Postal Services Bill

Michael Connarty Excerpts

Wednesday 27th October 2010 Commons Chamber

[Mr Denham]

I have seen that letter, and I will refer to it a little later, if I may.

[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.

--- Later in debate ---

[Mr Brian Binley (Northampton South) (Con)]

The House needs to recognise that the Post Office is a bust flush—

[Michael Connarty]

Rubbish!

[Mr Binley]

It is absolutely bust! In fact, the previous Government recognised that and tried to enact a Bill, but they did not have the courage to carry it through. So we want no lessons from Labour Members. The Post Office is a bust flush. Its management needs rejuvenating, its work force are demoralised and its pension fund is in massive deficit. If that does not add up to a company that is totally off the rails, then I do not know what does. It would do the Opposition good to recognise that fact, rather than pontificating about a matter that they dared not deal with.

The Post Office faces a massive challenge. Volumes have declined enormously since 2005, and they are now down by 13 million units per day. Good God! If any other business faced that kind of decline, it would instantly recognise that it was bust; it would not need me to tell it. The Post Office is now 40% less efficient than its European competitors, and its modernisation programme is proceeding exceptionally slowly.

--- Later in debate ---

[Mr Binley]

My hon. Friend was a wise prophet in a House that failed to listen to him, and that is a great pity. I accept his point totally.

The truth is that something needs to be done, and that was accepted by the previous Government. I first came across this matter when it was presented to the then Business, Enterprise and Regulatory Reform Select Committee in 2008. That Committee’s report highlighted the importance of the organisation to our local communities. It recognised that the poor, the elderly and the disadvantaged relied heavily on the Post Office, but it was not only disadvantaged people who felt that way. Small and medium-sized businesses also felt that the Post Office played an important part in the way they ran their businesses. Research by Postcomm estimates that the social value of the post offices up and down the country runs to about £10 billion. The case for the network is clear, well made and, I believe, totally understood by the Opposition. Sadly, however, they ran away from the issue.

There is a great need to heighten, increase and force through technical development. Of course, that could not happen in the past. Hooper said that the Royal Mail needed to modernise, improve its management and expand its range of services. I believe that the Bill will achieve all those objectives.

The relationship between management and work force needs to be improved—and the problem is not all the fault of the unions by a long chalk. Previous management, I believe, acted in a bullying way that did nothing for good industrial relations—and I said so at the time, as did my colleagues on the Select Committee. This is one reason why I came to the conclusion that there was a massive need for a real injection of good-quality management into the Post Office.

[Michael Connarty]

I just wonder where the hon. Gentleman has been. I happen to be secretary of the communication workers group in this Parliament, although unlike my predecessor I have never been a communications worker. Massive changes to the agreement took place in March. Where else in Europe can we find a management that is willing to work with the trade unions? In all other places, they have banned trade unions from their premises. These firms are absolutely out of order in their treatment of their workers.

[Mr Binley]

I understand the hon. Gentleman’s concerns. When I talked about senior management, I meant very senior management indeed. The lesson should go out to the whole House that bringing in from the private sector people who are sometimes seen as bully boys is not the best way to produce good industrial relations. That is, in fact, what happened. I see the hon. Gentleman nodding; I am glad he agrees with me.

--- Later in debate ---

[Michael Connarty]

The hon. Lady is moving on from mutualisation of the post office network. I thought she might ask the Minister where the guarantees will be when the Post Office is mutualised or split off. I believe that we have to put in £270 million at the moment to keep the network alive. I can see no guarantee under the Bill that the Post Office will be supported. How could mutuals find that £270 million to keep the network intact?

[Lorely Burt]

We have already had the announcements of the Secretary of State, which have covered the point that the hon. Gentleman has made. The Secretary of State might wish to address that point in his summing up.

--- Later in debate ---

[Michael Connarty (Linlithgow and East Falkirk) (Lab)]

I declare an interest, as I have worked with the Scottish branch of the National Federation of SubPostmasters over a number of years to oppose the closure of post offices introduced by the last Government, and I will continue to oppose closures. I have also worked with the Communication Workers Union, while my predecessor Harry Ewing—now, sadly, deceased—was a postman and eventually a Minister. I am deeply involved in this, and I am secretary of the liaison group for the Communication Workers Union in this Parliament.

The Bill does not provide a logical or necessary solution to the problems of Royal Mail, and it is not the only response to the Hooper report. It is, indeed, another Liberal Democrat betrayal. It is not part-privatisation, but a political decision by the Liberal Democrats to join in the carnage in the public sector.

[Lorely Burt]

rose—

[Michael Connarty]

I will take no interventions, as many Members wish to speak and I want to take just six minutes.

This is not about a part-share sale, which was the policy on which the Liberal Democrats were elected, but, to quote from the Bill, it is about allowing

“for an unrestricted sale of shares in Royal Mail”.

The Bill returns to the 1992 plan to break the link between Post Office Ltd and Royal Mail, with all the duplication of management and logistic structures that it will require, which will eat massively into the £1.2 billion set aside to set up a separate Post Office Ltd. It will tear up the operating synergies, which provide a third of Post Office Ltd revenues from services provided for Royal Mail, and there is no guarantee that these will continue. The current subsidy is £180 million a year; it will have to rise £270 million a year to sustain the post office network in future.

The problem is that there is no guarantee that the subsidies will be provided. Clauses 11 demands only an annual report and says nothing about what the Government will do to guarantee the post office network that sends the report. The sub-post offices’ postal and Royal Mail services that are vital to the commercial survival of villages and the sub-post offices in rural and urban areas will be jeopardised.

The Hooper report called for a number of things, none of which required the privatisation of the Post Office. The final report specifies three necessary elements: private sector investment, the Government taking on pensions, and changing the regulations, as the Bill does—in fact, in that respect, it is exactly the same as the previous Labour Bill. Hooper 1 recommended new management, and we have it, from a noted organisation that has been associated with high-quality services; Moya Greene has come from Canada Post to run Royal Mail. All parts of Royal Mail, including Post Office Ltd, are profitable at this moment. There is no need for a subsidy.

On the recommendation on pensions, let us look at what happened with BT’s pension deficit. The Government thought that they had taken on a liability of £7 billion, but the High Court has just ruled that the liability is an exposure of £24 billion, because it must include everyone who joined BT after its privatisation. There are no guarantees that the same will not happen with this privatisation. The clear and simple way to deal with the matter is to accept that we must nationalise the debt. If we did that now, Royal Mail would not have to pay £291 million a year to service its deficit. The changes involving Ofcom would bring in another £120 million of income, which would make £411 million available to Royal Mail to complete its modernisation.

Increased efficiency was the basis of the other recommendation in Hooper 1. In a vote in March 2010, there was two-to-one support among CWU members for the new modernisation programme. That was one of the first Hooper 1 criteria. Many opportunities were missed between 2000, the passing of the Postal Services Act and the granting of commercial freedom and the 2010 decision. Loans were given, but the management failed to deal with distribution or with sorting office networks. Sorting machines were bought from France and left uninstalled by the management. Bullying was used to downsize the number of staff in the distribution and delivery centres. The management’s actions were based not on efficiency, but simply on a desire to keep people out when they left the service. The chief executive who failed in that regard was given a £2.8 million bonus for his trouble.

The fully funded modernisation scheme based on the business transformation agreement that was reached in March is a great leap forward, but, as has been said, it will be massively painful. There will be substantial job losses. The whole thing could be handled by means of a change to allow Royal Mail to raise finance directly, without the need for privatisation or the sale of shares.

Let us examine the myth of “necessary privatisation”. Share sales do not guarantee investment; they merely move the ownership of shares to another body. Following Hooper 1, it was impossible to find any organisation, even TNT, that would take an interest in buying shares in Royal Mail. The failure came about not because those organisations feared that they would not gain enough control, but because they realised that there was not enough money to be made from the delivery of mail under the present universal service delivery obligation.

So what will happen? A private equity company will buy into Royal Mail. It will probably borrow money, and then load the debt on to Royal Mail. The Business Secretary will deliver a lot of money to the Treasury rather than to Royal Mail. It is likely that the service will then be split between the part that makes money by picking up and sorting the mail and the part that deals with delivery, which will be dumped on regional sub-contractors who will fail both financially and in terms of delivery. The whole service will then collapse.