Universal Postal Service

Robert Smith Excerpts

Thursday 17th July 2014 Commons Chamber

[Katy Clark]

I am grateful to my hon. Friend for that example, which illustrates the problems we are having and are likely to have to a greater degree as time goes on if the expansion takes place in the way that is intended.

[Sir Robert Smith (West Aberdeenshire and Kincardine) (LD)]

I congratulate the hon. Lady on securing this debate. It is important for people to realise that one of the problems is that while the customer is the person posting the letter, it is the recipient who does not get their bank statement, bill or cheque, and they have no say in that. That is why conditions are an important part of what Ofcom needs to look at.

[Katy Clark]

Given the hon. Gentleman’s constituency, I suspect that he shares many of my concerns. I hope that we will explore all these issues in the debate.

I do not think the House necessarily fully appreciated that the expansion of TNT would take place quite so rapidly, and that is why this debate is so urgent. This expansion is a direct threat to the universal service because Royal Mail needs the universal service in order to be able to use revenues that it generates in areas where it is easier to deliver mail. In the areas I mentioned—London, Manchester and Liverpool—it is easier to deliver mail and therefore easier to generate profits. It is necessary for Royal Mail to use that work to generate profits to help to cover the rest of the national network.

I represent a large rural constituency in Scotland with islands and many small communities. In many parts of it, the costs of providing a mail delivery service will be quite considerable, no matter how we organise postal services.

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[Sir Robert Smith (West Aberdeenshire and Kincardine) (LD)]

I again congratulate the hon. Member for North Ayrshire and Arran (Katy Clark) on addressing this important subject and welcome the decision of the Backbench Business Committee to choose it for debate. It takes up the issue raised by early-day motion 151 and the importance of the universal service.

The hon. Lady has outlined just how important that universal service is, given the diverse nature of postal deliveries. The service ensures that, almost wherever people live—one or two lighthouses are exempt—they can expect post to be delivered at the same price and in the same time frame as anywhere else. As the hon. Lady recognised, that is extremely important in my large and rural constituency, where there is great respect for the knowledge of the posties. I think that the posties’ commitment to public service is sometimes damaging to the institution they work for, because when the white vans are lost and cannot find where to deliver the parcels, it is often the postie who gives them directions and helps them get to their destination. The service is very valuable and important, and it is currently funded by the cross-subsidy from the easier business in the urban areas. That cross-subsidy is crucial to the universal service.

Competition was introduced by the previous Government under the European Union directives, but that competition went further, faster and deeper than it should have and Postcomm saw its role as driving competition rather than protecting the universal service. I remember warning it at the outset that the lost opportunity of going too slow was far less damaging than going deeper and faster and doing permanent damage. The regulator was so worried about not getting the most efficient market that it erred on the other side, which did too much damage. As the hon. Lady has said, that led to the downstream access being set at the wrong price, doing considerable damage to Royal Mail. Competition coming in faster did not give Royal Mail the time to adapt, which it needed to do, because it had inefficient machinery and had invested in the wrong kind of machinery. As a result of the UK going faster than the rest of the EU, EU operators could cherry-pick the upstream business in the UK, but Royal Mail could not do the reverse in other markets, because EU competition was not being driven as fast as that in the UK.

It was important that this Government enshrined the universal service in law, abolished Postcomm and brought in Ofcom to regulate. At least that did something to sort out that upstream competition and level the playing field. Now, however, we have the same concern that, when it comes to the final mile, the cherry-picking is going to go faster than expected by the markets. It is important for the regulator to review that risk, to make sure that we do not again get into a situation where competition goes too far and too fast for Royal Mail to be able to adapt.

The important suggestion from this debate is to consider putting burdens and regulations on rival delivery companies to require them to meet the same standards as Royal Mail, because, if they do not have to meet those standards, they will obviously be able to undercut costs. That goes back to what I said in my earlier intervention: it was very much Postcomm’s philosophy that the customer was not the person having the letter delivered to them, but the person making the decision where to post it. A big commercial organisation may well look at the bottom line when it comes to deciding who to contract its delivery services to, and it is the poor bank customer who never gets their letter who is the victim. The feedback loop means that they have to complain to their bank, which then has to consider whether to change the contract for delivery services. Ofcom should take on board the important suggestion that it should set standards of delivery and quality so that rival companies cannot unfairly undercut Royal Mail.

I will say to Ofcom what I said to Postcomm: if it goes a bit too slowly in introducing competition, we will not get the full benefit of competition as quickly as possible, but if it goes too fast, it will be far more difficult for it to unravel the situation in the end. I urge Ofcom to review the situation and look at the conditions that would protect such a vital service that has served our rural communities so well.

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[Mr Alan Reid (Argyll and Bute) (LD)]

I congratulate the Backbench Business Committee on giving us time to debate this important issue, and my constituency neighbour, the hon. Member for North Ayrshire and Arran (Katy Clark), on introducing it in a very measured and sensible way. It is a pleasure to follow the hon. Member for Ynys Môn (Albert Owen), although I must correct him on one point. Before Postcomm introduced licence conditions for Royal Mail, it had refused to deliver to the lighthouse he mentioned, so not everything was perfect in the past.

The universal postal service is obviously extremely important to my constituency, with its scattered population and its many islands, and to all rural constituencies in the country. Royal Mail has an extremely dedicated work force, who go out in all weathers to deliver the mail, often up muddy tracks and in very difficult conditions, and they have a detailed local knowledge that private rivals simply do not have, as in the example given by my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith).

I supported the Postal Services Act 2011 because it enshrined the universal service obligation into law. That means that Royal Mail is legally obliged to deliver to every home and business in the country, as well as to collect from every post box in the country six days a week, at the same price throughout the country. To back up the legal requirement, the Act imposed on the regulator, Ofcom, the legal responsibility to ensure the sustainability of the USO.

We must remember that competition is not new—it did not just start with the 2011 Act—because it was introduced more than 10 years ago by the previous Government, who, in an all-too-familiar story, gold-plated a European directive. Competition means that delivery companies can cherry-pick cheap-to-deliver urban areas, and leave Royal Mail the more expensive job of delivering to sparsely populated rural areas, such as my constituency. As has frequently been pointed out, Royal Mail relies on its cross-subsidy from profitable urban routes to sparsely populated rural routes.

TNT Post has made most use of the ability to cherry-pick the areas to which it is cheapest to deliver. Its end-to-end business has expanded rapidly since it started trials for the service in west London in April 2012. According to Royal Mail, TNT aims to cover about 42% of UK addresses by 2017. As well as cherry-picking areas, companies such as TNT can also cut costs by delivering only on certain days of the week.

[Sir Robert Smith]

That point is very important. The Ofcom argument is about volume, but such companies are cherry-picking the very high margin, good-quality business.

[Mr Reid]

My hon. Friend makes an important point. Some forms of high-volume business mail incur lower costs than for people sending Christmas cards or postcards. Obviously, if a company has high-volume mail from a big organisation coming into its system, that is much easier for it to deliver.

In fairness, it should be pointed out that Royal Mail has some advantages. For example, it has a nationwide infrastructure and benefits from economies of scale.

Royal Mail is very concerned about TNT’s plans and sees them as a threat to its ability to deliver the USO. We must always remember that Royal Mail is a private company with a duty to maximise the revenue for its shareholders. Therefore, it may or may not be crying wolf. It is Ofcom’s responsibility to decide whether Royal Mail is crying wolf.

Ofcom has many tools at its disposal to protect the USO. It could impose regulatory conditions on other operators to level the playing field. For example, it could require other providers to deliver over a larger geographical area than just a small urban area or to deliver on more days in the week. Ofcom also has the power to introduce a universal service fund. It can review whether delivering the universal service places a financial burden on Royal Mail and determine whether it is fair for Royal Mail alone to carry that burden. However, that cannot be done before October 2016 without Government direction.

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[Mr Mike Weir (Angus) (SNP)]

I fully support the motion. From what the hon. Member for North Ayrshire and Arran (Katy Clark) said, the Greater London authority’s motion also sounds interesting and worthy of support.

The universal service obligation is vital to rural areas of Scotland. It is crucial not only for those who receive mail, but for the many small businesses that rely on the service to get their products to customers. The internet is a two-way street, but only if there is a reliable and cost-effective postal service. We are now told that that service is in imminent danger.

We should not be in this position. The danger to the universal service following the extension of competition, the privatisation of Royal Mail and the Postal Services Act 2011 was entirely predictable and, indeed, predicted. The only surprise is that it is happening so soon. Royal Mail cannot escape all blame because, when the Act was going through this House, we were told repeatedly by the Government and Royal Mail that it would not endanger the universal service. They were adamant that the modernisation project would keep prices down and protect the USO. They said that the existence of the USO was a huge plus for the business.

Less than a year after the flotation, Royal Mail is finding that the brave new world of private enterprise is full of difficulties. The company wants Ofcom to undertake an urgent review of the USO because it cannot guarantee that it will remain sustainable due to the impact of privatisation and, in particular, the expansion of TNT, which the hon. Member for North Ayrshire and Arran described in great detail that I will not repeat. Other competitors are cherry-picking the most profitable routes, which is putting pressure on Royal Mail and on its rural routes. That is a far cry from the claim when it was privatised that the universal service was a huge plus for Royal Mail, as it was the only company that guaranteed that it would deliver to every address.

Ofcom’s role, as set out in the 2011 Act, is bound by conditions that mean that, even if it takes on board Royal Mail’s request to look at the operation of the USO, there is no guarantee that it will take urgent action to tackle the problem. Royal Mail is seeking a review by Ofcom under section 45 of the Act, which is headed, “Fairness of bearing burden of universal service obligations”. I remind Members that the options that Ofcom has under those provisions are very limited. The first limitation is that it will inevitably take time for Ofcom to undertake the necessarily detailed review of the universal service. If Royal Mail is correct about the impact that TNT is having, do we have time to wait for Ofcom to decide whether to undertake the review, come to a conclusion and bring in its changes?

[Sir Robert Smith]

On that point, it would obviously make sense that the sooner it starts, the sooner it will be able to finish the review.

[Mr Weir]

I do not disagree with that; in fact, I am very keen for it to start, but even with the best will in the world, given previous investigations of this nature, it will take time, and time may be what we do not have. Does anyone really believe that it will be done in a few months? What will be the state of the USO if it takes 18 months or even two years to undertake such a review? What will Ofcom do? Does anyone in the Chamber really believe that the Government would go to competitor companies and say, “You cannot continue to expand” or “You must contract”? I very much doubt that.

It seems to me that its options under the 2011 Act are constrained. Under section 8—no one has mentioned this point so far—the Government could review the minimum requirements in terms of section 33, and therefore reduce the minimum requirements of the service. We should remember that under section 29 of the Act, at all times when securing the universal service Ofcom must also take into account

“the need for the provision of a universal postal service to be financially sustainable,”.

Does that not also open the door, for example, to raising the price of the universal service? I have previously made the point that with the abandonment of price controls over all other services, second-class post is now the only truly universal service, and even that could be at risk under the proposals. Many small businesses have already seen a rise in costs since privatisation, with an increase in first-class costs and small package rates.

The hon. Member for Ealing North (Stephen Pound) recently sponsored a meeting in this House at which Royal Mail presented its case for a review of the USO. I asked it directly whether it was seeking a diminution of the USO, but it denied that. I cannot say that I entirely believed that, but we must be aware that it is one possible outcome of a review, whether or not that is the company’s intention.

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[Ian Murray (Edinburgh South) (Lab)]

I am pleased to follow my hon. Friend the Member for Hayes and Harlington (John McDonnell). This is the fifth debate in a row in which I have answered for the Opposition on this subject, and my hon. Friend has always been the last to speak and has been curtailed in his contribution. I hope that he will not listen to his doctor, because we would certainly miss the passion and anger he brings to the Chamber and the good sense that he always talks. I would like to thank, too, the Backbench Business Committee for bringing forward timeously before the summer recess this really important debate. I pay a huge tribute to my hon. Friend the Member for North Ayrshire and Arran (Katy Clark) who, beyond anyone else in this place, has kept this issue of Royal Mail and postal services on the agenda. Without her passion and energy, we would not be able to take forward some of the significant contributions that we all want to see on a cross-party basis. The hon. Member for Northampton South (Mr Binley) was quite right to say that this is indeed a cross-party issue.

It is worth putting the issue into context. It is a six-day, one-price-goes-anywhere service that Royal Mail provides, and its posties deliver to 29 million addresses each day of the week. It is a particularly important service for small businesses as consumers, although we have not spoken much about small businesses in that context today.

The botched privatisation of Royal Mail, mentioned a number of times this afternoon, cost the taxpayer £1 billion and we have seen the architect of it promoted to Defence Secretary. We have lost a national asset that the public did not want to see privatised. The hon. Member for Angus (Mr Weir) was absolutely right to refer to the process in this place. Time and again the Business Secretary has said that “the overarching objective” of privatisation was “to secure” the “universal postal service”. Yet just a few months after that privatisation, we are back here debating the dangers to the universal service obligation. That is why we are calling on the Secretary of State to use any powers he has under section 44 of the Postal Services Act 2011 to try to put pressure on Ofcom to bring this forward, so we can make sure that the USO remains viable.

We know that the volume of letters is in decline. Last year alone, the volume fell between 4% and 6%. The wonderful work of all Royal Mail’s staff to try to cope with that decline is to be commended, but this does underpin the fragility of the universal service obligation. Its sustainability depends on Royal Mail being able to use the revenues from easier-to-serve urban areas to cover the cost of the nationwide network. It does not require a postal economist to see that the geography of the UK means that delivery to the Scottish islands or to rural Wales is an expensive business and can be sustained only by cross-subsidy from more profitable areas. The hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith), my hon. Friends the Members for Ynys Môn (Albert Owen) and for North Ayrshire and Arran, the hon. Members for Argyll and Bute (Mr Reid) and for Angus and my right hon. Friend the Member for Neath (Mr Hain), who all represent rural constituencies, mentioned that in their contributions.

The genesis of this debate is the need to consider the impact that direct end-to-end competition is having on Royal Mail’s ability to sustain the USO. Royal Mail has submitted a quite extensive report to Ofcom on the effect of end-to-end competition and the threats to the USO, encouraging Ofcom to bring forward the review promised for 2015. The report says in great detail that the alternative providers, especially TNT, have grown quickly and have plans to expand to over 40% of mail delivery by 2017. This expansion will cover only 8.5% of the geography of the UK. It is this “cherry-picking” of low-cost, profitable inner city postcodes that threatens the economics of the USO.

These plans have been calculated by Royal Mail to represent an approximate revenue loss of around £200 million, but it is not simply about profitability; it is about the viability of fulfilling its USO. The end-to-end competition issues are magnified by the lack of a level playing field with rival operators. That was mentioned by both my right hon. Friend the Member for Neath and my hon. Friend the Member for Hackney North and Stoke Newington (Ms Abbott).

Royal Mail is—rightly, I think—subject to a complicated matrix of delivery standards, reporting and service levels, but the competition is not. For example, rival operators are able to cherry-pick when they deliver. TNT Post UK provides an every-other-day service, which reduces its costs. Rival operators are able to cherry-pick the type of mail they deliver—business mail is the easiest to handle and the most profitable—and they are also able to put mail they do not want to deliver back into the Royal Mail system. As right hon. and hon. Members have said, where they cannot deliver, they need to put it back into the system. That highlights the importance of the universal service to rival operators. They require a viable USO to make their own business models work so it is really important for Ofcom to take that into account in any analysis.

Royal Mail’s ability to compete on price is constrained, as we have heard this afternoon, and it is unable to alter downstream access prices that now make up almost 50% of all mail volumes. There is an ongoing Ofcom investigation into access pricing, which the hon. Member for Edinburgh West (Mike Crockart) mentioned in one of his interventions. Rival operators use a plethora of alternative employment contracts which mean that their staff are lower paid and more insecure than those of Royal Mail. That has the potential to create a race to the bottom in postal services which, in turn, has the potential to undermine the universal service obligation.

Many Members have referred to TNT Post, because many of the issues that we are discussing are relevant to its business model. I realise that TNT has become a lightning conductor for concern about the liberation of the postal market and the impact that it could have on the USO, but it should be borne in mind that it is operating according to the regulations that currently apply to it. That is why it is important for Ofcom to look at everything in the round. Major issues involving TNT are well documented, but I know that members of its union, Community, are working closely with the company to eradicate zero-hours contracts and introduce the living wage and better conditions for its work force. It is worth emphasising that it would be very much in TNT’s interest as well for Ofcom to conduct its review now.

We are calling on the Government to pull all the levers that they can possibly pull to encourage Ofcom to bring forward its review. Even if Royal Mail’s arguments, contained in the dusty tome that it has submitted to Ofcom, are found not to be wholly valid, or not as compelling as it has suggested—and the hon. Member for Angus implied that they should be tested—that will be known only once they have been fully investigated. Ofcom’s current programme for the review means that we shall have to wait until the end of 2015, and that could be far too late. Those issues were also raised by my favourite Conservative Member of Parliament, the hon. Member for Northampton South. I am sure that there is a keen socialist hiding somewhere in that Conservative body of his.

If Ofcom began its review now, any recommendations for changes in the regulatory environment could be implemented very quickly to ensure that we do not lose sight of the universal service obligation. There is a danger that the door could be closed after the horse had bolted. Every Member who has spoken today has raised that issue. If Royal Mail is right, the planned 2015 review could be brought forward. Remedial action will be severely limited if that does not happen. Surely it is best for all concerned—Royal Mail, rival providers and, crucially, customers—for the future of the USO to be secured and for what lies on the horizon to be made clear as soon as possible.

Let me list Labour’s proposals for the future of Royal Mail as we approach the 2015 election. We would secure the USO well beyond 2015; we would prioritise the continuation of the inter-service agreement with the Post Office beyond 2022; we would ensure that there was an appropriate degree of price certainty for Royal Mail and its customers; and we would ensure that regulations provided a level playing field for all operators.

[Sir Robert Smith]

I am sure that, given the badge that the hon. Gentleman is wearing, he will also point out that by voting “no thanks” in the forthcoming referendum we will maintain the universal service for the whole United Kingdom, ensuring that subsidies continue to go to those difficult areas in Scotland.

[Ian Murray]

I did not want to go into the independence referendum arguments, for two simple reasons: first, they are incredibly complex, and secondly, the issue is not entirely relevant to the debate. I think that we are all slightly sick of the independence referendum. I hoped that we could be “independence free” today, but perhaps that is not possible after all. However, the hon. Gentleman is absolutely right. Whichever way we view the issue, it is clear from the geography of Scotland that it would be much more difficult and expensive to deliver postal services there following independence. Scotland’s postal services are cross-subsidised because of that geography. That is one very simple argument about what would happen to postal services in an independent Scotland.