Royal Mail

My Lords, I first thank the noble Baroness for giving me the time to respond to this extremely interesting debate and congratulate the noble Lord for securing this debate on the Royal Mail. The noble Lord has spoken eloquently and knowledgeably about the issues affecting Royal Mail and I am grateful for the opportunity to respond. I have also been involved with the Post Office for many years—not as long as the noble Lords, Lord Clarke and Lord Young—but for 25 years, since I sat on the Carter committee that reviewed the performance of the Post Office 25 years ago. I also have a great affection for what is a great British institution. Looking back, what strikes me most is that, over that period—and it continues today—there is a constant need for the Post Office to adapt and change to the new circumstances in which it finds itself. The Government are entirely in agreement with the noble Lord, Lord Clarke, that the Royal Mail should serve the national interest. Royal Mail’s ““pipeline”” is a vital part of the nation’s communications’ network. It enables businesses to communicate with each other and with their customers and enables social users to send letters, cards and parcels from one end of the country to the other. The noble Lord raised the basic issue of the objectives of the Government for the Royal Mail. The Government’s stated ambition for the Royal Mail is for a publicly-owned company fully restored to good health, providing customers with an excellent service and its staff with rewarding employment. The Government’s primary policy interest is to ensure the provision of the universal postal service—a daily delivery, every working day, at an affordable uniform price to every address in the country. We all want that to take place in the context of the needs of people in the 21st century. Since July 1999, when we brought forward a White Paper entitled Post Office Reform: A World Class Service for the 21st century, the Post office has made very good progress. In 2001–02, the company was showing a pre-tax loss of £1.2 billion including a £318 million loss on its operations. The company was losing over £1 million every working day and its costs needed to be brought under control. Nobody could have disputed that restructuring and reform of Royal Mail was needed. In 2002, Allan Leighton, the chairman of Royal Mail, then known as Consignia, announced a three-year renewal plan to restructure its postal services. The aim of this plan was to reduce costs, wipe out these losses and return the business to profit by April 2005. I am pleased to say that Royal Mail has returned to profitability and the management has got to grips with costs and reduced overheads. In 2004–05, the company’s profit from operations was £537 million. The latest figures, published in mid-November, for the half year to 30 September 2005 show that the Royal Mail Group made an operating profit of £159.3 million. These interim results show a 20.5 per cent improvement on the previous year. Nobody should underestimate Royal Mail’s achievement. It is not in a dire condition, as the noble Lord, Lord De Mauley said, although it faces big challenges. The chairman, board, management and workforce should all be congratulated on their efforts to turn the company around. Not only is the company’s financial performance improving, the company is also showing its best performance yet in terms of quality of service. Figures for the first half of 2005–06 showed that 93.9 per cent of first class letters were delivered the next day. It is a performance that not only beats the company’s target, but also beats any performance that Royal Mail has ever achieved in the past. A recent Postwatch survey showed that between the end of September and the end of October last year, 95 per cent of first class letters in the survey were delivered the next day. That is an enormous improvement on the performance two years ago. We welcome these figures. Royal Mail, and, in particular, the dedicated postmen and women up and down the country who have put in a lot of hard work to achieve them are to be congratulated. As has been mentioned in this debate, industrial relations in the Royal Mail have also shown a great improvement in recent years. The number of days lost in the letters business through industrial action in 2004 and 2005 respectively was 7,541 and 4,283. That compares with nearly 85,000 in 2003. This has been achieved at a time of huge change in the structure of the business. The unions and management have both contributed to this improvement—as has the input from others such as the noble Lord, Lord Sawyer, who has made a valuable contribution with his independent reports on the state of industrial relations in the company. In addition, in recent years, the union has realised its ambition of £300 per week for employees and a five-day working week. I was pleased that the noble Baroness, Lady Prosser, explained what progress has been made. I also agree with the noble Lord, Lord Sawyer, that the unions and management need to develop ways of handling change in the future, because much change has to take place. While the Royal Mail has turned around its performance, it still faces many challenges and must modernise and radically reform itself if it is to compete head to head with other means of communication and its European rivals. For example, in common with many other companies, Royal Mail faces a pension deficit of £4 billion—a point raised by the noble Lord, Lord Clarke. The pension deficit has arisen because of market changes in the value of the pension fund assets—equities—the life expectancy of members of the scheme; and the way in which pensions are reported on company balance sheets. Less than five years ago the pension fund was more than £700 million. What we have seen take place in the Post Office mirrors what has happened in other public companies which badly underestimated the needs for pensions and took pension holidays. We consider that the costs involved in tackling the deficit are inherent costs of the business and as such should be reflected in prices. That was made clear in our response to Postcomm, regarding its recent consultation on the next price control and this has been reflected in Postcomm’s final price proposals. Another challenge that the Royal Mail faces is that mail volumes have decreased recently by 1.2 per cent. As the noble Baroness, Lady Miller, also pointed out, the company will continue to face the challenges of e-substitution and increased competition both in the UK and overseas. Today’s debate has raised all of these key challenges, so let me try to deal the specific points one by one. The noble Lord, Lord Clarke, raised the question of market opening. The Government believe that competition will encourage Royal Mail to continue to improve its products, quality of service and operational efficiency. I was pleased that my noble friend Lord O’Neill reinforced this point. I would say to the noble Lords, Lord Dearing and Lord Hoyle, that of course there is never any best time for competition or opening of markets. I am sure that the noble Lord, Lord Dearing, with all his experience of the DTI, will have heard many times the argument why it is not the best time for competition; but it usually turns out that if you do not take those opportunities, competition never comes. The decision to open the market from 1 January 2006 was taken by Postcomm. The noble Lord, Lord Christopher, raised some questions about that decision. Postcomm’s duties and functions are set out in the Postal Services Act 2000; its primary duty is to ensure provision of the universal service, and decisions must be taken against that background. The decision to open the market followed a full public consultation and was supported by, among others, Royal Mail management. Postcomm believes that the decision it has taken is in the best interests of UK consumers. The Government’s manifesto said it would look at the impact of liberalisation, and it will do so, but only once the market has been opened and there is an impact to assess. There is no timetable for the review, but we will monitor the market now that it has been opened. I should point out in this context that other member states, notably Finland and Sweden, already have fully opened postal markets. The Dutch have said that their market will open from 2007, and the Germans have indicated the same. The Government will continue to press for full liberalisation across the rest of Europe, to happen as early as possible to ensure a level playing field. Another major theme, which the noble Lord, Lord Dearing, raised, is the whole question of productivity and the investment that is needed to achieve it. The Government recognise that Royal Mail has fallen behind its competitors in terms of mechanisation and productivity. In particular, the Dutch and the German postal service operators do considerably better. For example, the number of letters delivered per Royal Mail full-time equivalent employee in 2003 was 117,000, compared with 130,000 in Deutsche Post and 156,000 in TPG. Another important figure is that the percentage of letters walk-sorted—that is, for a postman’s round—by machine for Royal Mail is 50 per cent, compared with 90 per cent to 95 per cent for Deutsche Post and TPG. Postcomm has also recognised the need for investment and its final proposals for the next price control make provision for £1.2 billion of capital expenditure over the next four years. In that context, the noble Lord, Lord Dearing, also raised the question of funding of the Post Office and the extent to which the Government have provided it with funds. The Government have made very substantial funds available to the company in recent years. In December 2002, we put in place facilities totalling more than £1 billion to help the company to implement its renewal plan for the letters businesses. In 1999, we made available some £500 million to enable the Royal Mail to acquire German Parcel, which has now been transformed along with other acquisitions into the Royal Mail group subsidiary, General Logistics Systems, which made a profit of £43 million in the first half of the financial year—up from £23 million in the corresponding period last year—and is expected to have profits close to £100 million by the year end. So when efficient management is brought to bear, we can compete very well. Comparisons have been made about the level of funding that has been available to Royal Mail’s European competitors, in particular with the part-privatised Deutsche Post and TPG. The Government have made funds available of over £3 billion since 1999 to Royal Mail to support the restructuring of the mails business; investment in acquisitions; and the modernisation and restructuring of the post office network. There has been a lot of speculation in the media recently about the Government investing a large sum of money in the business. I should say that the Government have not agreed to inject £2 billion into Royal Mail, despite some of the reports saying that we have. But what we have said is that for the shareholder to invest in the company, Royal Mail would need to put an investment case to the Government in exactly the same way as a private sector company would approach its shareholder. The impact of Postcomm’s final proposals for the regulatory settlement is being assessed, and future investment must be on a commercial basis. The Government also have to assess the affordability of any investment against other government priorities. I turn to what noble Lords have said, quite rightly, is a different and major other debating issue—the issue of the social network and urban reinvention. The issue was raised by the noble Lords, Lord De Mauley and Lord Cameron, and is an enormously important subject. Of course, it is not only the letters side of the business that faces the challenge of change, as noble Lords have said. The future of the post office network is also a matter of national concern and because of the social impact of the network, Government have quite a different interest here. The world has changed beyond recognition in recent years. If the post office network is to survive and thrive it needs to change significantly. The Government want a post office network that can prosper on the basis of today’s and future needs, not on those of 20 or 30 years ago. But in doing so, we also have to face up to present reality. Major sectors of the network are losing very substantial amounts, including the rural network, the directly managed ““Crown”” offices and the deprived urban area network. Clearly the status quo is not sustainable. Several important steps to restructure and revitalise the Post Office have already been taken but, once again, massive challenges remain. Decisive action in the form of the urban reinvention programme was taken to restructure the urban network. This saw almost 2,500 office closures while ensuring that, nationally, 99.3 per cent of people in urban areas still live within a mile of their nearest post office. We now need to address the issues facing the social network of sub-post offices in rural and urban deprived areas. It is no longer clear that the needs of those communities or the most disadvantaged are best served by the present traditional, costly and inflexible network structure. The social network payment of £150 million a year from the Government was introduced in 2003–04 as a transitional measure against the background of the migration to direct payment of benefits. It was intended to provide a financial breathing space in which Post Office Ltd would develop new products to replace lost income from traditional business and would identify more cost-effective ways of delivering its services. It is becoming increasingly urgent that we find innovative and more cost-effective ways of delivering post office services to rural and many urban deprived communities. We cannot ignore the fact that large numbers of rural offices have very low levels of utilisation, with some 1,600 offices averaging fewer than 100 customer visits a week. The 800 smallest rural offices average 23 customer visits a week, generating average losses of more than £6 per customer visit. The next smallest 800 offices, averaging 85 customer visits a week, generate average losses of £2.50 per customer visit. By any standard, that is neither a sensible or sustainable use of financial resources for either Government or Post Office Ltd. Even in the busiest rural offices, each transaction is loss-making on average. We now need to focus much more clearly on provision of post office services, not post offices themselves, and find innovative methods of delivering them. Post Office Ltd is, therefore, running a series of pilot trials of alternative, innovative means of delivering services to rural communities. There are four of these main outreach options: a full service offered by the postmaster/mistress or a fully-trained employee using either kit permanently at a site or portable kit as required; a partnered operation, which is a basic service, with access to cash, bill payments, stamps, weighing and leaving parcels being provided by another retailer alongside their main business, such as a petrol station or pub, but supervised by the core sub-postmaster who provides the site with the products required; a home service; and a mobile service. In all of the pilots, the service hours have been set at levels much more commensurate to the level of business generated in that community, and to eliminate the wastefulness of long opening hours with little or no custom. This is where our efforts and those of the Post Office should be directed, because we can give people a much better service that is economically viable for the future. I should like to touch on the subject of privatisation and employee shares, which a number of noble Lords raised. The Secretary of State for Trade and Industry has made it clear that the Government will not privatise Royal Mail. The Government’s ambition is for a publicly-owned Royal Mail fully restored to good health, providing customers with excellent service and its employees with rewarding employment. In this context I assure the noble Lord, Lord Brooke, that we are not ruling out options that could increase workers’ involvement, including an employee stake. We think this is at least worthy of examination in the context of a publicly-owned business where employee shares cannot transfer to non-employees. I should also add that the Government have not yet received any firm proposals from the company about an employee share scheme, and therefore we have not drawn up a detailed policy response to it. I shall address the comments made by my noble friend Lord Clarke about the appointment of Allan Leighton as chairman. I think his comments are totally inaccurate. As the chairman of Royal Mail is appointed by the Secretary of State, my department oversaw the process, which was conducted in a manner totally consistent with the Office of the Commissioner for Public Appointments guidelines. The post was advertised and Allan Leighton applied in the normal way, along with others. He was shortlisted, and the scrutiny panel considered him to be the strongest candidate. This recommendation was accepted by Ministers, and I think history has shown that it was the right appointment to make. I should also add that there is nothing in Allan Leighton’s terms of engagement that relate to any future privatisation or part-privatisation of the Royal Mail. The noble Lord, Lord Brooke, raised the role of Sir George Bain, who is giving ongoing advice and support to the Secretary of State. It is not envisaged that the work he is doing will necessarily be drawn together in any single report. I shall deal with a final couple of points. The noble Lord, Lord De Mauley, raised the question of the increase in the pension deficit, which went from £2.5 billion to £4 billion. This was due to the application of FRS17, which has much more stringent requirements for the actuarial valuation. That is why the increase was so dramatic. My noble friend Lord Clarke raised the question of whether the Government will forego dividends. The Government agreed to do so during the renewal plan period, and this was thought appropriate, given Royal Mail’s poor financial position. A decision on future dividend policy is yet to be made. Future policy will be linked to the outcome of price control and resolving the balance-sheet issues the company is facing. Like all shareholders, the Government wish to see a return on their investment in the form of dividends, although this is not our only measure of shareholder value. I have found today’s debate extremely useful. The standard of contributions has been particularly high. In turn, I hope I have been able to offer some greater insights into the Government’s policy towards Royal Mail, and also to convince your Lordships that the national interest lies at the heart of it.