John Denham
Main Page: John Denham (Labour - Southampton, Itchen)Postal Services Bill
John Denham Excerpts(14 years, 1 month ago)
Commons ChamberRead Full debate Read Hansard Text
Mr John Denham (Southampton, Itchen) (Lab)
For more than 350 years, the Royal Mail has delivered the post to homes and businesses across the United Kingdom. Created by the Crown, for all that time it has been to all intents and purposes a public service run in the public interest, and it has always been seen as a huge and valuable national asset, run in the national interest. Today’s Bill would change all that. It would lead to the total sale of the Royal Mail, and a huge sum of public money would be spent to enable a private sale to take place. I believe that that sum has just gone up again by a substantial amount.
The Bill may mean the Royal Mail, this national asset, passing into foreign ownership or to short-term investors interested only in the quickest possible profit. For the first time ever, it has to provide for a special procedure to deal with the insolvency of a private Royal Mail.
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD)
The right hon. Gentleman talks about Royal Mail being owned in the national interest and about profits in the private sector, but was not the great burden hanging over it when it was owned in the national interest that its profits were taken by the Treasury for other purposes, rather than being invested in modernising it to let it compete effectively in the market that his Government forced on it?
Mr Denham
The hon. Gentleman may have a point about the use of those profits, but I would rather they went to the Treasury or to the Royal Mail, not to a private company whose owners lie overseas. The defence of the national interest lies with public ownership.
Today’s Bill provides, for the first time ever, for the breaking up of the Royal Mail, with different organisations providing the universal postal service in different parts of the country. It breaks the umbilical link between the Royal Mail and the network of local post offices prized by residents and communities up and down the country, and does so in a way that threatens the future of thousands of local post offices. It is a very serious Bill, and it must be considered seriously and in detail in the weeks and months ahead.
Of course, serious discussion of the Bill must acknowledge why the coalition Government have concluded, as the previous Labour Government did, that doing absolutely nothing is not an option. The competition for the services offered by Royal Mail, including from new ways of communicating, has changed more dramatically than anyone envisaged even 10 years ago. Last year, it reported a drop of 7% in letter volumes. Other operators have been taking business upstream faster than expected. Some 87% of all mail in the UK is sent by businesses to people at home or to other businesses, and competitors have already won more than 60% of the upstream, pre-sorted bulk mail market, delivering their customers’ mail into the Royal Mail system for final delivery.
Over the fast-approaching horizon will come the full impact of technological change—e-mail, web-based advertising, text messaging, mobile phones and all the other modern ways of communicating. The worldwide postal market is expected to decline by 25% to 40% over the next five years. The problems with the pension fund, which had their origin in the 13-year pension holiday until 2001, have mounted. There was, therefore, a consensus that action needed to be taken.
Kate Hoey
My right hon. Friend has mentioned a number of issues, but he has not drawn attention to the EU directive on postal services, which allowed companies such as TNT to cream off all the profitable parts of Royal Mail and leave the universal service within the public sector. That directive was agreed to. Does that not show that we should examine EU directives a little more carefully in future?
Mr Denham
All EU directives should always be examined very carefully as a matter of principle. There is perhaps a debate to be had about whether a six-day service exceeds the strict requirements of the EU directive, but my hon. Friend raises an important point. If she will allow me, I will return a little later to how competition has developed in practice and whether we have a level playing field.
There was consensus about the nature of the action that needed to be taken. The Royal Mail needed to be transformed to become more efficient and competitive, and that transformation would need new management and vastly improved industrial relations. The taxpayer would need to take on the liabilities of the pension fund, and access to investment was needed.
However, the central question that the House must ask today and in the coming weeks is whether the Secretary of State’s way forward is the best. We will oppose the Bill, although we do not oppose every element in it. We believe that abandoning the commitment to keep Royal Mail as a publicly owned organisation is wrong. Clause 1 abandons that commitment, which was restated by the Labour Government. That will inevitably threaten the public interest, from the moment the sales process starts to the long-term future of both Royal Mail and the Post Office.
Public ownership of the Royal Mail provides the ultimate safeguard for the public interest. It ensures that even if other policy fails, it is not too late to defend the interests of the public, whether by protecting the delivery of letters six days a week to every home in the UK at a standard price, or by guaranteeing the business that can sustain a network of local post offices. Public ownership can ensure that public money is invested for public benefit, not private profit.
The front-line defence of the public interest lies, of course, in the legal framework in which Royal Mail and the Post Office operate. The Bill will transfer responsibility for regulation from Postcomm to Ofcom, as did Labour’s Bill. We will need to consider carefully in Committee whether a regulatory framework designed for a publicly owned company remains as well designed for the foreign-owned or private equity-backed company that might soon run Royal Mail.
The relationship between the public interest and Royal Mail is not governed by regulation alone. Local post offices need a continuing public subsidy, and that in turn depends on the commercial relationship between Royal Mail and the post offices. Both those issues have properly concerned Ministers and Parliament in the past. In some crucial areas, such as the relationship between Royal Mail and the Post Office, the Bill will weaken the ability of Ministers and Parliament to act in the public interest. In other areas in which Parliament might wish to defend the public interest, such as the universal service obligation, it leaves too much discretion for the regulators and Ministers to waive the public interest.
The Secretary of State made no case for why he had decided to go beyond the limited equity stake that was proposed, not without controversy, by the last Labour Government. I wait with interest to hear the remarks of my right hon. Friend the Member for Wolverhampton South East (Mr McFadden), if he catches your eye, Mr Deputy Speaker. The Secretary of State made no case for the full privatisation of Royal Mail.
As the Secretary of State said, we recognise parts of the Bill from our own legislation, and we broadly support parts of it, including employee share ownership. The possible mutualisation of the post office network deserves positive examination at the very least.
I have set out the changes that everyone agreed were needed, but in truth many people thought that Royal Mail could not change while it was a public company. However, change has happened. Considerable progress has been made, and more is under way. An important agreement was reached this March between the Communication Workers Union and Royal Mail supporting the £2 billion modernisation plan, £1.2 billion of which has now been spent. CWU members supported the agreement by a 2:1 majority.
Differences are being felt in operations. The opening hours of delivery offices have been extended and new generation letter-sorting machines have been installed. There are new machines so that mail is sorted for the exact route that postmen and women walk, and there is better equipment, including hand-held devices to track and record items of mail. Of course, the pace of change must be maintained, but in an industry dogged by difficult industrial relations, both the CWU and management should take credit for the start that has been made.
Our debates on Royal Mail have for some time been informed by the Richard Hooper reports of 2008 and 2010. Two years ago, Hooper’s report called for two changes: the injection of private capital and, closely related to that, the involvement of private sector management. However, he rejected full privatisation, saying that that
“option would only be appropriate and feasible if modernisation had been completed.”
His recent report also identified a need for private sector capital, but was markedly more confident about the quality of existing management and the capacity for change given the changes that had already taken place. The 2010 report states:
“The specific need for corporate experience is reduced today”.
It used to be said that Royal Mail could not change without an injection of private investment and management, but change has been possible. The argument now seems to be that change is needed so that Royal Mail can be sold, but that is simply not true.
The House needs to ask what the real costs could be. The public are making a heavy investment in preparing the postal services offered by Royal Mail for sale, including through a £2 billion loan to fund the modernisation process. In addition, the subsidy for the post office network was already set to increase from £150 million to £180 million next year, and we heard today of a further investment in sub-post offices, to which I will return. The Bill also leaves the taxpayer assuming the huge liabilities of the pension fund while Royal Mail benefits from a reduced contribution.
That is a huge public investment in preparing Royal Mail for sale, yet the returns look pretty low—according to media speculation, the sale price will be around £700 million, meaning a one-off income of less than £1 billion in return for costs of many billions. The Secretary of State did not make clear the timing of the changes. I simply point out that if he goes early, he will probably get the lowest possible price, but the later he goes, the more essential it will be to complete the transformation of Royal Mail, because as he said, Royal Mail cannot simply stand still and mark time. There is no relationship between the change that is necessary and his desire to sell the whole of Royal Mail.
As the Government’s own briefing makes clear, a fully efficient and competitive Royal Mail could generate a very significant return. Companies such as Deutsche Post in Germany achieve profit margins of 13% from their mail operations, even though they face greater end-to-end competition than Royal Mail does in the UK. There are similar profit margins in the postal services of Finland, Austria, France and other European countries. Some are private and some public. That shows what efficient companies can do. However, the Bill excludes the public from any gain from a transformed Royal Mail.
Richard Graham (Gloucester) (Con)
Is the right hon. Gentleman aware how much investment the German post office has had in the past few years? I believe that the figure is £15 billion. Is he suggesting that the UK Government have £15 billion for such investment?
Mr Denham
Richard Hooper’s point, which I do not fundamentally contest, is that additional access to capital is necessary, which may well need to be private capital, but that is not the same as making a case for the total privatisation of Royal Mail, which is what the Government are doing. Government Members need to defend that.
Mr Marcus Jones (Nuneaton) (Con)
What share of Royal Mail does the right hon. Gentleman think should be sold?
Mr Denham
The previous Labour Government floated proposals for the sale of a minority stake. Given the changes that have taken place in Royal Mail, there may be ways of accessing private capital that do not depend on an equity stake. Some partnerships of that sort might well be highly desirable, but the question is whether anything the Secretary of State said made the case for a total sale of the company. I listened to him very carefully, but I did not hear a single sentence that made a case for clause 1, which is the basis on which we oppose the Bill.
Mr Jim Cunningham
It does not take long for employees to sell their shares, so selling shares to employees would create another imbalance.
Mr Denham
I understand my hon. Friend’s point, but the Opposition should explore positively, including in discussions with the unions, how employee share ownership might work. Models of trust-based employee share ownership would avoid the risks he describes. It would clearly be nonsense to provide shares to employees that could be sold on within a few months, which happened in many previous privatisations, to everyone’s great regret. We should look at the conditions, but I agree that it would be a complete nonsense to create the conditions he describes.
Mr Cunningham
I remember the privatisation of Rolls-Royce. The employees were given shares, but rapidly sold them.
Dr John Pugh (Southport) (LD)
The right hon. Gentleman makes a rational and intelligent case, but if the Bill proposed a majority stake for private finance—say 51 or 55%—would it be possible to protect the public interest?
Mr Denham
If my hon. Friend will forgive me, I will happily take another intervention from him when I come to my point on protecting the public interest during the sale.
I said that the Bill excludes the public from any potential long-term gain from a transformed Royal Mail, but in addition the benefits could go entirely to overseas interests. Frankly, I am surprised how sanguine the Secretary of State is at that prospect, because faced with the sale of Cadbury to Kraft, he said:
“It is particularly galling…that state-owned RBS should part fund this takeover when it is clearly not in the interests of the UK economy.”
I must point out that the Secretary of State is today effectively using taxpayers’ money to transfer the ownership of Royal Mail overseas.
There are good reasons to worry about the public interest during the sales process. On one side will be potential buyers, who will have every interest in lobbying for the maximum commercial freedom for the operation and for the minimum of social obligation. The other side—we might like to think this means the Secretary of State, but it means the Treasury—has an interest in gaining the highest price. Both sides, therefore, will argue to cut social obligation to a minimum. It is not difficult to anticipate the outcome of that situation. I suspect that one reason the Secretary of State was able to say so little on the long-term interest of Royal Mail in the post office network is precisely that he is caught uncomfortably in the vice between the Treasury and potential buyers.
Mr Weir
I am listening carefully to the right hon. Gentleman and agree with a lot of what he says. He mentioned the pressures of the sale. Has he seen the letter from the current chief executive officer of Royal Mail, who argues for loosening social obligations now? Is that an indication of how things will go?
Michael Connarty (Linlithgow and East Falkirk) (Lab)
Is my right hon. Friend aware that in previous discussions about possible privatisations, no interest was expressed by any of the companies, either in the UK or abroad, in running mail services? Are we not likely to have a situation in which, basically, some equity finance company will borrow large amounts of money to buy Royal Mail and then load it up with masses of debt? There is no operator challenging Royal Mail’s ability to deliver the services that it currently delivers.
Mr Denham
That is certainly a real risk, and my hon. Friend is absolutely right. I return to the point that I made earlier. If the Government are serious about rejecting potential purchasers who they think are wrong or who offer a poor price, the Government will have to deal with the problem of transforming Royal Mail in the meantime. They cannot let it simply stand still, given all the commercial pressures. My fear is that the Government will go to the wrong place, with an inappropriate sale at an inappropriate price, because of the figure that has been pencilled in—although it is hard to find it in the detail—in the comprehensive spending review, and that this would happen irrespective of the long-term interests of the public in this country.
That pressure to reduce the social obligations brings me to one of the central concerns regarding the public interest: the relationship between a privatised Royal Mail and the network of local post offices. We oppose the Bill in part because of its central aim, which is the sale of Royal Mail and the breaking of the key contractual link between Royal Mail and the post offices. There are around 11,500 post offices. The Royal Mail Group is required by licence to support 4,000 post offices. The managing director of Post Office Ltd told a parliamentary Committee that a commercially viable network would have only 4,000 offices.
The previous Labour Government made provision to keep a further 7,500 branches open. They are supported by an annual public subsidy of £150 million, which is due to rise to £180 million next year, and by business that is guaranteed to Royal Mail through the inter-business agreement. The Royal Mail business that is guaranteed by the IBA is crucial to the current viability of the post office network. Leaving aside the public subsidy, Royal Mail business generates 37% of the income of local post offices. However, the IBA could end immediately under this Bill when Royal Mail is sold. A privatised Royal Mail could simply take the work elsewhere. As Consumer Focus—the organisation that the Secretary of State wishes to silence—says in its briefings,
“following privatisation of Royal Mail, subsequent contracts would require a competitive tender process with no guarantee that Post Office Ltd would retain this contract”.
The Bill provides no mechanism to ensure that the continued long-term use of the post office network is an integral part of Royal Mail. That would be a disaster for non-profitable post offices in rural and urban areas alike. The Bill could have defined post offices as access points for the universal postal service. Consumer Focus says that the Bill could have specified the number of post office branches to remain. However, the Bill does none of those things. That is a fatal flaw. The axe of uncertainty hangs over thousands of post offices, which puts a huge question mark over the interesting and attractive concept of a post office mutual, because mutuals can go out of business too if their income is taken away. Hooper concluded that the Post Office should remain publicly owned, saying:
“Given the social obligations of the Post Office, there is little prospect that the network will be sustained on a fully commercial basis.”
However, a mutual is a commercial organisation, subject to commercial logic, and without guarantees of income, it will fail.
The Secretary of State spoke about an additional investment of, I think he said, £1.34 billion. I acknowledge that, although it would perhaps have been useful to have more detail. We will need to explore that figure in greater detail than we can this afternoon, as we have no detail now, although it is clearly a large amount. We will need to know the answer to a few obvious questions. Does that money come from the Department for Business, Innovation and Skills budget that was set out in the comprehensive spending review last week, or can it be found elsewhere in the CSR? Does the Secretary of State intend to continue the annual subsidy beyond the CSR? Is the making available of that money linked in any way to the participation of sub-post offices in the formation of a mutual, or will it go to every sub-post office, whether or not it wishes to take part in a mutual? Will the beneficiaries be only current post offices, or could the money be made available to new entrants and companies that wish to enter the market for providing local post offices for the first time?
The Secretary of State talked about building up the business that is done through the Post Office, which I welcome. Doing so would build on work done by my right hon. Friend the Member for Wolverhampton South East on post banking and other areas, but we need more detail. I acknowledge that the figure that the Secretary of State cited would be a very large investment, but we need to know much more about it, and I hope that we will learn more before the Bill goes into Committee. However, I return to the same, fundamental point. Investment in the network without the guarantees of future business simply sets the network up to fail and puts a question mark over the public value for money of the investment now being made. I worry that the proposed mutual may ultimately be seen as a cynical attempt to shift responsibility for future closures of post offices on to the shoulders of the mutual owners of the post office network.
Let me make a few other points. Despite what I have set out, the Bill makes it clear that many risks still lie with the public, in addition to those that I have listed. The Bill results in the nationalisation of risk and the privatisation of profit—a phrase that the Secretary of State may well remember from the recent past. Part 4 sets out the provisions for taxpayers to step in through administration if a privatised Royal Mail becomes insolvent. That is a necessary part of the Bill, given the coalition’s intention to sell Royal Mail, but it should kill the idea that once Royal Mail is privatised, the taxpayer will no longer need to worry about or bear any expense for failure. Clauses 34, 35 and 43 create the possibility for the universal service obligation to be split between different operators and for there to be different levels of universal service obligation in different parts of the country. In turn, that makes it possible in practice for Royal Mail to be split up once in private ownership, creating the risk of a commercial dynamic that will make it difficult to maintain the same quality of postal services throughout the UK.
The other major issue of customer concern is the maintenance of the six-day universal service. The Bill gives Ofcom the power to make a universal service direction, and in principle this must include the current level of provision for collections and deliveries. However, the Secretary of State has given himself unilateral and unqualified discretion to remove services from Ofcom’s direction if he takes the view that Ofcom’s order is too extensive. Similarly, if Ofcom were minded to order a universal service provider to maintain the current post office network, the Secretary of State can overrule it. The Secretary of State has given himself the power to reduce services, but not to extend them. That tells us what he is thinking.
Finally, it is in all our interests to have a Post Office that operates as efficiently and cost-effectively as possible. We have recognised the need for private sector investment in the past, and it is likely that this will be needed in future. Now that there is less emphasis on changing the management, it seems that a wider range of approaches to engaging private capital can and should be explored, but I do not believe that the need for private capital justifies the privatisation that is proposed today.
It is also essential that the Government are clear about the future burden of regulation designed to allow competitors into the market. Many argue that that now imposes a real and unnecessary cost on Royal Mail. During its mandate, Postcomm chose to apply a challenging competitive regime to a near-monopoly organisation. Today, that regulatory regime applies to many parts of Royal Mail’s activities that are open to intense competition. In some areas, Royal Mail is forced to carry mail on behalf of its competitors at well below cost price, and the market share taken by new entrants is certainly much larger than predicted. I know that the figures are contested, but Royal Mail told Postcomm in August that it was subsidising new players in the upstream market at a cost of £100 million a year. Does that regulatory regime make commercial or competitive sense any more?
Crucially, what guidance will Ministers give to Ofcom? Potential buyers will want to know that now. Without a guarantee of more commercial freedom where competition is already strong, Royal Mail will be much harder to sell. By the same token, however, greater commercial freedom for a publicly owned Royal Mail would enable it to generate a higher income. I hope that all Members on both sides of the House will agree that it would be completely unacceptable for Ministers or regulators to offer greater freedom to a privatised Royal Mail than they are prepared to offer a publicly owned Royal Mail.
If the House is being asked to choose between a privatised, foreign-owned Royal Mail and a publicly owned Royal Mail, it must do so on a fair and level playing field involving a publicly owned Royal Mail enjoying the same level of regulatory freedom, and the same financial freedom and ability to reduce outgoings that comes with the taxpayer assuming pension obligations. The transformation of that publicly owned Royal Mail must also be well under way, and it must be able to explore a wider range of ways of raising the private capital that it might need. I invite the House to oppose the Bill.
Mr Davey
No, I am sorry.
My hon. Friend the Member for Solihull (Lorely Burt) raised concerns about the conditions for mutualisation. Of course we will have to ensure that there is a viable post office network, otherwise we could not make mutualisation work, so that is one of our conditions. Clause 7 makes it clear that a mutualised post office network would have to be “for the public benefit”, so that is also a clear condition.
Despite the fact that our Bill is better for Royal Mail employees, Royal Mail, the Post Office, customers and the taxpayer, the Opposition still oppose it. What is their problem? The right hon. Member for Wolverhampton South East, the former Minister of State for Employment Relations and Postal Affairs, said that it is about ownership but he did not ask the next question: what is the difference between the shareholdings to which the previous Government and this Government were prepared to agree? That principle concerns about 0.2% of the shares—the extra shares that they were not prepared to sell but we are. The sale of those shares will free Royal Mail from Treasury control and will enable it to be the master of its own fate and to invest for the future without coming cap in hand to the taxpayer. New Labour has been dying for some years but with the opposition to this Bill, old Labour has returned. I thought that I would be in danger of being called Red Ed with the bail-out of the pension plan, but the real Red Ed is on the Opposition Benches—ideology before reality, dogma before common sense and, worst of all, vested interest before national interest.
The idea that public ownership has delivered a successful Royal Mail and post office network clearly is not right. Perhaps Opposition Members are aware that Royal Mail shed 65,000 jobs during the 13 years of Labour government, so public ownership did not deliver for workers. Let us consider the experience under privatisation around the world. Since Deutsche Post was floated in 2001, it has seen investment of £11.6 billion. That just will not be possible for Royal Mail if it remains in the public sector, but through our measures, it will become possible.
The right hon. Member for Southampton, Itchen (Mr Denham) made another accusation against the Bill—it would lead to post office closures. What a cheek! Ten post offices closed in his constituency under the previous Labour Government and about 5,000 post offices were shut in total. As so many colleagues have made clear throughout this debate, Labour is the party of post office closures. This Government will not make those same errors. That is why my right hon. Friend the Business Secretary today announced our £1.34 billion investment programme for the post office network. That money will not pay for a closure programme—we will not throw money down the drain as Labour did—but it will bring a lasting change to the network and will tackle the underlying economic issues it faces. That is why the right hon. Gentleman and his colleagues will see, when we make our full statement on policy for the post office network shortly, a Government working as one—joined-up government is what they used to call it.
Mr Denham
We look forward to hearing the more detailed statement. Will the Minister confirm that his Department suffered one of the largest departmental cuts in last week’s comprehensive spending review—25% of revenue and 50% of capital? Will he also confirm that the money announced today will come from that same pot of money? What other cuts that he has not yet announced will be made in BIS to finance it?
Mr Davey
Unlike the hon. Gentleman’s Government, we do not wish up new pots of money left, right and centre. Of course it is in the BIS settlement.
The Opposition made much of one point tonight. Apart from their ideological contortions over ownership, they have tried to suggest that separating Royal Mail from the Post Office will somehow be the catalyst for post office closures. Let me explain why they are wrong.
First, a privately owned Royal Mail will not act against its own commercial interests. It will not give up valued retail space in the heart of communities the length and breadth of Britain, creating a vacuum that its competitors would gratefully fill. To think otherwise one would have to be living on Planet Consignia. Have Members heard of Planet Consignia? It is where the previous Government once tried to place Royal Mail. This Government, along with most people in Britain, understand the value and tradition of royalty, and will not make such daft mistakes.
Secondly, Royal Mail has made it clear that the current long-term commercial contract between Royal Mail and post offices will continue. Only this week, the chief executive of Royal Mail, Moya Greene, told me that
“the support that the Government is giving to Post Offices Ltd should mean that the Post Office should become an even stronger retail channel for Royal Mail.”
She went on to say that it was “unthinkable” that there would not be a strong relationship between the Post Office and Royal Mail in the future.
Thirdly, if the Opposition are seriously saying the Government should write into the Bill that there should be a statutory permanent contractual relationship between Royal Mail and the Post Office, they would be risking not only a legal challenge from competitors, but setting the Post Office in aspic. Do they not realise that as Royal Mail’s letter volumes decline, so too will the mail business for the Post Office, so it needs to be given the opportunity to build new revenues? Do they not realise that new sources of revenue will be critical if we are to achieve a financially viable post office network?
I have a confession. I am a postal anorak. Before having the honour of being elected to the House in 1997, I was a management consultant and I specialised in postal companies. I worked on projects for Royal Mail’s equivalents in Taiwan, South Africa, Belgium and Sweden. Although I co-authored a report for the US Postal Service to put to Congress on the commercialisation and liberalisation of postal companies and markets around the world, I have to disappoint the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont); I never worked on a privatisation programme—[Interruption.] Regrettably. Back then, in 1997—[Interruption.]