Postal Services Bill

Baroness Drake Excerpts

Wednesday 16th February 2011 Lords Chamber

[Baroness Drake]

My Lords, I, too, congratulate the noble Lords, Lord Empey and Lord Dobbs, on their maiden speeches. Perhaps I should advise the House that I represented telecom workers, including those in BT, and following union mergers became an employee of the CWU as deputy general secretary of its telecommunications sector.

I am concerned about the regulatory framework within which a privatised Royal Mail will operate and the implications for investment in the company and for the universal service obligation. There is a broad view that the regulation of Royal Mail has been harsh. That is clearly Moya Greene's view. Richard Hooper stated in his report that he was,

“struck by the depth and range of disagreements between Royal Mail and Postcomm. Even the most basic facts are disputed”.

He also concluded in his updated review that,

“The overall burden of regulation should be reduced”.

The compulsory regime of access to Royal Mail’s network, particularly downstream access—local delivery in the last mile—results in Royal Mail subsidising its competitors. As my noble friend Lord Christopher and the noble Baroness, Lady Howe, said, Royal Mail makes an average loss of 2.5p on every letter that it delivers on behalf of a competitor. The subsidy is of the order of £160 million a year.

Richard Hooper, in his evidence to a committee in the other place, commented:

“Cherry-picking is a big issue ... It basically means that somebody comes in and starts delivering two days a week to Liverpool, Birmingham, Manchester, Edinburgh, Glasgow and Cardiff, and then expects the rest of his or her mail to be delivered by Royal Mail to all the nasty places that cost lots more money”.

I am advised that Royal Mail has now lost 60 per cent of the upstream bulk mail market to competition in this way, and the figure keeps rising. It is also subjected to significant price regulation even in the most competitive parts of its market. That regulation has an asymmetrical feel about it. It will not sustain a viable business model; it will not secure major capital investment; and it will not deliver the requisite universal service.

It is clear that a truly universal national service that ensures delivery at affordable prices and meets the country's social and economic needs requires cross-subsidisation. If Royal Mail ceases to be a publicly owned body and becomes a private company, there will be a need for considerable confidence that the Government are giving to Ofcom both the instruction and the power to prevent cherry-picking damaging the universal delivery service, levels of investment and the viability of Royal Mail itself. If the conditions set by the regulator for competitors' access to Royal Mail's network disadvantage the company, a private buyer will struggle to see a business model that is in their commercial interest, and will certainly be reluctant to make the significant levels of investment necessary to deliver modernisation, develop new digital businesses and get the company to best in class.

Market conditions for postal service operators are challenging because of the growth of e-substitution and digital media, as any potential buyer will know. The regulatory settlement must allow the owners of Royal Mail to succeed commercially and bring capital and investment to the company in a manner that meets the needs of the users and sustains the universal service. Ofcom has a good reputation, but experience teaches us—the evidence is there—that regulators do not always get it right, and certainly not first time, when they set the terms and price for network access. This can undermine the level of capital investment in the major network provider. Equally, determining the definition of universal access and service requirements and the extent of the cross-subsidy can be greatly contested, particularly in changing and challenging market conditions, and the citizen’s national strategic interest can be lost in that debate.

In postal services it is important that the response to this challenge—because that challenge will be there and Ofcom will have to address it—is not to reduce the extent of the universal service and the products delivered. In fact, in our e-commerce world there is a powerful case for strengthening the obligation. If the new regulatory regime is to place postal regulation within the broader context of the communications market, it is important to remember that for many small businesses, certainly in rural and remoter communities, a universal postal service is as important as broadband access to their ability to participate nationally and internationally in an e-commerce world. The statistics confirm, for example, that internet sales are a growth area in the mail market, with internet shopping estimated to be worth £60 billion a year.

If the Bill does not unequivocally secure a meaningful universal service for all communities across all geographies in the country, many will be disenfranchised from areas of the mainstream—whether that is a cluster or hub of companies in Cornwall or the Highlands or a grandmother receiving a birthday card at her door. More than 10 years ago, I and many others argued passionately for universal access to broadband when regulators and civil servants were saying that such a proposition was unachievable; now, the debate is about speed and the need for universal access is simply taken as a given. Many people and companies cannot universally engage in e-commerce without the logistical back-up of an efficient and affordable universal delivery service.

The Bill sets the primary duty of Ofcom in relation to postal services as securing the provision of the universal postal service, but it also gives the regulator the authority to review what it considers must be provided by such a service. The Bill potentially weakens the universal service obligation. For example, it allows Ofcom to assess the financial burden of the universal service on Royal Mail and to make recommendations on how to alleviate that burden, which could include a recommendation that the minimum requirements in the Bill be reduced.

Indeed, Ofcom is directed to review the minimum requirements within 18 months of the passage of the Bill, which coincides with the time period over which the Government are looking to make a sale. A private company interested in acquiring Royal Mail will act in its own commercial interests and may well seek to push for a narrower definition of requirements or resist a lock-in to the post office network. Governments keen to secure a buyer will be under pressure to maximise freedom for the purchaser. A great deal is left to regulation. There is a real risk that the rigour of a regulatory review in the interest of the citizen and the consumer will be a casualty of the forces of political pragmatism, for whom the necessity of achieving a sale will be paramount.

The House of Lords Delegated Powers and Regulatory Reform Committee, while recognising that many of the delegated powers in this Bill are the same as those in the earlier Bill from the previous Government, drew to the attention of this House that the Bill gives a significant power to the Secretary of State to alter the minimum requirements for a universal postal service. This indicates that parliamentary oversight of changes to the requirements should be strengthened, and certainly that Ofcom’s review under Clause 33 should be laid before Parliament in a report. This, I believe, would be consistent with the recommendations in the 2008 Hooper report.

In conclusion, I have stressed what I believe to be both the economic and the social value of maintaining a universal delivery service. However, I certainly do not have in mind Charles I—not known for his willingness to be accountable to Parliament—who, my historian husband assures me, used his Royal Mail officials to regularly open and illegally copy diplomatic mail from the French.