Royal Mail

Michael Fallon Excerpts

Tuesday 25th June 2013 Westminster Hall

[The Minister of State, Department for Business, Innovation and Skills (Michael Fallon)]

I, too, congratulate the hon. Member for North Ayrshire and Arran (Katy Clark) on securing this debate, and I thank hon. Members who have contributed to it. It has been a good debate, and I welcome the opportunity to respond to the issues raised and to explain why the Government intend to sell shares in Royal Mail in this financial year.

The Government’s overarching objective is to secure the future of the universal postal service: the six-day-a-week service at uniform, affordable prices that delivers throughout the UK. The service is vital to our economy. The Government’s reforms go back to Richard Hooper’s independent review of the postal sector which was commissioned by the Labour Government because the volume of mail was falling. That review concluded that there was a substantial threat to Royal Mail’s financial stability and that the universal service was under threat. It recommended that action should be taken as a package to secure the universal postal service with responsibility for postal regulation being transferred to Ofcom, the Government tackling the historic pension deficit, and Royal Mail entering into a strategic partnership with one or more private sector companies to give it commercial confidence, access to capital and corporate experience. The Labour Government accepted those recommendations.

In 2010, following an updated report by Richard Hooper that confirmed his initial findings, apart from the need for a strategic partnership, the new Government introduced a Bill to enable implementation of the package of recommendations. Since the Postal Services Act 2011 received Royal Assent in June 2011, we have implemented two elements of that package by establishing Ofcom as the regulator with stronger powers to protect the universal service, and by taking on Royal Mail’s historic pension deficit. By removing those major barriers, Royal Mail has begun its journey to long-term sustainability. It is now profitable, as hon. Members have said, and its overall financial position has improved.

The challenge now is to maintain that positive momentum. We should not forget that in recent history the Royal Mail group has swung between profit and loss. Royal Mail’s core UK letters and parcels business suffered losses in five of the last 12 years. During that period, overall losses were around £1 billion and around 60,000 jobs were lost, so resting on the current year’s profitability is not enough. The core UK network made a margin of 3.9% in that financial year, which was an improvement, but it was well below international peers such as Deutsche Post and Austrian Post with a margin of more than 8% and Belgium Post with a margin of 17%.

A more profitable Royal Mail will be better able to weather any future market weakness and, more importantly, will be able to take advantage of new opportunities. The company needs future access to private capital to be able to continue its modernisation programme and to seize opportunities for growth such as the boom in on-line shopping. The final phase of our reforms and implementation of the Hooper recommendations is the sale of Royal Mail shares, which will give Royal Mail future access to private capital.

That is the way to put Royal Mail’s future on to a long-term sustainable basis. It is consistent with developments in Europe where privatised operators in Austria, Germany and Belgium have been profitable and continue to provide high-quality services. Only last week, there was a successful sale of shares in the Belgian post operator, bpost. The Government’s decision to sell shares in Royal Mail is not ideological. It is a practical, logical and commercial decision, just as the Labour Government’s decision was in 2009. What they got wrong and what everyone opposed, including me and most Labour MPs at the time, was of course their proposed implementation.

I will turn to some of the more detailed questions that the hon. Member for North Ayrshire and Arran asked. She asked about the effect on the Post Office, which is now a separate business. As my hon. Friend the Member for Gosport (Caroline Dinenage) said, we put an end to the closure programme. I am looking forward to re-opening the refurbished Otford post office on Friday. It is winning a range of front-line service contracts from the Driver and Vehicle Licensing Agency, the Skills Funding Agency, the Department for Work and Pensions, the Border Agency and many others.

The hon. Member for North Ayrshire and Arran asked me about the type of sale. We have not made a decision on how much of Royal Mail to sell, nor what form the sale should take. I assure hon. Members that when we decide, we will make a statement to Parliament and under the legislation we must lay a report to Parliament at the same time. The hon. Lady asked about the fees involved. If there is an initial public offering, the fees will be set out in a prospectus. I assure her that we will be very careful to keep them as low as possible.

The hon. Lady also asked whether the universal service provision is UK-wide, and the answer is yes. She asked whether Ofcom can review the universal service provision and throw it up into the air at any particular point, and whether ministerial approval is required to do so. The answer is that Ofcom may review it at any time, but cannot change it. Only the House can change the universal service provision—

--- Later in debate ---

On resuming—

[Michael Fallon]

When I was interrupted, I was replying to the important question from the hon. Member for North Ayrshire and Arran on what triggers a review of the universal service requirement: could Ofcom do it at any time or does a review need ministerial permission and so on? The answer is that Ofcom can review user needs at any time and it must carry out such a review before it can modify any part of the universal service order, but it cannot modify the order in a way that changes the minimum requirements. That can be done only by Parliament amending the Postal Services Act 2011, which gives all of us the protection we need, and that protection continues irrespective of the ownership of Royal Mail.

The hon. Lady asked about disposables. The directors of the company—a privately owned Royal Mail—must act in the best interests of the company. The Royal Mail is already clear that it sees the postal access file as an integral part of the business. It is separately regulated by Ofcom, and that separate regulation continues irrespective of the particulars of ownership. If I have missed any of her questions, I will write to her after the debate.

The Royal Mail is a business with a £9 billion turnover, which employs more than 150,000 people, and of course, a company of that size and importance to the British economy should have access to the flexible capital it needs: to continue to modernise; to become more efficient and competitive; to innovate and invest; and to seize opportunities presented by new markets, such as the rapid growth of online shopping. Over the past years, Royal Mail’s investment in the business has increased from £555 million to £665 million. As I said earlier, Royal Mail is profitable, but its margins are still behind those of its competitors. Investment remains crucial if it is to continue to improve margins and provide the services that customers demand.

No responsible party would propose that in the current environment Royal Mail should have to compete for scarce public capital against other services, such as schools and hospitals. Royal Mail, run on a fully commercial basis, has the capacity to be cash-generative, profitable and perfectly able to raise the capital it needs from the private sector. A sale of shares will also reduce the possibility of any future Government interference in the operations of the company. It is time for Government to step back from Royal Mail, to allow its management to focus wholeheartedly on growing the business and planning for the future. We will give Royal Mail the commercial freedom it has needed for so long.