RMP 06

Written evidence submitted by Save Our Royal Mail Campaign

Executive Summary

1. The Save Our Royal Mail campaign believes that the privatisation of Royal Mail will ultimately be detrimental to service user’s interests, particularly people in rural areas, small businesses and the elderly.

Universal service obligations

2. The fulfillment of the current universal service requirement is essential to the British economy. It is also vital for social reasons too. Yet it is expensive to maintain, particularly outside of urban areas. We believe that the privatisation of Royal Mail will mark the beginning of a fundamental change in the way Royal Mail undertakes its activities. Pressure from its new owners to cut loss making services will eventually see the denudation of the universal service requirements.

Prices

3. The service users who perhaps most need Royal Mail – small businesses, people in rural areas and the elderly are also those whom are most sensitive to price increases. We believe Royal Mail itself and price regulation has played a key role in holding postage prices down across the public and private carrier sectors. Privatisation will result in prices rising across the carrier sector.

Local Post Offices

4. The sub-post office network is dependent upon Royal Mail for its survival. We believe it was wrong to separate the two businesses as a precursor to privatisation. While the current ten year inter-business agreement (IBA) between Post Office Ltd and Royal Mail is welcomed there is nothing to suggest that a new owner of Royal Mail will be bound by its terms. Indeed as part of an inevitable drive to increase profitability the new owner is likely to exert more financial pressure on POL and hence threaten further the stability of the sub-post office network, particularly in rural areas.

Heritage

5. Royal Mail has a remarkable heritage dating back to 1635. We do not believe a new owner will be compelled to retain the key defining aspects of that heritage. A decision to rename the business Consignia a few years ago was stopped because Royal Mail is in the public sector. We believe postage stamps, pillar boxes, livery and the use of the Monarch will all undergo significant branding change. This has happened elsewhere in Europe when postal administrations were privatised.

Remaining successful in the public sector

6. Royal Mail is a successful public sector enterprise. It achieves a healthy profit and has clear modernisation plans. If user’s interests are to be protected in the long term it is best that Royal Mail remains publicly owned. Ministers have allowed utilities in the water and rail sectors to borrow capital privately without it impacting on the overall borrowing requirement. There is no compelling reason why, without the political will, Royal Mail cannot do the same.

Save Our Royal Mail

7. The Save Our Royal Mail campaign was established following the Government announcing its intention to privatise Royal Mail. The campaign is broad based with the support of hundreds of thousands of individuals as well as groups representing rural areas, the elderly and the small business sector.

8. The online aspect of the campaign has been particularly popular. Our online petitions have attracted circa 160,000 signatures calling on the Secretary of State to stop the privatisation of Royal Mail.

9. Public opposition to the privatisation of Royal Mail is widespread. A YouGov poll[1] for the Save Our Royal Mail campaign found that 67% of the public opposed the sale. Similarly 79% of respondents feared that prices would go up. By contrast a mere 13% felt that letter delivery services would improve post privatisation.

10. Small businesses are equally concerned about these proposals. A survey carried out by Create.net, found 87% of respondents used Royal Mail for business services. Of all on-line companies responding, 80% said they feared privatisation would lead to increased prices and a potentially worse service.

Royal Mail Privatisation and the threat to postal services

11. Many industry analysts and business leaders argue that the current universal postal service is living on borrowed time. Respected industry analyst Ian Senior[2] suggested:

“For the longer term, the universal service is just impractical…I would suggest in 3-5 years there will be only three maximum deliveries per week and that will be more than enough because most of what’s delivered now more and more is what’s called junk mail.”

As someone who knows more about postal economics than most, Mr Senior was even more downbeat about the long term future of the USO:

“Within 15 years there will be no Royal Mail or no traditional letters service at all.”

Along with postal academics, many businesses leaders in the carrier sector are equally convinced that the universal postal service will change fundamentally. James Greenbury, Chief Executive of carrier Parcel2Go said recently that the six day delivery will be outdated and redundant in ten years time.[3] Mr Greenbury also suggests the privatisation will herald an era of price rises as well.

12. The Postal Services Act 2011 S29 gives Ofcom a duty to secure the provision of the universal postal service. However, the same schedule sets out the requirement for the universal postal service to be “financially sustainable” (a) and “efficient before the end of a reasonable period and for its provision to continue to be efficient all subsequent times” (b)

13. This is aligned to an ongoing process of developing a more transparent way of measuring Royal Mail’s internal costs. Initially this was to facilitate the development of downstream access. However, a new owner will certainly want to develop a clearer understanding of how and where Royal Mail incurs its costs in order to reduce them.

14. Without doubt loss making rural services will come under close scrutiny. It can only be a matter of time before both Ofcom and Royal Mail come to the conclusion that reducing the requirements that make up the universal service obligation is the simplest and most cost effective way of ensuring those obligations are financially sustainable. Privatisation will enable this process to accelerate.

15. Despite Ministerial assurances, the current protections in place are not sufficient to guarantee the current requirements of the universal service for the long term. Future governments will not be bound by the approach of the current government. Ministers will come under significant pressure to allow Royal Mail to reduce costs and compete with private carriers on a more “level playing field”. Experience in other utility sectors including telecoms and water show that economic regulators favour full transparency, financial sustainability and ultimately competition. Equally for consumers the energy and rail sectors are examples of restructuring causing significant price rises to consumers.

Royal Mail privatisation and the threat to the post office network

16. The Postal Services Act 2011 requires Royal Mail and Post Office Limited to operate an inter-business agreement (IBA) for a period of ten years. This was agreed between the two businesses following the passage of the act.

17. Few businesses are compelled to manage their relationships in this way but this is a reflection of the unique nature of the postal service. The formal separation of the two businesses was one of a number of developments that have undermined the post office network. The privatisation of Royal Mail will further undermine the network.

18. Any new owner of Royal Mail will be bound by the principle of the inter-business agreement but not its specific terms. Undoubtedly the transactional relationship between RM and POL works to the financial advantage of the latter. A new owner will inevitably recoil at terms that patently disadvantage it. They will look to alternative retail outlets for their products and services, with the supermarket sector offering national scale. Royal Mail will also seek to reduce the transactional costs it incurs with Post Office Ltd, thus further undermining the post office network.

19. The post office network has been battered by the loss of key government/public sector contracts. Its revenue stream from Royal Mail activity is its largest and it can ill afford to see that decline. Yet privatisation makes that inevitable; the impact on the post office network, particularly in rural areas could be significant.

Royal Mail privatisation and the threat to prices

20. Most classes of stamps are now deregulated for pricing purposes.  That decision resulted in a significant price rise for first class stamps as well as for small packets and parcels. Inevitably those most sensitive to increases in postage costs are those who most rely on Royal Mail.

21. As is well documented, the growth of internet commerce has provided Royal Mail with significant and ongoing revenue opportunities. It is a vital cog in the wheel of on-line fulfillment. Most businesses use Royal Mail to send or receive goods. Small businesses in particular are reliant upon it. The importance of an affordable, efficient national carrier to the economy cannot be understated.

22. Many of these businesses and particularly small businesses are extremely sensitive to cost increases in their supply chains. Suffering from economic recession as well as high rent and energy costs, many would see their margins wiped out by large increases in postage costs.

23. People living in rural areas are similarly dependent upon Royal Mail. Again they would be adversely affected by reductions in the universal service and price increases. There is a great degree of fragility in the existence of rural communities. Often now the local post office, and the daily visit from the postman or postwoman is a major factor in ensuring people, especially older people, are not totally isolated and marginalised from participation in society. Bereft of shops but supported by the internet, Royal Mail has become increasingly more significant to the lives of people in rural areas.

24. There is little to suggest that the countryside will become a breeding ground for competition in postal services. Indeed, quite the opposite will occur as greater transparency and cost pressures expose rural postal services as uneconomic. The privatisation of Royal Mail will also hasten the demand for the removal of the universal tariff and the introduction of location based charging for letters and parcels. None of these developments will be of benefit to service users who live in rural areas.

25. Research by Saga[4] found that when the last price increase to first class stamps was introduced, older people reduced the number of Christmas cards they sent in 2012 by 50%. Clearly many elderly people remain price sensitive and withdraw from using Royal Mail if they feel stamp prices are prohibitively expensive.

26. It is claimed that Royal Mail privatisation is the right response to the increase in competition in postal services. The Government has said many times that Royal Mail cannot simply increase prices without regard for the impact this will have on its competitive position.

27. In reality the opposite is a much more likely scenario. Privatising Royal Mail will hasten significant price rises across the whole of the carrier sector. A combination of Royal Mail acting as a public service and price regulation have held down prices in both the public and private carrier sectors. As we have seen with the energy sector, competition has had little impact in constraining prices. The new owners of Royal Mail will want to increase what are by industry standards, quite thin margins. There are limited ways in which they can do this. Raising prices will be an almost immediate consequence of privatisation. Contrary to received wisdom, private carriers will be only too happy to then follow that lead.

Privatisation and the threat to Royal Mail’s heritage

28. Royal Mail is one of the oldest public services, dating back to 1635. It is both cherished and needed. The heritage of Royal Mail is a substantial one. Its livery, pillar boxes, the rural post bus service and its social obligations all form part of that heritage.

29. Much of this is because Royal Mail is publicly owned. No new owners would choose to undertake most of what the business does at a social level. Equally it is likely that a new owner would want to “modernise” Royal Mail’s branding. Renaming the business (again) is a potential step (Belgium Post has recently become BPost). One must ask why a new owner would want to maintain the traditional pillar boxes when European style tin boxes would be more cost efficient.

30. Much has been made by the Government about the so called “protection” it has bought in to retain the Monarch’s head on postage stamps. That protection (in the 2011 Act) is heavily qualified. Indeed it does not compel Ministers to take any action to ensure the Queen’s head – and subsequent Monarchs continue to appear on all postage stamps. A new owner would no doubt want to explore commercial branding opportunities on stamps where it is allowed to do so.

The better alternative to privatisation

31. The experience of privatising public utilities is a mixed one. There is certainly no public appetite to see Royal Mail sold. As we have seen with the energy and railway sectors, private ownership has not bought the consumer benefits that were initially imagined.

32. The reality is that this is an ideological fix rather than a rational economic response to the challenges Royal Mail faces. Ministers are keen to suggest that Royal Mail must be free to make its own decisions. We are constantly told that the business cannot do so much as buy a computer without government approval.

33. If that is the case it is only because Ministers choose to operate such a control regime. That is why it is an ideological choice not an economic one. Should Ministers decide to allow it, Royal Mail can be free, in the public sector, to manage its own affairs.

34. However, there is still a strong case for the ultimate accountability of Royal Mail to government and Parliament to remain. Examples of why this is necessary are many. From the empiric – e.g. price regulation or the maintenance of the universal service, to the more “political” e.g. housing allowances for senior executives, or daft ideas such as changing the name of the business to Consignia.

35. Privatisation will remove all controls on Royal Mail and this will result in reduced services in rural areas, increased prices and an escalation of pay and bonuses to senior directors. The better alternative is to allow Royal Mail to continue to thrive in the public sector; give it borrowing powers that are independent of the Governments; remove Ministerial oversight in all but the most exceptional circumstances; maintain an active regulatory regime that defends the interests of consumers first and foremost.

Conclusion

36. The privatisation of Royal Mail is imminent. The opinion of this committee will be extremely important, possibly the last opportunity for Parliament to ask Ministers to pause their plans and re-evaluate their priorities.

37. The Save Our Royal Mail campaign urges the Committee to call upon the Government to halt the sale, pending a far more in-depth analysis of the challenges facing the business and a realistic assessment of how it can continue to thrive in the public sector.

30 August 2013