Written Evidence submitted by the Mail Competition Forum (MCF) (USO 01)

Executive Summary

The Mail Competition Forum supports and encourages all forms of competition in the UK postal market and firmly believes that mail users have benefitted from considerable improvements stemming from the service choices offered by efficient competitors to Royal Mail.

We believe any constraints on market competition in whatever form would be unnecessary, disproportionate and contrary to the general duty on Ofcom (as the regulator for postal services) under the Communications Act 2003 “to further the interests of consumers in relevant markets, where appropriate by promoting competition”. The MCF further believes that limitation and control on competition may be illegal under the 3rd EU Postal directive.

Statements by several independent and expert sources (including the Department for Business, Innovation & Skills, Ofcom, the European Commission, Consumer Focus and other research) that competition in the postal market is beneficial and is not a threat to USO provision.

The Mail Competition Forum believes and provides evidence that Royal Mail has persistently failed to achieve reasonable productivity improvement and it is that inefficiency, rather than the commercial effect of efficient competition, which represents the major threat to USO provision.

1.   Introduction

1.1.       The Mail Competition Forum (MCF) is a non-profit making discussion forum and has the objective of supporting the development of conditions in the UK for fair, vibrant and sustainable competition to Royal Mail within a stable and undistorted market.

1.2.       Member companies of the MCF include: CFH Docmail, Citipost AMP, City Link, DX Group, ONEPOST, Racer Consultancy Management, Secured Mail Group, Whistl and UK Mail.

1.3.       The MCF supports and encourages all forms of competition in the UK postal market, where such competition is efficient and benefits postal users. It believes that such healthy competition is a vital catalyst to Royal Mail in pursuing improved efficiency (as it is to all mail service providers).

1.4.       The MCF is aware that the BIS Select Committee inquiry has been prompted by concerns raised by Royal Mail suggesting that that direct delivery competition is threatening the provision of the Universal Postal Service (the “USO”).

1.5.       Royal Mail has made a public submission to Ofcom and the MCF believes it is for Ofcom to respond appropriately to submission (Ofcom is sufficiently knowledgeable and has a statutory duty to ensure USO provision).

1.6.       However, we note that Royal Mail in its submission to Ofcom (and, we assume, in its input to the Select Committee) seems to have conflated the duty held by Ofcom with Royal Mail seeking to further its own commercial interests by telling Ofcom what actions must be taken.

1.7.       In particular, Royal Mail is asking Ofcom to limit and control direct delivery competition (section 6.4 of Royal Mail’s submission).

1.8.       The MCF firmly believes that any action by Ofcom to control mail market competition in whatever form is unnecessary, would be disproportionate and would be contrary to the general duty on Ofcom (including in relation to postal services) under the Communications Act 2003:

“It shall be the principal duty of OFCOM, in carrying out their functions…. to further the interests of consumers in relevant markets, where appropriate by promoting competition” [section 3(1)(b)]

1.9.       Further, the MCF believes that such limitation and control on competition may be illegal under the 3rd EU Postal directive, as since 1st January 2011 such constraint on competition is no longer permitted as a means to finance provision of the USO; for example:

“In the light of the studies carried out and with a view to unlocking the full potential of the internal market for postal services, it is appropriate to end the use of the reserved area and special rights as a means of ensuring that the universal service is financed” [2008/6/EC, Recital 25]

2.   Benefits of Competition to the UK mail market

2.1.       Since the UK mail market became more open to competition following the Postal Services Act in 2000 the MCF firmly believes that mail users have benefitted from considerable improvements stemming from the service choices offered by efficient competitors to Royal Mail.

2.2.       The advent of ‘down-stream access’ services in 2004 in particular and the development of a wider range of services including direct delivery of items by companies other than Royal Mail, have allowed mail users and mail recipients to gain from choice in postal service provision and new postal services.

2.3.       The benefits which competition in the mail market provides to mail users include:

Significant savings: MCF estimates competing services save mail users some £145 million annually (based on annual volumes carried wholly or largely outside Royal Mail’s ‘end to end’ services of c7¼ billion items and typical saving of about 2p per item compared with equivalent Royal Mail retail services)

Wider range of service specifications and benefits, with choices in posting-to-delivery speeds, later collection times, various tracking options, secure delivery, disguised items, extensive management information and service performance commitments

Innovation: The provision of choice in mail services and the variety of service specifications offered are themselves innovations, compared to the previous state monopoly position.

2.4.       More importantly perhaps, in terms of ensuring mail remains a key communications medium, competitors to Royal Mail have also brought innovation to mail services in vital areas such as hybrid (physical-to-electronic) mail. Hybrid mail combines electronic communication (including mobile telephony and the internet) with physical communication to allow business and social users to send items using the electronic devices common in everyday life; a photo taken on a mobile phone in Australia can be delivered as a postcard in the UK the following day. (This is an important development of mail services, in which Royal Mail seems to have very little interest). Other, specific innovations include services where a photograph is provided of the door to which delivery has been made (to give confirmation of correct delivery) and where tracking of all items is to the door.

2.5.       The MCF believes these benefits from competition have had an important (if unmeasurable) impact in mitigating the decline in mail volumes, by encouraging continued or even new use of mail.

2.6.       The Department for Business, Innovation & Skills (with responsibility including postal services) has made clear Government’s position that:

“Competitive markets are the best way of making sure a country’s resources are put to their best use. They encourage enterprise and widen choice for consumers.” [“Preventing and reducing anti-competitive activities”, December 2012]

2.7.       Ofcom confirmed the benefits of competition in its 2011 consultation “Securing the Universal Postal Service”, in which it said

“In particular, by providing a competing service to Royal Mail’s delivery operations, {competition} potentially provides powerful incentives on Royal Mail to reduce cost across the full length of the value chain.” [section 1.61];

2.8.       Ofcom went on to state that:

“in the context of postal services {competition} can lead to: efficiency incentives on Royal Mail .…, greater innovation …. and direct benefits for customers.” [section 7.4]

2.9.       Such competition also has a beneficial impact on the wider economy. A study by Europe Economics [“Benefits of Competition in the UK Mail Market”, 2008] concluded that mail market competition at that time had already had provided a boost to the UK economy of more than £229m and created more than 3,300 new jobs.

2.10.   Regarding Royal Mail’s call for Ofcom to constrain direct delivery competition, the MCF would also draw attention to the conclusion reached by WIK-Consult in its 2013 report for the EU Commission, which looked at developments across EU member states:

“In domestic letter post markets in most Member States, even after full market opening, competition has not yet emerged for different reasons ….. we conclude that there are important barriers to competition (economic and/or regulatory) in all domestic letter post markets, the incumbents’ market dominant positions are likely to remain” [“Main Developments in the Postal Sector (2010-2013)”; section 4.3.5]

2.11.   That is, even after full market opening there are reasons why incumbents (such as Royal Mail in the UK) are likely to retain their market dominance.

2.12.   Independent experts have confirmed competition generates benefits and does not threaten the USO, as Royal Mail alleges.

2.13.   Martin Stanley (former Chief Executive of the Competition Commission and Chief Executive of Postcomm) is an eminent civil servant and expert on competition and the mail market,  and is part of Manchester University’s Public Policy Unit (Policy@Manchester). He wrote in his briefing on Competition Policy for Postal Regulation [emphasis added]:

“Competition certainly offers a number of important benefits. Competitors will always attempt to offer customers new services, greater reliability and lower prices, and so incentivise Royal Mail itself to become more customer-friendly and efficient. This should in turn help the whole industry see off competition from 'e-substitution' (email, viewing bank statements and bills on the web, and so on)”;

“Concern is sometimes expressed that competition might mean that Royal Mail could no longer afford to provide the universal service …. But even putting this on one side, it is important to remember that:

Royal Mail's ability to offer the universal service is in fact a real benefit, for their customers expect and need their mail to be delivered to every address….

Competition drives improved services and lower prices, which in turn increase mail volumes. And it is easier and more cost-effective to provide a universal service if there is lots of mail to be delivered, even to outlying communities.” and

“it is arguable that the so-called universal service obligation (USO) in fact confers a distinct benefit on any company that accepts it …. The USO is not therefore greatly threatened by competition from other postal companies.”

2.14.   Consumer Focus, which has responsibility to champion the interests of consumers and businesses (now as part of Citizens’ Advice), concluded similarly in its report on “Competition in postal markets – a small consumer perspective” (2011) [emphasis added]

“However, this paper believes that the best way for incumbent USPs [Universal Service Providers] to meet the challenges of e-substitution and inefficiency is to foster greater competition in the postal market. This should provide the greatest spur to postal incumbents to become more efficient, customer orientated and innovative.”;

The empirical evidence shows that competition has provided significant benefits to consumers, especially for large mailers …. There is no evidence that the introduction of competition has put the viability of delivering the universal service at risk”; and

“The main conclusion of this paper is that .… The major threat to incumbent USPs in delivering the USO does not emanate from rival postal operators but from alternative communication media, and in some cases internal inefficiency. The only way to ensure the sustenance of the USO is an intensification of competition in postal markets”

2.15.   This view is supported by the “Customers in Britain 2013” study by Firebrand Insight on consumers’ perception of choice, which found that only 25% of people believed there was a lot or a moderate amount of choice in postal services and delivery - while more (28%) believed there was no choice at all and a further 42% said there was little choice.

2.16.   Given the benefits from choice through competition in mail services, the MCF believes that the UK mail market currently has too little, not too much, competition and choice.

2.17.   From this evidence, the MCF concludes that mail market competition in the UK brings significant benefits to mail users, to the wider economy and is not a threat to provision of the USO.

3.    Price Trend Comparisons:

3.1.       The MCF believes it is informative to look at Royal Mail price trends over recent years, such as:

a)   Bulk mail second class retail contract prices       b) Single item franked mail prices

c)   Downstream Access prices                                 d) Single item stamp prices

3.2         For a) and b) there has been increasing competition in the market since 2004, with competition in c) growing since 2012 but still low, while for d) there is no competition.

3.3         The chart below shows how these prices have changed between 2005 and 2014:

3.4    There has been a much higher increase for Stamp mail prices (where there is no competition to Royal Mail), with prices more than doubling between 2005 and 2014, while franked mail prices have increased by much less and the price for the benchmark 2nd Class retail bulk presorted mail service (where competition is strongest) has increased the least.

4.     Royal Mail Productivity:

4.1.       Royal Mail’s submission to Ofcom alleges that the impact of TNT Post (now Whistl) plans for direct delivery could reduce revenue “by over £200 million in 2017-18”.

4.2.       However, by its own admission in its Annual Report, that part of Royal Mail which provides the USO (known as UKPIL), has failed to achieve even its own productivity improvement target (i.e. not one set by Ofcom) of 2–3 %, managing only a 1.7% improvement last year and also in 2012-13.

4.3.       In fact:

“UKPIL operating costs before transformation costs increased by one percent” [Royal Mail Annual Report, page 20].

So while UKPIL letter and parcel volumes declined – Royal Mail’s operational costs increased.

4.4.       Were Royal Mail achieving now its own 3% target, it would have seen a reduction in UKPIL costs in 2013-14 by over £200 million – the figure it says it could in four years’ time lose to Whistl’s direct delivery (should Whistl’s plans be fully achieved).

4.5.       Royal Mail failed in 2013-14, just as it had in 2012-13, to achieve the midpoint of its 2-3% improvement target by 0.8 percentage. That failure would, if continued in the years to 2017-18, mean it failed to realise savings equivalent to more than what it alleges is the risk from direct delivery in 2017-18.

4.6.       This low level of productivity improvement by Royal Mail does appear set to continue, as the Interim Management Statement released on 22nd July says:

“Cost management remains a key focus. The management reorganisation programme announced in March 2014 is on track to realise cost savings of around £25m which will benefit the second half of the year. In particular, we are maintaining a tight control on non-people costs”

4.7.       So while “Cost management remains a key focus” it seems Royal Mail’s efforts will deliver only £25m savings in 2014-15 when operating costs for UKPIL alone were more than £7bn last year and the provision for the management reorganization programme was £104m.

4.8.       It is interesting in this context that Royal Mail’s statement refers to “maintaining a tight control on non-people costs” and so presumably excludes similar efforts on people costs, which actually increased 4% in 2013-14 [Royal Mail Annual Report, page 21].

4.9.       The MCF is concerned that Royal Mail’s three-year settlement with the Communications Workers Union (CWU) in December 2013 has locked in cost increases and inflexibility for a number of years. The CWU clearly believes it was a very good deal for its members, as its General Secretary told the National Association of Letter Carriers convention in Philadelphia on 24th July:

“The settlement of the dispute was very favourable, In order to settle things down management made a range of concessions. These included:

-          Maintaining all existing staffing agreements

-          A commitment to no outsourcing or franchising of work

-          Above inflation pay rises for a three year period

-          A commitment for the industry to remain primarily a full-time employer, with no zero-hours contracts

The deal was so good that when it was put to the membership it was carried by 94 percent of the members voting”

4.10.   The MCF does not believe Royal Mail can have any legitimacy in seeking to constrain competition when it has failed to tackle inefficiency in the largest element of its cost base and has instead committed to wage increases for three years that are almost double both the national average and the rate of inflation.

4.11.   Royal Mail’s submission also seeks to argue that the geo-demographics of the UK give rise to unique difficulties in more efficient provision of the USO.

4.12.   The MCF believes Royal Mail’s assertion may be misleading, if not incorrect.  For instance, Paris has a very high population density and yet the MCF is not aware of any significant moves to introduce final delivery competition there.  Also, Germany has a lower population density than the UK and yet final delivery competition is fairly highly developed, and Sweden has a successful USO provision despite very high levels of urban competition and an even more remote geography than the UK.  Furthermore, even in Scotland, most people live in conurbations and villages, not in isolated dwellings, meaning that most postal deliveries are made in relatively dense areas of housing rather than to individually remote properties.

4.13.   In its submission to Ofcom, Royal Mail seeks to make much of some of the legislative obligations placed on Ofcom by the Postal Services Act 2011 to secure the provision of the Universal Postal Service. However, Royal Mail chooses not to mention that the obligation also requires Ofcom to have regard to:

“The need for the provision of a universal postal service to be efficient before the end of a reasonable period and for its provision to continue to be efficient at all subsequent times” [Section 29(3)(b)].

4.14.   The MCF believes it is necessary for Ofcom to provide a statement on whether it considers Royal Mail’s provision of the USO to be efficient and, if not, what period Ofcom considers reasonable for the provision to become efficient (given that the Act was passed more than three years ago) and how Ofcom expects to see the market encourage this efficiency.

4.15.   The MCF is greatly concerned that if Royal Mail’s approach were to be adopted, it would wrongly impose significant restriction on competition and potentially permit Royal Mail to meet shareholder demands for profitability through maximising price rises wherever possible, rather than through more efficiency.  In other words, consumers would bear the burden of Royal Mail’s continued failure to tackle its ongoing lack of productivity improvement.

4.16.   Rather than the commercial effect of efficient competition allegedly jeopardising Royal Mail’s provision of the USO, the MCF contends it is Royal Mail’s own, persistent failure to achieve reasonable productivity improvement which represents the major threat to its USO provision.

Steve Hibbert

MCF Administrator

15 October 2014

The views expressed here represent the general views of the Mail Competition Forum and do not necessarily represent the particular position of any individual member organisation.