Written evidence submitted by Countryside Alliance (USO 07)

Executive Summary

1. The Countryside Alliance is a campaigning organisation covering the whole of the United Kingdom, whose aim is to promote the countryside, country sports and support the livelihood of rural people and their communities. As a membership organisation with more than 105,000 individual members and more than 250,000 affiliated members, we reflect the views and concerns of a broad range of rural people and their livelihoods.

2. The Alliance welcomes this opportunity to submit evidence to the Business, Innovation and Skills Committee inquiry into ‘Competition in the UK postal sector and the universal service obligation’.

3. Postal services and the Universal Service Obligation (USO) are essential to those living and working in the countryside, particularly for individuals and businesses that rely heavily on the postal service. Digital communications provide alternative ways for people to exchange information, but many still rely on the post, as it is seen as reliable and secure.

4. This is why the Alliance is concerned about the impact changes to the end-to-end postal deliveries could have on rural postal services and the subsequent impact that it will have on rural communities and businesses.

5. The working of the postal services market and the USO must be addressed as a matter of urgency. We are supporting the call for the regulator Ofcom to bring forward its planned review of end-to-end competition of direct delivery mail.

6. Countryside Alliance members value the six-day-a-week, one-price-goes-anywhere service that Royal Mail provides and want to see it continue.

Access and end to end delivery of mail and the Universal Service Obligation

7. The Countryside Alliance is increasingly concerned about the implications that the rapid expansion of end-to-end postal deliveries by ‘Whistl’ (formerly TNT Post UK) could have on rural postal services. We support Royal Mail’s call for Ofcom to bring forward its planned review of end-to-end competition of direct delivery mail.

8. The postal services market is fundamentally influenced and shaped by the USO. Royal Mail must, by law, fulfil its Universal Service Obligations. This means it must have the capacity to deliver to every UK address, six days a week.

9. The USO is essential for those living and working in the countryside, particularly for  individuals and businesses that rely heavily on the postal service.  Countryside Alliance members value the six-day-a-week, one-price-goes-anywhere service that Royal Mail provides and want to see it continue.

10. As Royal Mail’s submission to Ofcom highlights (submitted June 2014), the UK’s challenging geography already makes the Universal Service challenging to sustain.  The UK has a high concentration of large dense urban areas that are attractive to cherry-picking direct delivery, with 15% of the population living in very high density areas comprising just 1% of the landmass.  On the other hand, the UK also has large parts of the country that are deeply rural and costly to serve. 15% of the population lives in lower density areas, comprising around 63% of the landmass.

11. Relative to other European countries, the UK has higher per household mail volumes. UK households receive 583 items on average per year. This is 30% greater than Germany’s 450 items, 28% higher than Sweden’s 456 and 16% higher than the Netherlands’ 501. The risk to the USO is further increased as households receiving greater mail volumes are particularly concentrated in dense urban areas. For example, mail volumes per household are over 1.5 times higher in parts of London compared to the national average.

12. The costs of delivering mail to less densely populated, harder to deliver rural areas are met using revenues generated from more densely populated urban and suburban areas.  We are increasingly concerned that the current regulatory environment allows competitors like ‘Whistl’ to choose where it delivers, what it delivers and when it delivers.  If this cherry-picking continues, we believe this could pose a serious threat to the financial sustainability of the Royal Mail, which in turn puts the long term future of the Universal Postal Service under threat.

13. “Why direct delivery is an arbitrage of the USO, not fair competition” - An extract from Royal Mail’s Submission to Ofcom, June 2014.

• In a normal market, a business can compete to offer products or services that are more attractive to customers or which can be produced at a lower price. Other businesses in such a market will have the same basic opportunities available to them as their rivals and can seek to respond through innovations, improved production techniques, better quality or lower price.

• However, the postal services market is fundamentally influenced and shaped by the Universal Service Obligation. Royal Mail must, by law, fulfil its Universal Service obligations. This means it must have the capacity to deliver to every UK address, six days a week. This necessitates a particular network structure with an inherently high proportion of fixed costs. Direct delivery entails duplication of parts of this network, which therefore increases the total costs attached to the delivery of mail across the UK.

• When a direct delivery entrant targets only certain urban areas, delivering only selected mail types, and offering only a three days a week service it will inevitably have a lower cost base than if operating a six days a week service to every address in the UK. A direct delivery entrant can theoretically deliver the same volume of mail in three days as Royal Mail can deliver in six. This confers advantages as an entrant can maximise economies of scale by consolidating items across days.

• Royal Mail estimates that the three day a week service confers a cost benefit of around 40% relative to operating a six-day delivery network. This means an entrant will have opportunities to price at a level below Royal Mail – regardless of how efficient Royal Mail becomes – because of the inherently higher costs attached to delivering the Universal Service. This does not represent fair competition. It is an arbitrage of the terms of the Universal Service. It also brings no obvious advantages for those receiving mail in terms of service or innovation – in fact it puts the ability to finance the Universal Service at risk.

• In the UK, the access regime enables direct delivery operators to offer their customers national coverage without having to incur the costs of delivering to the whole country. They can price to win business safe in the knowledge that Royal Mail must accept mail for delivery to areas they do not wish to serve. So a direct delivery operator is in fact arbitraging the very service that enables its business model to work, and to offer the national coverage its business customers require.

Conclusions

14. Postal services play a valuable social and economic role in modern society, therefore it is crucial that everyone has access to these services on the same terms. Customer needs are likely to evolve, and it is widely recognised that the Universal Service will need to be monitored regularly and reviewed to ensure that it takes account of changing customer requirements.

15. However, if the direct delivery market continues to expand at its current rate, the Countryside Alliance believes that Ofcom’s timescale to conduct a review of the USO will be too late to ensure that the one-price-goes-anywhere service that Royal Mail provides will survive.

16. The working of the postal services market and the Universal Service Obligation must be addressed as a matter of urgency.

21 October 2014