Postal Services Bill

Debate between Lord Cotter and Lord Stevenson of Balmacara

Wednesday 6th April 2011 Lords Chamber

[Lord Stevenson of Balmacara]

I shall speak also to Amendment 24AHA. All the amendments in this group have a common theme. Amendment 24NZA seeks to maintain the integrity of the universal service obligation by maintaining one universal service provider. Amendment 24AHA provides that consumer protection conditions should apply not just to the UPS at the discretion of Ofcom but to all postal operators as is appropriate to the postal service that each provides.

There are several points where the Bill provides for more than one universal service provider. One example is where Ofcom makes a procurement determination under Clause 43 and decides to hand the provision to another operator. We do not know how rare an occasion that might be, although we hope that it would not be regular. The second is where the USP has been taken into administration under Part 4. We hope that this will not happen but, again, we do not know whether it will occur. Our basic contention is that the universal service should be delivered by one provider and that the only provider capable of delivering this is Royal Mail.

The provision of a daily collection and delivery service covering 28.4 million addresses in the UK requires a very large capital infrastructure and a large and skilful workforce. Because it constantly deploys such an array of capital and workers, Royal Mail is able to sustain an extraordinary turnover of mail. In the first half of 2010-11, the average daily mailbag contained around 68 million letters, packets and parcels. In 2009-10, Royal Mail carried 6.3 billion items of USO mail, 6.4 billion items of downstream access mail, and around 18.7 billion items in total.

No other company has ever delivered such a service in the United Kingdom and it is our view that no other company could do it going forward. However, surely the danger is that some companies think that they can provide parts of a universal service in certain geographically restricted areas. These areas are likely to be highly urbanised and, as was explained in our earlier debates, potentially very profitable for the provider. Therefore, we could envisage a competitor to Royal Mail offering to be a universal service provider for a city such as Birmingham. However, we could also envisage a situation where that competitor could not offer an alternative to the rural areas in the West Midlands.

Should that happen, there would be some huge problems. First, the areas surrounding Birmingham would have to continue to be serviced by Royal Mail. This would inevitably be loss-making, and Royal Mail would either have to bear the costs or increase stamp prices to compensate.

Secondly, the Birmingham provider would require a much more comprehensive access arrangement to Royal Mail’s network than exists under current downstream access arrangements. Not only would this create the basis for large-scale friction between the two networks but it would almost certainly create new costs, as the interaction between the two networks would have to be supervised.

Thirdly, there is no evidence in the EU of any other country currently operating with more than one USO provider. In Germany, at the moment there is no designated USP at all and it is all left to the market. Deutsche Post, however, is the effective provider, offering services six days a week nationwide and benefiting, by the way, from VAT exemptions in order to do this. The regulator in Germany has the power to arrange for the USP to be provided through public procurement if the market does not deliver a universal service but, as the market in the form of Deutsche Post is delivering a universal service, this has not happened to date. In the Netherlands, TNT can apply for a partial repeal of its designation as the USP, which perhaps could allow more than one USP to be designated but, again, that is not taking place.

It is noticeable in the legislation that there are two options under which we could see more than one USO provider in the UK. The first is a possible case of bankruptcy of Royal Mail and an interim administrative regime that would follow from that. The second is the case of the regulator making a procurement determination. On the first point, there has been no serious study of Royal Mail which suggests that its delivery of the universal service obligation has been malfunctioning to date; indeed, some earlier speakers have praised its operations, and I agree with that. Perhaps this lack of academic study is just an oversight of generations of academics and economists. Perhaps it is a tribute to the excellent staff and management of Royal Mail. Or perhaps it is really an acknowledgement that there is great effectiveness in the manner in which the USO has existed in Royal Mail—and, after all, if it isn't broken, don't fix it.

The second case in which more than one USO provider is provided for in the Bill is where Ofcom decides to allow for such a development by making a procurement determination. That is a power and not an instruction. We would argue that there is no reason why Ofcom should engage in such a move. We are all worried that there will be pressure from Royal Mail's competitors to secure such a procurement determination. That is why we think that, rather than experiment with the USO, it would be wise of the Government to secure its future without a gamble. The USO is a very complex operation to maintain, and ill-thought out ambitions are no alternative to the present provision.

On Amendment 24ABA, Clause 43 deals with how the universal service should be dealt with should Ofcom find that it constitutes a financial burden on Royal Mail. If it is found to be a burden, Ofcom has three options open to it. First, it can undertake a review of the minimum requirements of the universal service under Section 33; secondly, it can require that contributions be made from other postal operators towards the maintenance of the USO; or, thirdly, it can make a procurement determination, allowing part or all of the USO to be provided by a company other than Royal Mail. This amendment requires that a minimum of three years’ notice be given before any other operator can begin to provide postal services required under a universal service obligation.

As I have just argued, there are serious concerns about the potential impact of breaking up the USO through a procurement determination. It is questionable whether a multiple-provider USO could guarantee consistent levels of service across the country. We do not know what it might mean for the financing of the USO if the more profitable and easier-to-complete parts of the service go to competitors and Royal Mail is left servicing the more expensive, hard-to-deliver-to parts of the country. In a time of great change and economic flux, Royal Mail and the postal industry desperately need stability. Royal Mail is in the middle of a major programme of modernisation, including more than £2 billion of investment. That process, combined with an unloved regulatory regime, means that the company is facing a very restrictive financial position. Further major upheaval through the potential loss of the USO threatens the viability of such a programme. Any change to the USO provider must surely not come before Royal Mail has completed its modernisation and is financially secure. Moreover, the loss of any part of the universal service via procurement determination would have a major impact on Royal Mail’s business model and the viability of the business.

Royal Mail successfully delivers mail across the UK at an affordable, uniform tariff by taking advantage of the considerable economies of scale that it is able to access. The business must be given sufficient notice of any change if it is to be able to plan effectively and to continue to provide the service that we expect of it. A procurement determination is a very real possibility and inquiry into whether the universal service is a financial burden on Royal Mail would very likely find that it is a burden. For example, in evidence to the Scottish Affairs Select Committee, Tim Brown, the chief executive of Postcomm, stated that, a number of years ago,

“Royal Mail lost about £350 million on the universal service products”.

The postal industry has suffered from a lack of stability in recent years. The potential break-up of the universal service would exacerbate the problem. The most important element in the future of the postal services in the UK is the successful investment programme and the modernisation of Royal Mail. Long-term investment in postal infrastructure should not be compromised in order to make short-term savings via what would essentially be the franchising of elements of a profitable universal service. I beg to move.

[Lord Cotter]

My Lords, Amendment 24X suggests that the proposed period for the review of the universal service provider by Ofcom be extended from three years to four years. The Bill gives Ofcom a series of different powers to review the financial burden and how it is to be calculated through various recommendations. It has a lot to consider in the review and it is vital that the matters are considered in the correct manner. Ofcom must look at and assess the cost of the service provided both to the generator and to the consumer. We need to make sure that that is examined correctly to ensure that further losses are not made by Royal Mail. In view of the diversity and depth that are needed for the review to ensure the success of the universal service provided, why not allow an extra year for the evidence to be collected and presented? We need a comprehensive review that gives detailed examination to ensure that all aspects of the universal service provider are examined and given consideration. An extra year would ensure that all aspects were considered in such a way. I maintain that it is quite clear that more time is needed for the review of the universal service provider by Ofcom.