I have two related questions on Ofcom’s ability to designate more than one universal service provider. I have been heartened by the comments, made both now and earlier, on the viability of maintaining the universal service obligation, but there are a couple of situations in which that might not occur. If a postal administration order were in place due to the insolvency of one operator, do you feel that there is enough clarity on the role of Ofcom to reassure us that the universal service obligation would be maintained in those circumstances?
Ed Richards: Our understanding is that we will be able to designate in the way you have described and that the Bill does give us that power. Needless to say, it is very important to underline the fact that we never want to reach that position. If we do reach that position, either we or others will have made some very poor judgments, or a very dramatic change in the marketplace might have necessitated that outcome. Clearly, you cannot rule that out, but one or the other of those things will have happened if we find ourselves facing the kind of circumstance you describe. The backstop power seems to be there.
Ed Richards: I think that it would be invoked in the kind of circumstances you describe—the more unexpected and unusual ones. Again, it is not a circumstance that we would necessarily want to arrive at. We certainly would not want to invoke that in the short term as a reaction to a situation. If we arrived at that outcome, we would ideally want to have ensured that we had been through a process in which that had been signalled, expected, anticipated and that everyone had been able to adjust. That is the kind of process that you would hope would precede that kind of outcome. As I say, rather like the designation, if we are invoking that at short notice, we are either facing very trying circumstances or some very poor judgments have been made. I just hope that I never have to eat my words in relation to that, or be reminded of them.
I want to ask about some of the points raised about the USO. Clause 28 states that you must ensure that the provision of a universal service is financially stable. You also have the power in another part of the Bill to require contributions from other postal operators to help finance the USO. Do you see yourselves in the situation, where several private companies are competing against each other, of being able to insist that other private companies contribute to the USO provider?
You say there is only going to be one per geographical area, but are there any other providers who are able to provide a national USO in these circumstances? Do you anticipate the USO being divided between several operators in terms of the Bill?
Tim Brown: That is two points, one picking up on Nigel’s point in terms of modernisation and what Moya talked to you about this morning. We have had a huge programme over the past two years in terms of radically changing the way in which Royal Mail operates and modernises, which will drive the cost down for the business. She invited me to see some of the mail centres. We have been to see them and they are incredible in terms of the things that they are changing and in terms of behaviour and the efficiency they are getting out of simple things. No. 1, therefore, is that modernisation, which will drive through.
The other thing is that if you look over the past two or three years, you will see that, in Royal Mail’s accounts, last year they made a loss of only £8 million on the universal service. Three years before that, they made a loss of £350 million. An element of that is to do with some of the way in which they cost, but you can see that there have been improvements and Royal Mail have seen those changes. So we are a little bit more optimistic; we think there is a great opportunity, if Royal Mail is given the freedom to be able to invest and modernise, for a successful and very strong and robust Royal Mail.
But Royal Mail also says that its main cost is the last-mile delivery, which the other competitor gets the benefit of without paying full price. Do you think there is a case for demanding more from the other operators to enable that last mile? As far as I am aware, no other operator of a national network comes anywhere near rivalling Royal Mail in remote areas.
Tim Brown: A couple of points. When access was set up and agreed in the first contract negotiated commercially between Royal Mail and the operators, it included a profit margin. Royal Mail negotiated that price. We were in the wings determining it and we would have determined a price that was lower than that which was actually agreed. So it was agreed higher than we thought looking at it independently, and it included a return. Access prices have gone up by 14%, yet now it loses 2½p per letter, Royal Mail claim. Our first issue would be one of the reasons for that: the inefficiency or the failure to modernise over the last five years is worth more than 2½p per letter. So if they had been efficient, access would not be unprofitable, but it is now and I accept that. If you look at our proposals and decisions yesterday, and our “minded to” decision to support Royal Mail’s application for more money to support modernisation, you will see that we would support the increase in price.
Tim Brown: I have the benefit that, when I worked in Royal Mail for 11 years, five of them were in post offices. It was mentioned this morning that only a third of Royal Mail’s business actually comes from mail; that means two-thirds doesn’t. My personal view, in terms of the separation, is that it allows post offices to focus on their business growth and development, and work with Government on some of the things that were announced this morning. So, we think it is good to separate the two things: one is a retail business; one is a mail and distribution business. They are separate businesses, so we think that would be good.
Ed Richards: We will deal with postal services in the way that we deal with all the other responsibilities we’ve got. There is a wide range that covers radio, television, spectrum management, clearance and allocation, fixed telecoms and mobile telecoms. We were given a new responsibility last year for online copyright infringement on digital networks and we will be ready to deliver that by 1 April. In postal services, we will ensure that we have the capability in place to do it properly between now and when the powers transfer to us. We are familiar with that problem and I would expect, given the time we have available, to be able to be prepared in the right way. Jill, do you want to add anything?
Ed Richards: No; we had a plan in place 18 months ago. We have taken it off the shelf, dusted it down and we are modifying it in various forms, in the light of any changes to the Bill and changes to the position that Postcomm is in today, compared with 18 months ago. Between now and the passage of the Bill, we will implement that plan.
I am interested in the pending and future relationship between Ofcom and the Royal Mail. I ask in an open way, in the light of the Hooper report which spoke of the relationship between the Royal Mail and Postcomm as basically quite terse and difficult, with a sense of distrust. There is a caveat to that question, in the light of the colourful history that the Royal Mail has when it comes to industrial relations and disputes.
Ed Richards: We can only talk about the relationships that we have today. I have met Moya Greene once for about 15 minutes and Donald Brydon once for about 15 minutes as well. I have no idea how we will get on personally, but I can tell you how it generally works with other organisations. If you could magically click your fingers now and all of the companies we regulate in the rest of the sectors could appear here, some of them would say to you that they like working with us and that they think it is a good, open, trusting relationship. Some would say that sometimes they like what we do, other times they do not, while others would spit blood about us and say we’re an appalling regulatory bureaucracy and the sooner we are closed down the better. You can probably put names to some of those remarks with great ease. The truth is you get all of those and the relationships wax and wane and change with personalities. If you do the kind of job that I do, you just have to get used to it and have a thick skin and know that that’s the deal.
If a private competitor to the Royal Mail, such as TNT or Deutsche Post, took part or whole control of the Royal Mail, could you foresee any competition complications? Also, assuming that TNT or Deutsche Post did that—if a private equity company, for example, came along and took ownership of all or part of Royal Mail—would you expect it to seek to liquidise some assets, and how long-term would that private equity company’s commitment to the service be?
Nigel Stapleton: Clearly, the competition issues would be for the Competition Commission rather than the regulator. There was obviously a lot of speculation in the first part of 2009 about TNT being a minority shareholder in Royal Mail. Its market share here in the UK is very, very small. It is one of two access operators, and, as we said earlier, access is a relatively small part of the total marketplace. Clearly, that would have to be looked at, but there is no self-evident competitive leverage from TNT’s strong market position in the Netherlands in this marketplace. It is much more a transfer of best practice rather than a transfer of market power.
In setting out a regulatory framework in a Bill, we want to ensure that the regulator has enough flexibility for how a market develops, and for changes that are coming in the future. That has been one of the things in my mind. I just want to check whether you think the measures in the Bill would future-proof the regime so that if, for example, you needed to deregulate more because the market had changed, you would be free to do that—you would have the powers in the Bill and, in Ofcom’s case, in the Communications Act 2003.
Ed Richards: From our perspective, the change from the current regime for post to the one proposed in the Bill is definitely a significant improvement. If we were merely inheriting the regime that Postcomm is currently working with, my reaction would be that it would give us a lot of problems. The new regime that is proposed in the Bill is a huge improvement on a whole range of fronts: the scope for us to make economic judgments about regulation and also deregulation; the fact that we would have concurrent powers under the Bill which Postcomm does not have, which we find extremely effective and very important in the rest of the communications sector; the information gathering powers which I think are essential if we are, for example, to get underneath the issue of how much the USO truly costs and therefore be able to assess whether there is an efficiency opportunity or whether the scope for competitive entry is, in fact, more limited. All those areas are significant improvements and give us a framework with which I absolutely think we could work.
Three more colleagues want to ask questions, but we have only two minutes. Frankly, I doubt that colleagues would be able to ask questions and get responses that would be meaningful, so I thank our witnesses very much indeed for the time that they have given the Committee this afternoon. Thank you for the evidence that you have presented to us. It will make our deliberations even more valuable and more informed than would otherwise have been the case. Thank you very much indeed.
Welcome—I have noticed you sitting in the Public Gallery, so I think that you already have a feel for the style of this Committee. Please could you both introduce yourselves and make any opening statement that you wish to set out before the Committee starts asking questions.
Alan Halfacre: Ladies and gentlemen, thank you for inviting us. My name is Alan Halfacre, and I am chairman of the Mail Users Association, which is a trade association for bulk users of mail services. I am also chair of Postaf, which derives from the demise of Postwatch and is a trade association forum that promotes, informs and discusses the benefits of using mail. One thing that is very clear to us, and my statement is very simple, is that we require a strong, competitive and sustainable postal service in the United Kingdom.
David Sibbick: I am the secretary of the Mail Competition Forum, which represents the licensed competitors to Royal Mail. Our members compete at least as ferociously with each other as they do with Royal Mail, but we have a common interest in seeing a successful, viable and sustainable Royal Mail. We are all customers of Royal Mail, and given Royal Mail’s dominance of the market, particularly of final-mile delivery, if it fails customers, those customers will migrate in droves to the electronic substitutes, which will be disastrous for all of us who have invested in the industry.
We would obviously like to focus on the Bill and how you fit into its proposals, particularly with regard to the universal service obligation, the regulators, and so on. If the Bill goes through, could you tell us whether you will be more or less likely to use the Royal Mail rather than its competitors? What will be the key plusses and minuses of the Bill?
Alan Halfacre: It is very simple. Bulk mail users require two things. They require quality of service, but, you have to understand, at a reasonable, low price. There is no doubt that without bulk mail there is no universal service, because it would just not be affordable under any circumstances. That is the key. There has to be a liberalised, competitive marketplace in which we can maintain that high quality of service at reasonable, low prices to ensure that bulk mail users see this as an efficient way of typically communicating with customers.
David Sibbick: We very much welcomed Richard Hooper’s analysis of the market and the way forward. Subject to some reservations, we therefore welcome and support the Bill. We believe that Royal Mail’s position will be helped by a sustainable and undistorted market in which competitors can play a role.
Alan Halfacre: One per cent. or less. We talk about 99% in broad terms, but, frankly, it is noise on the system. Royal Mail delivers every letter that is posted in the UK, bar a few, but the access point is different. A lot of mail is going into a different point in the pipeline now than it was five years ago. It has not lost those customers; it still gets more than 80% of the revenue from them. This is just a more efficient access point—I am sorry to use that description, which is confusing in that it is termed access mail—for the sort of service that customers need.
Alan Halfacre: In round terms, half of access mail consists of direct contracts between Royal Mail and the end users—the customers. The other half goes through competitors. Half of it is nothing to do with the competitors directly; it is negotiated contracts between Royal Mail and its customers. It is just a product.
I wonder whether both gentlemen could tell me what benefits the Bill will give to their members. Do you have any ideas on how this piece of legislation could be improved?
Alan Halfacre: I do not fancy the tower, gentlemen, I really don’t.
Could it have been improved? Of course it could. There is some concern from customers that there is quite a gap between your Bill and the way Ofcom regulates. You have proposed that the regulation should be carried out by Ofcom, which has a very open regime. It says, “Do what you like, and we will tell you if it is wrong afterwards.” From a customer perspective that is a little concerning, because it means that one must continually monitor—rather than having the regulator monitor—what is going on. Customers and people such as me in a trade association would have to do more work to ensure that they are decent, honest and truthful in the way they approach the marketplace, and that power is not abused.
Alan Halfacre: It is the way you have suggested and laid it out in the legislation. As far as the privatisation is concerned, that is a concern for others. If it is sustainable and profitable, and a reliable service, as users I do not believe we should be interfering with that. As far as pensions are concerned, that is clearly a situation that needs to be clarified and sorted out.
Those issues we have little concern about; it is in the regulation, and it is what it is. We can work with it. As you move forward in Committee and on Report we will almost certainly be whispering in ears about little things that we would like to see modified, but in the broad sense we are with you.
That is the point I wanted to come in on. In your opening remarks, you set out a vision for what you would like Royal Mail to be like, and I think everyone would agree with that. The challenge from the Hooper report is the fact that, because of market pressures, Royal Mail is heading in the opposite direction.
Just for the record—and for my benefit—when you talk about bulk mail are you talking about direct mail, mailing of bills and large-scale commercial mailouts from big organisations?
Alan Halfacre: I am talking about two things, and they are slightly different in their approach to where we are going in the next few years. One is what is broadly termed bills and statements, and the other is what certain individuals in the House have called junk mail—direct mail marketing. They are very different, but they are volume mail. These are not the ones and twos that small businesses may send to each other in exchanging invoices. They are material amounts of mail, and they make up at least 80% of the volume that goes through Royal Mail in any day. One has a certain amount of elasticity. If Royal Mail puts its prices up, direct marketing will say, “You are going to get fewer of them, because we have a fixed budget.” Higher price means lower volume.
On the first sort—statements and bills—you may have been given the impression that there is less elasticity there in that if the price goes up, they pay the bill. They will have to on day one, but on day two the boardrooms of those companies will be pushing very much harder to get people to transition away from mail altogether. There is concern about the relationship between price and volume.
I am glad that you said that, because I was going to ask that as a follow up. Those areas of bulk mail are highly competitive not only within that sector, but from outside competition as well. Direct mail competes against online advertising, newspaper inserts and other things where you can reach a direct audience. The trend to take bills online—
Alan Halfacre: The competition is enormous. Some of us still find it easier to handle pieces of paper. On the other hand, we are the dinosaurs of this world, and the future is not in paper. I have to protect this industry for as long as is reasonable, but someone just after me will turn the lights out on it. It will not be there at all in some of our lifetimes.
Well, if it is of small comfort, I would say that since becoming a Member of Parliament—I am sure that some of the new Members will agree—I have found that people still write to their Members of Parliament physically, on pieces of paper. We are certainly bucking the trend in that regard, but I do not know if it will be enough.
I have one final question, if I may, Mr Chairman. Market forces are only going to get more competitive, and, even with Royal Mail becoming more and more competitive, it is still going to be a challenge to make money out of doing those things. Do you basically agree with the view of the chief executive of Ofcom that, with the provisions in the Bill to bring in private money and to bring in new efficiencies through better regulation, we need a total step change in the way that Royal Mail works if it is going to survive?
Alan Halfacre: We need a step change. There were comments this morning and comments this afternoon. There has been a lot of money spent in capex and in investment, but there has been very little improvement in efficiency. In 2006, there was an expectation of 5% improvement in cost efficiency per annum. It was negotiated down to some 2.5%. What has been achieved? Zero. The issue is not necessarily the competitors; it is the fact that the cost is not coming out of the business fast enough. There is a lot of equipment going in, but the cost is not coming out anywhere near as fast as is necessary to maintain an efficient service.
Before Mr Weir puts a question to our witnesses, when Mr Banks was asking his question, I think you were trying to catch my eye, Mr Sibbick, and I moved on too quickly. Would you now like to respond to that question?
David Sibbick: Thank you, Chairman. That question was about improvements to the Bill that we might like to see. As I said at the beginning, we very much support the Bill, but there are a couple of areas where we feel that the Bill is perhaps looking to assist Royal Mail—we all support that—but at the expense of competitors. We think that is the wrong way of going about it. Clause 37, for example, puts hurdles in the way of new access applications, and the compensation fund in, I think, clause 44 is perhaps another such area, and so there are some areas where we feel that the Bill rolls back the playing field for competition.
There are some other areas, to which Alan alluded I think, where the way in which the regulatory responsibility transfers to Ofcom leaves Ofcom with a lot of discretion, which translates for our members and, perhaps, for the market, at this stage at least, into uncertainty, and that uncertainty is damaging for the market. The sooner that there is some clarity as to how Ofcom intends to use its discretion, the better it will be.
What Mr Halfacre was saying about bulk mailing was interesting. It seems that most of the individually addressed mail that we receive these days starts life with either UK Mail or TNT, and it is the last mile delivery by Royal Mail that is important. From Mr Sibbick’s point of view, as a representative of the competitors, I wonder whether he thinks that they are paying a fair price for that last mile service, given that none of them have a comparable network. Also, given that the Bill contains the power for Ofcom to say that others should contribute to the cost, does he think that his members should contribute to the cost of providing universal service?
David Sibbick: To answer the first of those two questions, I do not—nor would I expect to—have access to Royal Mail’s costs, so I cannot give you a definitive answer as to whether the price that is being paid is fair. However, I think the point that Postcomm made earlier was that that access price was the result of a commercial negotiation between Royal Mail and UK Mail. Once that price had been agreed, it was simply put into the market and was available to anyone who wanted to take advantage. Anything else would have been discriminatory. In the event, almost as much of that access has gone to Royal Mail’s own customers as it has to my members.
I recall that in Richard Hooper’s first report, when he looked at or tried to look at whether the price was fair, he also could not find convincing cost evidence to make a decision one way or another. Similarly, I think that in 2008—although it might have been a year earlier—when Royal Mail applied for the price or margin to be changed, Postcomm also concluded that the cost information to make a decision was not there or not robust enough. My answer to that part of the question is that I do not know whether the price is fair, but I have no reason to believe that it is not. What we had yesterday was a very large pile of paper that Postcomm has produced on the new regulatory regime and, as a result of the work it has done on cost transparency, it is now looking at that in a slightly different way. We will have to see what that will mean when we have had chance to study it in more detail. It will also depend on what Royal Mail chooses to do with the new flexibility that it is given.
Given that Postcomm said in the earlier evidence session that it was losing money—albeit not as much as perhaps it was previously—can you not see that, if it is privatised, there will be extreme pressure for others to contribute and cover any perceived loss on universal service?
David Sibbick: The compensation fund has always been seen as something that would be invoked only as a last resort. The risk is that saying to Royal Mail, “If you do not improve your efficiency and get your costs down, there is always a compensation fund there to support you”, simply gives it a soft option and means that competition, which is struggling in a market that is far from neutral with VAT and so on, has even less of an opportunity to develop and give customers choice. A compensation fund might, at some distant point in the future, become a possibility but it should be used only when the regulator at the time is absolutely satisfied that Royal Mail is as efficient as it can possibly be. The Bill, quite rightly, sets out a number of hurdles that would need to be cleared before such a fund could be introduced, and we would support that.
Do you think that the Bill goes far enough in terms of competition and freeing up Royal Mail from many of the regulatory burdens we have heard about and know of? I would like to follow up on Mr Banks’s point. You touched on Ofcom a little bit. What key regulatory powers do you think Ofcom should have?
David Sibbick: Royal Mail has complained for a very long time that it is being strangled—I think that is the word it used—by regulation. My reaction to that is that anyone who is as dominant as Royal Mail is in almost any market will be subject to competition law. In a sense, I am not sure that it matters hugely whether it is the Competition Commission or a sectoral regulator who deals with that. The regime that Postcomm came up with yesterday will reduce the regulatory burdens somewhat on Royal Mail and that is the decision that it has come to. I do not have a huge amount of sympathy with the view that Royal Mail should be unlike any other organisation that has a massive monopoly in its particular field and be completely free from regulation.
Alan Halfacre: It is disappointing in one sense in the Bill that while the USO has primacy in its considerations in regulation, competition has been, for want of a better term, downgraded. We now have what others have called the triple lock that Ofcom has to be able to go through to ensure that competition continues at all, in one sense. Competition is for others in one sense, but without it we do not feel confident that Royal Mail would continue to be efficient and able to provide the quality of service at the price we need. That is why we believe that competition is necessary.
Alan Halfacre: From a user perspective it is difficult to understand how we would get any advantage if, for example, GLS—the European parcels business—were sold. Yes, there would be a large piece of revenue that comes from a service that very few of the bulk customers use. As far as the UK service is concerned, which is where I focus, breaking it into small pieces is likely just to cause confusion. It is that balance between market power and excessive market power: you need a strong player and that therefore has to be a big player.
David Sibbick: Royal Mail does not have a statutory monopoly any more. As long as there is a playing field in which competition is free to develop, customers will get the best of all deals. There is a view, which I would probably subscribe to myself, that when the market was first opened the threat of competition had quite a galvanising effect on Royal Mail. If that competition is seen not to materialise to any meaningful extent, there is a risk that Royal Mail would fall back into its easy monopoly ways and that is not going to be in its long-term interests and certainly not in the longer term interest of customers.
I was going to ask about the regulations but I think that we have covered that one. So I have a generally broad question to both of you. Obviously the Bill has to get the balance right between ensuring the long-term viability of Royal Mail for its customers and employees, protecting the USO and taking account of taxpayers’ interests. Do you think that, at the moment, across the board on all the issues in the Bill, the balance being struck by the Government is right, or do you think that it is a bit out of kilter?
David Sibbick: The pension fund is clearly the area where taxpayers are going to put their hands into their pockets most deeply. I don’t think anyone would wish to see postmen’s pensions put at risk in any way at all. I take the view that a large part of the pension deficit can be laid at the feet of previous Administrations that took too much money out of Royal Mail at a time when it should have been ending its pensions holiday and resuming contributions to the fund. That doesn’t necessarily mean that I feel the whole of that deficit should necessarily be picked up by the taxpayer. It represents, I think I heard this morning, something like £300 million a year to Royal Mail. That £300 million gives it, if you like, a competitive advantage that private sector companies, which are having to cope with pension fund deficits themselves, do not enjoy.
Alan Halfacre: The first two parts of the Bill—I do not have any disagreement with what David has just said about the pension—are really for others. If you look at the Consumer Focus research that was published yesterday—and I suggest that somebody finds that particular document, or documents as there is a substantial amount of it, and at least makes a précis for you—with the greatest respect to the House, there appears to be some out-of-date thinking as regards what consumers, and therefore voters, think of the universal service obligation. In what appears to be a strong and reasonable piece of research—and that is, perhaps, for everybody to determine—when asked about wants and needs, for want the usual thing is leave it well alone, and we quite understand that; when it comes to need, five days seems to be something that 90% of people are quite happy with, as is a single service in the USO, rather than first and second. A two-day service seems to be something that voters would vote for. As far as price is concerned, they seem to be relatively relaxed about the price of a stamp.
Now, that is the retail consumer. The business users might have a slightly different view, but I commend you to read that research because you have been very tough in the Bill about maintaining the USO exactly as it is now. I believe that if you were allowing Royal Mail to make some significant change now, then its cost structures would change substantially, and that would provide a better baseline for the provision of the universal service. You are only delaying the inevitable, is really what I am saying and I ask you to consider doing it now if you have the courage. I do understand your issues, but look at the research and feel comfortable.
Alan Halfacre: You will have to change it. I don’t know when, but you will have to change it, because there will be so much less of it. If you insist on continuing with the full six days and the first and second—the full McCoy, as it is at the moment—it will become intolerably expensive. Who pays? I’ve suggested to you that the bulk mailers—it is not fair to say that they will not pay—will be unlikely to pay over the longer term, because they will migrate to other things, and your constituents, if they have to pay, will find it very very uncomfortable.
Alan Halfacre: It has two ends. There are people who are suggesting that 40% of mail will be gone in five years. I can’t demur from that sort of number. It could happen a lot faster. If unpleasant things happen, it could perhaps be slowed down, but only perhaps, if regulation and the carriers provide a quality, profitable, correctly priced level of service.
David Sibbick: It is a very difficult balancing act. On the one hand, if you reduce the universal service, to an extent you reduce the attractiveness of the post, as compared to the electronic alternatives. You don’t want to do it if you don’t have to. On the other hand, if the costs of the universal service become too high—and the key to that is whether the Royal Mail is able significantly to improve its efficiency and keep its costs down—then in particular Alan’s members will migrate away from the universal service. At that point, with all due respect, it almost doesn’t matter what legislators say. The universal service will become financially unsustainable, a compensation fund wouldn’t even begin to touch the problem. The amount that the taxpayer would have to stump up to maintain something like the existing level of universal service, on a hugely reduced volume of mail, would be astronomical.
Finally, we heard from Moya Greene this morning, who was clear that the Royal Mail modernisation programme is going very well and that efficiencies are being made. Your view is that, even if it is already making efficiencies, to support USO it will have to make significant other efficiencies. Would that be a fair assessment?
David Sibbick: I think what you are seeing is inevitably a gradual migration from paper to various electronic media. That will continue and it would be Luddite to try to halt it in its tracks in some way. There are certain applications, for which mail will always be the medium of choice, as long as it remains affordable. The trick is, how long will it remain affordable? How quickly will the migration of other mail—and of that mail if it isn’t affordable—take place? I don’t think any of us have any kind of firm grip on what that time scale might be. At some point, there will be a need, as Alan has said, to reduce the universal service. It is certainly not too early to start talking about how you would reduce it in ways that would be least damaging to customers and to the service as a whole, but I don’t believe that the need for action is here now. Perhaps the need for talking about how best to do it is here now.
Alan Halfacre: You asked this morning to see the five-year plan from Moya Greene. I perceived some significant ducking and diving frankly from this end of the room. I suggest to you that it is important for you to see that five-year plan. She is very new, but Royal Mail has pretty much burned its way through most of the £2 billion in capex, and has not yet shown the results of it. She suggested, on serious probing, that she was going to need possibly £2 billion or £3 billion more. I hope that you will be able to influence where she spends that money. You will not provide it—it will be for others to do so—but it could go to the wrong places.
Currently, modernisation is almost exclusively in letter mail. Which is the biggest area that is dropping? Letter mail. There is much less investment in packets and parcels. Automation in handling packets and parcels will become critical, because that is the area that is actually growing at the moment, and will almost certainly continue to grow, as will competition for it—but volumes will grow.
I would like to ask a general question about the market and the industry that we are considering. I want to know whether I should be an optimist or a pessimist. If I am hearing you two gentlemen correctly, each of you is quite pessimistic about the future if we go on as we are. I would be interested in whether you confirm or challenge that view.
You both seem to be generally bullish on the industry. You encourage your members to use the service, and you encourage people to compete in it. Do you think the impact of the Bill should make us feel more bullish about the industry overall? If we were all to come back in five years’ time, would the optimists have won out over the pessimists?
David Sibbick: I am an optimist by nature, so I would like to be optimistic about this, but perhaps one has to define what optimism means here. I think optimism probably means that it will be possible to adjust to the decline that is bound to take place, so that for a considerable period of years into the future there will remain sufficient volumes of mail in the system to justify the continuation of something like the existing universal service, but perhaps scaled down over time.
However, as I said before, that depends critically on prices not needing to rise to the level at which particularly bulk mail users, for whom fractions of a penny on an item are important, at some point throw up their hands and say, “We like mail. It has served us very well in the past. In some ways, it’s the most effective way of getting our message across, but it’s just got too expensive.” In a sense, the remedy is in our own hands, but because of Royal Mail’s dominance, that particularly means Royal Mail’s own hands.
Alan Halfacre: I agree. It’s a difficult situation, because one has to try to be optimistic about the direction going forward. I am concerned that if things don’t go well, both the regulator and the suppliers—Royal Mail and others—will be reacting rather than being proactive about where we are going. I come back to the point that it is probably necessary to recognise some of the inevitability of where we are going and try to be ahead of it rather than waiting for it to catch up and then having to take much more drastic action just to stay afloat.
You have advocated that if the USO were weakened or a reduction of service were applied, that would potentially increase efficiency and competition. Would you apply the same logic to the inter-business agreement?
Alan Halfacre: Representing bulk users, I probably ought to say that the IBA is something for others. It’s not necessarily a negotiation between equals, is it? Although I look after the personal interests of my members, I would hope that many of them are interested in being able to use services in the post office sense—there are, of course, some 11,500 sub-post offices. The IBA has to be negotiated in a way that ensures that it is good for both parties. It would be of no value in the long term if it was only good for one of those parties. I am not saying that one or the other has the power or the hand to be able to deal those cards in a particular way. If it is possible, I would recommend that you, ladies and gentlemen, should have some input into the quality of that inter-business agreement. That may not be possible directly, but if there is some indirect way in which you can do that, I think that would be very important indeed.
David Sibbick: To add a slightly different perspective on that, my members would hope any new arrangement that separated the Royal Mail’s business from the Post Office’s counter business would not include in the contract the exclusivity provisions that have made it difficult for them to put new business the way of post offices, even though they would like to.
A large part of my question has just been pinched, actually. I am very interested in your views on that separation, particularly given that you started your career at the Post Office. It is being suggested that there is a logic to the proposed separation. We got quite a strong welcome for it when we spoke with the regulators earlier. David, do you see real opportunities for your members to bring business into the Post Office, if the right framework is set up within the inter-business agreement?
David Sibbick: Yes, I do, in a number of different ways. For example, where one of our couriers is unable to deliver an item, perhaps because they need a signature and no one is at home, very often the most convenient way for the recipient to collect the item is from a local post office, rather than some depot that might be very far away and might not open for the same number of hours. There could be an opportunity for post offices to sell alternative services. There is an outfit that we sometimes see on high streets called Mail Boxes Etc. In the parcels express area, in particular, you can go along and access the services of a number of different carriers. So, yes, there is scope, but under the existing arrangements it has been very difficult for my members to try to access that.
If we focus again on your actual service requirements, it is obvious that you are an absolutely key player in providing income for Royal Mail. Without your members’ business, it would not be able to keep going. Will there not be a huge amount of pressure from you to influence the way that the regulator copes with Royal Mail? You have already mentioned that, were it not for European law, you can see the six-day delivery going. Are you saying that, because most of your bulk mail is probably not very time constrained, effectively you think that perhaps a Monday and a Thursday would be adequate for most parts of the UK, and that it could just go down to something like the arrangements we have for the milk service, with deliveries being made on alternate days, for example? Are you saying that you will be putting on a lot of pressure to weaken the universal service agreement? Are you saying that it is strict enough in the Bill and that five days would be quite enough? On the access points, would it not make any difference to you at all if there was no post office network and virtually no access points?
Alan Halfacre: Having no post office network would be survivable for most of my members. I do not think that they would believe that that would be appropriate, in the sense of social needs, but there is one aspect of it that is of course excellent from an access point of view: the sending of packets and parcels. Remember, of course, that access points are not part of the USO in that sense.
To come back on that, the question arises whether there should not be some provision for the regulator to control a number of access points. That is a separate issue. The initial question is, will you be putting pressure on the regulator to get rid of the extra expenses?
Alan Halfacre: The pressure is one of balance. If the only way forward for an inefficient Royal Mail is to load the pricing to bulk mail, the push back will have to be, “You’ve got to be efficient in other areas.” If that means the reduction in the scope of the service in other areas will make a material difference in your efficiency in your total cost, then we will have to push in that area, because the alternative would be that members would want to move away from the mail service more quickly than they are currently. It would not be gradual; it would be a much more steep decline. Witness the situation after industrial action. It puts post on the boardroom table; once it gets to the boardroom table, a lot of people take a lot more interest in it and migration becomes much clearer and a more defined path for that sort of customer.
That leads into what I want to ask. To clarify, if anything puts cost on the service without a material big improvement in delivery—and we are talking about a relatively simple product—it will hasten the decline of Royal Mail. If Royal Mail charge more for the final mile of delivery, that extra cost will not be absorbed by the industry, it will push more people out of Royal Mail.
Alan Halfacre: I think I hinted at that early on. Of the two parts of bulk mail, the direct mail business will look at it very simply and say, “That’s the budget; we’ll send fewer of them.” The financial services—bills and statements—markets will say, “Ouch, that hurts. I think we’d better move more quickly because it’s only going to get worse. It’s only going to get more painful.”
In general, the issues that you have outlined are not unique to Britain. The input technology will have an impact on mail services in most countries. Are there any examples you would look at around the world and say, “Here is an example of a postal service that is working with its bulk customers particularly well” and is something that we could learn from?
You have both been fairly downbeat over the past 10 or 15 minutes in your appraisals for future business load, for a range of reasons. You have also been downbeat about the potential future of the USO. You also made some comments about the investment needed to finish the modernisation programme, depending on when the sale goes through. That was a point that I was working on this morning with Moya Greene. I am not tying you down to your evidence, but if businesses are thinking the way you are, it is going to impact significantly on who is going to want to buy this business and what they are going to pay for it. If people share your views, what kind of deal will the Government get?
Alan Halfacre: If I had the option to buy BT or Royal Mail shares now and the prices were appropriate, whatever that may mean, I think I know which way I would go. It is difficult, when one can clearly see that future innovation and the development of technologies are likely to impact on the transmission of paper between people, to say that this is something you should invest in.
As a personal example, I manufactured mail for 25 years. That was my business. I was not personally putting stuff in envelopes but using machinery to generate mail. If somebody came to me now with a large cheque book and asked whether I would invest in that business now, I would suggest that they did otherwise. I do not mean to be pessimistic about it, but I think that one has to be realistic about it. The options for the future are relatively limited in which way this will go. You can perhaps delay the decline, but it is difficult to see how one will be able to find in any encouragement in letter mail to see volumes increase. Packets and parcels are a different issue. Until we get a transporter mechanism the only way to get those 3D items to the door is via a carrier service, which should and could be Royal Mail.
David Sibbick: It is interesting that because I am fairly ancient and go back a long way, I can remember that the telex, the fax machine and the telephone were all going to kill mail. At one point they appeared almost to be doing so. I think it was really from the beginning of the 1980s onwards, following the separation of post and telecommunications, that mail had a big, big resurgence. A lot of the electronic alternatives, as with those earlier technologies, have proved to supplement mail rather than to replace it. I do not believe, for example, that more than the most minute fraction of a percentage point of all the text messages that are sent would ever have been a letter in any case.
We know now that some structural decline is going on in mail. Will it plateau out at some point—the point where mail is the best medium to use for a particular purpose—or will mail continue either to price itself out of the market or to irritate customers out of the market by industrial action and that kind of thing? I believe there may well be a plateau which becomes sustainable for a reasonable period of time, and that good business can be made out of what exists at the moment and what would exist over a continuing period. I do not want to be downbeat about it but, as Alan has said, there are risks.
I would like to ask one supplementary question in relation to that, which is just something that I have been thinking about. From the private sector’s business point of view—possibly from the Government’s, but largely from the private sector’s—we will see the demise of cheque payments in the years to come. That is not something that I totally agree with, with my background, but do you share concerns that that decision will have an impact on the amount of traffic through Royal Mail? I sat last night and—dare I say it—did my IPSA payments, and I sent a lot of cheques away to people. At some time in the future, if I am still a Member of Parliament, I will not be able to do that, so all those envelopes that I posted last night will not be going through Royal Mail.
Alan Halfacre: It is chickens and eggs. Utility bills are the classic example; people pay online nowadays rather than put a cheque in the post. Cheques are going down. That is clear, and we have all seen it. I understand your point about how you support, or do not support, that decline and what it means in a statutory sense, but the evidence is clear about the volume of cheques being used. A lot of those have always historically been going through the post. It shows and demonstrates that the volume decline is hitting the social mail area, because most cheques are probably consumer to business. That is already a small amount of the total mail, but it is going to go down even further. Businesses do not like to use cheques any more if they can avoid it. That has already happened.
You say that as if the construction industry is an ogre, but it employs an awful lot of people. Cheques are very valuable to small businesses.
David Sibbick: That is exactly right. I have not had a chance to look at the study that Postcomm and Consumer Focus have carried out on the universal service but, from the glance that I have had at it, it seems very clear that small businesses, perhaps more than individual consumers or bulk mailers, still attach a huge amount of importance to mail, a next-day service and so on. That is linked to the fact that they still rely very heavily on cheques. I know that there is a huge amount of resistance to getting rid of cheques, so we will have to see where that goes.
Very quickly, you have all touched on the USO, which is pretty much the focus of the Bill and is central to it. Mr Halfacre, you have touched on the issue of the future sustainability and viability of the USO. Do you think that Royal Mail’s management and its employees understand fully what is required to make the USO fully sustainable and viable? I caveat that with their own behaviours from an employee point of view. We heard some union representatives this morning touching on the fact that they are not pro-employee ownership and want more dialogue and so on. Until we shift and change the behaviours, do you think that will have a long-term impact on the viability of the USO?
Alan Halfacre: As we are running out of time, the answer is yes, it will impact on the viability. If they cannot have good manager-employee relations, that makes my face even longer. The downer is even worse without that being solved. We have a new team with Moya Greene, so we will see what happens.
There is always a balance in regulation between competition and ensuring something like the universal service obligation can be delivered. I am sure that your members will have different views on where that balance has been struck. I am keen to look at the big picture and your members’ view on the Bill’s overall direction of travel given that they rely, and will rely for the foreseeable future, on Royal Mail as a universal service provider. I am going to try to put you on the spot—you might not like it, but we get put on the spot occasionally. Do you think that your members welcome the Bill overall or not?
Alan Halfacre: It must be the wrong way if we think it is tilted. You have accepted that the USO is something to be discussed, but you have avoided the discussion, and you have made competition rather difficult. We will have to rely on Ofcom and on each and every occasion presenting evidence to Ofcom that it should support competition.
David Sibbick: We certainly support the overall direction of the Bill. As I said at the beginning, we thought that Richard Hooper and his committee got it right the first time round. On the second time round, the answer is yes, but even more so. And we agree with that. As I have mentioned, we have some reservations about trying to help Royal Mail, seemingly at the expense of competition. We do not think that was necessary, and we do not think that that was helpful. A big area is uncertainty, because as long as there is uncertainty, there will be a reluctance to invest either with new people coming into the market or existing people expanding their services. The fact that there has been a very long period of uncertainty and that this Bill will now put an end to that is extremely helpful, but we would like the minor uncertainties cleared up as quickly as possible as well, please.
I am afraid that that brings us to the end of the allotted time for this sitting. There are only two of you fielding questions from the Committee this afternoon, so on behalf of the Committee, thank you both very much indeed for your time.
Welcome to our witnesses. I do not think you have been here for the whole of our sittings but this is your opportunity to answer questions from members of the Committee on the record so that when we come to the Committee stage of the Bill next week they will be much better informed. Thank you for being here this afternoon. Could you all introduce yourselves and make an opening statement to the Committee for perhaps two or three minutes?
Carole Leslie: I am Carole Leslie. I am policy director of the Employee Ownership Association. We represent the employee-owned sector in the UK. We have 116 members and are growing substantially. Currently we are talking to a number of public sector organisations that are looking at an employee ownership stake. We welcome the Bill. We welcome the commitment to some form of employee ownership within the postal services. I am delighted to see today in Mr Davey’s paper the commitment to future mutuality in the Post Office. That is where we are.
Peter Stocks: Good evening. My name is Peter Stocks. I am a director of the Employee Ownership Association. For the last couple of years I was the chair of the Employee Ownership Association. I have just stood down from that. I am the chief executive of the Baxi Partnership, which is an organisation that invests in employee-owned companies and is an employee-owned company. In a previous life I was the European managing director of a very large US employee-owned company, so I have probably 12 years’ involvement in the employee ownership sector.
I am absolutely not an expert on postal services but I do know a little about employee ownership so my evidence is really about the impact of employee ownership on business generally. I have worked in conventional business and I have worked in employee-owned businesses. I think if you get the combination of two factors—people having a genuine stake in the business and secondly a degree of participation and a sense that they have an influence over their businesses, my personal experience is that remarkable things start to happen. Either one of them is quite interesting, but put the two together and you get really interesting results.
Alexy Armitage: Good afternoon, I am Alexy Armitage from ifs ProShare. I am the head of employee share ownership at ifs ProShare, which is effectively a non-profit organisation that supports and promotes employee share schemes and ownership throughout the UK. We also work quite closely with the European Commission to keep up to date with directives that may affect the UK. Our membership consists of large corporations such as BT and BP, advisers such as law firms and accounting firms, and administrators that administer share plans on behalf of companies—such administrators tend to be independent of the company and the employees.
The organisation has been going since 1992, and we are part of ifs School of Finance, which is also a not-for-profit organisation and promotes financial education, not only academically, but through institutions and their memberships. We are very much in favour of employee share ownership and are very interested in the details of the Bill concerning Royal Mail’s potential employee share scheme.
I should mention that we probably differ from the Employee Ownership Association in that we look more at employees owning shares in their company, as opposed to direct ownership by employees, but I understand that there are some commonalities in our desires to see more employee ownership.
Peter Hunt: My name is Peter Hunt, and I am the chief executive of Mutuo. We are not a trade association, but we have been working and campaigning as a think-tank for the past 10 years or so. We have looked at different aspects of mutual business and mutual governance and how those can be applied in interesting and new areas.
There are two basic starting points for our interest in the Bill, which we also support. We have a slightly different take on public ownership from the traditional view that has prevailed for the past 80 or 90 years, and we believe that people who are deeply involved in businesses that are operating for public benefit, or are paid for by the public, should have more of a role in participating in them. For the past few years we have been engaged in promoting foundation trust hospitals, co-operative trust schools, football supporters’ trusts, and all such organisations in which people can have a more direct say. We think that Post Office Ltd, once it gets over the hurdle of being a financial business that can make profits, actually has a huge opportunity to engage with all of the different stakeholders—sub-postmasters, employees, multiple operators and, indeed, the general public.
I have two questions, one on share ownership and one on mutuals. On the issue of share ownership, what benefits would share ownership bring to Royal Mail—both as a company and to its employees—and why 10%?
I shall ask my other question now, too. On Second Reading, John Redwood asked what the Government were talking about mutualising. Would it be the Crown offices, which the Government already control and own, or the mass network of self-employed businesses? Is the first doable and the latter impossible, or are they both doable from an administrative side?
Starting with the share ownership question, what does it bring to Royal Mail? What does it bring to the employees, and why 10%?
Alexy Armitage: From the surveys that we have put together, and from the companies that we have looked at, we definitely see that employee share schemes are a good way of engaging employees with businesses and making them feel that they are part-owners. On the question of whether it should be the 10% ownership that is stated in the Bill—obviously, that is a matter for whoever is putting the formal proposal together—and how that affects employees, we have seen companies in which employees hold lower stakes but still feel engaged. Although they might not hold as much as 10%, or more than that, they like the fact that they own shares in their company and they see that as a benefit and a worthwhile thing to do. That is at all levels, not just executives, and it goes right through those organisations. For example, one of our members, National Grid, has been offering employee share plans on an all-employee basis for 25 years. It looked at this, following privatisation, as a good idea. At the moment, its level isn’t even up to 10%, but it still encourages its employees to acquire shares in the business because it does engage them. I have got some statistics. I don’t want go over dry statistics, but it is something that I could provide to you. I could deliver the information.
Alexy Armitage: From the US side, the UK and from Europe as well, we are seeing that employees appreciate having some rights to ownership and being offered share plans, because they feel that the employers are taking them into account. The actual 10% ownership issue is a point about what marked changes or what impact they can actually have when the company is making decisions, because 10% is not any kind of controlling stake, but it can still allow them to have some voice. A lot of the employees we see do attend shareholders meetings. If they do not all attend in person, then they will have representatives who attend on their behalf.
Carole Leslie: Can I make a clarification, so that we are clear about what we are talking about here when it comes to share ownership? There are different ways for employees to own shares in their company. Generally, people think about what Alexy is speaking about—the direct share ownership where people have the share certificate and the shareholders’ rights in the company individual shareholding. At the other end of the spectrum, more like the John Lewis model, the shares are held in a trust on behalf of the employees. Both are very good models and the one thing to know about employee ownership is that there is not any one size fits all—you have to have something that fits the organisation.
What makes a difference with your normal engagement activities in an organisation is that the shareholding, whether it is direct or indirect, does give the employees rights. It gives them rights to information. It gives them rights to influence. It gives them rights to have a voice in the company. So, it is not just the shareholding itself that makes the difference, it is the governance and leadership that surrounds that that really makes it work, and that is where you see most of the success.
You asked about the 10%. Personally, I am a bit disappointed at 10%, because 10% to me is small, which means that you have to put more effort into giving employees that real voice in the company so that they do feel that it is theirs—they do feel that that ownership, if you like, is real and it is not a token.
Peter Stocks: I want to reinforce that point. I think that 10% is quite low and I think that there is a danger that if it is just shares and there isn’t a participation culture that goes with it, it won’t change a lot. We see real results in companies where the whole of the company feel that they have a sense of ownership. They feel that they participate in decisions. They discuss decisions and when they make a decision they stick with it. It was interesting watching some of our members through the recession. Employee-owned companies are affected the same as everybody else. They would have gone through an awful lot of agony about how you manage through different times but, because those decisions were made in a very participative way, once the decisions were made they were stuck to, and bought into, by everybody. Our members have gone through the recession in a very resilient way and I think that is down to the way you manage the company.
Alexy Armitage: Following what Carole says, she is right that it depends on the entity you are looking at as to how best to engage your employees. I suppose that is the kind of question I had here. The information that we have got from the Bill does not necessarily go into the detail as to whether this will be an acquisition by a third party, maybe some type of public offering, and how, to that level, employees can then be engaged. Because 10% may seem low, but we work with a lot of companies and, because of how they are structured, 10% to them is quite high because they have other shareholders and they need to take them into account. It is going to slightly depend, I would have thought, on the entity and how this is actually looked at for the privatisation with the Royal Mail side.
Peter Hunt: There is a lot of fast and loose talk about mutuality and mutuals, and the label comprises many different types of businesses and many different types of organisations. Mutuals across the UK turn over £100 billion a year, but they are as varied as the Co-operative Group, the biggest mutual, down to the smallest co-op pub or local community organisation. There is a real mixture of organisations here, and if we were to talk about a mutual post office, we could all be talking about different things. I will tell you what I am talking about, which might also help Mr Redwood, who is probably going to read this tomorrow.
Basically, the opportunity for Post Office Ltd is to have a mutual that is a mixture of different stakeholders, and one which does not put one particular stakeholder group at the front of the queue—there is an unintended pun there. It does not put the employees ahead of the sub-postmasters or the multiple operators or, indeed, the general public, because the one thing that they all have in common is that they all want to see a successful Post Office operation.
The type of mutual structure that you are starting to lean towards in all of this is, in the jargon, a multi-stakeholder co-operative. It is run as a business, but you try to manage the different stakeholder groups so that you have a balance of who is responsible for what. Ultimately, the point that I am making is that no particular stakeholder group—the employees or the multiples or the sub-postmasters—is actually in the majority at any one time. The governance structure, which is some way downstream from what we are talking about in the Bill, would try to balance out those different interests and try to make sure that there is a range of opportunity for those interests to be aired, but not to control and overrule each other.
Do you accept that there is difficulty in what can be mutualised, because of the very structure of post offices, sub-post offices and other self-employed outlets?
Peter Hunt: It is difficult, of course. All of this is difficult, but the question is whether it is desirable and doable. The answer to the question, “Is it doable?” is, “Yes, it is.” We can take some comfort from the existing successful mutual businesses that mix and match different types of stakeholder. I mentioned the Co-operative Group, which has members who are members of the public—there might be members here. There are also a number of regional businesses, which, from time to time, might actually see the world in a different way to the executive that is running the business. There are in-built frictions, and there are in-built ways of dealing with those frictions. You can take that further, looking at the example of NHS foundation trusts, where there is a whole range of different stakeholders involved in the governance arrangements. The key point is working out the most appropriate role for each of the stakeholders and making sure that that is matched in the governance structure that you adopt.
Most of my experience with employee ownership is in high-growth early-stage businesses, and I do not think that this business could be described as having either of those two features.
Earlier on, we were talking with the unions and with management, and they had different perspectives on the value of share ownership in providing incentives. You have mentioned other forms of participation, involvement or influence on the business, and I would be interested if, first of all, you would like to comment on what other considerations we should be giving to those other forms of influence. Secondly, on the question of 10%, which a number of you have mentioned, would you encourage the employee representatives, if the Bill is passed, to look to participate along with some bidders in order to increase their stake in the business, particularly on the Royal Mail side?
Alexy Armitage: As far as we have seen, we do tend to want to encourage matched or shared ownership as part of a way of participation, but that is not always possible when working with organisations that are effectively global. We have obviously seen other ways in which they might try to replicate a type of share scheme, but it might actually have to be paid in cash depending on the location of your employees.
Bonuses can also be linked to the performance of an organisation or a company, and they can be paid in cash. They could have similar performance conditions as you might see attached to a share scheme, say, so that you actually have to perform before you receive your return or your shares.
On the other side, as far as the 10% is concerned, I know that there were some discussions, as you were saying, with the trade unions earlier on, and there seems to be a difference of opinion as to whether 10% is enough. Again, I am assuming that it slightly depends on the entity and what it is trying to achieve. If you are working with something like a trade sale, it will presumably depend on the purchaser’s view of how much employee participation there should be. But it is something that they need to take into account early, I would have thought, because it will affect potentially what they pay for the company.
The other issue that we have seen with some companies is where they want to effectively allocate a certain percentage of shares to employees and how that company is then retained as, shall we say, employee-owned, when original employees may leave the company. Are you then looking at maybe having to buy back their share ownership for it to go back into a pot for employees, and if so, what are the potential costs to the company of putting a structure like that in place? Some companies have fallen foul of that because they have realised that the costs can be quite prohibitive if they have a lot of transition of employees.
Peter Stocks: My background is more from the entrepreneurial side of employee ownership. The issue there is, how do you motivate people to want to solve problems and grow a business? If you were to put some degree of incentive into the scheme whereby, if people can find innovative ways of solving their problems and growing the business, they get a greater share of what they create—they share the wealth creation—I think that is worth looking at. Just being given a greater share of something if you can’t see how you are going to grow it is not much of an incentive.
Peter Stocks: The ones that have retained it have been very long-term, resilient businesses: John Lewis, Ove Arup and an awful lot of our members have very long-term approaches to employee ownership. You’ve got to bake that into the business model at the start though, because if you have a situation where there is an opportunity not to have a proper endgame, you see situations where business are spun out again. So we would recommend that part of this is structured in such a way that the employee’s share is in a trust or whatever, and you can control them.
Carole Leslie: I think that exit has to be considered very carefully as to how that would work. Where the shares are seen as a way to make money, that changes the whole dynamic of what makes employee ownership work. The reason it works so well in organisations like John Lewis and Arup is because people can concentrate on the long-term success of the business, not on the quarterly share value. The decision tends to be longer term and much more sound than it would be just making quite short-term decisions. Therefore, I would suggest that you want to have some kind of safety net built in that ensures that the shares will always be retained within the business, so if there is going to be a direct shareholding, then it can be resold to the organisation or to internal employees—but the shares do not eventually end up going outside. Because then you are losing what you have created and the long-term capability.
Alexy Armitage: We have seen encouraging signs from our members and a lot of them are FTSE companies. The issue is always going to be that employees, like any other shareholder, will look at the share price and will be likely to sell when the share price goes up. However, a lot of them actually do retain their shares because they have a long-term commitment to the company. We have seen that with some of our members. We got some results in our recent surveys at about 50% to 60%, or sometimes higher, of employees actually retaining the shares—not necessarily the full amount that they acquire, because there is often a tax implication behind this so they may sell some of the shares to meet those liabilities, but of employees actually having a long-term holding. I hope no company would encourage employees to hold shares or to buy shares in a market that is dropping, or to try and prevent them from selling shares when they wish to do so. We can back it with, say, an employee benefit trust, which allows them, if the company is not a plc—so there is not a ready market—to at least sell into that as an effective market for those shares. It is always difficult. It is encouraging that employees retain their shares, but at the same time I think that companies will get a thin line if they try to demand that employees retain their shares whereas other shareholders might have free access to sell in an open market.
Earlier today, we heard quite a bit of resistance to the whole concept of employee share ownership from members of the unions. Would our experts please spell out what the benefits would be to Royal Mail employees? Secondly, are any of your respective organisations starting to liaise with the Royal Mail board and members, in terms of educating them and raising some awareness about what this potentially could look like for them?
Alexy Armitage: As far as employee share schemes are concerned, the benefits, as I have mentioned before, include engagement of employees, having employees feel that they are part of the company. I don’t think that’s any different from the John Lewis model which is a trust arrangement, not actual employees owning direct shares.
We also have, as a number of you know, a tax-approved regime in the UK for certain types of employee plans. In particular, the share incentive plan has proved very popular with many FTSE 100 companies and larger entities, because that way, not only can employees acquire shares in a tax-preferred way, but the employer can also match their participation levels and effectively give them shares in the company. As long as they hold them within the required time frame, they can receive them in a more tax-preferable way, compared to other shareholders. For them, the cost of obtaining shares can be reduced for the employees without necessarily giving them a discount. There are share option schemes as well, which work in a similar manner to give them similar tax benefits.
Our organisation hasn’t engaged with Royal Mail at present, but would be happy to present to any company. We do that quite often with our members, going in to speak to people not just at senior levels, but also with their employees if they need that assistance. They often get that through the administrators who deal with their plans, but if they haven’t had a plan in place officially in the past it is something that we would be happy to do.
Carole Leslie: You have mentioned resistance. It makes me sad but it’s true that a lot of resistance comes because people just don’t know enough about employee ownership and they haven’t seen the benefits, because it is not yet a mainstream model. If you look at the United States, employee ownership has really taken off. Just this week it was announced that a company of 15,000 employees has gone into employee ownership, and that is happening on a regular basis. We don’t have that head of steam yet. I think that is where the resistance comes from; it is really just a lack of knowledge. I don’t see where else it can come from.
The benefits for the Royal Mail in considering employee ownership would be giving employees who work in that organisation a real stake in the company, a real interest in delivering an excellent service to the customers and service users, finding, as Peter said, the right way to solve problems. They look at it not as something that is done to them, but as something they own and have a bit of control and influence over. They also have the information to use that influence wisely. A huge benefit is what I see. With regard to your other question, we are not currently working directly with anybody at Royal Mail.
I have a question for Peter Hunt. In the introduction to your document—and you again said today—you said that before POL can be transferred it has to pass the test as a sustainable business, which it clearly isn’t at the moment. We have heard evidence today that some 7,000 to 8,000 of the existing sub-post offices are not profitable. What is your take on how they would survive in a mutual organisation? Is it possible to form a mutual when you’ve got so many non-profitable parts of the organisation?
Peter Hunt: The first thing to say is that you are calling better people to give evidence to talk about the business of Post Office Limited. However, what I would say is that it is a fundamental starting point that there is no point in trying to change the governance arrangements or the corporate structure of a business that is bust. The business needs to be making profits and capable of going forward to make profits. That is a given and that is why we put it in the introduction to that paper. Whether in any business you seek to ensure that every single part of the operation is profitable in the same way, is a matter of the strategy of the business. It might be that certain parts of the business would be tolerated to work at a lower profitability or even temporary losses. The point overall is that the business has to be profitable, otherwise it is not a business.
The Post Office is different from many businesses, in the sense that it performs a social obligation as well as a purely business obligation. At the moment, effectively two thirds of POL is not profit-making, although some post offices might become profit-making. Is a mutual really only a possibility if we get to the stage where the vast majority of branches are profit-making and able to form part of a mutual organisation?
Peter Hunt: A mutual is like any business; it has to be able to make profits, wash its face and make a return on the capital employed. That is how a mutual builds up the funds it needs to invest in the future. On those basic terms, there is no difference between a mutual business model and any other business model. It is possible, within the mutual structure, which is not designed to maximise the profitability of the business, to have a different view on the profitability of individual units. You talk about the social service that post offices provide, and a good example might be co-operative societies that keep marginal stores open in the highlands and islands. They cannot make as big a profit as they could on the mainland, but they are kept open because they might be the only store in the area. The business is able to tolerate a different view of overall profitability than it could if it was seeking to explain all that to profit-seeking shareholders.
Turning the question on its head, if most of the smaller post offices are part of a larger business, and if the owner has invested his own money and is seeking to make a profit, I do not see how that will fit into a mutual model if it keeps open loss-making shops.
Peter Hunt: The point is not about keeping open the shops. You will find that lots of the smaller sub-post offices that you are describing are actually stationers or newsagents as well and do other things as part of their business. We are talking about the post office part of the business, and it is entirely possible within the management of Post Office Ltd to take account of the needs of different stakeholders and different business parts of the organisation. You cannot speculate on how that would work out in any individual case. Ultimately, the sub-postmasters, just like the multiple operators and the general public, want to see the Post Office succeed, which means getting people through the doors and using the service. It is no different, regardless of which stakeholder group you are taking about.
I want to return to employee share ownership schemes, of which I am a great fan. On a point of clarification, the Bill stipulates 10% or more for share ownership, so we should not get too fixated on the 10% figure. That would be the largest figure for employee share ownership of any major privatisation anyway, and that is the minimum it can be. We have already talked about whether it was just shares, rather than being in a trust, and whether employees would be able to dispose of those shares. Could you comment on some of the other factors that you think the Government should take into account when designing the scheme? What should Ministers bear in mind?
Alexy Armitage: From the employee share scheme side, which you have mentioned, they should look at some form of employee benefit trust, or at making some kind of market to look at those shares, not so much because you necessarily want employees to be buying or selling in any kind of bulk, but because you obviously need to factor in people leaving or coming into the Royal Mail in future and how they will be included in any kind of share scheme. I suppose that it is just about keeping a certain number of shares.
On the 10%, presumably that will depend on how the Royal Mail is affected and, if it is acquired or there is a public offering, how much employees can reserve. It is obviously not for me to comment on the size of it, because that would be more of a market issue. You can still encourage employees to acquire shares, even though it might not be, say, a publicly listed company. We have definitely seen private companies that have a number of employee share schemes in place.
Again, it depends on whether there can be created some kind of market for the shares, and it depends on the private company, because some have restrictions in terms of their actual structure as to who can own shares—the reason that they are private. It can be a difficult way for employees to own shares, especially when you are looking at a private entity. Usually, there is not such an issue with plcs, because there is an open market, and employees have the same rights as other shareholders to deal in those shares.
Peter Stocks: There would be some benefit in leaving the 10% in a trust rather than individual shareholdings. Otherwise, the percentage will be volatile.
Alongside the financial mechanics of creating the shareholding, the other issue is how to build in representation and get participation going, because if you are going to change the business and make it successful in the long term, you have fundamental business problems to solve. The issue is how to get the energy, creativity and enthusiasm to go out and fix problems. They will be solved somewhere in the organisation, so how do you get the organisation working together with the right behaviours and attitudes to make the business successful, and then for employees to have the benefit of their 10%? Without solving the problems, they will not benefit from the 10%.
Carole Leslie: You need to think carefully about the model that you want to go for. The benefit of an employee benefit trust is that it is very stable. It is easy to administer, you do not have the turnover of shares, you do not have to think about people buying and then selling—it is very stable. It could be said that it is a bit more difficult to give people a tangible sense of ownership if they do not have the bit of paper that says that they are an owner of the company, but companies such as John Lewis Partnership and others do a great job with that. A lot of it comes down to how you enshrine the employee voice, and how governance of the trust is implemented. That is a way to do it.
If you go for individual share ownership, there are mechanisms such as the share incentive plan, which gives tax benefits to employees. Even if you do not see a lot of growth in the shares, the tax benefits themselves can be rewarding and worth while. If you are going down the individual shareholding route, you want to think about who would be eligible to benefit from it. I would argue that you want it to be open to all employees of the organisation, not just executives and managers.
I cannot emphasise strongly enough what Peter said. How does the company then bring in engagement, voice, governance and so on to make the scheme really worth while?
Coming from an industrial relations background in the steel industry, I can say that the proposed 10% minimum is not a precedent. That was set by Rolls-Royce in the 1980s. We spoke to CWU representatives today. I do not think that they were resisting; they were just apprehensive because of previous bad practice in share distributions to employees in the ’80s. My own experience with British Steel in 1988 was that 6% of shares were sold to employees, and they were mainly managers who had the tip-off, who were in charge of the redundancy programme at the time and who had access to capital.
What previous best practice have you seen in terms of equitable distribution among the categories of employee in a company to make sure that such a scheme could work?
Carole Leslie: I try very had not to be prescriptive, because as much depends on how the scheme is implemented and communicated as what the actual model is. It is how that is done. You are right: back in the ’80s, they seemed like get-rich-quick schemes. You got your shares one day, then tried to sell them as quickly as you could for as much as you could. That was nothing to do with ownership—it was just a perk. Yes, I can see why there is a lot of baggage attached to the idea.
I would have to know more about the organisation to answer the question. A lot of companies will go down the route in which everybody gets an equal allocation. It can be done on length of service, which recognises that people have contributed to where the organisation is now. It can be distributed according to salary. There are many ways, but I would have to know more about the organisation.
Alexy Armitage: As Carole has said, it really will depend on the type of corporation, and on where employees are in the structure. Obviously, if the company is, in effect, starting up and starting to put the business together, it may consider that it needs key employees to come in, and perhaps they will have to incentivised more to push the business forward and make it more profitable.
I agree that in the 1980s a lot of effectively public businesses that were already profitable were sold. The employees were very enthusiastic, but to some extent they were getting a very fast return. In some ways, that has been turned around, because you still see employee ownership in a lot of those industries and they are looking much more closely now at retaining their shares, from both the employee and the company perspective. I think that way of thinking has changed as employers have become more aware of the benefits of employee share-ownership. But to say that every company should have x amount for employees and x amount for executives does not really work as a model. It will depend on the company and where it is in its industry.
Peter Stocks: I have seen two models of best practice for how to use share ownership effectively. One is the John Lewis one—a trust model where, essentially, the stock is locked up and you give all the employees the benefit of the profit you make from those shares. They essentially get a dividend every year based on how the company has performed and how they have performed, so it is not spread evenly. There is a judgment on performance.
In the US, I have worked with much more entrepreneurial schemes of employee ownership with reasonably long-term option schemes, the notion being that you are rewarding people whom you believe will solve problems, fix the business and give it long-term growth. You are not giving them something they can spin out tomorrow. You are saying, “If you want to get that reward, you will have stick around for five years, solve the problems, get the growth, make the company strong. Then you will get the benefit.” It is really important that you fix the rewards in the long term.
It is no secret that Royal Mail has had its problems with industrial relations over the years. We heard earlier from one of the customer groups, which said that industrial relations breakdowns could be a threat to the long-term business model and the universal service obligation. Can you give any examples of companies that have been able to improve their industrial relations through employee share ownership? Will you also expand a bit more on how employee share ownership can improve communications between management and workers? I have talked to my local CWU. Breakdowns in communication caused a lot of the problems, when it did not believe that management were listening to their employees.
Carole Leslie: One example that comes to mind quickly—this has been prompted by someone talking earlier about the demand for paper, which is a declining industry—is the Thomas Russell paper mill in Fife, Scotland, which has been employee-owned since the ’80s and fully employee-owned since the mid-’90s. It is unionised, has an excellent industrial relations record and has been out-performing other paper mills in the UK and performing well globally as well. Recently, its employees voted to come out of the collective pay agreement, because they did not think it was right to do it, and the union backed that locally. Having a strong ownership voice with the union, if it is managed properly, can work exceptionally well.
You asked another question about how it can improve communication. It is a bit of a journey and not something that happens overnight. You have to work very hard to make it work. A lot of it is that you have to look at how the employee voice will be represented throughout the organisation to ensure that all parts of the organisation are heard and how much import is then given to the different parts, whether it is done by a council, elected representatives or something else. Involving unions in setting that up, as well as involving employees, can go a long way to setting it off on the right foot.
I want to return to the issue of mutualisation and post offices, but do not wish to address purely Mr Hunt, because I think that the business experience of the other three witnesses would be useful. Clearly, we have a situation in which perhaps 4,000 post offices are viable and two thirds are not. If we are trying to make the business viable, presumably there are options of increased business and continued subsidy, or the mutual staff will have to decide that some of those post offices will close. What could be put into the Bill or how could it be strengthened to make the post office network more attractive? People have to want to buy it. First you have the sub-postmasters who have a lot of money in it anyway. Do they want to spread that money around to less viable post offices which is effectively what they may be doing? Who else would you interest? What is your take on things like the inter-business agreement with Royal Mail and what would you want to see from that to make a viable post office network? What about the issues of regulation and having not just the collection and the delivery points, but the access points defined very clearly in the Bill in terms of regulation? What types of measures like that would you want to see to strengthen it and make it a worthwhile organisation to buy into?
Peter Hunt: I am not sure you can legislate for all those things. Two things need to be achieved. I have already talked about the first one which is that it is a viable business. I do not think it can be a half-viable business, or a nearly viable business or an unviable business if it is transferred to a mutual. It needs to be viable first. So if difficult decisions need to be taken to make it viable, they have to be taken before it is transferred. To use sporting terminology, it would be a hospital pass to hand over something that was a pretty difficult decision that someone would then need to take. I would want to see at the point of transfer that that business is viable going forward, not full of problems and unresolved decisions and unable to trade profitably.
Having said all that, the opportunity for all the different stakeholders to try to solve some of those problems together is not currently being taken. I know you have spoken to the National Federation of SubPostmasters and you can talk to multiple operators and other people who are currently running post offices. Their experience is that they do not generally feel part of Post Office Ltd’s decision-making process. They do not generally feel that they are people who are consulted and able to give their own expertise, which in many cases is pretty substantial. So they do not feel that they are cut into the deal as it stands at the moment. So over the next couple of years, I would like to see a change in the culture of the Post Office so that it opens up to being able to receive this new kind of arrangement, talking to the sub-postmasters and their representatives more openly and deciding the business direction more openly with the different stakeholders.
Putting all that into the Bill would be nigh on impossible, and I am a great believer in legislation that sets the principles. In this situation, one golden principle is set in the Bill as it stands, which is the public benefit of Post Office Ltd. It is really important that the future business adheres to that public benefit and is effectively held to account by Parliament for that. You talk about regulation. It is entirely possible to run mutuals in highly regulated business areas. There will always be different external interests in it and that should be something that continues. Ultimately the viability has to be sorted out before this is transferred.
To follow up on that, I have a question about access points. I am not talking about the access criteria, which we know are linked to Government funding of the Post Office; I am talking about access points for Royal Mail to use and to be in the universal service obligation. Would you not see a place for that in terms of making the post office network viable?
Peter Stocks: I will give you a view, not as the director of the EOA but as a resident of Cornwall who uses the local post office, so I am going off piste a bit here. It always strikes me that it is a tremendously underused asset, because in most rural communities it is the point where everybody goes to get things and fix things. I have never understood why there was not more innovation in terms of how you build those businesses and how you use them. Before dismantling it and chucking it away, I would recommend that somebody has a good look at how you might use that network much more effectively. I think that it is critical to an awful lot of rural areas.
I have two quick questions. I would like to sum up a little on what you have said about employee share ownership schemes. Given that good communication between management and employees and a sound business model are the two most important things, is it correct to say that the percentage of shares offered to the employees is secondary to the quality of the scheme that they can join, particularly if that scheme means that they feel they have a stake in that business and are sharing in the success of that business? Would that be your view?
Alexy Armitage: It depends on where you are coming from. Employee share schemes work with companies for which it is their first share scheme, so they do not obviously have any necessary percentage of employee share ownership before they go into their initial share scheme. Often they want to put together a share plan that is as encouraging to employees as possible. For example, entities that can have one of the tax approved plans may well go down that line, because they can offer employees benefits other than just employee share schemes. They may also be able to offer them something that is familiar, because their employees will not have just come from nowhere; they might have come from another organisation that offers those plans.
We have seen that when foreign-owned companies have come into the UK and built up their presence here, sometimes when they offered a plan in the UK that had been very familiar in their particular location they did not have a very large take-up because the UK people were not familiar with it. They have then tried again, often using an approved plan, and they have seen the take-up increase very highly. That is not because they are offering more of a percentage, but because they are offering a different kind of scheme. It is hard to say whether it is because you offer a large stake in the company, or because of the scheme. Often it can be both, or it can depend on the organisation.
This is my final question, because I am aware that we are running out of time. There has been discussion about what you do when you have a failed community business, particularly in a rural community where business cases fail and it is difficult to get anything else. One way in which people try and resolve that is not so much mutualisation but community ownership. I wondered whether there were any models of community ownership, particularly of shops, pubs or things like that, which you think might be a good model for post offices in communities.
Peter Hunt: There are lots of examples of community-owned businesses such as pubs, shops and even post offices. You can already look to those that currently exist. The point is really, in all of this, that once a business becomes unviable, the decision needs to be taken about it. If that decision is whether it stays or goes, it might be a bit blunt as an instrument. You can also look at a different way of doing it, which might involve the local community. All of that, which you say is an alternative to mutual ownership, is actually one of the types of mutual ownership that could fit within it.
This is a quick point. I was interested in what Carole said about the need for employees to be involved in the decision making. We have evoked the John Lewis model, which is 100% ownership. We are looking here at possibly as little as 10%. I wonder what you think is the minimum needed to make it realistic, rather than having 90% owned by, say, Deutsche Post and 10% by the workers.
Carole Leslie: I do not know if I can give a quick answer. I don’t know that you can put a figure on it. I will give you two quick examples: there is Admiral Insurance, which is based in south Wales, where they currently have employee ownership of 12% to 15%. If you add on the senior executives, the ownership stake gets up to about 20%. That is still quite small, but they are working to grow that. I think you have there a company that has much higher retention than other businesses, has high levels of customer satisfaction, is more innovative and is expanding in a market that is not expanding. So it is working very well. Another good example would be Eaga plc, which was formerly a public sector organisation, 100% employee owned and listed on the AIM market in 2004. It has now got 37% employee ownership stake. However, it has an excellent infrastructure with a really good employee voice, with a partnership council, which is fully involved and fully informed on what is going on in the organisation, and it works well. I would be reluctant to put a figure on it, but 10% seems very small.
May I ask whether any of the organisations you are involved in have been in talks with the Government about mutualising the Post Office?
It is often what you can’t put in the Bill that is a bit of a debate. It has come from what you have all said, that with employee shares, the key part is participation and involvement. I want to check that we couldn’t put that in the Bill, because it seems to me to be quite difficult to put in the Bill. I want your views on that. In terms of the mutualisation model, we can be reassured as a Committee, that we shouldn’t have a detailed prescribed model for that, because with mutualisation you need to bring people with you. Are we right to keep it in principle approach in the Bill and set in train consultation?
Peter Hunt: Yes is the answer. You heard on Second Reading people say that you can’t do mutuality to people; you can’t do a top-down mutual. You can set the principles, but the establishment of the arrangements of how you actually run it have to involve the people who will be involved in running it. So, I think, no, if the Bill goes through, the next period should be about getting those people together and making sure that they are involved in designing the structure that they themselves will be operating in the future.
Carole Leslie: The employee ownership stake will lead on to how the engagement works within the organisation. There will be an open invitation to any of you who want to go and see an employee-owned organisation. They are across the UK, so you can go locally. That invitation is open. Just get in touch with us at EOA and we can organise that.
Alexy Armitage: That is the point. Until you definitively know the structure you want and how this will be privatised, I don’t see how you can be more prescriptive. Because effectively you are going to be limiting what you can do. You need to know the structure of the organisation in advance. So keeping it fairly loosely defined, shall we say, in the legislation is probably a good thing at this stage. It may be something that needs to be tightened up for the future.