Royal Mail

My Lords, I thank and congratulate the noble Lord, Lord Clarke of Hampstead, for initiating this timely debate, which follows the House of Commons Trade and Industry Committee report on Royal Mail after liberalisation. I pay tribute to the management and work force of Royal Mail, who work hard in a difficult industry to provide a service to every citizen of our country. We are not easy to satisfy, and their contributions should not be underestimated. Together they are to be congratulated on, among other achievements, the Mail Centre Efficiency Initiative and on a recent dramatic improvement in industrial relations. However, Royal Mail faces a uniquely difficult period. Liberalisation of its market is being forced on it at a time when it is in almost the direst financial situation imaginable. On a net asset base of about £2 billion, it estimates that it has a deficit on its pension fund, according to the committee’s report, of £4 billion, or about £70 for every member of our country’s population, and that it needs more than £2 billion to modernise its infrastructure to enable it to face its post-liberalisation competitors. Will the Minister give us the Government’s views on the estimate regarding the investment required in infrastructure by management, and can he explain the Government’s own plans regarding the funding for that? As for the pension fund deficit, I mentioned a figure of £4 billion, which was given by Royal Mail’s management in evidence to the committee. However, at 31 March 2003, the deficit had been reported as £2.5 billion. Could the Minister explain how such a huge difference arose, incurred over a relatively short period, which it is hard to believe happened only because of a change of accounting standard? Given that it is hard to imagine that management will be able without the shareholders’ support to develop a viable plan to eliminate that deficit and to fund the capital investment required, could he also explain the Government’s plans on that? We note that dividends have been waived since 1999. It would be interesting to know from the Treasury’s perspective to what extent the dividends waived have been replaced by the additional annual tax revenue from the pension fund following removal of ACT for pensions. Royal Mail made a loss on operations of £110 million last year. Although it is apparent that this is being turned around, the committee’s report refers to suggestions that price control be reopened as a way of increasing profit, to help tackle the pension fund deficit. In that this would presumably mean an increase in the price of a postage stamp, would it not represent commercial suicide in view of liberalisation, which would simply lead to a loss of business to competitors, exacerbated by falling volumes? The current annual funding of £150 million provided by Government is due to end in 2008. What are the Government’s intentions to fill that particular gap? We are told there is evidence that the approach of liberalisation created an incentive for efficiencies and improvements in quality of service. Doubtless this is true, but surely suggesting that the value of such improvements in the short term will make a material impression on the mountain of funding required to put the business on a sound footing is just a trifle optimistic. The Government’s plan appears to be to resolve the current funding crisis over a period of many years out of retained profits, by which time a good number of the employees will presumably be expecting to draw their pensions. Furthermore, competitors will have reaped the advantage that Royal Mail’s antiquated sorting technology has given them. In short, it will be too little, too late. The final elimination of Royal Mail’s monopoly for packages under 50 grams in weight apparently took place at the start of this month, three years earlier than required by the EU directive, as the noble Lord, Lord Clarke, has mentioned. The committee was rightly sceptical about the reasons, saying:"““we regard Postcomm’s choice of dates for the move to full liberalisation in the UK postal services market to be an untimely one””." We are told that business post is subsidising private post to the tune of 8p for second-class post and 5p for first-class post. Given that a high proportion of business users can reclaim VAT, Royal Mail’s VAT exemption, combined with the fact that it is anyway the more lucrative part of the business, might be expected to mean that business post will be the area where competitors focus their attack. Will this result either in price control being lifted dramatically on private post, as Royal Mail is forced to rely on it as an increased proportion of its overall under-50-gram business; or, especially given the concerns I have just expressed, that competition will restrict scope for this, with the universal service obligation being jeopardised? As the noble Lord mentioned, concerns have been voiced by the magazine industry, first, that Postcomm’s recommendation to remove Royal Mail’s second-class and magazine delivery service from price control from 1 April will effectively expose the magazine industry to ransom by what is likely to remain, in this area at least, a monopoly nationwide delivery service; and, secondly, that what is termed ““pricing in proportion””, representing a move from weight-based to size-based pricing, recently approved by Postcomm, may lead to cost increases of up to 50 per cent for some magazine titles, which might not be mitigated by the so-called ““mitigation scheme”” put in place by Royal Mail because the thresholds have been set too high. Will the Minister comment on these points? The universal service obligation is a vital part of Royal Mail’s service to the nation. The latest annual report says that Royal Mail is making losses of over £200 million on nearly 90 per cent of its price-controlled volumes, which it has to provide under the universal service obligation. However, the committee’s report says:"““Royal Mail later confirmed that in 2004/05 profits from the universal service area were in the region of £400 million””." How are these two statements reconciled? The national network of post office branches contains about 14,500 post offices, of which about 8,000 are rural branches. It is widely accepted on all political sides that the network of post offices provides a valuable service to the community, especially in deprived areas where its value is measured in more than mere financial terms. This network has been savagely and, some have suggested, rather thoughtlessly cut. There were over 18,000 post offices as recently as 5 years ago. There are serious concerns about rural closures. Concerns have also been raised by the CWU about the urban closure programme; about the suitability of the companies to whom certain offices, especially in north-west London, will be franchised; and about the transparency of the franchising process as a whole. How can the Minister comfort us that it has been undertaken with due care and attention? There are periodically reports of proposals to issue shares to employees. Can the Minister tell us where these plans have got to, and what percentage of the equity is being considered for the giveaway? The committee reports that the explanations offered to it were,"““far from complete and no coherent process for how these shares would be transferred or traded has been given””." If a plan exists, that would appear to be inappropriately evasive. Once again, I thank the noble Lord, Lord Clarke of Hampstead, for initiating this debate and I look forward to the Minister’s responses to the points that I and he have raised and to those which other noble Lords will raise.