RLITO000002
RLITO000002
DEPARTMENT OF TRADE AND INDUSTRY
The Future of Postal Services
A Consultative Document
Presented to Parliament by the President of the Board of Trade
by Command of Her Majesty
June 1994
Cm 2614 LONDON : HMSO.
RLITO000002
RLITO000002
RLITO000002
RLITO000002
DEPARTMENT OF TRADE AND INDUSTRY
The Future of Postal Services
A Consultative Document
Presented to Parliament by the President of the Board of Trade
by Command of Her Majesty
June 1994
Cm 2614 LONDON : HMSO.
RLITO000002
RLITO000002
RLITO000002
RLITOO00002
CONTENTS
page
Chapter 1: INTRODUCTION ........c000c:ccesseee a]
Chapter 2: CURRENT STRUCTURE OF THE POST OFFICE...
Chapter 3: I THE CASE FOR CHANGE v7
Chapter 4: THE NETWORK OF POST OFFICES..
Chapter 5: ROYAL MAIL AND PARCELFORCE:
POSSIBLE WAYS FORWARD o.....ccssssssssssssssesssnnssststrennseeeeeed
Chapter 6: I REGULATION OF THE POSTAL SECTOR........essesesssseee1-20
Chapter 7: I COMPETITION IN THE POSTAL SECTOR...
Chapter 8: I CONSUMER REPRESENTATION. .....sc.ccsssssssssssssseeseseseeeeeees25
Chapter 9: POST OFFICE EMPLOYEES AND
SUB-POSTMASTERS.........-.-sessss 26
Chapter 10: VALUE ADDED TAX............... 27
Chapter 11: THE ROYAL ASSOCIATIONS ............00
Chapter 12:
CONCLUSION AND NEXT STEPS.......
a
RLITO000002
RLITO000002
RLITO000002
RLITO000002
CHAPTER 1
INTRODUCTION
1 This Green Paper invites views on the future of postal services. It explains the
present structure of the Post Office and the possible options for the future. It indicates
the Government’s current thinking on these options.
2 The Post Office has for centuries made a vital contribution to our national life.
Both individuals and businesses rely on it for a wide range of services. It delivers over
60 million letters and three quarters of a million parcels every working day; and post
offices serve some 28 million customers every week. The Post Office is one of the
nation’s unifying forces and delivers daily services to the remotest of locations, helping
to keep those communities alive. British industry and commerce also depends on good
communications, as the Government’s White Paper on “Competitiveness : Helping
Business to Win” (Cm 2563) recognised.
3. The Government is committed to the maintenance of these services. That is why
the Government has emphasised the importance of service standards under the Citizen’s
Charter, and made clear in its Manifesto its commitment to:
= anationwide letter and parcel service, with daily delivery to every address in
the country;
- auniform and affordable structure of prices, under which it will cost the public
the same to post a letter no matter where it is posted or to where it is sent,
throughout the United Kingdom;
- anationwide nctwork of post officcs.
At the same time the Government undertook to introduce measures which would bring
more choice and competition into the postal market.
4 Inorder to decide how best to mcet these commitments the Government has been,
considering the fature structure and organisation of the Post Office, whose status as a
nationalised industry dates from 1969. Since then the commercial environment has
changed radically. The rate of change will accclerate still further in future years and it
is essential that the Post Office is not left behind if it is to respond to competition and
to continue to meet its customers’ needs. The all-party House of Commons Trade and
Industry Select Committee, in their recent report “The Future of the Post Office” (HC
207, published on 24 March 1994) accepted this argument. The Government agrees
with the Committce that “the Post Office cannot be retained in its present form”.
5 The Post Office consists of three main businesses: Post Office Counters, Royal
Mail and Parcelforce. Post Office Counters runs the network of almost 20,000 post offices.
It is already a successful partnership between the public and private sectors. A very high
proportion of post offices - over 95% - are run as private businesses, while the hub of
the network, Post Office Counters Ltd, is in the public sector, negotiating and co-
ordinating the contracts on which the network depends. The Government has
concluded that the current arrangements for the nctwork should remain essentially
unchanged, though there is considerable scope for modernising its operating methods
and expanding the range of its activities. This is set out in detail in Chapter 4.
1
6 — Royal Mail has been a highly successful business in recent years. From declining
volumes and heavy losses in the 1970s it has produced record profits, dramatically
improved quality of service and higher volumes. Nevertheless it has been losing its
share in a rapidly changing and increasingly competitive communications market.
Parcelforce, in contrast, has made losses in recent years, faced with the recession and
overcapacity in the parcels market.
7 Technology is transforming the market place of both companics. It is allowing
postal operators to improve standards and speed of service in traditional areas of business,
Itis also turning postal communication into an increasingly international business, with
different national post offices competing to be the point of posting for bulk mail. More
fundamenually, postal services are facing increasing competition from other forms of
communication like fax and electronic mail.
8 Customers stand to gain greatly from these developments. Both the range of
services and their speed, quality and cost should improve. Greater competition is the
best way of ensuring that the benefits of modern technology are fully realised and the
Government remains committed to introducing more competition into the UK
market.
9 But Royal Mail and Parcelforce also need the freedom to respond effectively and
flexibly to this changing market place. They need access to capital to invest in new
technology and the frecdom to compete against private sector operators in supplying
new and better services to customers. Other countries are giving their Post Offices
more freedom to compete in this new market. The Dutch, for example, are selling a
large sharcholding in the company which runs their postal service. They have ambitions
to be one of the leading postal administrations in the world. Our Post Office is already
among the best in Europe. Given the freedom to compete, it could be a world leader.
10 The Government wants to find a way forward which will secure basic postal
services across the country, maximise the benefits to customers from increasing
competition and greater efficiency, and enable Royal Mail and Parcelforce to compete
effectively in a changing commercial environment. A number of options are discussed
in Chapter 5.
11 The Government’s provisional conclusion is that the best way of meeting all its
objectives is to allow Royal Mail and Parcelforce to operate as a private company owned
by the public and cmployces, with the Government retaining 49% of the shares. The
public services would not be put at risk by such proposals. The Government's
commitment to the universal service and uniform tariff would be written into
legislation, and a strong and independent regulator would be appointed to enforce
standards of service under the Citizen’s Charter. The regulator would advise on the
progressive introduction of more competition, so long as this was consistent with the
maintenance of the basic services.
12 Regulation and compctition are discussed in more detail in Chapters 6 and 7.
Chapter 8 covers the issue of consumer representation in postal services. Chapter 9
discusses implications of change for the Post Office’s employees, together with the sub-
postmasters and sub-postmistresses. The Government recognises that the Post Office
is almost unique in British life in the level of daily contact between its employees and
the public. While the Post Office will increasingly have to invest in automation in the
interests of efficiency, postal services are bound to remain a major source of
employment.
RLITO000002
RLIT0000002
RLITO000002
RLIT0000002
13 Chapter 10 covers the VAT treatment of postal services, making clear that there is
no possibility of VAT on stamps for letters or parcels. Chapter 11 sets out the position
on the Royal connections which the Post Office has traditionally enjoyed.
14 Some of the options for change outlined in this paper would require legislation.
Before taking final decisions the Government wishes to hear the views of interested
parties. An address for responses is given in Chapter 12.
CHAPTER 2
CURRENT STRUCTURE OF THE POST OFFICE
1 The Post Office has undergone many changes over its long history. While its
origins can be traced back to the seventeenth century, it was established in a form we
would recognise only in 1840. In 1969 the Post Office ceased to be a department of
Government and became a public corporation. The telecommunications business -
now BT - was separated in 1981, and Girobank was sold in 1990.
2 The Post Office consists of three main businesses: Post Office Counters, Royal
Mail and Parcelforce. Royal Mail and Parcelforce are separate operating divisions of
the Post Office, while Post Office Counters is a wholly owned subsidiary. There are
important links between them: Royal Mail and Parcelforce sell stamps and other
products and services through Post Office Counters, and Parcelforce uses Royal Mail
to collect and deliver parcels in remoter areas. All these arrangements are the subject
of contracts between the businesses drawn up on an arms-length basis. All three produce
their own separate audited accounts. Details of each business are given below.
3. The Post Office itself is set up under statute with a Board appointed by the
Government. It is required by legislation to meet all reasonable demands for letter
services, It carries out many other tasks which are not required by statute, but with
which it is traditionally associated, such as the nationwide parcels service provided by
Parcelforce and the payment of social security benefits at post offices.
4 Key facts on each of the three main Post Office businesses are as follows:
Post Office Counters represents 20% of Post Office tumover - around £1bn. tt runs
the network of neatly 20,000 post offices, of which nearly 19,000 are sub-post
offices owned and managed by private individuals or companies on an agency basis.
The rest are directly run by Post Office Counters, which has about 15,000 staff.
It provides services for many clients besides Royal Mail and Parcelforce, including
the Benefits Agency, Girobank, the Driving and Vehicle Licence Agency, the
Department for National Savings and a number of utility companies. Of these,
much the most important is the Benefits Agency which accounts for about one
third of its income. About 25% of its income comes from Royal Mail and
Parcelforce.
Royal Mail represents around 70% of total Post Office turnover - over £4bn, It
employs 165,000 people. Most of these are front-line postmen and women
providing a daily delivery service to 23.4 million addresses. Together they deal
with over 60 million items of mail per day, collected from 100,000 strect postboxes
as well as from post offices and directly from many organisations. Royal Mail has
astatutory monopoly on letters delivered for less than £1 (though the Government
is committed to reducing this figure - see Chapter 7).
Parcelforce represents around 10% of Post Office turnover - around £500m. It
employs 13,000 staff and deals with three quarters of a million parcels per day. It
‘Post Office Counters effectively provides a retail outlet for a range of Government bodies, and ex-
Government bodies, to provide services to the public. These are generally called “clients” of Post Office
Counters, to distinguish them from “customers”, namely members of the public who receive or buy those
services in post offices. It is generally the clients of the business, rather than the customers, who provide
the income of Post Office Counters Limited.
RLITO000002
RLIT0000002
RLITO000002
RLITO000002
offers an individual parcels service to customers at post offices, delivering anywhere
in the country for a uniform tariff. Its main business activity, however, is to provide
a collection and delivery service for larger customers on a contract basis for which
it competes with many other businesses in the private sector. For reasons of
efficiency it subcontracts some of its services to Royal Mail.
5 A fourth trading business, Subscription Services Ltd (SSL), provides licensing and
subscription management services, principally for the BBC. It employs around 1,400
people and has a turnover of over £50m’,
6 Although the Post Office is accountable to Ministers, it has been the policy of
successive Governments to leave operational matters to the Post Office Board. It is the
Post Office, therefore, and not the Government, which decides on such matters as the
number of deliveries a day and the location of post offices. The Government’s role is
confined to various financial controls and agreeing the strategic direction of the
organisation. These are looked at in turn.
7 As regards financial controls,
- the Post Office is set each year an External Finance Limit (EFL), for the
following three years. This is similar in some ways to the dividend that would
be paid by a private sector company to its shareholders. In practice the Post
Office does not pay a cash dividend but the EFL requires it to purchase public
sector securities, thus making a positive contribution to Government finances.
- in setting the EFL the Government takes account of the Post Office’s need to
finance investment. The Post Office is given an annual capital expenditure
limit. It is also required to submit capital projects with an overall cost of over
£20m to the Government for specific approval.
- the Post Office is set, on a three year basis, a profit target (expressed as a return
on capital employed), and an efficiency target (real unit cost reduction) for the
Royal Mail and Post Office Counters.
8 This financial framework is intended to create broadly the incentives and pressures
on management which they would face from. private sector shareholders. But the
controls differ from a private sector approach in the following respects:
- because of the needs of overall budgetary management, the EFL is set a year
in advance and is cash rather than profit related. A private sector company
would decide on the level of its dividend retrospectively. The EFL is sct by
the Government, whereas private sector dividends are determined by the
company’s directors;
- the Post Office is not allowed to borrow on capital markets. Like other
nationalised industries it has to rely on the Treasury for external funding except
in the limited circumstances where it can take advantage of the Private Finance
Initiative;
- through the setting of the EFL and the capital expenditure limit, the Post Office
effectively competes against other candidates for public expenditure in the
annual public expenditure survey.
9 As regards strategic direction, the Government requires the Post Office to produce
a corporate plan annually setting out its proposed strategy for the next five years.
*This paper does not consider farther the future of SSL, nor of other Post Office activities which are
not part of Post Office Counters, Royal Mail or Parcelforce. Detailed consideration of them will depend
on the decisions reached on the three main businesses.
5
In this context:
- the Government has been reluctant to see the Post Office develop new services
or products that go substantively beyond its existing activities;
- the Government has specifically been opposed to permitting joint ventures or
allowing the Post Office to make acquisitions of companies.
10 All nationalised industries are subject to similar restrictions. Their purpose is to
protect the interests of taxpayers, who stand behind all public sector concerns, and to
avoid unfair competition with the private sector. The scope for relaxing these
restrictions in the case of the Post Office without breaching these principles is discussed
in Chapters 4 & 5. The next chapter, however, discusses the developing commercial
pressures on the business as it approaches the end of the century.
RLITO000002
RLIT0000002
RLITO000002
RLIT0000002
CHAPTER 3
THE CASE FOR CHANGE
1 Under the arrangements described in Chapter 2 of this paper, the Post Office has
been successful, improving its overall profitability, while offering its customers
significant improvements in service quality. Each of the main Post Office businesses
now faces substantial change over the next decade and beyond, which will present both
threats and opportunitics. All three must change if they are to survive the threats and
make the most of their opportunitics.
Post Office Counters
2 Post Office Counters Limited has been consistently profitable since its creation as
a separate organisation in 1986. It has also managed to increase its tumover year by
year. It remains the largest retail chain in the UK, maintaining a presence in many small
towns and villages from which banks, for example, are beginning to withdraw. It is
recognised as providing a very personal and popular service to the public.
3 Changing social habits and new technology are challenging the traditional business
of the post office network. In recent years, there has been a general move in UK
shopping habits away from smaller retail outlets towards larger retail stores, notably
supermarkets. Sub-post office status helps many village shops to survive by providing
asecure level of income and encouraging people into them. Post Office Counters seck
to maintain a presence, wherever possible, for example through the Community Office
programme which allows post offices to remain open, offering a more limited range
of services, with restricted hours. But, even with this help, a number of small post
offices close every year because no one can be found to run them as a going concern.
4 Most services available in post offices are now available elsewhere. Pensioners, for
example, now have the opportunity to have their pensions paid direct into their bank
or building society accounts and approximately 40% of new pensioners are clecting to
do so, It is now possible to buy a television licence or pay bills by post or by direct
debit, as well as at post offices. Stamps are available at a wide range of outlets. ‘The
Government welcomes this diversity of choice for customers but recognises that, as a
result, post offices are sceing a decline in their market share of such traditional business.
5 Both these changes offer opportunities too as other organisations like banks
withdraw from smaller towns and villages. The ability ofthe network to provide services
in 20,000 different locations allows it to reach more members of the public than any
other organisation. Given freedom to do so, Post Office Counters could offer a wider
range of services, reducing its current heavy reliance on a limited number of clients.
New technology also offers the chance to automate many transactions, which would
be both cheaper and able to offer better and quicker management information,
benefiting both Post Office Counters and its clients. Automation should also make
benefit payment significantly less susceptible to fraud.
6 The Government believes that the network of post offices can not only survive
but also prosper. To do so, it needs to be able to respond to the decline of its traditional
business by modernising and diversifying. The next chapter discusses the Government's
proposed way forward.
Royal Mail and Parcelforce
7 Royal Mail has been consistently profitable for many years. It currently provides
by far the largest contribution to the Post Office’s overall profits. Parcelforce, in
contrast, has been operating in a parcels market which has had acknowledged
overcapacity in the recent recession and has been loss-making.
8 In Royal Mail’s case, it is important to recognise that the letters markct is not sclf-
contained but part ofa wider communications market. Both businesses and individuals
have an ever increasing number of ways of sending messages, such as telephone, fax
and electronic mail. Firms can now order and pay for goods electronically, home
banking is a reality and home shopping is in prospect. Direct mail is competing with
television, radio and press advertising.
9 These changes are posing an increasing threat to Royal Mail’s traditional business.
Royal Mail has a monopoly over all mail delivered for less than £1 per item, But even
with this protection, commercial pressures are making themselves felt:
- Royal Mail’s market share in the wider communication market is estimated at
only some 14 to 16%. Competition in that market is fierce. The Electronic
Data Interchange (EDI) market is growing by about 20% a year and the fax
market by 30% a year. There is evidence that the practice of “confirming” a
fax by sending a hard copy in the post is declining. ‘There is also some threat
to the “core” letter service between individuals - already no more than 10%
of Royal Mail turnover - with mail posted through pillar-boxes showing signs
of decline. Both businesses and individuals have a wide range of alternatives
to written communication, sent through the post;
- there is also increasing competition for letter traffic. Letters costing more than
£1 can be delivered by a wide range of local, national or international private
sector courier companies. The real value of the £1 limit has been reduced
significantly since its introduction in 1981. If mail for UK companies is printed
overseas and posted into the UK, that provides lower revenue for Royal Mail
than if the letter is posted in the UK. The Government is committed to
lowering the monopoly further to allow other operators to devclop new
services, consistent with ensuring that Royal Mail can deliver its universal
service at a uniform and affordable tariff. This can only be good for Royal
Mail’s customers, but the business needs to have the flexibility to respond to
such competition.
10 Developments in the market place also offer opportunitics which Royal Mail
should be well placed to seize:
= many companics are already looking to integrate their marketing, including
direct marketing, on a Europe-wide basis. An American company looking to
market a new product in Europe is likely to prefer to deal with a single
marketing and mailing operator rather than deal direct with different
companies in different countries. If Royal Mail could offer a combined
marketing, printing and posting operation for mail to be sent to customers
throughout Europe then this would give them clear new opportunities - and
bring business to the UK economy as a whole. Other countries are already
doing this;
= businesses are increasingly concentrating on their key activities and looking to
contract out their ancillary services. If Royal Mail can offer value-added
services, such as mailroom services, printing and marketing support as well as
sending of mail, then they will find new sources of revenue and their customers
will be more likely to use printed distribution for their communication needs;
8
RLITO000002
RLIT0000002
- the EC Green Paper on postal services has opened up the clear prospect of a more
competitive letters market throughout the European Union. The UK is at the
forefront in supporting this liberalisation. Royal Mail is well placed to take
advantage of it.
11 Parcelforce is, of course, not protected by a monopoly. While it is the only parcels
service available at post offices, this represents only about 6% of its volume and, for the
most part, Parcelforce is competing directly with the private sector. It faces growing
competition from:
- amarked growth of competitors in the UK market, particularly from small
independent businesses;
= increasing demands by its business customers, for an ever faster and ever more
reliable parcels service. Most of Parcelforce’s competitors have invested heavily
in this area of the market, notably in “track and trace” facilities which cnable
customers to be given much better information on whether and when their
parcels are delivered;
- growing international competition. In the absence of a monopoly, there are
no constraints on other companies delivering parcels and related services within
the UK. In particular, the postal administrations of Germany, France, the
Netherlands, Sweden and Canada have joined forces in a joint venture with
TNT to bring together their international time-sensitive delivery services.
12 While both Royal Mail and Parcelforce have taken many steps to respond to the
new business environment, there are many limitations on their ability to do so within
the constraints of nationalised industry status. The Post Office Board has made very
clear that the long term future of both businesses - and thus their ability to maintain
the vital public services which they carry out - require them to be able to respond with
a higher level of commercial flexibility and freedom than is permitted to them while
they remain under the current public sector control regime.
13. The Trade and Industry Select Committee in its recent report accepted this
argument and argued that
“the traditional Treasury restraint on its activities [is] having a detrimental
impact on the Post Office’s ability to act as a commercial organisation, to
deliver an ever higher quality of service to its customers and to meet the
challenges and opportunitics of international competition. As competition
increases both at home and abroad in existing and revolutionary forms, its
prospects can only worsen”.
14 The Government believes that increased competition benefits consumers and
strengthens the UK economy. Time and time again, competition has been shown to
stimulate innovation and greater efficiency. But the Government also accepts that Post
Office Counters, Royal Mail and Parcelforce need greater commercial freedom if they
are to respond effectively to the challenges they face. It therefore takes the view that
it is in the interests of consumers and the wider economy that these businesses should
be allowed to change, so that they can flourish in a more competitive environment.
RLITO000002
RLIT0000002
RLITO000002
RLITO000002
CHAPTER 4
THE NETWORK OF POST OFFICES
1 The previous chapter explained the need to improve the commercial outlook for
Post Office Counters and the network of 20,000 post offices. This chapter sets out the
Government's proposals for responding to the commercial pressures on the business.
Structure of the business
2. The network of post offices represents a partnership between the public and private
sectors. Post Office Counters, the public sector core of the business, sits at the hub of
the network, negotiating and coordinating the contracts with Government bodies and
other clients on which the network depends. It provides the infrastructure which
supports the individual post offices and ensures that all of them provide services to a
high standard, building on the reputation of the business for security and efficiency. It
also runs some 800 of the larger offices - known as “Crown” offices - direct, though
the Post Office has been converting these to agency status in the interests of efficiency
and customer service. Even including the staff employed in these offices, the Counters
business is relatively small, employing just 15,000 of the 200,000 staff of the Post Office
3 The network of sub-post offices provides a strong injection of private sector
involvement - and capital - into the business. It provides direct employment for 19,000
sub-postmasters and their support staff. The combined investment of the sub-
postmasters in the post office network has been estimated as more than £1bn, well in
excess of the public sector investment in the business. This combination of public and
private interests is mirrored at the level of the individual office. The great majority of
the 19,000 sub-post offices run an independent business alongside the post office, and
the two businesses are often mutually sclf supporting, with the “private” side of the
shop, supporting the “public” services of the post office and vice versa.
4 During the course of the Post Office Review, the Government considered whether
there was a case for changing this structure. It considered, for example, whether there
was a case for privatising Post Office Counters in order to inject further private sector
capital into the business. The Government has concluded, however, that such radical
changes are unnecessary. The existing public and private partnership is the nctwork’s
strength, allowing national provision for the size and activities of the network, coupled
with local private sector provision for the delivery of services. The National Federation
of Sub-Postmasters has made clear that the key issue for the sub-postmasters is not the
ownership of Post Office Counters, but improving the commercial prospects of the
network.
5 The Government agrees that changes in the structure of the post office network
would not help the business respond to the commercial pressures it faces. The previous
chapter made clear that the immediate needs of the network are twofold: first, to
increase the level of services it provides, to offset the potential long term decline in its
existing business; and second, to modernise itself so that it can provide a more
competitive service to those wishing to make use of its unique ability to reach
throughout the country from cities to villages and hamlets. These needs, and how they
can be met, are discussed in the remaining three sections of this chapter.
10
Freedom to take on new business
6 The previous chapter set out the extent to which developments in consumer
choice are changing the existing business of the network of post offices. Overall, 90%
of volume derives from eight clients, each one of which offers alternative outlets for at
least some of its services. The profitability both of Post Office Counters and the
individual sub-post offices is highly sensitive to the volume of work carried out on
behalf of this limited range of clients. Losses in turnover can seldom be offsct by a
parallel reduction in costs.
7 The Government recognises the risk that, if the traditional business of the network
declines, the ability to sustain the nationwide network will also be called into question
unless there are corresponding opportunities for the business to expand. It has decided,
therefore, to allow Post Office Counters greater commercial freedom in the future to
provide services to new private sector clients.
8 The business has already been secking to develop new areas of business, within
the framework of its existing activities and powers. It has, for example, recently agreed
with British Gas that consumers will, in future, be able to pay their gas bills at post
offices free of charge; it is currently trialling the provision of bureau de change facilities
in post offices; and it is optimistic that post offices will play a considerable role in the
selling of tickets for the national lottery. But the Government has not generally allowed
the business to seek new opportunities from new private sector clients. This has been
a significant constraint on the ability of the business to develop new services and make
the best use of the network of post offices. Post Office Counters and the National
Federation of Sub-Postmasters have argued that consumers would now welcome the
opportunity to obtain a wider range of services from post offices, particularly given the
geographical range of the network.
9 The Government accepts this argument. It believes that Post Office Counters
should seek to develop new services by building on its existing activities. The business
has considerable strengths in the size and range of its network and its ability to carry
out both simple and complex transactions to high standards of reliability and integrity.
By offering these facilities to a wider range of clients, the business should be able to
increase its turnover, without undermining the traditional strengths of the network and
without changing the fundamental nature of the busine:
10 The Government has therefore agreed a sct of Guidelines setting out a framework
under which Post Office Counters will in future be allowed to develop new business.
The Guidelines, set out at the end of this chapter, are designed to ensure that proper
account is taken of the need for fair competition with the private sector. They provide
a clear framework under which the management of Counters can plan for the future.
11 It will, of course, be for the business to devclop these new opportunitics as best it
can. For example, the management of Post Office Counters is keen to build on the
network’s expertise in the cross-counter bill payment market by extending its client
base to take in a wider range of private sector partners. It also sees opportunities to
enhance services in the communications market, building on existing links with Royal
Mail and the telecommunications companies.
Automation
12 The Government also recognises that, to survive, the network must be able to
handle present and future business in a cost effective and efficient way. This is the best
way of securing the future both for the sub-postmasters and cmployces of Post Office
Counters. Automating many of the post office clerical routines, which underpin the
network, will provide the network with a modern and efficient platform on which to
11
RLITO000002
RLIT0000002
RLITO000002
RLITO000002
develop its business into the next century. Automating benefit payments will require
investment of at least £130 million, and the Government intends that it should be
brought rapidly to fruition. The Government's preferred course would be to see this
project developed, managed and financed by the private sector. A number of possible
options are now under consideration.
13. The largest client of the network is the Benefits Agency. The Government
confirmed last year that it intended to continue to allow all benefits to be paid at post
offices, while continuing to expand the availability of alternative methods of payment
to widen choice for the public. The Government recognises, however, that the existing
system of paper-dominated procedures for the payment of benefits at post offices is
outdated, expensive and prone to fraud. The Benefits Agency is, therefore, an active
partner in the automation project, which it expects to lead to reduced costs, both in
terms of administration and fraud savings.
Links with the Royal Mail and Parcelforce
14 Although the Government is not proposing any change to the present status of
Post Office Counters, some of the options in the next chapter envisage a change of
ownership for Royal Mail and Parcelforce. This therefore raises the question as to
whether there is any commercial need for Post Office Counters to remain under
common ownership with the other two businesses.
15 The Government has concluded that there is no such overriding need for the two
businesses to be under common ownership. There are important trading links between
them but these are based on arms length negotiation and pricing. There is no cross-
subsidy. Moreover, the businesses are in two fundamentally different markets. Royal
Mail and Parcelforce are essentially communications and distribution businesses,
increasingly operating in international markets. Post Office Counters, in contrast, is a
unique retail business, with a network of 20,000 outlets representing the largest chain
of shops in Europe.
16 Both Royal Mail and Parcelforce are, of course, very important clients of Post
Office Counters. The Government also believes that the public would wish the full
range of Royal Mail and Parcelforce services to continue to be available at post offices.
It will, therefore, ensure that, whatever option it chooses for the future of Royal Mail
and Parcelforce, both businesses will be required to maintain their services through the
full network of post offices. But this can be done through regulation. There is no need
for the businesses to be under common ownership.
Summary
17. This chapter has described the unique nature of the Post Office Counters business
and the nationwide network of post offices. The Government believes this structure
has great strengths and has no proposals to change it, although it expects the Crown.
Office conversion programme to continue. It wishes to ensure the long term prosperity
of the network by allowing it greater freedom to develop new services and modernise
its operations. It will also ensure that the future arrangements for Royal Mail and
Parcelforce maintain the important trading links between the three companies.
RLITO000002
RLIT0000002
COMMERCIAL ACTIVITY BY POST OFFICE COUNTERS:
PROPOSED GUIDELINES FOR NEW BUSINESS
1 Through the network of 20,000 post offices and the infrastructure that supports
them, Post Office Counters has a unique potential to offer services to its customers
throughout the country. The Guidelines set out in this note are intended to ensure that
the fullest use is made of this potential, both securing wider cconomic benefits and
improving the finances of the business, to the benefit of existing and new clients and
of sub-postmasters. They are intended to give a predictable and stable framework within
which Post Office Counters can plan for the future.
2 Post Office Counters’ programme for new business will be monitored by
Government through the corporate plan process. In a number of cases Post Office
Counters will be able to develop new opportunities within existing powers. In other
cases current legislation requires the formal agreement of Ministers to specific proposals.
In all cases, particular attention will be given to the need to avoid unfair competition
through cross-subsidy.
3. Under these Guidelines the Government has agreed that Post Office Counters
may scek to take on new clients where any of the following applies:
i, potential clients are themselves seeking to transfer part of their own activities
to Post Office Counters for efficiency and other reasons. Any displacement of
private sector activity would in these circumstances be voluntary;
ii. Post Office Counters can offer a quality or type of service which cannot be
matched by other suppliers. This could happen, for example, when clients are
seeking services which require the ability to carry out large numbers of
transactions with a high level of security, record keeping and reconciliation;
the proposed activity would help create a new market for services which had
previously not been available to the public (eg the sale of lottery tickets), or
would help to foster the development of a recently created market;
iv. the entry of Post Office Counters is likely to lead to significant growth of
existing markets, rather than to the displacement of existing activity. This is
most likely to happen by widening consumer choice through the provision of
the relevant service at a significantly wider range of outlets, including those in
remote or rural areas not served by other providers;
v. notwithstanding low growth in the relevant market, the entry of Post Office
Counters is unlikely to have a significant impact on existing private sector
companies because the market is already diversified.
4 In addition, the Government will require proposals to take account of;
i. factors specific to Post Office Counters’ business, including the impact on its
discharge of existing functions and the compatibility of new proposals with its
core business activities; how far it will be increasing utilisation of existing
capacity; the effect of any expenditure on new investment on its overall return;
and the need for revenue from a new service to meet the incremental costs of
its provision, including administrative expenses;
ii. wider economic market and competition issues, including whether the relevant
market is already well served by the private sector; whether Post Office
Counters’ involvement would give it disproportionate market power; and the
need to ensure that services provided on behalf of third parties, while delivered
to high standards of quality, integrity and reliability, are not perceived to be
underwritten by Government.
13
CHAPTER 5
ROYAL MAIL AND PARCELFORCE:
POSSIBLE WAYS FORWARD
1 This chapter considers the options for allowing Royal Mail and Parcelforce to
respond to the challenges discussed in Chapter 3. The Government accepts that, in
order to do so, Royal Mail nceds greater commercial flexibility than is available to it
at present. It needs to modernise its business, through greater investment; to offer new
services to meet the changing needs of its customers; and to make strategic alliances,
including joint ventures, to respond to the increasing competition at home and abroad.
‘The Chairman of the all-party House of Commons Trade and Industry Select
Committee has said that the Committee “strongly believes that the status quo cannot
prevail”. The Government shares this view.
2 Given greater commercial freedom to respond to the challenges of increased
competitive pressure, Royal Mail should be able to improve its efficiency still further.
The Government believes there will be scope for introducing more competition and
choice for customers in postal services, while maintaining the universal services at a
uniform and affordable tariff, to which it is firmly committed.
The future of Royal Mail
3 The Government considered, in the carly stages of the Post Office Review, a
variety of radical options under which Royal Mail would be split into regional
businesses, allowing for local monopolies and some “cross-border” competition.
Thought was also given to the possibility of splitting the business according to its
different functions, namely the collection of letters, sorting, distribution and final
delivery. Discussions both with Royal Mail and other experts in the mail industry made
clear, however, that any break up solution would be likely to lead to a marked
deterioration in the quality of service. They would make it more difficult for Royal
Mail to compete effectively in international markets. These options were therefore
rejected.
4 The options the Government is still considering are threefold. They are as follows.
(1) Commercial freedom within the public sector
5 The Government has considered whcther Royal Mail could be retained in the
public sector as part of the Post Office, and given the commercial freedom it is secking
without a change of status. This would mean changes to the standard control regime
for nationalised industries, as outlined in Chapter 2. These controls reflect the fact that
the risks assumed by nationalised industries are ultimately underwritten by the taxpayer.
In particular, Government controls over borrowing by public corporations (all of
which, by definition, falls within the public sector borrowing requirement (PSBR))
provide a discipline over all funds which are raised with the backing of the taxpayer
and for which the Government is ultimately accountable. Without such controls,
nationalised industries would have a clear advantage over commercial rivals, both in
competing for business and raising new funds on capital markets. Public sector controls
are designed to prevent public corporations from exploiting this privileged position.
14
RLITO000002
RLIT0000002
6 The Government has considered how far it could amend the existing regime, by
the relaxation of certain specific financial controls. For example:
- the Post Office could be freed from its overall capital expenditure limit. This
would allow the business greater freedom to reinvest retained profits. The
Government could also relax scrutiny of specific projects;
- greater flexibility in the EFL arrangements, with the EFL effectively sct as a
dividend in relation to prospective profitability;
- the Government could replace the existing efficiency target for Royal Mail
with direct control over prices, perhaps incorporating a tariff formula such as
those imposed on privatised industries.
7 There is also some scope for giving public bodies a degree of commercial flexibility
within the framework of existing controls, for example joint venture projects under
the Private Finance Initiative (PF1). The essence of the PFI, however, is that it provides
for the private sector to take forward desirable projects in partnership with the public
sector, but with the private sector partner taking on overall management control and
the majority of the risk and receiving commensurate rewards. It is, therefore, of limited
valuc to Royal Mail, which wishes to extend the scope and operations of its own
business, in response to new competitive pressures, and which wishes to ensure that
the additional activity generates additional benefits for Royal Mail itself.
8 Given the nature and extent of the commercial activities in which Royal Mail
plans to engage, the Government sees serious difficulties in freeing it from all controls
as long as it remains in the public sector. Such an approach would be inconsistent with
So long as Royal Mail
remains in the public sector, the business would be effectively protected from failure,
as any commercial losses would be funded by the taxpayer. This would give it a clear
and unjustified advantage in new activities since potential lenders or joint venture
the Government maintaining strict control over public finances.
partners would perceive it as a low risk proposition with the taxpayer standing behind
it, whatever their assessment of the commercial realities. At the same time, the taxpayer
would be investing in activities going well beyond Royal Mail’s existing services, pre-
empting decisions on alternative uses of those resources in areas such as health and
education. Competitors would be understandably concerned that Royal Mail, in
developing new commercial opportunitics, should be regulated to ensure it was
competing fairly. It is questionable, however, whether such competitors would have
confidence in the Government’s ability to ensure independent regulation of the
business, while it remained in public ownership.
9 The relaxations discussed in paragraph 6, together with use of joint ventures under
the PFI, would be of some value to Royal Mail. They would also place it in a very
favourable position compared to other public sector bodies and nationalised industries.
But the key question is whether such changes would give Royal Mail enough
commercial freedom to respond flexibly to changing market conditions. Unlike Post:
Office Counters, Royal Mail has ambitions to become a major international competitor
in the communications industry. It has significant market power and the commercial
expansion it secks will bring it into direct competition with a wide range of private
sector businesses, requiring additional capital. Above all, it is more likely to be successful
and efficient if it is responsible for taking its own decisions, according to commercial
criteria, within a clearly defined framework of independent regulation.
10 The Government has provisionally concluded that the changes that would be
possible within the public sector would fall short of the commercial needs of Royal
Mail. Given the speed with which the communications industry is changing, and is
15
RLITO000002
RLIT0000002
RLITO000002
RLITO000002
likely to continuc to change over the next decade, the clear risk is that the public sector
option would condemn the business to slow decline.
(2) A 100% share sale
11. The Government has considered the option of a 100% sale of Royal Mail via a
Stock Exchange flotation, whether in one or more stages. This would involve the
transfer of Royal Mail’s business to a public limited company, with a public offer of
the total share capital and no residual Government shareholding. All the shares would
be offered to the public, employees, sub-postmasters and financial institutions.
12. The Government intcrest would be limited to the retention ofa special share which
the Government would hold in view of the business's strategic importance. This would
ensure that no single shareholder, or shareholders acting in concert, could acquire more
than 15% of the equity without the Government’s agreement. Consideration would
also be given as to whether the special share should cover any other issucs.
13 Under this option, the Government would create a comprehensive regulatory
regime guaranteeing the universal service and uniform tariff structure. This is discussed
in full in Chapter 6 of this paper, with the regulator also having responsibility for
competition issues as set out in Chapter 7.
14. This option has much to recommend it. The maintenance and enhancement of
the basic public services could be assured by independent regulation. Within that
framework, Royal Mail would be able to:
- plan, invest and run its affairs on a commercial basis;
- forge new alliances, including joint ventures, in the UK and overseas;
- gain access to private sector capital free from public sector controls;
- benefit from sharper commercial disciplines thereby improving its efficiency
and responsiveness to its customers.
15 This option would maximise the shares available to the public. It would follow
the well established patterns of earlier privatisations, as a result of which companies like
BT, British Gas, British Airways and BAA are now fully established, highly competitive
companies in the private sector with no residual Government interest. The
Government sct out in the recent White Paper on “Competitiveness : Helping Business
to Win” (Cm 2563) how the privatisation programme had brought substantial benefits
for consumers and how the lower prices, greater innovation and higher levels of service
provided by the privatised companies are helping to raise the competitiveness of other
UK companies.
16 The Government recognises, however, that many people would prefer a closer
link between the Government and Royal Mail than this option would provide. The
desire to sce such a link reflects the important role which Royal Mail plays in our
national life. The Government has therefore looked for ways to meet this concern
while also responding to Royal Mail’s commercial needs.
(3) Joint ownership by Government, the public and employees
17. This option would involve a new partnership under which the public, the
employees, the sub-postmasters and the Government would cach hold significant
shareholdings in the business. The Government would particularly hope that those
directly involved in the business would wish to invest in it and intends to offer shares
on a preferential basis accordingly. The Government sees scope for a significant
proportion of the shares to be held by employees and sub-postmasters - perhaps around
10% - and would consider how best to achieve this.
16
RLITO000002
RLITO000002
18 Under this option, the Government would intend to retain its sharcholding
indefinitely. Indeed, it would cnsure that the legislation needed for this option would
require Parliamentary approval before any sale of its remaining shares. The retention
of this Government shareholding would be a clear indication of the Government’s
continued commitment to the vital public services Royal Mail provides. It would also
allow the Government and the taxpayer to share in the company’s future success
through its shareholding. The requirement for Parliamentary approval before any
subsequent sale would reinforce the provisions of the special share, which the
Government would also retain in the same way as under the previous option (para 12
above).
19 In terms of the structure of the company and regulation this option would follow
the lines of the previous one. The significant difference, however, is that the
Government would retain a substantial stake in Royal Mail.
20 The Government is attracted to this option, and has considered what would be
the appropriate level of its retained stake were it to proceed. But for it to meet Royal
Mail’s needs, it is essential that the retained Government sharcholding should not leave
the Government in control of the business. Ifthe Government were to retain a majority
shareholding, it would still be in control, Royal Mail’s borrowings would continue to
count against the PSBR and the taxpayer would effectively be underwriting the
business. Alll the difficulties set out in option (1) above would still apply.
21 For Royal Mail to be allowed to operate as a private sector company, the
Government must sell a majority of the shares. As long as the Government is only a
minority shareholder, the business would be classified to the private sector, and would
be free from public sector controls . The Government would propose to retain 49% of
the shares in the company though not intend to use its rights as an ordinary sharcholder
* During the course of the review it has been argued that Royal Mail could be classified to the private
sector even if the majority of the shares were owned by the Government. This is not the case
Sector classification in the UK accounts is determined in accordance with standards contained in the System
of National Accounts (SNA), in order to maintain the integrity of the accounts. The SNA is issued jointly
by five international organisations (CEC, IMF, OECD, UN and World Bank). A revised version was
published at the end of 1993.
In the present context the following extracts from the SNA are relevant:
“Ownership and control of corporations
4.30 As explained later in this Chapter, the sub-sectors of the System require private corporations to
be separated from public corporations subject to control by Government units, .... Owning
more than half the shares of a corporation is evidently a sufficient, but not a necessary, condition
for control. Nevertheless, because it may be difficult to identify those corporations in which
control is exercised by a minority of shareholders, it is recommended that, in practice,
corporations subject to public .... control should be confined to those in which governments
‘own a majority of the shares. This recommendation is intended only as a practical guideline,
however, to which exceptions can be admitted if there is other evidence of control.
Pablic non-financial corporations
4.72, .... The Government may secure control over a corporation:
(a) By owning more than half the voting shares or otherwise controlling more than half the
shareholders’ voting power; or
(b) Asa result of special legislation, decree or regulation which empowers the Government to
determine corporate policy or to appoint the directors
4.73 In order to control more than half the shareholders’ voting power, a government unit need not
own any of the voting shares itself. For example, a public corporation could be a subsidiary of
another public corporation in which the government owns a majority of the voting shares ....”
‘The Central Statistical Office, which is responsible for determining sector classification, believes that Royal
Mail must be classified to the public sector as long as the Government owns a majority of the shares, Past
decisions would not provide a basis for departing from current standards.
17
to intervene in the commercial decisions of the company. In particular, it would not
expect to vote its shareholdings on resolutions moved at General Meetings of the
company although it would retain the power to do so.
22. This approach, with the Government's retained stake of 49%, is the Government's
preferred option. It would give Royal Mail all the commercial freedoms it needs to
respond to increasing competition. It would benefit the consumer, by allowing the new
company to develop new services and it would fully protect the essential public services
provided by Royal Mail, through the arrangements set out in the next chapter.
The future of Parcelforce
23 The Government announced in July 1992 its intention to sell Parcelforce. This
reflected the fact that, while Parcclforce provides a vital social function in delivering
parcels, handed in by the public at post offices, to every houschold in the country, the
business’s main activities are in the commercial parcels market. There is no monopoly
in this wider markct and no public interest in the Government being an active
participant in it. In announcing its intention to sell the business, the Government made
clear that a universal parcel service at a uniform and affordable tariff would continue.
24 During the course of the wider Post Office Review, the Government has
considered the option of selling shares in a joint Royal Mail and Parcelforce operation.
As already indicated, Royal Mail wish to become a major player in the international
communications market. In this market customers will expect them to provide a full
range of services, including parcels. The management of the Post Office have made
clear that they see parcels as an important strategic market for the future.
25 For the Government to attempt to sell Parcelforce separately would, therefore,
run counter to the thrust of giving Royal Mail greater commercial freedom through
the options outlined above. It is likely that any purchaser of Parcelforce would require
an agreement, as part of the sale process, that Royal Mail would not develop a
competing parcels service of its own. Alternatively, if there were no such restriction,
Royal Mail would wish to develop a new parcels business, at a time when analysts of
the parcels industry recognise that there is adequate and arguably excess capacity in the
UK parcels market. Neither would be attractive.
26 The Government has therefore decided that the future of the two businesses lies
together. This would allow the key social services provided by Parcelforce, namely the
public parcels service at post offices, to be subject to the same regulatory control as
would be proposed for Royal Mail under the Government's preferred option.
27 The Government acknowledges the concern expressed by other participants in
the parcels industry that there should be no cross-subsidies between the regulated mail
and parcels services and the fully competitive commercial parcels sector. It also accepts
that the recent commercial history of Parcelforce, which has been trading at a loss in
recent years, is unsatisfactory. The regulatory system proposed would seek to ensure
that the accounts of the combined business were sufficiently transparent to allow the
regulator to prevent any cross-subsidy.
Summary
28 This chapter has set out the possible options for the future of Royal Mail and
Parcelforce. Subject to consultation on the Green Paper, the Government's preferred
way forward is the sale of 51% of the shares in a combined Royal Mail and Parcelforce
sale as set out above. Such an approach would give the business the commercial
freedoms it needs, while safeguarding the interests of consumers in essential public
18
RLITO000002
RLIT0000002
RLITO000002
RLIT0000002
services. The Government believes that it would also permit the progressive
introduction of more competition in postal services. In the next three chapters, this
paper sets out what would be required in terms of regulation, competition and
consumer representation to deliver these objectives.
CHAPTER 6
REGULATION OF THE POSTAL SECTOR
1 The Government is committed to ensuring that Royal Mail will continue to
provide important and socially necessary services - even where it may not be profitable
to do so. The Government will, in particular, protect the services which are vital to
rural communities. If the Government were to pursue an option involving the sale of
shares, the legislation that would be necessary would sct up a regulatory system to ensure
this. This Chapter scts out how such a regulatory system would operate. It assumes that
the new company, including both the current Royal Mail and Parcelforce, would be
known as Royal Mail
2 Atthe centre of the system would be the Director General for Postal Services (“the
regulator”). Both the Secretary of State and the regulator would be under a statutory
obligation to ensure that the public are provided with universal letters and parcels
services. They would achieve this by being given powers to appoint Royal Mail to be
the universal service provider. The Government would expect to make the initial
appointment itself, with the regulator being responsible thereafter for monitoring the
Royal Mail’s performance and ensuring it maintained its obligations. The regulator
would also ensure, under the Citizen's Charter, that standards of service continue to
be maintained and improved.
3 The regulator would be appointed by Ministers, but would have independent
powers which he or she could exercise without reference to the Government. It would
be a legal requirement on Royal Mail to provide universal services, and on the regulator
to ensure that they do so. This is a greater degree of legal protection for customers than
exists at present.
4 The legislation would in particular place on Royal Mail an obligation to provide
letters and parcels services throughout the country within a uniform and affordable
tariff structure. Under this structure, it would continue to cost the same amount to
senda letter or parcel between Land’s End and John ©’Groats as between neighbouring
streets. Royal Mail would also be legally obliged to maintain a wide network of
collection points at which letters can be posted, including both post offices and letter
boxes. Similarly, it would have to collect parcels from every post office.
5 The tariffs for both first and second class post would be controlled by a price-
~ capping formula. The Government expects, through these arrangements, to ensure that
prices continuc to decline in real terms as they have in recent years, reflecting increased
efficiency. The Government rejects, in particular, the argument that prices would need
to rise “to fund dividends”. The Post Office has in practice been paying substantial
sums to the Exchequer for some years through the EFL arrangements, discussed in
Chapter 2. Indeed the Post Office has argued that recent EFLs have been significantly
higher than a private sector company would expect to pay in dividends. As explained
in Chapter 10, there would be no VAT on stamps.
6 There are other services which the regulatory system would impose on Royal
Mail. It would also be required to provide:
= a free service for blind people as at present;
20
RLITO000002
RLIT0000002
- recorded delivery and registered post for important and valuable items;
= satisfactory arrangements, free of additional charge, for redelivering mail sent
to the wrong address and forwarded on;
- acomprchensive “difficult address” service, so that efforts are made to deliver
mail where the address given is non-existent, wrong or incomplete;
- a full range of international services;
- delivery and return of the writ for Parliamentary elections.
7 Past experience has shown that regulatory systems can make sure that such services
are delivered by private sector firms. BTT, for example, is obliged to provide telephone
lines and callboxcs throughout the country. There are now 122,000 BT callboxes in
the country compared to 86,000 in 1987 - an increase of over 40%. There has been a
significant improvement in the reliability of phone boxes so that 95.7% are now
working compared to 75% in 1987. Many are not profitable for BT to operate, but
they are legally required to keep them going. At the same time BT’s prices overall have
fallen by around 35% in real terms since privatisation.
8 As well as ensuring that certain services are provided, the regulator would, in line
with the Citizen’s Charter, set standards for their delivery. For example, the standard
for the proportion of first class letters to arrive at their destination in the next working
day, currently agreed between the Post Office Users National Council (POUNC) and
the Post Office, will be set by the regulator. He or she will be able to ensure that Charter
principles are implemented; in particular that a proper complaints procedure is put in
place, and that compensation levels are determined if mail is lost or if other specified
service levels are not met.
9 Finally, mention should be made of a number of other specific services:
= It has been argued that, if it were not within the public sector, Royal Mail
would no longer be required to carry out a second daily delivery of mail. There
is, however, no such requirement at present. The provision ofa second delivery
is not one of Royal Mail’s social commitments but entirely an operational
matter decided by Royal Mail at a local level. Neatly one area in six receives
no second delivery, so its provision is by no means universal. Royal Mail
expects the second delivery to continuc in the vast majority of places. A key
Government concern, however, is to ensure that an ever higher percentage of
first class mail is delivered the day after posting. It will expect the regulator,
therefore, to set Royal Mail tough targets for the delivery of mail, including
for the time of delivery. Provided those targets are met, Royal Mail will have
the operational responsibility to decide how best to achieve this, Through the
operational oversight of the regulator, customers will be better protected in
this key arca than at present.
= It bas been argued that, under the preferred option, Royal Mail would no
longer maintain the post bus network which provides an important service in
rural areas. It is not generally understood, however, that post buses are only
provided at present when they make a positive contribution to Royal Mail's
finances. Where they are directly subsidised, they are subsidised not by Royal
Mail but by the relevant local authority. The Government sces no reason,
therefore, why any of its proposals in this paper should have any impact upon
the provision of post buses.
- HM Forces, serving overseas, are currently able to send and receive mail at
UK inland rates. This docs not involve any Royal Mail subsidy, however, as
the movement of mail to bascs overseas is both the responsibility, and at the
21
RLITO000002
RLIT0000002
RLITO000002
RLITO000002
expense of HM Forces. Again, this would be unaffected by the Government's
proposals.
- It is the general practice in the UK for letters to be delivered through the front
door rather than to the “garden gate”. This is not a legal obligation, however,
and there are numerous cases, notably in blocks of flats, where the postman is
not given access to the front door of each household. Royal Mail has no plans
to change the current arrangements. But under the regulatory system proposed,
it would be for the regulator to monitor. This, again, is a better system of
protection for the public than exists at present.
- Lastly, it has even been suggested that Royal Mail would no longer provide a
frce service of replying to letters sent to “Father Christmas”. The Government
doubts that such a service - the cost of which is minute, given the size of the
business - should be the subject of legislative or regulatory underpinning. The
Post Office Board have made clear, however, that the service fully justifies
itself commercially in terms of goodwill. They have no plans to remove it.
The Government welcomes this commitment to a traditional customer service.
10 Although the key obligations on Royal Mail would be set out in the legislation,
many of the precise details would be set out in a separate legal document, initially agreed
with the Government and then enforced by the regulator. It would be open to Royal
Mail and Parcelforce to discuss with the regulator the precise terms of this and of the
obligations it imposes. It needs to be recognised, of course, that such obligations are
effectively funded by other mail users, some of whom may prefer fewer social
obligations and lower national tariffs. But the regulator would only be able to agree to
any changes ifhe or she were satisfied that the universal service and uniform tariff would
continue to be provided, as sct out on the face of the primary legislation.
11. The regulator’s primary duties will be to ensure the provision of basic services
supplied by Royal Mail and to ensure that its continuing letters monopoly is not abused.
Consistent with this, he or she will also have a duty to promote competition in the
industry to the greatest extent possible. The Government sees no reason why the
arrangements it is proposing should put any new burdens on private sector businesses
in the postal sector, which currently operate satisfactorily in a largely unregulated
environment and will continue to do so. The next chapter explains how the
Government would propose to introduce greater competition alongside a private sector
Royal Mail.
CHAPTER 7
COMPETITION IN THE POSTAL SECTOR
1. The Government believes strongly in the benefits of competition and free markets.
Competition forces companies to innovate and invest in new services. It encourages
companies to ensure they provide services that meet the needs of their customers and
obliges them to control their costs, so that their products provide real value for
customers. Constraints on competition are seldom in the interest of consumers.
2 In the case of postal services, the Government’s commitment to maintain the
universal service and uniform tariff structure will set limits on the level of competition
in the market that is possible or desirable in practice. The cost of delivering letters varies
considerably according to the location of the address to which they are being delivered.
The cost of delivering a Ictter from Land’s End to John O’Groats, for example, is many
times more than the current cost of a first class stamp. It can only be delivered for that
price if many other letters are delivered at a cost less than a first class stamp. Royal Mail
thus averages out the total costs of running the network over all letters posted. If it had
no monopoly, other carricrs would be able to concentrate on city and urban areas where
the cost of delivering letters is lower. The resultant loss of business would make it
impossible to maintain the uniform tariff.
3 Accordingly, the Government recognises that a degree of monopoly will be
necded to support the maintenance of the universal service and uniform tariff structure.
Nevertheless it remains committed to reducing the letter monopoly limit closer to the
level of the first class stamp. At one time, it was assumed that Royal Mail required an
absolute monopoly over all written communication. In 1981, however, the
Government introduced a monetary limit to the monopoly, by allowing anyone to
carry lettcrs provided they charged at least £1 per item. The practical effect of this
reform was to allow the growth of the courier business, which has been of considerable
help to businesses which need mail delivered urgently, usually within cities and urban
areas. Although it was argued at the time that this reform would be a major threat to
the viability of Royal Mail, it has not proved to be the case, even though the value of
the £1 limit has been eroded over time. Indeed, the increased choice and range of
services available has been a benefit to consumers, whether private or business, while
protecting the public services. The Government made a further reduction in the
monopoly in 1981 by authorising document exchanges which allow mail to be
interchanged between nests of post boxes, with customers taking their mail to and from
stich nest boxes. Again, this has increased choice, without damaging the service to the
public.
4 In addition to a reduction in the monopoly limit, the Citizen’s Charter also set
out a number of further proposals for competition. These were:
- to extend the range of discounts available for those companies who pre-sort
their mail to include additional discounts for companies who wish to transport
the mail to the end destination themselves, though with Royal Mail still being
responsible for door to door delivery (“downstream access”), This would place
competitive pressure on the costs of Royal Mail’s transport network;
23
RLITO000002
RLIT0000002
RLITO000002
RLITO000002
= asubsequent extension of such discounts for companies collecting and sorting
such mail on behalf of third parties (“consolidation”). This would extend the
availability of cost related discounts to a wider range of customers; and
= a willingness to consider applications for “niche licences” to deliver specific
services within the monopoly. This would allow further development of value-
added services. For example, such licences currently allow the operation of
document exchanges (described in paragraph 3 above) and the delivery of
Christmas cards by charities.
5 In the main, the Citizen’s Charter proposals would require primary legislation
before they could be implemented. The legislation that would be necessary to
implement other proposals in this paper would provide, therefore, the opportunity to
move forward in all these areas.
6 Additional competition must not be allowed to put at risk Royal Mail’s ability to
maintain a universal service at a uniform and affordable tariff. In order to achieve the
correct balance in this area, further detailed work will be needed to ensure that sufficient
empirical information is available on which to base judgements. In the light of this
work, the Government will introduce a package of pro-competitive measures in parallel
with the other aspects of the new regime. It would then be for the postal regulator to
monitor the new competitive structure of the industry, ensuring that the correct balance
between the necessary level of monopoly protection and the interest of customers is
maintained. The Government expects that competition will be introduced
progressively, to ensure that any implications for the universal service and uniform tariff
structure can be closely monitored.
Parcels
7 In the parcels market there is no monopoly and anyone can offer a parcels service
at any tariff. As now, therefore, there will be no monopoly protection for the services
currently provided by Parcelforce. The new company will, nonetheless, have an
obligation to provide a universal service at a uniform and affordable tariff available at
every post office. The Government will ensure that the new company can continue
to provide this public service and believes that it should be possible for the new company
to doso profitably. The Government will be considering whether the existing exclusive
access granted to Parcclforce at post offices needs to continue, or whether other
companies should be allowed to offer parcel services at post offices in competition with
the new company.
8 Whatever the arrangements for the parcels services at post offices the Government
regards it as essential that there are no cross-subsidies between the public letters or
parcels scrviccs and the wide range of non-obligatory and non-monopoly services, for
both letters and parcels, that the new company might offer in future. It will be a key
function of the regulator, therefore, to ensure that this boundary is properly scrutinised
and the legislation will provide for powers to require the disclosure of accounting
information.
24
CHAPTER 8
CONSUMER REPRESENTATION
1A more commercial Royal Mail, operating within a clear regulatory framework
in a more competitive market place, would provide the consumer with a reliable and
improved postal service. But the consumer's voice should still be heard and given
appropriate weight.
2 At present, the interests of the consumer are represented by the Post Office Users
National Council (POUNC). There are separate Users Councils for Wales, Scotland
and Northern Ireland, and local Post Office Advisory Committees throughout the
country. The Post Office is obliged to consult POUNC before taking certain steps such
as putting up postal charges. POUNC are obliged to look into consumer complaints
about the Post Office, and are also free to comment on any matter which they believe
affects Post Office users.
3. Under the regulatory system set out in Chapter 6, the Government believes there
arc two possible models for consumer representation. Either POUNC could be retained
as a separate consumer organisation, along the lines of the current Gas Consumers’
Council, or the regulator could be charged with specific consumer responsibilities, thus
absorbing the functions of POUNC. The Government is already consulting over
whether the present arrangements in the gas industry should continue or whether
consumer issues would be better represented within the regulatory framework.
4 Whichever model is chosen, the Government will also ensure that the consumer’s
voice continues to be heard in relation to Post Office Counters, It will therefore ensure
that arrangements similar to those under which POUNC represents the interests of
consumers on matters such as queuing times and closure procedures will be maintained.
5 The issue of consumer representation is one where the Government is particularly
anxious to receive the views of the Post Office’s many customers. An address for
responses is given at the end of this document. The Government would also welcome
views from POUNC and other consumer bodies over what arrangements should be
made in the cvent of the Government's preferred option going ahead.
25
RLITO000002
RLIT0000002
RLITO000002
RLITO000002
CHAPTER 9
POST OFFICE EMPLOYEES AND SUB-POSTMASTERS
1 People are the Post Office’s most important asset. The business of the Post Office
is very labour intensive: even if new technology has been able to take over some of the
sorting and processing functions, the daily delivery round cannot be done by machine.
The Post Office is a very large employer (around 200,000-cmployees) and staff costs
make up some 65% of total operating costs. In addition Post Office Counters relies
heavily on the 19,000 sub-postmasters and their assistants, who work for the main Post
Office on an agency basis.
2 Under any option, all three Post Office businesses will remain important
employers. As this paper has shown, however, all three businesses face compctitive
pressures which can be expected to increase over time. These pressures will apply
whether the businesses are in the public or private sector, so the key to long term
employment prospects is to ensure that the structures adopted for the businesses are
those most likely to improve their competitive position. The Government thus believes
that the greater commercial freedoms proposed in this paper offer the best future for
those who work in the Post Office businesses.
3 The Post Office is committed to motivating and training its cmployecs to give the
highest levels of service. Almost all of them have undergone quality training, the results
of which can be seen in the greatly improved levels of service quality achieved in recent
years. Each of the Post Office businesses intends to continue and strengthen that
commitment to training and to excellence, and the Government welcomes this.
4 The Government is anxious that the people who contribute to the success of the
different businesses should be able to participate in their future. If an option involving
the sale of shares is adopted the Government will ensure that employees have special
opportunities to acquire such shares. Experience has shown that employce share
ownership is mutually bencficial to a company and to its workforce.
5 The Government intends that sub-postmasters will benefit from the proposals in
Chapter 4 for the future of Post Office Counters, which will enable them to offer new
services to their customers. Because postal work remains a significant proportion of
total Post Office Counters turnover, the Government hopes that sub-postmasters
would also wish to take up shares in Royal Mail.
6 Subject to Stock Exchange rules, therefore, preferential share entitlements would
be available to Post Office employees and sub-postmasters. In order to encourage
maximum take-up the Post Office would intend to make it possible for employees to
save at preferential rates in advance of the sale of shares.
Pensions
7 Pensioners and employees will also want to know whether their pensions will be
affected by the Government’s proposals. The Government will ensure that under any
option all pension rights are safeguarded.
26
CHAPTER 10
VALUE ADDED TAX
1 As made clear earlier in this paper, there is no possibility of VAT on stamps for
letters or parcels, This chapter sets out the issues in more detail.
2 Postal services are subject to a particular VAT regime set out in the sixth EC VAT
Directive, which provides for public postal services to be exempt from VAT. The VAT
arrangements following any changes in the structure and organisation of the Post Office
would need to conform with the provisions of this directive.
3 In the light of discussions with the European Commission, as well as earlier
jurisprudence of the European Court of Justice, the Government is satisfied that none
of the options it is considering for Royal Mail and Parcelforce would mean imposition
of VAT on the universal letter and parcel services which they will continue to provide.
This is why the stamps which customers buy in order to use these services will continue
to be free of VAT.
4 A specific issue which arises in relation to the parcels market is whether the new
company should charge VAT on contract parcels - that is, parcels which are carried under
a negotiated contract with the customer and not under the universal service obligation
imposed by the regulatory system, At present Parcelforce does not charge VAT on such
services, whereas all other operators must do so. This is not necessarily an advantage
for Parcelforce, as is often claimed, because it means that Parcelforce is unable to reclaim
VAT it pays on its inputs, but the different VAT treatment clearly affects the competitive
playing field.
5 If the Government proceeds with a change in the status of Royal Mail and
Parcelforce it will be considering, in the light of EC law, the appropriate VAT treatment
of non-obligatory services provided by the new company. The Government will, of
course, wish to take the interests of customers fully into account in any change. The
Government's consideration of this issue will not however result in the imposition of
VAT on the ordinary letters or parcels services provided to individuals at post offices.
27
RLITO000002
RLIT0000002
RLITO000002
RLITO000002
CHAPTER 11
THE ROYAL ASSOCIATIONS
1 The Government recognises the historical character of the Royal Mail business
and its continuing Royal connections. As will be clear from this Green Paper, the
Government believes that the organisation will continue to have a unique role in British
life. It is therefore pleased to report that Her Majesty the Queen has graciously agreed
that under any of the options which the Government is considering the traditional
Royal connections should continue. In particular, Her Majesty has consented that
- a depiction of Her head should continue to appear on all stamps issued by
Royal Mail, the designs of which will be submitted to Her for approval;
= the Royal emblems, the Crown and the Cypher should continue to appear on
such items as post boxes, vehicles and of business premises;
- the new company may be registered under the new name “Royal Mail Plc”.
2 The Royal connections, important both to Royal Mail customers and to stamp
collectors, will remain symbolic of the essential national role which Royal Mail will
continue to play. Measures will be put in place to ensure that they are used in an
appropriate way.
CHAPTER 12
CONCLUSION AND NEXT STEPS
1 The Post Office’s commercial environment is changing rapidly. To meet this, the
Government believes that change is now necessary in the structure and organisation of
the Post Office. The management of the business has made clear that the current
arrangements are against the long term interests both of the Post Office and of its
customers. The all-party House of Commons Trade and Industry Select Committee
has accepted this view.
2 The Government is firmly committed to a universal letter and parcels service, at
a uniform and affordable price, with a nationwide network of post offices. The best
way of ensuring these services is through the commercial success of the businesses which
provide them, backed by effective regulation. Subject to consultation, the Government
has concluded that;
- for Post Office Counters, the existing structure is effective and should remain.
The Government recognises, however, the desire of the business, the sub-
postmasters and their customers for greater freedom to widen the scope of
services available in post offices and believes this can be met, by building on
existing activities. It also intends to automate the post office network. Work
is underway to implement both decisions. They will do a great deal to further
the commercial prospects of the network, to the benefit of Post Office
Counters, its clients and customers and the sub-post offices;
- for Royal Mail and Parcelforce, more radical change is necessary to allow the
business greater flexibility in the fast expanding communications market. The
Government believes that this will be consistent with the introduction of more
competition in the supply of postal services, and will greatly benefit consumers.
It has provisionally concluded that the best way forward is a private sector
partnership with shares owned by the public, the employees and the
Government. This would provide the business with the scope to improve its
service and to increase efficiency in a more competitive environment. It would
ensure that decisions on investment and business strategy were taken on
commercial grounds alone. It would remove the current conflict between the
Government as sole owner of the business and the Government as regulator
and enhance fair competition with the private sector.
3 Some of these proposals require legislation before they could be implemented.
Pending final decisions in the light of consultation, preparatory work for such legislation
has been put in hand. Such legislation would:
- provide the necessary powers to restructure the Post Office businesses;
- establish a regulatory system to maintain and improve the standards of postal
service under the Citizen’s Charter;
- provide powers for the progressive introduction of more competition;
- establish a new legislative framework for Post Office Counters.
29
RLITO000002
RLIT0000002
RLITO000002
RLIT0000002
Consultation
4 — The issues raised in this paper arc complex, but of fundamental importance to the
public, If you wish to comment on them, please write to:
Post Office Review Team
TP Division
2nd Floor
Department of Trade and Industry
151 Buckingham Palace Road
London
SW1W 9SS
If you wish to fax your comments you can do so on I
local rates’).
(calls charged at
5 You can also dictate your comments over the telephone on}
number will be operational between 8am and 8pm, seven days a week, from 11 July
to 30 September. Again, calls will be charged at local rates‘.
6 All comments and representations should be received by Friday 30 September.
* May not apply if you are not a BT or Mercury customer.
30
Printed in the United Kingdom for Her Majesty's Stationery Office
Dd 0509894 6/94 C70. «3840 51-1290
RLITO000002
RLITO000002
RLIT0000002
.9°780101"261425
RLITO000002
RLITO000002
RLITO000002
RLITO000002
HMSO publications are available from:
HMSO Publications Centre
(Mail and telephone orders only)
PO Box 276, London SW8 SDT
Telephone orders
General enquiries
(queuing system in operation for both nuntbers)
Fax orders 4
HMSO Bookshops
49 High Holborn, London WCLY 6HB
J Past count
2HE
+ service only)
y's Accredited Agents
(see Yellow Pages)
and through good booksellers