[Mr. Martin Caton in the Chair] — Universal Service Obligation

– in Westminster Hall at 12:00 am on 13th June 2007.

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Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Watts.]

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Perhaps if zonal charging was introduced, we living in remote areas...

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Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport 9:30 am, 13th June 2007

I am pleased to have the opportunity of serving under your chairmanship, Mr. Caton, and to have secured this debate on an important issue for many of my constituents and people throughout the United Kingdom.

It might assist the Chamber if I first explain why I have chosen this topic. The universal service obligation has been an ongoing concern of mine for the past six years while I have been a Member of Parliament, but it has particular relevance and resonance at the moment following the recent application by the Royal Mail for zonal pricing for bulk mail, on which consultation with Postcomm has just concluded. That has particular relevance to this debate and I shall discuss it in greater depth later in my speech.

This debate must be put into its proper context of recent political history, particularly the way in which the Government opened up the letter post market to full competition. They did so at the prompting of many in Postcomm and, I regret to say, Postwatch with unnecessary and unseemly haste in what history will record as an act of commercial, economic and social vandalism. The full implications of that act, the way in which it was done, and the way in which it was driven by officials at Postcomm in particular, will ultimately show it to have been highly damaging to the basic market structure of postal services in this country, and especially to our most remote and peripheral communities. Too many people in the Department of Trade and Industry and in Postcomm feel qualified to speak on matters of competition without ever having run a proper business. If there is to be a new phase of Government, I hope that some economic realism will be injected into bodies such as Postcomm and—I say this with considerable regret, because it is supposed to protect consumers' interests—Postwatch.

My concern is that if Royal Mail's application for zonal charging for bulk mail is approved, bulk mail will be removed from the universal service and what is left will hardly be worth the name. It will hardly be universal and it will barely be a service.

According to Postcomm,

"The universal service means that anyone in the UK can post letters and parcels to any other part of the country at the same affordable rates. And it guarantees one delivery of mail for every UK household and business, each working day, and one collection of mail, six days a week. One of Postcomm's most important jobs is to protect the universal service, by requiring it in Royal Mail's licence and making sure the company has the resources to fulfil its duties."

The USO covers letters and packets weighing up to 2 kg, the non-priority service and parcels weighing up to 20 kg, the registered and insured service, and a range of support services to ensure security and integrity of the mail—for example, the Royal Mail's re-direction service, international outbound services, Mailsort 1400 and the Cleanmail bulk mail services.

It would be remiss of me if I did not remind the House that the writ of the USO does not run in some parts of the country, where the availability of transport and the sparsity of population make it difficult to provide a daily service. Many of those places are in my constituency, but I shall strike an uncharacteristically positive note and say that since the creation of Postcomm and Postwatch, we have seen significant improvement in the service in those hard-to-deliver-to areas.

Communities in Orkney and Shetland depend on Royal Mail's universal service. Local businesses face many challenges—we have additional travel costs and exceptionally high fuel prices as a result of our geographical location. However, mail prices have remained largely uniform throughout the country and companies in the northern isles have been able to send mail at the same price as firms in other parts of the country. Some of the most innovative and exciting uses anywhere of the mail order business are to be found in the northern isles—indeed, I am told that no less a person than Mrs. Dunwoody orders high-quality products by mail from businesses in Orkney.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

My hon. Friend is making an excellent point. The same applies to the Isles of Scilly in my constituency. Because of their geographical remoteness from centres of population, the universal service obligation is vital because a decent postal service provides a good basis on which remote businesses can survive. The postal service is a vital economic link.

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

My hon. Friend makes an excellent point. It is often said that we need a solution that will suit both the Shetland Islands in my constituency and the Scilly Isles in his. In fact, I have often thought that that is the easy part; it is fitting in the bits in between that is more challenging. I thought for a moment that my hon. Friend was going to challenge me about competition for the business of the hon. Member for Crewe and Nantwich, and I am pleased that we do not differ on that.

Other parts of the Department of Trade and Industry, and the Scottish Executive beaver away to persuade more people to work in areas such as those that I and many of my hon. Friends represent. Maximum use is made of modem technology, which is tremendous and which I wholeheartedly support because it is crucial to the future of remote and peripheral communities if we are to maintain a balance and mix of population, but modem technology alone will never be enough. We must keep traditional communications in place as well. A business may have the most creative website in the world and supply the best quality produce in the world, but that is not worth much if it cannot get its goods to the customer.

According to a report produced by Postwatch Scotland in April 2003 on parcel and other postal services in the highlands and islands, 12.5 per cent. of companies have experienced difficulties with businesses refusing to send them goods, and I suspect that the figure for businesses in island communities is higher than for those in the mainland highlands. The report also revealed that 17 per cent. of highland and island firms were being charged higher delivery charges than businesses elsewhere in the UK. I have had many cases in my constituency of a 900 per cent. levy on parcel post to the isles compared with that to the British mainland. I realise that parcel post is not part of the USO, but I offer it to the Minister as an example of bad market liberalisation. No proper, meaningful protection was put in place for the universal service, with the result that areas such as mine have been left without a universal service.

Photo of Danny Alexander Danny Alexander Shadow Secretary of State (Cabinet Office) and Shadow Chancellor of the Duchy of Lancaster

My hon. Friend is making an important point about the disgraceful practice of imposing substantial surcharges on many parcel deliveries to the highlands and islands. Parcelforce Worldwide, the commercial arm of Royal Mail, charges a 100 per cent. surcharge to deliver in some parts of the highlands in my constituency. Does he share my concern that Royal Mail's proposals for zonal pricing of business mail suggests that rather than rejecting that model, it is one to which it aspires?

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

That is, in essence, my concern, and I share my hon. Friend's concern about Parcelforce, which draws an invisible line in Scotland, and once that line is crossed charges increase. Parcels sent from elsewhere in the UK to the north of Scotland still have a surcharge added and parcel recipients in my constituency must pay a surcharge wherever that parcel comes from. Allowing, in effect, a free-for-all in the parcel post market has given people living in Scottish highland communities a bad deal. I had hoped that Ministers had seen what we experienced with parcel mail, and learned some lessons.

At the heart of the debate is the challenge of reconciling liberalisation of the mail market with protection of the universal service. A truly free market would not produce or sustain a universal service. The Government have not thought through how to reconcile those differences and resolve the tensions. In truth, there is a tension between the two objectives, but the Government seem happy to continue to open up the mail market without truly considering the practical impact on the universal service.

Some Departments—particularly the Department for Work and Pensions at the beginning of the year—appear to think that there is no contradiction whatever between saying that they support the universal service and taking their own bulk mail contracts away from Royal Mail and giving them to its competitors. Geraldine Smith highlights that point in her early-day motion 587, which criticises the DWP's decision to award contracts to the Royal Mail's competitors. I should point out to the Minister that the early-day motion has the support of no fewer than 67 of his Labour colleagues.

The universal service obligation has positive and negative aspects from Royal Mail's point of view. Although there are costs involved, its universal coverage should provide it with a significant competitive advantage. I hope that Royal Mail can maintain the universal service obligation without a subsidy or a levy from other mail companies. However, the Liberal Democrats recognise that if that is not possible, a levy might be imposed on other mail delivery companies to help to finance the universal service obligation. Such a levy is specifically envisaged and permitted by the European postal services directive, which gave rise to liberalisation of the mail market in the first place. I hope that when the Minister replies he will tell us the Government's thinking on the use of such a levy. Even if he were to place on record a willingness to consider it, he would send to operators in the postal service market an important and powerful message that the Government are prepared to act if necessary to ensure that constituencies such as mine and many other less peripheral areas in the United Kingdom will be protected from the worst excesses of a liberalised market.

My very real concern is that the Government, and Postcomm, are pressing ahead with the opening up of the mail market without first ensuring that there are adequate safeguards in place to protect the universal service. That point was demonstrated by recent proposals for zonal pricing of business mail. As the Minister knows, Postcomm's second consultation on zonal pricing for some business mail products closed at the start of this month. When Postcomm last consulted on zonal pricing, the idea was not supported by large bulk mailers, who are key customers for Royal Mail, or by Royal Mail's customers. Royal Mail applied to Postcomm in April 2006 for zonal pricing of business mail. The decision will be made no later than 2 January 2008; if the application is approved, Royal Mail will start zonal pricing in April 2008. As the Minister knows, Royal Mail wants to divide the country into five price zones, allowing it to charge its business customers different amounts.

I have real concerns about heading down that road. However, even if we support the principle of cost-reflective pricing, which I do not in this instance, Royal Mail's proposals do not make any sense, and they are certainly not the best way to bring about that situation. The proposal is for a surcharge of 4.8 per cent. for delivery to rural areas. Royal Mail has also made it clear that that will be just an initial extra charge. Over time, it intends to increase the differential, which appears to be an open-ended commitment. Royal Mail estimates that, to be cost-reflective, the surcharge should be 11 per cent. Clearly, if the concept is introduced, there will be pressure for the surcharge to increase over time, which will result in uncertainty for local businesses when planning just how much bulk mail to produce.

Photo of Mark Williams Mark Williams Shadow Minister (Wales)

My hon. Friend makes a strong case on the injustice, as many rural businesses see it. Does he agree with Postwatch that one implication of zonal pricing could be the reduction of volume in rural areas, which would reinforce many people's case for diminishing the current delivery system and the number of deliveries in rural areas?

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

Yes, indeed. My hon. Friend returns to the point that I made at the beginning of my remarks. If we remove that business from the universal service, we will be left with a service that struggles to be universal—indeed, it will hardly be a service as we understand it.

The cost to businesses sending bulk mail will depend entirely on the destination of the mail. So, if a business based in Orkney wants to send out a mailing to customers who live in Orkney, it will pay the same as a business based in Cornwall which wants to send a mailing to customers living in Orkney. What on earth is cost-reflective about that? Answers on a postcard, please—a stamped postcard, if the aim is to get it to Orkney and Shetland post-2008. Royal Mail's real ambition, as far as I can tell, is to cut back on business mail in rural areas, and to increase business mail in urban areas.

Photo of Danny Alexander Danny Alexander Shadow Secretary of State (Cabinet Office) and Shadow Chancellor of the Duchy of Lancaster

Does not my hon. Friend accept that the position is even worse than he describes? A business in Aviemore that wants to deliver to customers in Carrbridge will pay more than a business in Aberdeen that wants to deliver to customers in Exeter, because customers in Exeter do not fit the rural definition.

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

Yes, that is exactly the position. I hope that I was not understating it, because it was certainly never my intention to understate the difficulties that will result from the proposal. My hon. Friend outlines another Royal Mail ambition, which is to reach the low-hanging fruit. The real opportunities for profit are in the big urban areas that are easy to deliver to, and the rest of us can go whistle, as far as I can tell. Given the support that many in the House have given to Royal Mail, that is an act of betrayal. It is a betrayal of the areas that have given the best support to Royal Mail and that rely on it most for their communities' viability.

If Royal Mail's application to apply zonal pricing is successful, pressure will build to increase prices in rural areas still further and to cut them again in most urban areas. There will be a vicious cycle of higher prices in rural areas, which will produce less business mail, and therefore even higher prices. If zonal pricing is introduced, over time the differential between the cost of delivering business mail in rural and in urban areas will only increase.

There is also the danger that businesses will pass on the increase in costs to the consumer. Consumers will be discriminated against simply because of where they live. If electricity, gas and telecoms companies that send out bulk mail know that they will have to pay more to Royal Mail to send a bill to a customer in a rural area, they will pass on the cost to the customer and the people in rural areas will receive larger bills. Such a situation would hit Royal Mail's most vulnerable customers hardest, and for some, Royal Mail's services would no longer be cost-effective. The move towards electronic mail would become more compelling, and utility companies would have to go through the inconvenience of adapting their computer systems to take account of the differing costs of delivering their products. All of that would cost businesses time and money. The system would benefit and convenience Royal Mail, not the customers whom it seeks to serve.

Photo of Robert Smith Robert Smith Liberal Democrat, West Aberdeenshire and Kincardine

My hon. Friend makes a powerful point about the effect on mail recipients. Sometimes, the regulators' market view can be too narrow. They regard the Royal Mail's customer as the person posting the letter, and in the sense of who passes on the cash that is the immediate customer. However, from our constituents' point of view, the recipient is very much the beneficiary of the Royal Mail. Therefore, the universal service should protect the recipient as well as the poster.

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

My hon. Friend makes a very good point. He strikes at the heart of the lack of understanding, particularly in Postcomm and Postwatch, of the market and what competition within that market involves. For that very reason, I have used the term "consumer" rather than "customer". We should consider the market as an unusual one in which "consumer" includes recipients as well as senders. To use the term "customer" is slightly misleading.

Providing equal access to our postal system, regardless of location, is an essential part of that system, and any attempt to erode that should be challenged. Postcomm's statutory duties include taking into account the interests of customers in rural areas. Indeed, Postcomm has an obligation to ensure that, when promoting effective competition, it has regard to the interests of residents of rural areas. It must ensure that no section of the population is discriminated against. I cannot see how it would be possible for the regulator to claim that it was acting in the best interests of rural communities while allowing the introduction of zonal charging as proposed by Royal Mail.

Postcomm recently held a forum discussion on zonal pricing. Postwatch pointed out that the initiative had received "no customer support whatsoever" and that

"this change will be unreasonable for users of the service".

At the same meeting, Nick Wells, TNT Post's chief executive, said:

"Zonal pricing is bad for everyone—both consumers and businesses alike. It is complicated, reduces transparency and creates a tremendous amount of uncertainty. No one is asking for it, and it will threaten deliveries to the millions of people who live in rural areas. So why bother? It isn't necessary. In fact, Royal Mail could haemorrhage millions of pounds from the introduction of zonal pricing, which will slow down the modernisation of the UK postal service. Everyone will lose as a result of zonal pricing."

I could not have put it better myself.

I hope that Postcomm will reject the Royal Mail application. If it does not, I promise the Minister this: we shall be back here again and again until the Government provide meaningful protection for the interests, needs and wishes of my constituents. I warn the Minister that next time, I might bring the hon. Member for Crewe and Nantwich. He has been warned.

Several hon. Members:

rose—

Photo of Martin Caton Martin Caton Labour, Gower

Order. I should like the wind-up speeches to start at 10.30. Several Members are indicating that they would like to contribute. I ask them to show a little self-discipline so that everybody gets in.

Photo of John Grogan John Grogan Labour, Selby 9:52 am, 13th June 2007

I congratulate Mr. Carmichael on his choice of debate and the thorough way in which he made his case. I cannot promise to have the same style as my hon. Friend Mrs. Dunwoody, but I shall do my best to make a small contribution to the debate.

Last night, my bedtime reading was the Labour party manifesto. The hon. Member for Orkney and Shetland briefly referred to one of the promises that we made in it, which I shall read out for the record:

"We will review the impact on the Royal Mail of market liberalisation, which is being progressively introduced under the Postal Services Act 2000 and which allows alternative carriers to the Royal Mail to offer postal services."

My hon. Friend the Minister has been a staunch defender of the manifesto. I was pleased that he and his ministerial colleagues defended the concept of the publicly owned Royal Mail making its decisions on Mr. Leighton's recent proposals. I have high hopes that the review will be able to proceed without further delay. It appears to be a mechanism under which the impact of the Postal Services Act 2000 and the performance of Postcomm and Postwatch, to which the hon. Member for Orkney and Shetland referred, can be reviewed. In many circles, there is disappointment at the performance of Postwatch in comparison, for example, with Energywatch, which I would say was a stauncher defender of consumer interests. I hope that the review will proceed without delay and I would be interested in the Minister's thoughts about how it might proceed.

It is interesting that Postcomm has made various calculations of the cost burden of the universal service obligation. A few years ago, it said that that was £80 million-plus—no doubt it has increased since then. Many things have changed in the postal market since Postcomm last looked at it. Even with bulk mail and so on, the postal market is declining for the first time in many years. Royal Mail's share of bulk mail is also declining quite rapidly and about 40 per cent. of such mail is now in other hands. It is interesting to see how the rest of Europe is responding to the issue. Oxera, an Oxford-based research consultancy, has produced a report entitled "Funding universal service obligations in the postal sector" that considers about eight different postal services throughout Europe, including La Poste, Poste Italiane, Magyar Posta, Cyprus Post and Poczta Polska. Royal Mail did not contribute towards the study, which nevertheless provides interesting ideas, some of which the hon. Gentleman referred to.

If Royal Mail continued to lose market share, it would be possible to set up a compensation fund, as has been done to protect the universal service obligation in telecoms markets around the world. It would be possible to put a mark-up on the access charges for Royal Mail's competitors. In Finland, a system of "pay or play" is already in place. In other words, competitors to the established operator contribute to the universal service obligation through delivering, or by paying towards it.

Those are many possibilities for the future. There is a feeling among Back Benchers of all parties that Postcomm is being a little complacent in its mantra that the only way to preserve the universal service obligation is to continue cost-cutting at Royal Mail—basically, that is its answer. Obviously, that is a comfortable message to give from offices in London, but ultimately it has implications for the terms and conditions of postal workers.

To be fair, Royal Mail has stripped out a lot of costs in recent years. It will be interesting to see whether Postcomm will at any stage feel the need to think about the perfectly legal measures that are being considered in other parts of the European Union.

Finally, it would be interesting to hear from the Minister about progress on other Royal Mail issues that are relevant to the pursuit of the universal service obligation. Obviously, certainty at the top is vital for any organisation. I note that Mr. Leighton has written a book entitled "On Leadership: Practical Wisdom from the People Who Know"—like the hon. Member for Orkney and Shetland, he does not believe in underselling his case. I do not know whether Mr. Leighton intends to spend more time on the lecture circuit. Incidentally, many Leeds United supporters remember his leadership while he was on the board of their club. At one stage, the Department was thinking of appointing a vice-chairman to bolster Royal Mail's leadership, but I do not know whether that will happen.

As the Minister has often said, the Government have been generous in providing investment facilities to the Royal Mail. Are those being implemented? I hope that it is not still smarting from the rejection of some of its plans. Finally, while the universal service obligation is delivered during the summer, it would be extremely helpful if the industrial dispute could be solved. That will require both sides to talk together. I hope that, without taking sides, Ministers will encourage both parties to talk so that we can avoid an extremely damaging postal strike over the summer.

Photo of Dan Rogerson Dan Rogerson Shadow Minister (Culture, Media and Sport) 9:58 am, 13th June 2007

I congratulate my hon. Friend Mr. Carmichael on securing this important debate. As he pointed out, it is also timely.

Recently, with my hon. Friend Matthew Taylor, I met Sarah Chambers, the chief executive of Postcomm, to discuss this very issue. Clearly, Postcomm remains confident for the time being that simple stamp mail will retain a uniform price. However, business bulk mail does not go only to business and it does not stay in bulk. Utility bills are sent out in batches across the entire country, but as we heard from my hon. Friend, any higher costs for delivering bills to rural areas will soon be passed on to the constituents in those areas.

As delivering to rural communities becomes unprofitable for mail order companies, the very sustainability of the stamped mail service will be put under threat. The delivery of letters between family and friends and that of bulk mail from advertising companies cannot be divorced from each other. Postcards and flyers come on the same van and one supports the other.

How long will it be until so few businesses want to pay the extra to deliver to rural areas such as Cornwall that Ministers say that rural deliveries are simply unsustainable and implore Parliament to re-evaluate how the universal service obligation is delivered? Will everybody be asked to collect their mail from their local post office, providing that it is still there? The price increases associated with zonal pricing are not clear, either. Postcomm says that there will be a small rise in the first year, but what about the second year or subsequent years? How long will it be until there is a significant increase in the price of delivery of business mail to rural areas? How long before the constituents whom hon. Members are here to represent, such as those in Cornwall, the Lake district and the highlands and islands, start to feel the pain and receive fewer deliveries?

It is worrying that Postcomm says that it does not have the final say on the proposals and that its remit is to protect the universal service obligation. As we have heard from Mr. Grogan, it sees protecting the profitability of Royal Mail as the solution to how mail services will continue in the future. Bulk mail products, save for one or two, are not covered by the obligation, and so the whole service could be undermined in a piecemeal fashion.

It is seven years since the Postal Services Act 2000. As my hon. Friend Mr. Reid said in the Whitsun Adjournment debate, perhaps it is time to take stock and to review the universal service obligation with communities in mind, not competition. I have also recently highlighted concerns about so-called final collections. Many rural villages have found that their final collection happens shortly before the morning mail is delivered, which prevents people from responding by return and leaves the first class service with a two-day turnaround.

Royal Mail has turned its business around and, on the whole, it provides a good service. We should support it in finding solutions that can ensure its profitability without undermining its service. That is why I am pleased that my party has come forward with proposals that we believe will allow Royal Mail to be free to compete on a far fairer footing. Perhaps the Minister will be able to tell us why the Government restrict Royal Mail when it could flourish, but refuse to do so when its proposals could have a serious and deleterious effect on rural communities.

I know that other hon. Members want to speak, so I shall keep my remarks brief. It is our duty as Members of Parliament to defend the universal service, and I cannot impress on the Minister strongly enough just how important it is that we do not start to chip away at it. Our postal service was once the envy of the world. It has to change, but as that change occurs, we need to keep our country together and ensure that the service provided to rural areas is on a par with that provided to urban areas. We need to ensure that those who live in remote areas are offered the same service as those who live in more populous areas and that those who live in more deprived communities do not get a lesser service than those in more privileged communities.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

The unwritten assumption behind such a move, which is often spoken of behind the scenes, is that those who live in rural areas, especially remote rural areas, choose to do so, rather than that they were living there in the first place. The assumption thus follows that this is a class issue in that the middle classes have a subsidised service so that they can live in rural areas. Does my hon. Friend agree that that assumption, which pervades a lot of views about the cost of services in rural areas, needs to be challenged? We are talking about deprived rural areas, especially those in many of the most remote parts of the United Kingdom.

Photo of Dan Rogerson Dan Rogerson Shadow Minister (Culture, Media and Sport)

As ever, my hon. Friend makes the point far more eloquently than I ever could. Given that there are no London Members here other than the Minister, we should draw attention to the fact that high costs for delivery have been a problem in London, too. The issue affects the whole country, and I am convinced that zonal pricing would be a retrograde step that would undermine the universal service obligation, which we should all be here to protect.

Photo of David Drew David Drew Labour, Stroud 10:04 am, 13th June 2007

I am delighted to be able to speak briefly on the matter, and I congratulate Mr. Carmichael on raising it. I presume that it is a second choice, because its title is nice and bold on the paper that notifies us about upcoming debates.

For a good or bad reason, I was on the Committee that considered the Postal Services Act 2000 when it was a Bill, so I have some knowledge of what happened at that stage. To be fair, the Government made great play of the fact that it was not a privatising Bill. All the way through we heard the mantra of liberalisation, and that it was about ensuring that Royal Mail and the postal market were fit for purpose and were fit to compete in the UK market and further afield. It has not quite worked out that way, and that is why it is fair to ask the Minister, his team and Royal Mail to reconsider the Act. It was made clear when it was considered in Parliament that the universal service obligation was not an add-on and could not be undermined but was a key part of the Act. If it is not working properly, and if changes could threaten that universal service obligation, we should go back to the legislative process.

The then Minister for Competitiveness, now the Secretary of State for Education and Skills, made it clear that the Government would consider open-mindedly how we could maintain the universal service obligation. I reiterate the call for the Minister present to tell us whether they will consider how that is working, produce a report and talk to MPs from all parties to consider some of the implications. It is not just about Royal Mail per se. I always get a bit confused about Royal Mail's domain, because it is made up of different elements that seem to drop in and out of what we mean by Royal Mail. Of course, it includes the parcel service, but it also included the sub-post office network.

The Minister knows that Gloucester sorting office might close. That is about presence on the ground, so I do not dismiss it, although I know that it does not form part of the debate. However, what is part of the debate is the controversy over the 2,500 sub-post offices that are likely to be hit by the proposals. I am sure that all hon. Members have their spies in the camp, as I have, but we have just had a meeting to go through the potential process. As always with Royal Mail, it is cloak-and-dagger stuff. No one is supposed to know that the meeting has taken place, and the only thing we know is the compensation package. None of the sub-postmasters or sub-postmistresses know whether their office will be one of those notified for closure, but some areas are going more rapidly. Once a decision is taken, we will be given a month to make representations, but the opinion is that the circumstances would have to be extraordinary for the decision to close an office to be changed. It is not much of a consultation, then, is it? It stresses the point that once a decision is made it is made.

Who is doing the work to ensure that there is a rural provision and that the three-mile rule is kept to? Sub-postmasters and sub-postmistresses have been asked to give their opinions by e-mail—an interesting statement on Royal Mail's confidence in its own network—but who will be carrying out that co-ordination? It affects the universal service obligation, because if we do not have sub-post offices, we will not have a universal service. I accept that some areas are already without post offices, and we are told that is possible to put new post offices back in place where the need is not being met. That is an interesting point on which we need to dwell.

An interesting aside that presents a dilemma is that in one respect the universal service obligation works like osmosis—it is there because it has always been there and we assume that it will continue. With zonal pricing and the potential loss of sub-post offices, that must not be taken for granted.

Royal Mail cannot have it both ways. There is an incident at the moment in my constituency, where a post office might change hands for all sorts of reasons. It is a good post office and has a future, and I imagine that it will be maintained. Royal Mail wants to micromanage it, and the sticking point is that it wants to set the opening hours. It is not about whether it opens on a Wednesday or a Thursday; it is about whether it is open at lunchtime, even though the whole town shuts at lunchtime. That may be quaint, but in some rural areas people might have something of a siesta. It has been demanded that that post office should open through the siesta, which is not a good example of localism. On one hand Royal Mail is trying to micromanage the post office, but on the other it is trying to lose its responsibilities and say "It's nothing to do with us, guv, it is to do with the market, and if the marketplace doesn't allow the universal service obligation to operate, we want to lose our responsibility." It is not fair to put the decision just in the hands of Royal Mail.

I hope that the Minister will at least consider—I shall put it no more strongly—whether, as was implied in the passing of the 2000 Act, other major national carriers, not just companies delivering the odd piece of post here and there, should, as my hon. Friend Mr. Grogan mentioned, pay a levy to ensure that the key part of that Act is being adhered to. Otherwise, the universal service obligation will be under attack and will one day just disappear.

Photo of Alan Reid Alan Reid Shadow Minister (Northern Ireland) 10:11 am, 13th June 2007

It is a pleasure to serve under your chairmanship this morning, Mr. Caton. I add my congratulations to my hon. Friend Mr. Carmichael on securing this debate on an item that is of particular importance to both our constituencies, particularly on the islands, and on the powerful case that he made against the proposals for zonal pricing and the problems that it will cause.

One of the basic principles of Royal Mail has always been that whatever part of the country someone lives in, the cost of sending a letter to any other part of the country is exactly the same. That is an important principle for sustaining rural communities and the small businesses in them. The universal service obligation means that anyone in the UK can post letters and parcels to any other part of the country at the same rate, and it guarantees at least one delivery and one collection of mail throughout the country six days a week, excluding public holidays.

However, I have concerns that the USO is slowly being chipped away at. My hon. Friend the Member for Orkney and Shetland mentioned the case of Parcelforce, which shows the danger of what can happen in an entirely free market, free from the safeguards of the USO. Parcelforce has divided the country into three zones. Zone 1 is the vast bulk of the country, zone 2 is the highlands and islands and zone 3 is Northern Ireland, the Isles of Scilly and the Isle of Man. It costs far more to send a parcel from zone 1 to zone 2 or 3 than to send it to another part of zone 1. That means that some small parts of the country get a far worse service than the rest of the country. The pricing structure is complicated, but sending a parcel to the highlands and islands costs roughly double what it costs to send one anywhere else in the country. That is an indication of what would happen to postal services in the highlands and islands without the USO.

There are, of course, private companies in the parcel delivery market, but Parcelforce is a big player and the rates that it sets are largely the charges that others have to compete with. Parcelforce charging more to deliver to the highlands and islands makes it easier for private parcel companies to do the same. Parcelforce is an unelected quango and has the important job of deciding what is and is not covered by the USO.

We have heard from other speakers about the threat to the USO from Royal Mail's application to introduce zonal pricing for certain types of bulk mail, which is a large part of the postal market these days. That means that organisations such as utility companies and magazine delivery companies will be charged more for sending bills or magazines to customers in remote areas. The initial proposal from Royal Mail is to increase the charges by 4.8 per cent. for postage to what are called low-density areas, such as my constituency and, I suspect, those of most hon. Members who have spoken, compared with a 2 per cent. fall for sending to a high-density area. That would mean a price differential of about 7 per cent. between living in a remote rural area and in a large town or city. We all suspect that that is only the thin end of the wedge. If the principle is established that Royal Mail can charge more for deliveries to remote rural areas, we will all expect the differential to increase greatly. In its submission to Postcomm, Royal Mail claimed that it costs about 11 per cent. extra to deliver to a remote rural area, which is perhaps an indication of what we will be faced with if the proposals are accepted.

The proposals would clearly have an unfair impact on recipients of mail who live in remote rural areas. Although they would perhaps not be buying the stamps, it is quite obvious that utility companies, banks and magazine distributors are likely to increase their charges to those customers, as they will want to recover the charges. There would also be an unfair impact on companies that regularly send bulk mail to residents of rural areas. The most obvious example that springs to mind is publishers of farming magazines. There would also be an impact on councils in rural areas, because when they sent rent or council tax notices they would have to pay more than they currently do or than a council in a big city would have to. I hope that Postcomm will reject Royal Mail's application, mainly because it would impact unfairly on people living in rural areas but also because it would mean costs to big organisations such as utility companies and banks, as they would have to change their computer systems to be able to cope with the extra cost of mailing customers in remote areas.

Another example of Postcomm not properly protecting the USO is the 15-minute rule, which it has allowed Royal Mail to introduce from 1 July this year. It will extend the current 15-minute exclusion rule, which until now has applied only to individual premises accessed by a private track to which it would take the postman more than 15 minutes to carry out a round trip. The rule applies mainly to a single house at the end of a private track. Royal Mail has applied to Postcomm to extend that exception from a single house to a group of houses, and Postcomm has accepted the application.

I shall quote from Postcomm's decision document and direction, "Policy Review of Exceptions to Royal Mail's Universal Delivery Service", which was published in April. Ruling 11(c) introduces a new long-term exception in the case of

"the need to make round trips to premises over private roads or tracks (whether or not they are the subject of public rights of way) which are in poor condition (but not in such poor condition as to preclude delivery on health and safety grounds) in excess of 15 minutes...by a vehicle driven in a safe manner, or...by foot if access by vehicle is not reasonably practical."

Whereas I would be perfectly happy to accept an exclusion on health and safety grounds, I find it impossible to accept Postcomm's decision. It has allowed Royal Mail to exclude a group of houses, even if it is safe to deliver to them, simply because it would take more than 15 minutes to carry out the delivery. That is simply a cost-cutting exercise and has nothing to do with health and safety. It chips away at the principle of the USO. The highlands and islands are full of badly maintained tracks, so the exclusion will deprive many of my constituents of their daily deliveries.

All is not doom and gloom, however. There is at least one piece of good news. At Postcomm's insistence, Royal Mail agreed to review its recent decision to bring forward collection times in rural areas. When Royal Mail introduced earlier collection times, the only collection of mail in some rural areas was as early as 9 am, which is ridiculously early. That means, for example, that the mail in many rural areas is collected before that day's mail is delivered, thus depriving people of the ability to reply to mail the same day that they receive it.

However, rather than reliance on Royal Mail's review, there should be safeguards in the USO. As well as specifying at least one collection and one delivery each day, it should specify the time of the last, or only, collection and the latest time for the daily delivery.

Nearly every hon. Member who has spoken this morning has said that, as it is seven years since the passing of the Postal Services Act 2000, it is time that the Government reviewed its operation. I certainly endorse that view. It is obvious that if we do nothing, Royal Mail will gradually lose more and more of the profitable business to private operators, leaving it largely responsible for delivering mail to remote communities. Obviously, that is the more expensive part of the business.

A review is needed to create a more level playing field for Royal Mail and the private operators, otherwise the USO will be chipped away by Postcomm decisions and the gradually increasing cost of a stamp. I echo the suggestion that has been made by other hon. Members that a levy should be placed on major bulk carriers that do not fulfil the terms of the USO, and that the proceeds from it should be used to pay Royal Mail for the extra cost that it incurs in fulfilling the USO. That is the only way to create a level playing field. Clearly, a situation in which we simply allow the private sector to cherry-pick the lucrative parts of the market and leave Royal Mail with the USO would be unsustainable. A levy would create a level playing field.

We will be heading for a serious situation if steps are not taken now, so I hope that, in his winding-up speech, the Minister will respond favourably to the calls for a review and for imposing a levy on large-scale private operators.

Photo of Robert Smith Robert Smith Liberal Democrat, West Aberdeenshire and Kincardine 10:22 am, 13th June 2007

It is a pleasure to serve under your chairmanship, Mr. Caton, for this important debate secured by my hon. Friend Mr. Carmichael. He chose a topical and timely subject, and reminded us again of the importance of the service that Royal Mail provides to all our constituents, and of ensuring that the best of that service is preserved, protected and enhanced, not chipped away at and reduced.

My hon. Friend highlighted the heart of the debate and the heart of what the Minister must address: the apparent conflict between the universal service obligation and the impact of market liberalisation. It is interesting to think back to when the market was being liberalised. Postcomm argued that the USO was an asset for Royal Mail, not a burden, yet, as it manages the liberalisation process, it seems to be entertaining reductions in the quality of what it called an asset. Clearly, Postcomm must consider carefully how it is managing liberalisation, and ensure that it is not damaging what was an asset or undermining what it said would be enhanced by competition.

My hon. Friend made it clear that the present situation has come about because of the opening up of the letter market, which was the result of European Union regulations and the decision to open up the whole of the European market—albeit not at the pace that it is happening in the UK. The UK has gone much faster and much more fully into competition. We now hear that the rest of Europe wants to back-pedal, to slow down—other countries do not want to keep up with the UK, so again we have a differential market.

I think of what happened in the energy market. Okay, there were upsides to the UK in getting competition in and in improving efficiencies, but there were also downsides to linking two markets—a free market and a rigged one. The linkage impacted on our high-energy consumers.

We now must consider the pressures on Royal Mail. The competition in the rest of Europe is not subject to the same challenges. Those companies are allowed to come here to do what they like, yet Royal Mail is not allowed to take reciprocal action in the rest of Europe and manage its business in that way. The regulator must consider carefully how the UK market is regulated, and it must protect what is valued by UK customers, rather than simply view the situation as the introduction of competition. The playing field across the whole of Europe is not at all level.

My hon. Friend highlighted the long-held grievance about what happened when parcel services were completely opened to competition and the reality of how consumers in rural and difficult-to-serve areas are affected when competition strikes. In many areas, there was a drop-off in service as the many rival delivery companies could not work out where people in rural areas lived. The quality of delivery became much worse. Often, Royal Mail staff—still public servants at heart—provided directions to the rival companies when delivery staff got lost on the rural roads while trying to find properties without names or addresses. Royal Mail knew that a parcel should be left in the shed around the back and exactly how to deliver parcels if there was no letter box and no one at home.

Not only has there been a loss of service across rural areas, but the pricing issue, which used to affect only the highlands and islands, has spread far wider. The north-east of Scotland, which was protected by being near the big city of Aberdeen, is now also affected by differential prices set by the delivery companies. As I emphasised in my intervention, ultimately it is the consumer who suffers, because the company that sends out the product puts a surcharge on it to cover the extra delivery costs. We have a very real challenge. What happened with zonal pricing in the parcel market is a warning sign that the regulator needs to take fully on board.

My hon. Friend made a point about cost-reflective pricing. The fact that what is proposed will just be a starting point and that Royal Mail will want to increase the differential brings uncertainty to the market, to people using the market and to business planning. Bulk mailers do not want such pricing. Postcomm will have to be extremely vigilant during the consultation to ensure that it protects the universal service and does not allow Royal Mail to go down that road.

Mr. Grogan said that the Labour manifesto promised a review of the impact of the Postal Services Act 2000. Royal Mail's application for zonal pricing is a timely warning that we must review the Act to avoid irreversible damage. I hope to hear from the Minister how the review is to be implemented to produce a timely response. Royal Mail has responded dramatically to the challenges of competition, and it has done much to improve its services and operations. It must be allowed to bed in those improvements and to adapt to the pressures of competition in a way that does not destroy its operation.

When introducing competition, regulators try to get it absolutely right, but there is a risk that they will get it wrong by not introducing competition efficiently enough and therefore not getting the full benefit of it, or by introducing it too dramatically and thereby destroy what they are seeking to improve. The risks are not even. The risk of going too slow is that the full benefits of competition are not realised as quickly as they might be, but the risk of going too quickly is that the operation that was to be improved is destroyed, and it becomes impossible to rebuild it or recover.

This country has a great asset in the universal service currently provided by Royal Mail. The regulator must err on the side of not destroying it, even if that means that we do not get the full benefits of competition opening up the market as quickly as might otherwise be the case. A request for a review of how the regulators are interpreting their role of protecting the USO would be an extremely important message from the Government. It would highlight how important the universal service is to this country and this House, and how it supports our constituents.

My hon. Friend Mr. Rogerson made an important point that should not be lost on Members who represent London constituencies. It is not only in rural areas that Royal Mail wants to set higher prices; it wants to load on higher prices for deliveries in London as well. The breaking up of the universal service obligation is a UK-wide issue that will have a UK-wide impact, so Members from across the country need to take an interest in what is happening.

Mr. Drew, who served on the Committee on the Postal Services Bill and therefore remembers the promises made at the time, reinforced the need for a review. He also highlighted sub-post office closures and the way in which that process is being handled, and raised concerns about a cloak-and-dagger consultation process whereby a fait accompli is announced and there is not time to respond. He also mentioned the review of the USO. We must not allow it to be chipped away until only a basic service is provided. As I have said, we have a great asset that must be preserved.

Mr. Reid also talked about the delivery service. If health and safety is not at risk and communities that are located at the end of a track have been delivered to until now, it seems odd that suddenly they can no longer be delivered to. When we met with Postcomm in the early days of opening up the market, it kept emphasising that the USO is an asset to Royal Mail. If that is so, why is it contemplating changes, such as those relating to delivery, that undermine the USO? Clearly, Postcomm is starting to think that the USO is a cost. If that is the case, it will need to look at how it has set access pricing in the market, as that is one means in its immediate control through which it can establish how that cost is borne.

It is perhaps time to explore how, under EU regulations, a levy would work in this country in fundamentally underpinning the USO. The Government rejected putting on the statute book the right under EU law to have a levy, but it might be sensible to at least have the power to impose a levy so that the regulator has full freedom to consider how to preserve the USO. Without the ability to respond quickly when things start to go wrong, it will be difficult to rescue the operation.

I would welcome the Minister explaining his view of the right under the EU directive to use a levy to preserve the system, whereby mail providers that are not interested in providing a universal service contribute some of the cost of ensuring that all consumers get the same access to Royal Mail services.

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

I ask this in the spirit of genuine inquiry and in the hope that if it is put on the record now, the Minister might be able to find the answer by the time he replies. Is it not the case that, by virtue of the nature of the postal services directive and the direct applicability of EU legislation, it is possible to introduce a levy without primary legislation?

Photo of Robert Smith Robert Smith Liberal Democrat, West Aberdeenshire and Kincardine

I would welcome that information from the Minister, because when we were debating the 2000 Act, there was concern that it had not been put on the statute book. Will the Minister say whether Postcomm has the power to go down the levy route without legislation? That would provide a chance to put a safety net in place. Will he also update us on his view of EU competition and what rival providers in the rest of the EU are doing to implement competition in the market to which Royal Mail should be allowed access? Will he inform us when the review of the Postal Services Act 2000 will take place, as mentioned in the manifesto? Finally, the changes are taking place when Postwatch is going through a major upheaval under the Consumers, Estate Agents and Redress Bill. Will the Minister say how scrutiny will be maintained in the consumer interest during the transition?

I repeat: the regulator said that the USO is an asset. If it is an asset, we should not allow it to be chipped away, but should consider how it can be maintained and conserved. The Government must ensure that Royal Mail serves all consumers across the UK; not just the easy consumers. The Government will not be forgiven if they allow such a valuable asset to be lost.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform) 10:34 am, 13th June 2007

I join other hon. Members in saying what a pleasure it is to serve under your chairmanship, Mr. Caton. I also congratulate Mr. Carmichael on securing the debate and on the way in which he introduced it. This is an extremely good example of how a Westminster Hall debate should work. It is a relevant and topical issue that affects the most rural parts of this country. There are certainly genuine grounds for concern about the future of the universal service obligation and the debate has raised a significant number of questions for the Minister to answer. I welcome the contributions of all hon. Members and the points that they have made.

If might be helpful to consider what Royal Mail achieves at the moment. There have been concerns about whether it is still operating a first-class service—no pun was intended as it obviously also offers a second-class service—but Royal Mail collects every day from 115,000 pillar boxes, 14,000 post offices, and 90,000 businesses. It delivers some 82 million items of post a day to 27 million addresses, six days a week. It is a formidable operation and for the overwhelming majority of the time it works well.

It is interesting to consider international comparisons. The cost of a British stamp is 34p, which is by far the lowest cost in the whole of the European Union. Let us consider some other countries. In Spain the price of the average stamp is 56p; in Sweden, where there is open competition, it is 75p; in France, 91p; in Germany, 103p; and in Italy, 109p—three times the price of ours. Even at that price, Italy manages to deliver only 88 per cent. of mail the next day, compared with 94 per cent. in the UK. We have by far the lowest cost mail service and one of the best delivery achievement rates. Mr. Rogerson said that we used to have service that was the envy of the world; I think that we probably still do.

Let us be clear that we are absolutely committed to maintaining a universal service obligation. As Mr. Reid said, that means one delivery and one collection of relevant postal packages every working day at a flat rate. He talked about the danger of that being chipped away, but when we look at that definition, it is hard to see how it could be chipped away. Anything less than one daily collection or delivery would be in breach of that obligation and anything that was not charged at a flat rate would also clearly be in breach. It is encouraging to see the extent to which Royal Mail shares that view of how important the universal service obligation is. In a briefing sent in advance of today's debate it said:

"Royal Mail is committed to the one-price-goes-anywhere universal service - it is at the heart of what we do, it is a unique service that is important to customers particularly those living in rural areas."

Today, we are considering issues that go beyond the universal service obligation. The ability to fulfil the universal service obligation has traditionally been a result of cross-subsidy whereby the service in urban areas subsidises the service in the rural areas, and the business service is used to subsidise the social service. The ability of Royal Mail to cross-subsidise has been eroded by the nature of the competition that it faces, which has taken on the most lucrative parts of the market. The other companies involved have not been placed under a universal service obligation. That means that Royal Mail is being undercut by its competitors, which highlights a real failure of the European single market, as Sir Robert Smith has said. Ministers need to do more to resolve that. We are in an unacceptable situation; our market has been opened up to full competition yet Royal Mail is not in position to compete elsewhere.

We should pay tribute to Royal Mail management for what they have achieved. They are having to fight with one arm tied behind their back. They do not question the universal service obligation, but they are unable to break into other European markets and they face increasing competition in some of the most lucrative parts of the domestic market, as well as strict price controls. Yet, against that background, they have managed to move back into profit. We should pay tribute to Adam Crozier and his team and all those who work at all levels within the Royal Mail for their contribution to that achievement.

The situation is complicated further by the fact in many circumstances the competitors still use Royal Mail to cover the last mile of the mail's journey, which means that they carry out the central part of the distribution before putting the mail in the Royal Mail's system for the final delivery. The prices for that are set by Royal Mail as a mixture of wholesale prices which are agreed by Postcomm. That is done already on a zonal-pricing basis. Royal Mail has lost the most lucrative part of its business, but has to carry out the most expensive part itself.

Royal Mail emphasises that the changes it suggests are nothing to do with the universal service obligation. It has asked for the ability to use zonal pricing for business customers so that it can charge more according to how much it costs to make the delivery, as is the case already with parcel deliveries. The hon. Member for Orkney and Shetland described that as the Royal Mail going for the low-hanging fruit, but the reality is that if the company does not reduce its charges in the areas in which it faces the most competition and in the most important parts of the market, it will lose out to competitors, which means that it will be unable to cross-subsidise other parts of the network. He quoted concerns expressed by the head of TNT, but it is precisely the competition from TNT and others that is causing Royal Mail to make changes, so it is not at all surprising that the head of TNT does not like them.

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

Will the hon. Gentleman be quite clear about this? Is he saying that his party favours the Royal Mail's approach? I have to say that that view would be ill-received in our communities.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

We are absolutely committed to maintaining the universal service obligation, but recognise that in a highly competitive world, Royal Mail has to look at alternatives if it is to run its business profitably and effectively, although certainly its proposals contain significant flaws, which I shall come on to. At this stage, however, I am trying to set out some of the background to why the company is looking to go down this route. I hope that the hon. Gentleman will not seek to represent my comments in his local media as, "Tories say, 'Get rid of local services to Orkney and Shetland'". We understand why Royal Mail is looking in this direction, but we recognise the flaws as well, which I shall come on to in a moment.

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

Why is the hon. Gentleman so determined to define the universal service so restrictively, as the Royal Mail seeks to do, as applying to stamped mail only and not to bulk mail?

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

Because that is the definition given by Postcomm. We are using the legal definition that currently applies and we say that there should be no change to that.

As the hon. Gentleman just mentioned, the changes affect bulk mail only, not stamped or franked business mail. He expressed concerns earlier on behalf of Mrs. Dunwoody about internet orders placed in his constituency posted as stamped or franked mail, but such mail will be exempt from the changes. Andrew George should not be concerned about internet orders placed in the Scilly Isles either, because they, being dealt with as stamped mail, will not be affected. We must be very clear about that. I understand why the hon. Member for Orkney and Shetland might wish to blur those aspects of the debate. However, we must be very clear about what is included.

Photo of Robert Smith Robert Smith Liberal Democrat, West Aberdeenshire and Kincardine

The important thing is that customers buy certain products only because they have been contacted and given information about them, and that information goes out as bulk mail, which means that those businesses still have to send bulk mail. Again, we must come back to the point that the consumer is the end recipient. If there is differential charging, there will be differential costs to consumers.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I share the hon. Gentleman's concerns, and I shall discuss them, albeit briefly, because the Minister will need plenty of time to respond. There are certainly fringe areas, but we must be very clear about what is being included. The proposed changes are not an assault on the universal service obligation. Royal Mail has said that that is sacrosanct, and we agree that it should remain so.

The European Union directive states that member states must ensure that universal service tariffs apply with certain principles—affordability, geared to costs, transparency and non-discrimination. Postcomm proposes that those principles be applied when considering the application for zonal tariffs. It would be interesting to hear whether the Minister believes that consumers receiving such post would be discriminated against as a result of the changes.

It has been reported—we have covered this in today's debate—that the measures might have an adverse effect on businesses based in rural areas using bulk mail for operating purposes, as the hon. Member for West Aberdeenshire and Kincardine just said. Again, will the Minister quantify his assessment of the problems that that might create for small and medium-sized enterprises in rural areas? There have been reports that the measures might be the thin end of the wedge and that the USO will be eroded gradually. Will the Minister give assurances on behalf of his Department—for as long as it continues to exist—that he will oppose any steps to erode the USO?

The Highland council's submission to Postcomm on the application by Royal Mail noted that it could become prohibitively expensive for companies to circulate their correspondence and will result either in a reduction in services provided in affected areas or in the costs being passed on to consumers. Does the Minister share that analysis? What assessment has he made of the likely impact of the proposals on the standard of living in profoundly rural areas?

The hon. Member for Orkney and Shetland made valid points about the inherent absurdities of zonal pricing. I would be grateful for the Minister's response to that as well. It would appear to be more expensive to send something within the zone than from there to an urban area. That does not seem to make economic sense. We look forward also to his response to issues raised today about whether other carriers should be surcharged to assist the funding of the USO and whether that would require primary legislation.

Other useful issues have been raised in the debate. Mr. Drew talked about the closure programme and the unacceptable way in which that has been handled. The hon. Member for Argyll and Bute talked about the changes to early collection times.

This debate goes to the heart of the future of the postal service's operation in the 21st century. We all agree, I think, on the importance of preserving the universal service obligation. We recognise also that Royal Mail must be allowed to adapt to new competition. Some 90 per cent. of its business comes from business post, which is vital to subsidising social mail, where the company is making big losses. To many consumers, that is the most important thing to preserve. If we do not allow Royal Mail to compete effectively, the ability to subsidise social mail will decline, with severe consequences for the cost and quality of postal services for all of our constituents. However, we are all right to be wary of where the changes might lead. The debate has raised significant and legitimate questions on which we would welcome the Minister's reassurances.

Photo of Jim Fitzpatrick Jim Fitzpatrick Parliamentary Under-Secretary (Employment Relations & Postal Services) 10:47 am, 13th June 2007

It is a pleasure to see you in the Chair, Mr. Caton. I begin by congratulating Mr. Carmichael on securing the debate and by expressing my appreciation to all hon. Members who have contributed to this interesting and useful discussion. The hon. Gentleman spelled out clearly and fully his concerns about the future of the universal service obligation. I hope to be able to address the specific points raised by him and other colleagues.

Let me start by making it clear that the Government consider the maintenance of a universal postal service to be of the highest importance. I can assure the hon. Gentleman that there are no plans to abandon the universal postal service obligation, which is an obligation under EU law. The Postal Services Act 2000 reflects that and requires the universal service to be provided at an affordable, uniform tariff throughout the UK. The Government have no plans to change that requirement.

As well as enshrining the obligation in primary legislation in the Postal Services Act, we established Postcomm as an independent regulator and gave it statutory duties under the Act, with the primary duty of ensuring the provision of a universal postal service at an affordable, uniform tariff. Postcomm ensured that the obligation was written into Royal Mail's licence as the universal service provider.

The universal service is written into law as well. Section 4(1) of the 2000 Act guarantees a delivery every working day to homes across the UK, a collection every working day from access points throughout the UK and a uniform and affordable price for posting a standard letter. Postcomm has taken the lead among Europe's national postal regulators by initiating a thorough public consultation on what services should be enshrined as "universal services".

In June 2004, following a year-long review, Postcomm listed five areas of service offered by Royal Mail that the company will be required to provide as universal postal services at an affordable flat rate. They are Royal Mail's first and second class services, Royal Mail's standard parcel service, a registered and insured service, a range of support services to ensure the safety and integrity of the mail, and an international mail service.

Postcomm is responsible for defining the scope of the universal service and may choose periodically to revisit it. Although there will be exceptions, they can be allowed only in specific and restricted circumstances. The 2000 Act is clear on that by asserting that the universal service is provided

"except in such geographical conditions or other circumstances as the Commission considers to be exceptional".

Following a wide-ranging consultation, Postcomm published a policy statement in January 2003 in which it explained the circumstances under which Royal Mail could be exempted from its licence requirement to deliver letters to all homes or premises every working day. Long-term exceptions can be justified only, for example, in cases where there is a risk to the health and safety of Royal Mail staff, or in cases of geographical remoteness, to which Mr. Reid referred.

The reasons for building that exception into the Act are clear. It is recognised that there are some circumstances in which it might be impractical to deliver and collect mail on a daily basis. The responsibility for determining those circumstances rests with the postal regulator, Postcomm. Consequently, Royal Mail requires authorisation from the regulator on exceptions. In such cases, there is a formal process involving four stages of assessment and scrutiny, under which any proposed exemption is carefully examined by Postcomm, together with the Consumer Council for Postal Services—Postwatch. Postcomm's exceptions policy is designed to ensure that the number of homes or premises excepted from delivery every working day is kept to a minimum. I understand that just over 2,800 of the 27.5 million addresses in the UK are exempted from the universal obligation.

Postcomm fully opened the UK postal market to competition in January 2006. It is now developing a strategic review on how postal regulation should develop in the medium to long term. Specifically, Postcomm is addressing three fundamental questions: first, how the postal market might develop over the next five to 10 years; secondly, what postal users will need from the universal service and how that will be best provided; and, thirdly, what is the best long-term framework for promoting effective competition and deregulation. Following an initial consultation in 2006, Postcomm is expected to bring forward proposals later this summer. It is important that all those with an interest in postal services make their views known. Given the comments that have been made in the debate, I am sure that all hon. Members who have contributed are waiting for those proposals so that they can respond to them.

A number of hon. Members mentioned the levy. The Government have not said anything specific about the levy, but the 2000 Act allows Postcomm to put a levy on other operators to fund the USO, if that is necessary. Several hon. Members, including my hon. Friends the Members for Selby (Mr. Grogan) and for Stroud (Mr. Drew), raised the issue of "pay or play", which is contained in the proposal for the third postal services directive. The UK strongly supports the option for USO funding. To respond to hon. Members' questions, it is possible to raise a levy, if necessary, because Postcomm's primary responsibility under the 2000 Act is to sustain the universal service obligation, and a levy would certainly be one way of doing that, via licensing obligations. I understand that the third postal services directive has been agreed and that it is expected to be introduced some time in 2008.

Let me respond to the question about conducting a review of the working of the 2000 Act, which was set out in our manifesto. The Government's view is that that will not be appropriate until the strategic review has concluded, but that it might be appropriate after that time.

The hon. Member for Orkney and Shetland raised the issue of zonal pricing, as did virtually every other hon. Member who contributed to the debate. It is clear that Royal Mail is interested in charging bulk mail companies for the delivery of mail on a zonal basis, given that different delivery footprints, as they are known, have different costs, according to the geography and population density of the delivery area. There is, however, a critical consideration to bear in mind on zonal pricing. Even if it is ultimately agreed by the regulator, it will apply only to bulk mail products on which prices are negotiated commercially by Royal Mail. Zonal pricing will not extend to universal services. There is no question of the consumer being charged different prices for single-piece letters deposited in letter boxes simply because they are addressed to different destinations in the UK. As we know, international mail is different because prices vary according to the overseas destination.

Photo of Jim Fitzpatrick Jim Fitzpatrick Parliamentary Under-Secretary (Employment Relations & Postal Services)

If the hon. Gentleman will allow me, I have several points to make about zonal pricing, which might deal with the question that he wishes to ask. If I do not cover it, however, I will of course be happy to give way.

Hon. Members asked about the effect of zonal pricing on the recipient. That is a matter for Postcomm to take into account in its forthcoming consultation, which is due in the next few months. As I have mentioned, it is vital that all interested parties participate in the consultation when Postcomm issues its proposals. Postcomm is responsible for safeguarding the interests of vulnerable consumers, too.

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

I cannot remember the exact figure myself, but will the Minister remind the Chamber what percentage of the letter post market will be affected by the situation involving bulk mail? My recollection is that the figure is substantial. Does he not understand that that is the root of concerns about the chipping away of the universal service? Whatever the legal definition might be, the layman or woman in the street would consider that mail to be part of a universal service in any meaningful sense.

Photo of Jim Fitzpatrick Jim Fitzpatrick Parliamentary Under-Secretary (Employment Relations & Postal Services)

I do not have the figure that the hon. Gentleman requests to hand. It might be handed to me in a moment, but if it is not, I will write to him and other hon. Members who have contributed to this debate. [Interruption.] I am advised that bulk mail constitutes about 85 per cent., which is a significant element of the market, as he suggested.

Charles Hendry, among others, asked about the differential market in the EU. It is important to remember that we liberalised the market in the UK for consumer benefit, not to secure reciprocal access. Postcomm takes those elements into account when considering what Royal Mail can and cannot do in its overall business and when setting its price controls, which are to be reviewed later this year. According to Postcomm's figures, 18 months after the liberalisation of the market in 2006, the effect of competition is that Royal Mail still has 96 per cent. of the market. The suggestion that Royal Mail has been decimated by its competitors therefore does not really stand up.

The Government consider the universal service to be of the highest importance. We have tasked the regulator with the duty to protect the provision of the universal postal service. It is not for the Government to become involved in decisions on deliveries to specific areas because that is rightly the responsibility of Postcomm. Postcomm has put in place a robust process for examining any proposed exceptions on the basis of established criteria. It also undertakes public consultations from time to time so that all postal service stakeholders may make known their views on whether the universal service meets consumer needs, or whether it should be modified. It is right that it should do so. As consumer needs and the wider communications market evolve, it is in all our interests that the universal service evolves with them. That is the best way of ensuring that mail services have a sustainable future.

I was asked about the consultation exercise on the Post Office restructuring programme. There will be considerable advance planning among Post Office Ltd, Postwatch and local authorities before proposals come forward, so they will be quite refined before the six-week consultation period.

Photo of Alistair Carmichael Alistair Carmichael Shadow Secretary of State for Transport

Since the Minister has two minutes remaining in which to speak, will he say what he is doing to encourage his colleagues in other Departments to use the Royal Mail for their bulk mail?

Photo of Jim Fitzpatrick Jim Fitzpatrick Parliamentary Under-Secretary (Employment Relations & Postal Services)

As the hon. Gentleman knows, the Prime Minister established a Cabinet Sub-Committee—the Post Office Network Committee, or MISC 33, as it is called—to review Post Office Ltd. It has created a framework for all the main Departments to discuss Royal Mail Group and Post Office Ltd and the services that they provide. We have thus reinforced the Government's awareness of the importance of the services provided by Royal Mail and the Post Office. Notwithstanding the fact that Departments have a responsibility to the taxpayer to ensure that they get the best possible value for money from services, I assure the hon. Gentleman that the £1.7 billion that we are committing to Post Office Ltd and the £3.5 billion that we have committed overall to Royal Mail Group demonstrate the Government's full commitment to both the universal service obligation and the post office network. We are determined to ensure that that is in the best possible position and that it has a secure financial footing.