Royal Mail Proposals
A level playing field for Royal Mail
Key Points
•The government has published a Bill and policy document on the Royal Mail.
•The package aims to ensure a level playing field for Royal Mail; secure its future in public ownership; and protect the universal postal service.
•As part of these measures, Royal Mail is to be enshrined in legislation as a publicly owned company. No government would be able to change this status without further primary legislation in the future.
•The Bill will say Post Office Ltd. is to be owned by government in its entirety. Similarly, no government would be able to change this status without further primary legislation in the future.
•The universal service – letters collected and delivered anywhere in the UK, six days a week, for a single, affordable price - is to be written into the legislation.
•The current regulator, Postcomm is to be abolished. Ofcom is to regulate postal services and to have as its primary duty maintenance of the universal service.
•Unlike the current regulatory system, it will be written into the Bill that Ofcom must give precedence to maintaining the universal service if there is a tension with any of its other functions.
•Ofcom will have powers to clarify Royal Mail’s costs and therefore ensure that other companies’ access to Royal Mail’s network is regulated on a fair basis.
•Enabling powers for a compensation fund will be in the Bill. This would not be introduced now but would be a reserve power. It could mean Royal Mail’s competitors have to pay towards maintenance of the universal service if it puts an unfair burden on the company after modernisation has taken place.
•So our package of changes says:
-No to privatisation. Royal Mail will remain in public ownership.
-No to downgrading the universal service now or in the future.
-Yes to a level playing field for Royal Mail
-Yes to greater security on Royal Mail pensions.
-Yes to outside investment and management expertise in Royal Mail.
-Yes to a new system of regulation that works with the company and workforce, and that puts maintenance of the universal service as the top priority.
•The top and bottom line is that Government policy will keep Royal Mail in the public sector and our legislation makes this clear. But the Royal Mail will run out of money to sustain its current universal, six day service unless its pension fund deficit is solved and its business transformed.
•If the taxpayer is going to pay for the pension fund deficit, the taxpayer must get back a full, improved letters service in return. The Government cannot do one without the other. The Royal Mail's workforce will have a secure pension if the other changes are made.
1.The Government’s commitment to the Royal Mail
Since 1997, the Government has repeatedly demonstrated its commitment to a publicly owned Royal Mail.
•Over the past 7 years, since Royal Mail became a public limited company, we have made available funds totalling £3.5bn.
•Prior to 1997, management and unions were pressing for Royal Mail (then the Post Office) to be given greater commercial freedom (including the ability to make joint ventures and acquisitions). The Postal Services Act 2000 delivered this.
•The CWU were also pressing for independent regulation and a strengthening of the consumer representation body. The Post Services Act delivered this.
•The CWU wanted an RPI – x price control for Royal Mail’s monopoly services. Postcomm adopted this.
•The Government provided £500m in loans in 2001 to fund the acquisition of European parcel companies (notably German Parcel) that now comprise Royal Mail’s successful purchase European logistics arm, General Logistics Systems (GLS).
•In 2007, the Government agreed to provide £1.2bn in debt facilities to assist Royal Mail’s modernisation plans.
•Also in 2007, the Government agreed to the use of £850m of reserves on the Royal Mail balance sheet to support the pension fund.
•The Government put the requirement for the provision of the universal postal service into primary legislation for the first time.
•The Government is fully committed to a post office network that offers a broad range of financial services throughout the country, supporting both financial and social inclusion.
•We have strongly supported POL’s Joint Venture with the Bank of Ireland to offer a wide range of financial products.
•We have ensured that the Post Office retained the contract for the POCA, meaning that 4 million POCA users could continue to access benefits and pensions at their local Post Office.
•We are now working with the Select Committee on Business and Enterprise to examine what further services the Post Office should offer.
•It is because of our commitment to a publicly owned Royal Mail that we are proposing changes to turn round the Royal Mail from an organisation facing decline to one that thrives and prospers.
2. The challenges facing Royal Mail
The Royal Mail is being hit with a double whammy.
Firstly, its pensions deficit. The pensions deficit which last year stood at £5.9 billion and could be significantly higher by the time of its next valuation due this year. The size of the pensions deficit is 75 times the company’s profits. On an accounting basis, Royal Mail had a pension deficit larger than any FTSE 100 company at the start of 2008. It cannot afford its growing deficit payments.
Secondly, the volumes of letters being sent are falling year on year. Since 2005, volumes carried by Royal Mail have decreased by 7%. Royal Mail used to handle 84 million items a day, it now carries 78 million.
The challenges facing Royal Mail:
•On an accounting basis, Royal Mail had a pension deficit larger than any FTSE 100 company at the start of 2008. The pensions deficit which last year stood at £5.9 billion and could be significantly higher by the time of its next valuation due this year.
•The size of Royal Mail's pension deficit, and its volatility, adversely affect its ability to finance and invest in its business.
•This is combining with a structural change in the postal market which is seeing the volumes of letters being sent falling year on year. Since 2005, volumes carried by Royal Mail have decreased by 7%. Royal Mail used to handle 84 million items a day, it now carries 78 million.
•The Hooper Report estimates that, last year, the shift of mail to new technologies cost the company £500 million in lost profits – five times more than the loss of revenue due to competition from other mail companies. While changes to regulation are part of the Government’s package, making the other mail companies go away is not the answer to the Royal Mail succeeding.
•Labour relations are extremely difficult which has hindered the progress of necessary change in the company. There is also strong tension between Royal Mail and Postcomm. Many believe that Postcomm is too focused on the introduction of competition, at the expense of the regulator's primary duty to protect the universal service, and Postcomm is frustrated at the slow pace of change in Royal Mail.
•Royal Mail is much less efficient and less profitable than its main European peers. Profits are lower than in other countries and the Royal Mail lags behind its international counterparts.
•Post Office Limited (POL) depends on a government subsidy of £150 million a year. And in order to maintain a network of around 11,500 branches providing easy access for whole population, particular in rural and urban deprived areas, there is likely to be a continued need for subsidy from Government, even after 2011.
3. The alternatives examined
Alternatives offered by critics of the package of changes proposed by the Hooper report say that:
1.They accept proposals for Government to accept responsibility for the historic liabilities for the pension deficit, but reject proposals for a strategic minority partnership.
2.Outside investment is not needed because the Government has allocated money to modernisation, half of which has not been spent.
3.The Post Office could be turned into a ‘People’s Bank’ instead.
These alternatives do not offer solutions to the scale of challenges the Royal Mail faces for the following reasons. Taking each of these alternatives in turn:
1.Action on the pensions deficit and regulation, but no minority partnership:
This would mean the taxpayer footing the bill for a “no strings bail-out” of a pensions deficit anticipated to be around £7 billion or even higher.
2.Modernisation investment is already available:
The commercial agreement this refers to is actually a £1.2bn loan that needs to be paid back on commercial terms. And it does not face up to the scale of the challenge the Royal Mail faces, not least from a ballooning pensions deficit which last year stood at £5.9 billion and could be significantly higher by the time of its next valuation due this year.
3.Turning the Post Office into a People’s bank:
We are warm about this idea. The Government is keen to work with Post Office Ltd to expand its financial services, based on its position as a trusted brand with a strong reach in both urban and rural communities. The Post Office already offers a wide range of financial services and we agree with those who argue that the Post Office should fully realise its potential in this area. The Government is fully committed to a post office network that offers a broad range of financial services throughout the country, supporting both financial and social inclusion.
But whilst these changes have the potential to offer a more prosperous future for the Post Office they cannot be the answer to the huge challenges that Royal Mail faces. The Post Office currently represents around only 13.75% of the turnover of Royal Mail. It depends on a government subsidy of £150 million a year. And in order to maintain a network of around 11,500 branches providing easy access for whole population, particular in rural and urban deprived areas, there is likely to be a continued need for subsidy from Government, even after 2011.
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