Postal Services Bill

Baroness Kramer Excerpts

Wednesday 6th April 2011 Lords Chamber

[Baroness Wheatcroft]

My Lords, I share the concerns of the noble Baroness, Lady Dean of Thornton-le-Fylde. Overgearing is as bad for companies as it is for Governments, and it is something we need to be aware of as we move towards selling Royal Mail. I would favour an initial public offering, but that in itself is no protection against what might come afterwards, so this is something we should look at. But first we have to have something that is saleable, which in its current form Royal Mail most certainly is not. Protecting the interests of the users of the postal services must mean protecting the universal service; that is paramount. Clause 28 gives Ofcom an overriding duty to do just that, to secure the universal service, and that is why my noble friend Lord Jenkin and I have tabled Amendment 24Q because, in our view, if there is an overriding duty then the triple lock imposed by Clause 37(4) is unnecessary if we are to stimulate the competition that eventually we would like to see.

Competition, as we have heard, depends first on having a level playing field, as otherwise fair competition is completely out of the question. Competition is in the interests of consumers and it is what in the long term our amendment would help to achieve. But, at the moment, the universal service is in jeopardy because Royal Mail’s financial position is indeed precarious. To some extent the company has brought this fate upon itself. Successive managements have failed to achieve the efficiencies that they knew should have been brought about, and that in the face of a market becoming ever more dangerous. However, the current management is well aware of what needs to be done and, I believe, is fully capable of doing it as long as it is given the tools. It has the will, but it does not have the right regulatory regime.

I agree with the noble Lord, Lord Young of Norwood Green, about the problems with the current access arrangements. Royal Mail needs much more freedom to decide on its products and its prices. Competition has to be on that level playing field. There are now many private postal operators who are free to tailor their products and their prices to what the market wants. They can cherry pick, but Royal Mail is prohibited from giving itself that freedom. Ofcom, when it takes over the regulation of Royal Mail from Postcomm, needs to impose a different and very much lighter regulatory regime. As we have heard, Postcomm has not been the most successful of regulators, but it has put forward among the options going ahead that of removing its ability to set prices and leaving Royal Mail free to set its own prices, with a right of appeal being in place for those who feel that it is not playing fair. The competition would have the ultimate answer.

If Royal Mail is to have a viable future and appeal to investors, it needs to be able to compete. It should not be as expensive for the company as the current regulatory regime, which is expensive in two ways: it forbids Royal Mail to compete with the many private operators, and it gives Royal Mail a huge bill—£53 million in the current year, as we have heard. In the interests of fair competition, we really should consider what my noble friend Lord Jenkin mentioned, and share the cost of regulation. In any case, under the new regime the bill should be much lighter, but I see no reason why those who are benefiting from it should not make a contribution.

[Baroness Kramer]

My Lords, I hesitate to rise on this occasion because there have been so many detailed, coherent and powerful speeches, but perhaps I may make two brief comments. I would ask the Minister, as he looks at the potential amendments to Clause 28, to recognise that it is an extraordinarily powerful clause. Everyone in this House is concerned that Royal Mail should have an effective future and that we should have a secure universal service provider. Moreover, everyone in this House is aware that Postcomm in its approach to regulation has played a role—it has not been the only factor but it is certainly a critical one—in bringing Royal Mail, frankly, to its financial knees. If I were a potential investor I would ask myself how that regulatory environment was going to change because I certainly would not want to put my head into the same noose that Royal Mail has had to face for the past decade or so. Clause 28 therefore signals a fundamental change in the outlook, priorities and focus for Ofcom, particularly by for once looking for financial sustainability. So I urge the Minister, in looking at a variety of complex and interwoven evidence, to continue to recognise the importance of sustaining a balance between competition and the future of the universal service provider. But let us not lose what this clause has finally brought to the picture.

My final brief comment is that concerns have been expressed around the Committee that one of the responses Ofcom might make to financial pressures in the universal service provider would be to restrict the scope of the universal service. It seems to me that that would be very hard to do, given the language used in this clause and in Clause 30. I know that it was only meant to get the debate going, but I am rather taken with Amendment 24H tabled by the noble Viscount, Lord Eccles, which would require paying attention to the underlying costings. That would drive in the direction of recognising that price might be the mechanism to use to ensure Royal Mail’s financial future rather than reducing the scope of the USP.

[Lord Brooke of Alverthorpe]

My Lords, I shall speak briefly in support of Amendment 24PB, which has already been spoken to by my noble friend Lady Dean. I await the Minister’s response with interest because that will give an indication of the Government’s view not just on how they will tackle this particular piece of legislation, but their more general view on the problems we face in many other areas of society related to indebtedness. It will also be an indication of whether we are learning the lessons of history. I go back to NATS which, when it was privatised, was very highly geared indeed. My old friend the former Chancellor and then Prime Minister was even prepared to contemplate a gearing of 129 per cent, but in the event it was limited to 110 per cent, which was still an extraordinarily high gearing to bear for the airlines group that bought the major part of the company.

We privatised in order to bring in capital, to bring in to a degree the economic disciplines of the private sector, and to bring in private sector management that we hoped would result in better performance. Capital was a vital part of that, so if you end up with a company potentially coming in which has borrowed most of the money to purchase your concern and then finds that it is unable to provide the capital needed to effect changes in the operation of your concern, you are in real difficulties. That was the experience with NATS. It ran into the September 11 debacle fairly quickly and then had to go running back to the Government for a form of bailout. We know perfectly well from our experiences over the past decade that if utilities go to the wall, they have to be bailed out. We know also that in defining utilities, we find that a substantial part of the private sector itself ends up as a form of utility, which is what the banks are. They could not be allowed to go to the wall so they had to be bailed out. Let us hope that the report that is coming out on the banks will teach us some lessons from history that we can use to good effect.

BAA was purchased on the basis of very high gearing indeed, and there is a big question mark over the extent to which the capital that went in has been used to its fullest effect. We know perfectly well that those who suffered from the poor performance of BAA just before Christmas because of a lack of capital investment in equipment will feel that BAA did not deliver as it should have done. Instead, BAA has spent much of its time trying to make profits to repay the capital it borrowed at very high interest rates. When we come to changing the status of Royal Mail, there is no way that we should be looking at a company that is very highly geared.

The noble Baroness, Lady Dean, has made in this amendment a modest attempt—it is not very prescriptive—to put right the wrongs that we have experienced in the past. When we move to talk in a different context about the private sector, perhaps these are the frameworks that we should lay down for changes there, too. The Americans certainly know that, when utilities have been privatised, there should not be gearings of more than 60 per cent. I hope that we can look for similar changes in this legislation.

--- Later in debate ---

[Lord Clarke of Hampstead]

I start by declaring my usual interests. From the age of 14, as a telegraph boy, I have been directly associated with the Post Office and am very proud to have that association.

In the past 24 hours, I have given a lot of care to the idea of moving this amendment separately, upsetting some of my friends, who wanted me to leave it in the group. The purpose of taking it out of the group is to focus on one of the most important things that the new Royal Mail will have to face, which was mentioned in the last debate at length. Incidentally, the last debate has given me some comfort because, after 10 years of criticising Postcomm with very little or no support from my own Government and my own friends, I heard an analysis from the noble Viscount, Lord Eccles, who put his finger right on it. It has been a con from the start, and those of us who said so 10 years ago can feel a little bit comforted that after a decade people have come round to realise that what we were saying about cherry-pickers has come true. I welcome the new approach, whoever the owners are of the new Royal Mail.

I will not be too long. Given the timing of this debate and its wide and, I think, unwieldy groupings, I know that there is a desire among noble Lords to get off for the Recess in good time, so I will not go over the history too much, but I will say one or two things. However, some people will find it difficult to understand why, with all this complexity that we have just been dealing with, we are proposing legislation at the fag-end of a term, when people are going off. I find that a little bit trying—but never mind, it has happened.

I would be failing in my responsibilities as a human being and my conscience if I did not stand up and speak about this question of profitability of the new Royal Mail. A number of friends have said that it is not necessary, but what is at issue here is the regulator and the criteria that Ofcom will have to apply to looking at things like tariffs and at what surrounds the making up of a price structure for competitors and for access agreements to work. Of course they are necessary to make sure that we have the universal service. I think every Member who has spoken would agree that it is an important part of the fabric of our society to maintain the principles not only of Rowland Hill but of the 300 years of Post Office service since Queen Anne’s time.

I have every confidence that Ofcom will do a good job, although it would not take much to do better than Postcomm. In fact, this is not a new thought. On 9 February two years ago I wrote to Mr Brown, the chief executive of Postcomm, who had written a nice letter to me asking a couple of things. I told him,

“Postcomm is an organisation that gives me little confidence that its existence was ever necessary. I may be the only person who believes that the transfer of postal regulation to Ofcom is a step in the right direction”.

I welcomed the change then and I welcome it now, providing that Ofcom is given the right tools to do the job that it is going to be charged with. Part of that is dealt with in my amendment, which says that the question of profitability must be in the minds of the people considering these things. It is no good expecting Royal Mail to do the work contained in the universal service obligation if it is not able to price things the right way. The price structure must allow profitability. I spent too long in my job trying to get the Post Office to pay its dues to the pension fund. There was a 12-year holiday, when it did not pay anything into the pension fund—and we wonder why it got into a state in the end—but that is another story.

There was ill conceived regulation at that time. I sat over there and listened to the Statement from a chap from down the other end, Stephen Byers, telling us that this liberalisation and new deal would bring in an era of a tremendous new Post Office for the 21st century. I stood up and said that it was a load of nonsense, because if you do not have something to stop people creaming off the work of Royal Mail, as has happened, you will find yourself in trouble. Yet nobody listened, least of all from my own Government’s side. That followed through to the ill fated 2009 Bill, which has been mentioned, and the product of that ill conceived regulation has been that people in the industry have paid a heavy price. Billions of pounds have been lost because of how Postcomm works.

I said that I would be brief and I will. We will be entering a new era in the long and well respected history of the Post Office. I am not used to begging for things but I beg the Government on this point: not to make another mistake by allowing the anomalous situation whereby an outside body is able to hamstring the business. I have had to come to terms with the idea that the Royal Mail will never be the same once it is privatised. As I said last time we were in Committee, it hurts but it is happening. Nevertheless a new Royal Mail, invigorated by new and competent management, gives us a new chance. That is not to say that Post Office managements were not competent in the past but they were never allowed to do the job because of political interference over decades. The 1960s, 1970s and 1980s were dominated by political interference. Ever since the Post Office became a corporation in 1969, politicians had their fingers on the service being provided.

With that new and competent management, together with the historic agreements that have been mentioned about going forward with modernisation, the staff and people who run Royal Mail deserve to be given fair and just regulation, to quote the noble Lord, Lord Jenkin. It has to be fair and just. I hope that the Government will recognise that the regulator has to be fair. I believe that requiring that the service be “profitable”, instead of “financial sustainable”, will help. I look forward to the Minister telling me that the Government agree that the Royal Mail will be entitled to be profitable.

[Baroness Kramer]

My Lords, I had not expected to speak on this amendment at all. Having looked at the language, I thought that “financially sustainable” looked pretty adequate. Why shift it to “profitable” and set the bar higher? However, listening to the noble Lord, Lord Clarke, I found myself convinced on this so I felt I should get to my feet. It would be a positive for this Bill if we came out knowing that we would not have to revisit the future of Royal Mail, the universal service provider, and that it had been moved on to a basis where it would thrive in future and deliver the services that we all want and that our community and economy need, so that we do not have to keep coming back to patch it. Constant salami slicing is quite often the tradition as we make change. As I look at that, the requirement for profitability has some real appeal because financial sustainability can be achieved in many ways; you could talk about additional subsidy, or whatever else. It seems to me that there is a far more secure future. The noble Lord, Lord Clarke, has convinced me and I hope that he will have some success in convincing the Government.

--- Later in debate ---

[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.

[Baroness Kramer]

I shall speak briefly to Amendment 24AB in my name and that of my noble friends Lord Razzall and Lord Cotter, as the argument for the need for stability and certainty for Royal Mail as a universal service provider has been made extensively in the House today in discussion of the previous group of amendments and by the noble Lord, Lord Stevenson, on this group. However, there is a glaring gap in the Bill, because there is no set timetable for the period during which Royal Mail would continue reliably to carry that role. The amendment would set a period of 10 years before Ofcom may make a procurement determination that would change that position.

The case was well made in the other House by a Member of the Opposition—some people will think that I am supporting those on the Benches opposite more today than those on mine. The honourable Member for Ochil and South Perthshire, I think, said that moving to the 10-year period,

“gives Royal Mail the certainty to make investment and business decisions, confident that it will remain the universal service provider for a reasonable amount of time”.—[Official Report, Commons, Postal Services Bill Committee, 7/12/10; col. 648.]

The point was also made that, for Royal Mail to have a secure future, significant investment will be required, much of it in equipment. Given the lifespan and cycles of equipment, 10 years becomes a reasonable minimum for that kind of stability.

We have heard again in this House real concern about cherry picking. It is clear to me that your Lordships do not want others coming in to cherry pick pieces or aspects of the universal service. I am sure that that is true for the public at large, who perhaps matter the most; it will certainly matter to Royal Mail itself and future investors. Given the widespread concern, it strikes me that an amendment such as Amendment 24AB neatly covers a variety of concerns by providing fundamental stability over a 10-year period. That may alleviate many of the other issues raised in this important debate.

[Baroness Wilcox]

My Lords, this group of amendments relates to the actions that could be taken if Ofcom found that there was an unfair financial burden on the universal service provider as a result of its complying with its universal service obligation to ensure that consumers are protected under the new regulatory regime. Clause 43 sets out three options if there were found to be an unfair burden: a review of the minimum requirements; a procurement process; or the establishment of a compensation fund. If it considered that action would need to be taken, Ofcom would have to recommend to the Secretary of State which of those options would best address the unfair burden.

I speak first to Amendment 24X, in the names of the noble Lords, Lord Razzall and Lord Cotter, and the noble Baroness, Lady Kramer. The noble Lord, Lord Cotter, made an eloquent case for the amendment. It is right that we should consider it alongside the other amendment that would prevent a procurement determination for 10 years; the two need to be seen in balance. Your Lordships will need no reminding that our central objective in the Bill is to protect the universal postal service. We have been clear that Royal Mail must continue to modernise and, to that end, have included a new requirement on Ofcom to have regard to the efficient provision of the universal service.

No one would dispute that Royal Mail needs to improve its efficiency, and the company has already taken significant steps on its modernisation journey. However, without further modernisation, costs will remain high, increasing the risk of substitution by other forms of communication, in turn exacerbating volume decline and further threatening the universal service. The package of measures in the Bill will greatly assist Royal Mail in its modernisation. We believe that it is important to allow Royal Mail to continue on this modernisation path for a few years, able to take advantage of the benefits of the Bill, before the regulator assesses whether the universal service represents an unfair burden. This would also give certainty to all those who might be required to contribute to a compensation fund, given the reassurance that that would not be on the table for at least three years after the Bill came into force. This is clearly a fine balance. There is no right number; it is a judgment. I would therefore like to take the amendment away to consider it, so I hope that the noble Lord will, for now, consent not to press it.