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Department of Trade and Industry
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Post O ffice Reform:
A world class service for
the 21st century
Presented to Parliament by
the Secretary of State for Trade and Industry
by Command of Her Majesty
July 1999
Cm 4340 £9.20
Foreword by the Secretary of
State for Trade and Industry
The Post Office is a vital part of both our economic and our social life.
With its regular delivery to every address in the country — an average
of 75 million letters delivered every working day of the year — and its
nationwide network of post offices visited every week by the equivalent
of half the population of the country, it is not surprising that it is one of
our best known and respected national institutions.
But the Post Office needs transforming. It needs further modernising
as customer demands change, as technology advances and as new
players ~— from private courier services to e-mail providers — emerge.
This White Paper shows how the Government intends to deliver its
pledge to provide a world class Post Office for the 21st century.
We have a vision of the Post Office as a thriving business:
® efficiently serving the needs of those who need to send and receive
letters every day;
® expanding into new areas of electronic and hybrid mail, and complete
distribution arrangements;
making alliances with other players in the market;
overseeing a nationwide network of post offices equipped with the
°
latest technology with a place in every high street and rural area
to offer an increasing range of services for an ever greater number
of clients; and
e employing a highly motivated work force that enjoys job satisfaction
which will ensure an effective response to the challenges.
The Post Office is taking steps to improve its efficiency, introduce
modern services, and enter new markets. The Government will enable
the Post Office to invest more in its future so as to realise this vision.
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Post Off
We also have a vision of customers being given greater choice in postal
services by the entry of new players into the market, meeting developing
customer demands as well as challenging the Post Office to provide ever
more efficient services. We will help realise this vision by allowing
more competition, strengthening the Post Office Users’ National
Council (POUNC) to ensure customers’ interests are taken fully into
account, and establishing a Regulator to ensure fair competition in the
UK postal market.
This White Paper details the way we will set the agenda for a modern
UK Post Office operating in global markets and providing high quality
services to every user in the country. It also describes the way we will
ensure that the postal services of this country develop in such a way
that all businesses and individuals can be confident of having the
communications services needed as we prepare for the new century.
Stephen Byers
Contents
Foreword
Our vision for the Post Office of the future
The challenge of change
Objective 1 — To improve postal services for business and
domestic customers through greater choice, better quality
and falling real prices
Objective 2 - To maintain a universal service of postal delivery
throughout the UK, and a uniform tariff
Objective 3 - To establish clear and accountable relationships
between the Government, the Post Office, the Regulator
and POUNC
Objective 4 — To equip the UK Post Office to meet the challenges of
the changing postal market both domestically and internationally
Objective 5 — To support a viable network of post offices so as
to ensure nationwide access to a range of public and private
sector services
Royal associations
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Contents
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Our vision for the Post
CHAPTER ONE
Our vision for the Post O ffice
of the future
introduction
The Government intends to ensure that the United Kingdom has a
vibrant, competitive postal market and an efficient and effective Post
Office to meet the country’s needs in the coming years. This White Paper
describes the Government's plans for the development of this postal
market and the place of the Post Office within it.
Effective postal services which meet the commercial and social needs of
the country are important to both competitiveness and social cohesion.
But the environment in which postal services will be provided in future
will differ greatly from the present. The challenges are:
e changing customer demands (such as businesses seeking delivery to
time and international end-to-end services);
°
greater liberalisation of traditional monopolies opening up European
and world domestic markets;
e new technology including the growth of electronic mail and the
internet, and sophisticated logistics handling including track and trace
technology; and
globalisation of postal services and consolidation amongst key
postal players.
These call for:
e high quality services to meet differentiated and changing business and
social needs;
increasing efficiency and productivity in the face of competition from
alternative means of communication and from both domestic and
international competitors;
flexibility and adaptability in changing markets; and
e a Post Office with the ability to respond to this more competitive and
changing environment.
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3. The Post Office’ has been a vital part of the infrastructure of our country:
« helping government, business and individuals to generate wealth and
increasing social cohesion through good communications, swift flows
of information and knowledge, and access to the wide range of
services available through post offices; and
® maintaining a successful and profitable business.
4. If the Post Office is to sustain this position and develop into a major global
player it will need to change and adapt. But so will the Government's
approach to the Post Office. The statutory powers which govern UK
postal markets, the blurred relationship between the Government and
the Post Office, both on strategy and management, and undue constraints
on investment and commercial freedom —all of which have been acting
as brakes on successful development — belong to the past.
5. The changes spelt out in this White Paper should ensure that high quality
postal services are offered at a reasonable price and that a universal
service under a uniform tariff structure can be provided without direct
public subsidy. They are designed to enable the Post Office, as an
important national asset, to maintain and enhance its value in the face
of increased international competition and technological change.
6. The Government's twin goals therefore are:
® enhanced postal services which satisfy developing business and
individual customer needs at affordable prices, and
¢ a Post Office which is able to succeed in an increasingly demanding
national and international market place.
7. The Government is convinced that successful reform requires more than
granting the Post Office greater commercial freedom. It requires greater
competition in the postal market and the creation of a new, transparent
and accountable regulatory framework. This will ensure that the demands
of customers are given priority and that any greater freedom is exercised
1 The Post Office currently comprises three main businesses: Royal Mail, Parcelforce Worldwide and
Post Office Counters Ltd. In this White Paper the term ‘Post Office’ refers to the organisation as a
whole, while ‘post offices’ is used to describe the network of nearly 19,000 outlets nationwide.
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effectively, and will therefore provide the right environment for the
Post Office to transform itself into a successful, competitive business.
Government objectives for the reform of postal services
The Government has developed five linked objectives which govern
the reform programme. These are set out below, with the actions which
flow from them.
Objective 1 To improve postal services for business and domestic Objective 1 To improve
customers through greater choice, better quality and falling real prices. postal services for
business and domestic
Experience with the utilities has shown that, in the right framework, customers through
greater competition can lead to improved services and falling real greater choice, better
prices for domestic and business customers. Competition encourages quality and falling real
innovation, productivity and growth. Where there is competition in postal © p
markets, and where it is anticipated, here and abroad, it is already
leading to a diversity of products, tailored to meet consumer needs.
The Government therefore intends to extend competition by liberalising
the postal market. This approach will be combined with robust regulation
to ensure fair competition and to provide a surrogate for market pressures
where a monopoly remains to protect a universal service. The Government —
will therefore be establishing an independent postal Regulator (to be
known as the Postal Services Commission) in order to achieve this
objective.
The Government believes that greater competition will bring benefits to
the consumer. At present competition is restricted to items costing £1 or
more. The Government will take a major first step towards liberalisation
by halving the monopoly currently enjoyed by the Post Office to 50p. The
necessary order is being laid today to enable the change to take effect
from 1 April 2000. From that date anyone may compete to offer postal
services where individual items cost more than 50p to send, or weigh
over 150 grams. The Government is committed to further liberalisation of
the market. It intends therefore to ensure that the new independent
Regulator will have a duty to promote competition through reduction of
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the monopoly area. One of the first tasks of the Regulator will be to
examine the scope for further liberalisation subject to the need to ensure
that the Post Office’s obligation to provide a universal service at a
uniform tariff is not compromised. The Government will be asking for a
report within one year of the Regulator’s appointment. The disciplines of
increasing competition and independent regulation in its home market
should have the additional benefit of strengthening the Post Office and
improving its competitive position in the European market and beyond,
as liberalisation extends and markets are opened up.
The primary duty of the Regulator will be to promote consumer interests by:
® promoting competition;
@ insisting on high standards of service;
@ regulating prices; and
® ensuring that the Post Office is able to provide the universal service
obligation at a uniform tariff.
To inform the decisions both of the Post Office and the Regulator it is
important that the voice of all types of consumers should be clearly heard.
The Government is therefore strengthening and clarifying the role of the
Post Office Users’ National Council (POUNC). A strengthened POUNC will
work with the Regulator to the benefit of all Post Office consumers.
Creation of an independent Regulator will be important for building
market confidence and protecting the interests of Post Office users. It will
be important to provide credible assurance that there is no undue cross-
subsidy from monopoly to non-monopoly areas. The Regulator will have
powers concurrent with the Office of Fair Trading (OFT) to oversee fair
competition so as to ensure that the Post Office is not using its
monopoly and size to suffocate innovation and enterprise, particularly
in smaller companies.
Regulation is usually only necessary in a market where competition is
not possible or where it is not fully developed. The UK market, outside
the statutory monopoly, is a vibrant one with over 4,000 competitors.
It is therefore the Government's intention that regulation should focus
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primarily on the Post Office and any others operating in the monopoly
area, leaving the rest of the market free to operate as now in the largely
unregulated environment.
I Objective 2 To
Objective 2 To maintain a universal service of postal delivery throughout ; maintain a univ
the UK, and a uniform tariff. © service of postal
delivery throughout
It is vitally important that all customers, wherever they live or workin the — the UK, and a
UK, should be assured of a world class level of postal services provided uniform tariff,
at a reasonable price. The universal service which the Post Office has
been providing at a uniform tariff, regardiess of the distance for delivery
for letters, registered post and postal packets up to 20 kilograms involves
an element of geographical cross-subsidy. This has proved uncontroversial
in view of the clear social and business needs that it has met. The
Government is committed to its continuation. So whatever other services
the Post Office wishes to provide and whatever ambitions it has to
expand, the Regulator will need to be assured that its universal service
obligations can be met in full.
However, not all customer needs in the monopoly area can be met by a
single tariff. Without large volume users of postal services the Post Office ©
could not maintain the infrastructure necessary for its universal service at —
such a reasonable price. Such large users can turn to other competing
non-postal services (eg advertising through the media rather than
through the post) and choose those services based on cost. The
Government therefore judges it is in the interests of postal services
generally that the Post Office should have greater freedom to offer
commercial, competitive discounts to such users, provided that the
flexibility is not used to reduce unduly the prospects for increased
competition or to undermine unfairly the viability of competitors’
activities in adjacent unlicensed areas.
The Government will be looking for the Post Office to maintain and
improve the quality of service. The Government intends that required
levels of service will be laid down by the Regulator, who will look for
such standards to be improved over time, with power to impose
Objective 3 To establish
clear and accountable
relationships between
ihe Government. the
Post Office, the
Regulater and
POUNC,
Objective 4 Te equip
the UK Post Office to
meet the challenges of
the changing postal
market beth
domestically and
internationally,
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penalties on the Post Office for any shortcomings. In addition,
the Government intends to enshrine in legislation, for the first time, a
definition of the universal service obligation and uniform tariff structure.
Objective 3 To establish clear and accountable relationships between the
Government, the Post Office, the Regulator and POUNC.
The boundaries between the responsibilities of the Government and the
Post Office have become blurred over time. In addition, the Government
has previously acted both as owner and regulator with no clarity as to
how it balances its interests. Under the reform programme, clear
boundaries and a genuine arm’s length relationship will be established.
The Government will have two, separate, roles:
® as the national authority setting the legal and regulatory framework
and social and environmental objectives; and
® as owner.
The Government will restrict its activity to the strategic level, both
in setting social objectives and on matters of commercial direction.
The Post Office Board will become clearly accountable for running the
business successfully on the basis of a rolling, five year, Strategic Plan
agreed with the Government. Separately, the Regulator and POUNC will
be given clear duties and the necessary powers and resources to promote
consumer interests. The Government intends that these arrangements
should be as transparent as possible. All four parties will publish annual
reports on their roles and their performance during the year.
Objective 4 To equip the UK Post Office to meet the challenges of the
changing postal market both domestically and internationally.
The Post Office will have to become more strongly competitive and
customer focused in order to operate successfully in the rapidly evolving
market place. It will need to be more responsive to change, and be
equipped to take on and manage new commercial risks and opportunities.
This will require a transformation in the way that the Post Office manages
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its business, its openness to outside influences, and its willingness to
engage with private sector partners.
The Government's intention is that in future the Post Office will be driven
by market and regulatory disciplines. It will need to respond to these by
improving efficiency and seeking out commercial opportunities. The
Government recognises that to make this work the relationship between
the Government and the Post Office has to change.
For its part, the Government has already announced that it will be
reducing its financial demands on the business. The Government will
expect a dividend at commercial levels — in 1999/2000 this will be 50 per
cent of the post tax profits, and thereafter 40 per cent of such profits,
subject to a cash floor to be set in the context of the approval of the
Strategic Plan. This will, in effect, more than halve the rate at which
profits will be taken out of the business, greatly increasing the Post
Office’s ability to invest in new technology and enhanced services in its
core business as well as in new business areas. This will result in some
loss of income to the Exchequer in the short term. But investment to
grow the value of the overall business should not only improve services,
but also eventually produce higher returns (and tax receipts) to the
Exchequer on a sustainable long-term basis.
The Government recognises that to grow successfully, with new products,
partners and markets, the Post Office may need to make larger growth
investments including acquisitions, joint ventures, alliances and
partnerships. These may not all be financed from retained profits. The
Government is therefore prepared to see the Post Office borrow in such
circumstances, at commercial rates. For investments of £75 million or less
there will be timely notification with borrowing limited to a maximum of
£75 million in each of the next five years. For investments over £75 million
(or where the satisfactory return from a smaller investment is dependent
on further linked investment) the approval of Ministers will be required.
The Government will approve Post Office requests for borrowing for
investment cases which are consistent with the Strategic Plan,
commercially robust, and pose no undue risk to the taxpayer.
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26. As the boundaries of the postal and adjacent markets change, the Post
Office should be able to invest and grow into these areas. Current
legislation enables the Post Office to enter into a wide range of activities,
and it is not expected to constrain the Post Office's current plans. But it
did not anticipate the current changing market conditions. When the
legislative programme allows, the Government will therefore clarify
the Post Office’s permitted range of activities to reflect the continuing
evolution of the scope of the postal services market. The legislation will
also provide for transforming the Post Office from a public corporation to
a public limited company.
27. In order to respond to commercial pressures, including increased
competition and price regulation, the Government believes it is right to
allow the Post Office more flexibility, within the necessary context of
public sector pay policy, to increase the linkages between pay,
productivity and performance. The Post Office already offers tailored
productivity schemes to reward staff for their own particular
contributions to more effective working. But, in addition, the
Government and the Post Office will be looking at the possibility of
developing a general framework of parameters for overall pay
settlements, rather than requiring the Post Office to put forward each
settlement for approval. They will also consider ways to share long term
success of the business with staff, based on any increasing value of the
organisation. These areas will be explored further over the next few
months, with a view to implementation from 1 April 2000.
28. The Post Office must also be free to meet the challenges of market
developments by structuring its business as it decides best in the light
of the changes. The Government will not involve itself in such decisions,
but the Regulator will need to ensure that the necessary accounting
transparency is in place to give credible assurance that there is no undue
cross-subsidy from the business units operating in the monopoly area to
those competing in other market sectors.
29. This new framework will provide the scope for the Post Office as an
independent business within the public sector to respond effectively
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to the changing market. It is now up to the Post Office to respond
to the challenges ahead.
Objective 5 To support a viable network of post offices so as to ensure
nationwide access to a range of public and private sector services.
The Government remains firmly committed to a viable network of post
offices across the country. The sub-post office plays a valuable role in
local communities, particularly for the less mobile. But the Post Office
cannot sustain a network if it is not sufficiently well used, and nor can
Government. The network therefore has to offer products people want.
Automation is vital to this since it will provide the opportunity to offer
a wider range of products as more traditional business falls away.
Following a major review, agreement has recently been reached with ICL
to take forward the Horizon project to automate the network of post
offices. The benefit payment card has been removed from the project,
which in its restructured and streamlined form will enable all post offices
to be equipped with a modern, on-line electronic platform by 2001. There I
will be no change in the existing methods of paying benefits until 2003,
after which the Benefits Agency (BA) intend to move from the traditional
paper based methods of payment to a more modern and efficient way of
paying benefits, building on banking technology and using the existing
automated credit transfer system to make benefit payments into bank
accounts accessible throughout the nationwide network of post offices.
Post Office Counters Ltd (POCL) and DSS/BA will be working together on
plans to introduce the new arrangements in 2003. This will mean that all
benefit recipients who wish to collect their benefits in cash at post offices
will continue to be able to do so both before and after the change.
But customers must also play their part and offer their support through
the use of a valued national institution if it is to remain viable.
POCL is a unique organisation. It is a public sector body which distributes
its services through nearly 19,000 outlets, 97 per cent of which are
privately owned by subpostmasters and franchisees, (usually in
conjunction with another retail business) who make their own decisions
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I Objective 5 To support
a viable network of
I post offices so as to
ensure nationwide
access te a range of
public and private
© sector services.
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about the commercial viability of their businesses. Whilst many of these
businesses are successful, a minority may run into difficulties or the
incumbent may retire. In some cases a new subpostmaster is
subsequently found (often through joint Post Officefocal community
effort), but each year there are a number of post offices (around 200)
which close in spite of best efforts. However, the Government is
determined that this valued communications and community service
should not lose its truly national reach by default. The Government will
therefore set (as part of the Government's guidance to the Post Office
and the Regulator on environmental and social issues) minimum criteria
for access to post office counters’ services. Both the Post Office and the
independent Regulator will report annually on achievement against these
criteria. The Regulator, with input from POUNC on behalf of consumers,
will be required to advise the Government of any concerns particularly
on rural parts of the network and areas of social deprivation, so as to
give timely warning of a potentially serious reduction in access to Post
Office facilities. The Government will then be responsible for consulting
and deciding on the best way forward, taking account both of social
needs and overall financial viability.
33. The Post Office is committed to maintaining and modernising a
strategically well-positioned network of Crown post offices. Such a
network provides POCL with direct contact with the customer, and
enables them to develop high standards of service and products which
their customers need. For the foreseeable future at least 15 per cent of
the total business transacted by the counters’ network will be done at
the Crown offices. The Post Office will convert some of the current
Crown post offices to an agency basis where such conversion would be
beneficial to customers and the business. In doing so, the Post Office will
have regard to ensuring good customer service, cost effectiveness and
the ability to manage related staff issues. The Post Office will also be
enhancing the public consultation process associated with conversion.
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Future developments
Events will, no doubt, continue to move rapidly in this constantly
changing commercial environment so further structural changes may be
required, to enable the Post Office to grow and to meet customer needs,
which are in the best interests of the Post Office and its staff. The
Government does not rule out the possibility of introducing private
share-holding into the Post Office - for example through the sale of a
minority stake in it or an exchange of equity with other businesses - at a
later stage. However at present wholesale privatisation would not be a
realistic option. Primary legislation will be necessary to convert the Post
Office into a pic. The Government will propose that such legislation shall
contain a commitment that if there is any proposal to sell or exchange
shares, then there would need to be further approval of such a proposal
by both Houses of Parliament.
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CHAPTER TWO
The challenge of change
Throughout the world postal services have traditionally been provided by
public postal operators rather than being driven by the market. In the
United Kingdom that provider has been the Post Office (see box below),
a product of its historic position and the postal monopoly. But this
position is changing in the UK and elsewhere.
The Post 0 ffice
The Post O ffice has for centuries made a vital contribution to national life. It is part
of our history and culture; and business and individuals rely on it for a wide range
of services.
The Post O ffice has three main businesses:
Royal Mail which provides a national and international mail service, handling on
average 75 million items a day;
Post Office Counters Ltd which runs the network of nearly 19,000 post offices
(of which 600 are directly-operated Crown offices); and
Parcelforce Worldwide handling some 140 million parcels a year.
A fourth business Subscription Services Limited provides licensing and
subscription management services, principally television licences for the BBC
Surveys show that the Post O ffice is surpassed in the UK only by Coca-Cola in
the strength of its branding. It employs some 200,000 people; in addition to which
it has about 18,000 agents running sub-post offices. In 1998/1999 it had a turnover
of £7 billion
. There is now a broad consensus that the postal sector worldwide has
entered a period of fundamental change. The key drivers are changing
customer demand (particularly in the business sector); greater
liberalisation; new technologies and, in response to these pressures,
globalisation and consolidation in the postal market. Looking ahead the
market is likely to change much more quickly than it has in the past; and
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the communications market and postal services within it will be very
different in five to ten years from now.
The market
Despite the existing letter monopoly and the fact that it currently holds
96 per cent of the UK domestic letter market, the Post Office is beginning
to face threats to the volume of business handled through the postal
system and the Post Office network. Competition, both from within the
postal sector and from alternative technologies, is increasingly fierce.
A letter can be sent from one continent to another by fax in seconds;
and e-mail is both cheaper and quicker than traditional post.
Several overseas post offices are now operating in the UK international
mail market (see box below). And in the parcels and express delivery
market in the UK, in which the Post Office enjoys no monopoly, there are
over 4,000 competitors. In addition, mail order operators have tended to
set up their own distribution operations — integrating the whole delivery
chain from warehouse to customer.
There is increasing pressure for liberalisation around the world from
competitors and customers; and increasingly from governments, who
want to promote faster, more effective response to the changes that are
already happening in the market so as to promote consumer interests
through greater competition.
T he competition
Within its traditional, protected market the Post O flice has been regarded as
something of a model by many other public post offices. But that position is slipping
as its main rivals become more commercially focused, using their ability to make
acquisitions and increasing their productivity, efficiency and effectiveness. For
example, in 1992 Deutsche Post only handled 78,000 items per employee per year
compared to 90,000 by the Post O ffice. But by 1996 Deutsche Post’s productivity
had increased 35 per cent to 105,000 items per employee, overtaking the Post O ffice
which handled 102,000 items per employee, an increase of only 13 per cent
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Seven overseas post offices are now operating in the UK international mail market
providing re-mail and value added services. There are also smaller companies focusing
on high volume international city to city mail routes. In the parcels and express
delivery market the Post O ffice has over 4,000 competitors operating in the UK.
In New Zealand, Sweden and Finland the post offices have become independent
ples. The Netherlands, Argentina and Singapore have privatised their public post
offices; and Germany in moving in that direction.
Furthermore the UK Post O fiice is behind its competitors in entering new markets.
Within Europe the Dutch and German post offices in particular have been investing
in substantial acquisitions (the Dutch bought TNT; the Germans have made
numerous investments including a 25 per cent share in DHL). The post offices in
France, Sweden and Finland are also free to invest in other companies.
6. The EU Postal Services Directive adopted in December 1997 mandates
the Commission to bring forward proposals for the next stage of
liberalisation, following a review of the sector. Decisions are unlikely to
be reached before 2000 but the expectation is that from 2003 onwards
domestic letter markets within the EU will be opened up progressively.
There is also demand for postal services to feature strongly on the World
Trade Organisation (WTO) agenda for the next round of services
negotiations in 2000.
7. Customers, particularly business customers (who account for some
90 per cent of the mail, directly or indirectly) are becoming increasingly
demanding. They want faster, more reliable postal services; more choice
of product (including more sophisticated products, such as tracking); and
competitive prices which meet their individual requirements. They are
increasingly looking for a pan-European (or international) ‘end-to-end’
delivery service. If the Post Office cannot meet these needs they will
look elsewhere.
8. As the information society comes of age we can expect an explosion in
communications, stimulated and enhanced by the growing acceptance
and development of electronic commerce. New and existing technologies
(eg fax, e-mail and the internet) will increasingly be used as a substitute
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for physical mail. At the same time the growth in electronic commerce,
including home shopping, will tend to increase the market size not only for
parcels but also for related mail such as bills and direct mail advertising.
The Post Office needs to embrace the information age as its customers
increasingly do so, using new technologies in order to provide value
added services and secure volume and value from these growth markets.
Need for change
Against this background it is no longer appropriate to think simply in
terms of letters and parcels. Both are part of a wider communications
and logistics market; and a monopoly limited to those markets will no
longer provide automatic protection for postal business given the
choices for information delivery available to customers. Faced with these
challenges the Post Office needs to change radically if itis to have along
term commercial future. Market developments pose no immediate threat
to profitability but there is a real danger it could be left behind in the
medium term. It is clear that the old way of running a nationalised
industry is no longer appropriate; and that the Post Office needs to
change in order to maximise its potential.
More dynamic postal and wider communications markets offer
opportunities as well as threats to the Post Office. Data from reports
compiled by a number of authoritative sources show that the size of the
global letters, package and express market is expected to grow from
£126 billion in 1995 to £167 billion by 2010. Substantial growth is
expected in the logistics market, including integrated mail order
operations, and in the express and parcels markets. Growth in the letters
market will be much less and is expected to be concentrated in direct
mail, cross border mail, and mail order; and in new products that
incorporate some electronic process.
Although it has lost ground in recent years to its competitors, most
notably the Germans and the Dutch, there remains an expectation in
the postal world that given the right commercial focus, the Post Office,
currently the second largest exporter of mail in the world and with a
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Post Office & form
good reputation at home and abroad, has the potential to become one of
the key players in the global market, alone or in partnership with others.
12. The Government has recognised that if it is to respond effectively
in a changing market, the Post Office needs to be transformed. The
Government can play its part by adjusting the framework within
which the Post Office operates, in part by giving the Post Office
greater commercial freedom. But a successful transformation of the
business depends ultimately on how the Post Office itself responds
to the challenges ahead.
13. The status quo is no longer an option. Hence the reforms outlined in this
White Paper combine greater commercial freedoms, including the
freedom to form partnerships and alliances, with the disciplines of
competition and regulation, the better to prepare the Post Office to meet
the challenges ahead.
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CHAPTER THREE
Objective I — To improve postal services
for business and domestic customers
through greater choice, better quality
and falling real prices
COMPETITION
Benefits of competition
Promoting competitiveness through increasing competition is a central
objective of the Government. The Government has strengthened UK
competition laws and is enhancing competition within the regulated
utilities. Now it is increasing competition in the postal sector.
. Together with robust independent regulation, greater competition in
postal markets will bring benefits for consumers as it has in markets
such as telecommunications and energy where consumers have
benefited from greater choice, better quality and lower prices.
Greater competition will also heip to change the business culture of the
Post Office, challenging it to become more efficient and competitive.
This should make it a stronger business which is essential if the Post
Office is to become truly world class; and play its part in improving
UK competitiveness.
Post Office monopoly
The Post Office currently has a statutory monopoly for letters priced at
under £1. The traditional justification has been that a statutory monopoly
is necessary to enable the Post Office to benefit from economies of scope
and scale and therefore provide a universal service at a uniform tariff
without direct public subsidy. However, there is growing evidence from
studies carried out in Europe for the European Commission that, contrary ©
to long-held assumptions, there may be considerable scope for
introducing greater competition in postal services without undermining
these essential services.
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Liberalisation of the UK market
5. The European Commission is expected shortly to bring forward
proposals for greater competition within the EU postal market. There
has been debate about whether or not to open our own market in
anticipation of wider international market liberalisation. It has been
argued that any extension of competition in the UK in advance of any
agreed EU-wide liberalisation might undermine the Post Office’s
competitive position in relation to other public post offices who would
continue to benefit from protected home markets; and that in the longer
term this could have negative consequences for consumers.
6. The Government is unconvinced by these arguments, not least in the
light of the benefits of greater competition in the utility markets in the
UK in advance of wider EU developments. There are some differences
between the private utilities and the postal market. Barriers to entry into
the postal market are lower than in energy and telecommunications. But
the Government does not believe that the differences are so great as to
qualify the assumption that competition should benefit the consumer in
the postal sector.
7. On the contrary, exposing the Post Office to greater competition ahead of
many of its EU counterparts should put it in a better position to take
commercial advantage as markets are liberalised across Europe and
beyond. Some other countries (see box below) are already seeing
advantage in the early introduction of greater competition into their
postal markets.
Liberalisation of overseas markets
A number of very different postal markets are now fully liberalised: Sweden, Finland,
New Zealand and Argentina have all abolished their monopolies. In the Netherlands
direct mail already falls outside the scope of the monopoly; and they are planning to
reduce the scope of the monopoly this year to 100 grams and three times the first
class tariff.
Halving of monopoly to 50p
8. The Government's judgement is that a reduction in the monopoly is
entirely compatible with the continuation of essential services; and that
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service levels will not only be maintained but enhanced by the
introduction of greater competition to the postal sector.
The Government has rejected the immediate abolition of the monopoly. —
It believes that the best results for consumers, including the protection of ;
the Universal Service Obligation (USO), can be achieved if the Post Office -
is given time to respond to changes in market conditions. Liberalisation
will therefore be phased. As a first step the Government is halving the
monopoly from £1 to 50p; or, expressed in weight, 150 grams. So, if an
item of mail is priced above 50p or weighs over 150 grams it will not be
subject to the monopoly and can be delivered by any operator. It is
anticipated that this reduction will not have any significant impact on the
profitable delivery of USO services by the Post Office. An order under
section 69 of the British Telecommunications Act 1981 has been laid and
with Parliamentary approval this reduction in the monopoly will take
effect from 1 April 2000.
Further reductions in the monopoly
The Regulator will have a duty to promote competition in the interests
of consumers. An early task for the Regulator will be to review the scope
for increasing competition by further reductions in the monopoly, subject I
always to the Post Office’s ability to meet the universal service and
uniform tariff obligations efficiently. The Government will expect the
Regulator to report within a year of appointment on its proposals,
including a timetable, for further liberalisation of the market. In the
meantime the Government has made it clear to the Post Office that
it should proceed on the basis that following the Regulator’s report
competition will be further enhanced.
The Regulator will not be restricted to enhancing competition through
reductions in the price and weight thresholds of the monopoly. Instead it
is intended that the Regulator should be free to consider all appropriate
mechanisms for introducing competition, including liberalisation by class
of mail (eg direct mail) and the scope for licensed competition within the
monopoly area, including the further development of ‘niche licences’ (see
box over page). The Regulator will, of course, need to take fully into
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account actual and prospective developments in the EU, WTO, and the
Universal Postal Union; and to ensure that its own actions and proposed
policies are compatible with those of these organisations.
12. Until new primary legislation is in place the Regulator will not have the
power to introduce greater competition itself, but will make
recommendations to the Secretary of State.
Niche licences
The Secretary of State may, under section 68 of the British Telecommunications Act
1981, grant a licence to operate within certain conditions within the area otherwise
reserved as a monopoly for the Post O ffice.
A number of licences have been issued to cover postal operations within the
monopoly area. These include a general (class) licence to cover the operation of
document exchange (used by the legal and other professions); a licence covering the
collection and delivery of Christmas cards by charitable organisations; a licence to
cover internal mail between Government offices; and one individual licence to cover
the collection and delivery of brokers’ research. The Government believes there
may be opportunities for extending niche licensing to give the consumer greater
choice and will be asking the R egulator to explore the possibilities.
In the meantime, to facilitate operational management of competing services,
the Government proposes to amend the class document exchange licence to clarify
its boundaries.
Post Office privileges
13. The Post Office enjoys a range of special privileges granted through
legislation in order for it to meet its USO and uniform tariff obligations.
These include exemption from traffic regulations, the power to require
the conveyancing of mailbags and compulsory land purchase powers.
14. The Government intends that these privileges should be maintained.
However, the Regulator will keep them under review and advise the
Government on their continuation, particularly in light of the effects of
reductions in the monopoly. In addition the Government does not rule
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out extending such privileges to other postal service providers if they are
licensed to compete with the Post Office in the monopoly area.
REGULATION
Need for regulation
The Post Office has a dominant position in significant parts of the market, -
most obviously the statutory monopoly it enjoys for letter post below £1.
Whilst the Government is setting in train a reduction in the scope of this
monopoly and envisages further liberalisation over time, it is anticipated
that there will continue to be a statutory monopoly for some time. That
in turn creates the potential for competition to be constrained outside as
well as within the monopoly because of the possibility for the Post Office
to abuse its dominance in the monopoly market to compete unfairly with
businesses in competitive markets.
The Government therefore believes there is a strong case for transparent
regulation. In principle this could be carried out from within Government.
But this would involve conflicts of interest for the Government as owner
and regulator and would not, therefore, maximise confidence in the
transparency and effectiveness of the regulation.
The Government will therefore establish an independent Regulator. Key
functions will include:
® protecting and promoting consumer interests including standards
of service;
® regulating prices;
* ensuring fair competition; and
® ensuring that the Post Office is able to meet its universal service
obligations at a uniform tariff.
The creation of an independent Regulator is widely supported; indeed
many of those consulted prior to the announcement of the reform
package saw it as a necessary accompaniment to the freedoms sought
by the Post Office. The model proposed will be fully consistent with that
proposed by the Government for the regulated private utilities.
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Scope of regulation
18. The Government believes that economic regulation is only necessary
in a market where competition is not possible or where it is not fully
developed. Regulation and red tape should not extend into a market
which is operating effectively to the benefit of consumers. The UK postal
market outside the statutory monopoly is a vibrant, competitive market
with over 4,000 competitors. It is therefore the Government's intention
that regulation should focus on those who are operating within the
monopoly area, leaving the rest of the market free to operate as they do
now in a largely unregulated environment (see box below showing the
different segments of the market). In the first instance this means
that regulation will focus on the Post Office.
T he difference between the monopoly area and the USO
: Monopoly} i Competition -——————__—>
Letters over
the monopoly
threshold,
Registered post,
Standard parcel
Letiers under
the monopoly
hreshold
Express letters
Express parcels
19. The Post Office will be subject to three broad tiers of regulatory control:
@ full regulation, including price regulation, of services within the
monopoly area;
® regulation of provision and quality of services within the competitive
area which are subject to the USO and uniform tariff obligations; and
e regulation of fair competition of services provided within the
competitive area not subject to the USO and uniform tariff obligations.
20. Other businesses operating under licence in the monopoly area will
be subject to regulation. The extent of regulation for other businesses
operating in the monopoly area will depend on the type of licence and
the extent of the services offered. It is anticipated that any other bodies
21.
22.
23.
24.
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licensed to operate a full service within the monopoly area will be subject
to aregulatory regime similar to that for the Post Office.
Price regulation
Effective price regulation is vital in the absence of effective competition.
It is therefore intended that the Regulator will regulate prices within the
monopoly area. Whilst the method of price regulation will be a matter for
the Regulator, the Government anticipates that this is likely to bea
derivation of RPI-x which is the system of price regulation used by
existing utility regulators. The Government will expect the Regulator to
report its proposals on price regulation within one year of appointment.
Enforcing service standards
Ensuring the delivery of the required quality of service standards will
also be a key role for the Regulator (see Chapter 4 for details of quality
of service standards). The Regulator will be responsible for setting and
enforcing service standards not only in relation to monopoly services,
but also in relation to those services which are outside the monopoly but —
subject to a USO and uniform tariff obligation (ie standard parcels and a
registered postal service). In carrying out this duty it will be assisted by
POUNC which will have responsibility for monitoring the quality of
service provided by the Post Office.
Subject to primary legislation the Government intends to give the
Regulator powers to order that any USO service deficiency is put right;
and to fine the Post Office for breaching service standards within the
USO area.
The Regulator and the consumer representative body will each have a
role to play in ensuring that there is an adequate system for individual
consumers to seek compensation from the Post Office (and any other
licensed postal operator) and that it is working effectively.
Fair competition
The Regulator will ensure that the Post Office (and indeed any other body
subsequently licensed to operate a full public postal service within the
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monopoly) competes fairly and does not act anti-competitively. This may
involve intervention in the competitive area in respect of services which
are not subject to the USO and uniform tariff obligations. In these cases
intervention will be restricted to the use of general competition rules
and apply only to the activities of bodies licensed to operate also within
the monopoly. It is proposed therefore that the Regulator should have
concurrent powers with the Director General of Fair Trading to apply
UK competition rules in respect of the Post Office (and other licensed
postal operators).
26. In particular the Regulator will ensure that any cross-subsidy from the
monopoly area to competitive activities is the minimum required, in the
opinion of the Regulator, to ensure the continued provision of services
required by the USO and the uniform public tariff. It will also ensure that
access to monopoly activities (either as a complete service such as first
or second class mail or as an input into an activity outside the monopoly)
is fair and non-discriminatory. And it will also need to ensure that there
is no abuse of a dominant position, for example by the Post Office using
predatory pricing to deter or drive out competition or by abusing its
monopoly power to extend its dominance unfairly into adjacent markets.
Role of Regulator in relation to the Post Office Counters’ network
27. Post offices deliver a wide range of Government and private sector
services; and, on the private side of their businesses, individual post
offices deliver a range of retailing services in an open market.
The Government does not intend to see regulation of postal markets
extend into such areas. The Government proposes that the Regulator’s
role will be confined to ensuring the general ability of the Post Office
network to support the USO on letters and parcels; and to monitoring
levels of access to the network, reporting any concerns to the
Government (see Chapter 7).
Duties of the Regulator
28. The primary objective of the Regulator will be to exercise its functions
in the manner best calculated to promote the interests of consumers,
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wherever possible and appropriate through promoting effective
competition. The interests of consumers will be interpreted to include:
® the continuity and availability of universal postal services at a uniform
public tariff;
® the prices charged for services within the universal service obligation;
and
® the quality of services within the universal service obligation.
In defining the interests of consumers, due weight will be given to their
longer and medium-term interests as well as to their immediate or
short-term interests.
Subject to the primary duty, the Government proposes that the Regulator
will have a duty to exercise the functions assigned to it in a manner best
calculated:
® to ensure that the Post Office can supply all demand for public postal
services, so far as it is reasonable to do so, in the United Kingdom;
® to promote efficiency and economy in the provision of public postal
services; and
® to enforce the Post Office monopoly.
Furthermore the Regulator will also be required in the exercise of its
functions to:
® have regard to social and environmental guidance issued to it by the
Secretary of State;
advise the Secretary of State as to the exercise of his regulatory
functions in relation to the Post Office under the Post Office legislation;
® keep itself informed about postal matters generally;
® prepare an annual report on the performance of its functions to the
Secretary of State; and
e
consult the Post Office Users’ National Council on specific issues
affecting the interests of consumers, including individual and overall
standards of service; and on the Regulator’s strategic forward planning.
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Transparency
31. The Government is committed to the creation of a transparent regulatory
regime, and the Government will expect the Regulator to consult widely.
The Regulator will, therefore, be placed under a statutory duty to consult
on, publish and follow a code of practice governing its consultation and
decision-making processes. The Regulator will also be required to
publish reasons for individual key decisions; and will be expected to
make an annual report on the performance of its duties to the Secretary
of State, who will lay it before Parliament.
32. The Regulator will have the power to require information relevant to the
exercise of its functions from the Post Office and other operators licensed
to operate within the monopoly; and a power to publish information for
the benefit of consumers and in the interests of good regulation, subject
to tests relating to substantial harm, including matters of commercial
confidentiality and public interest.
33. In particular it is intended that the Regulator will be able to require the
Post Office (and any other licensed public postal operator) to provide
regulatory accounts and other financial information clearly distinguishing
between monopoly and competitive services; and in the competitive area
between USO and non-USO services. Subject to the introduction of
primary legislation, refusal to supply such information will be an offence
punishable by fines. It is also intended that the Regulator will have a
power to impose changes in accounting practices if this would facilitate
transparency.
Guidance
34. The Secretary of State will issue guidance to the Regulator setting out
the Government’s social and environmental objectives for the Post Office.
The guidance will be subject to full consultation including with
Parliament, and would be intended to last for a set duration of a number
of years. The Regulator will need to take this into account when carrying
out its duties.
35.
36.
37.
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Establishment of Regulatory Body
In line with the Government's policy for better regulation of the private
utilities the Government proposes to appoint a Board of Regulators
rather than a single Regulator. The advantages of the Board approach
as identified in the context of the Government's review of the utility
regulation are that: it de-personalises the regulatory process; provides
collective but streamlined decision-making; spreads the burden and
increases the scope for greater continuity and consistency when new
regulators are appointed.
The Government intends to provide for the Regulator when the UK
implements the EU Postal Services Directive.2 The Regulator will act as
an independent adviser to the Secretary of State until primary legislation
empowers the Regulatory Board to act on its duties in its own right. It is
intended that the Regulator will be funded by a contribution from the
Post Office itself, and in due course any other licensees as appropriate.
This is in line with the financing of regulation in the utilities.
CONSUMER REPRESENTATION
It is vital that consumer interests are safeguarded and that consumers
share in the benefits of an increasingly competitive postal market. The
Government therefore sees a real need for a strong consumer body at
the heart of the regulatory system working with the Regulator but from
a position of independence.
Current framework for consumer representation
Currently the interests of the consumer are represented by the Post
Office Users’ National Council (POUNC) which is an independent
organisation, established under the Post Office Act 1969. Separate Post
Office Users’ Councils (POUCs) are established by statute for Wales,
Scotland and Northern Ireland. These have particular responsibility to
consider any matter relating to Post Office services in their respective
geographical areas. POUNC is the national voice for Post Office users,
2 Directive 97/67/EC of the European Parliament and of the Council of 15 December 1997 on
common rules for the development of the internal market of Community postal serives and the
improvement of quality of service: Official Journat of the European Communities, 21 January
1998, page L15/14
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responsible for developing national policy. But whilst the Chairmen of
the POUCs are full members of POUNC they are not formally
accountable to POUNC.
39. There is also an extensive network of Post Office Advisory Committees
(POACs). These are locally based committees that represent the views
of users of postal services at the local level. They are not statutory
bodies; but they are provided for in statute.
New role for POUNC
40. The Government intends to strengthen POUNC, enabling it to play a key
part in providing information and advice to consumers; articulating the
consumer interest; working with, and where appropriate challenging, the
Regulator in improving standards and ensuring that there is a tough
regulatory framework which protects all consumers.
41. The Government proposes to give POUNC broad functions within the
regulatory system for postal services. Their key functions will be:
to act as the public advocate on behalf of all users of Post Office
services (although it is not intended to prevent individuals, business
users or groups of individuals representing themselves),
e
to provide strategic advice to the Regulator, the Government,
Parliament and others on consumer interests;
e
to provide advice and information to consumers;
to handle and investigate consumer complaints not satisfactorily
resolved by the Post Office (or other licensed postal operators),
mediating as appropriate; passing on to the Regulator those where it
appears a determination or enforcement action by the Regulator may
be required;
e to work constructively with the Post Office (and other licensed postal
operators) to reduce the causes of complaints;
e
to monitor service performance against the standards set by the
Regulator;
to make representations and recommendations on the level of fine to
e
be imposed by the Regulator for failure to meet service performance
standards; and
42.
43.
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® to ensure that licensed postal operators have an effective complaints
handling and compensation system.
The Government will expect POUNC to consult widely when fulfilling
these functions. Moreover it is intended that these functions will be
underpinned by a research capacity to monitor Post Office performance
on service standards and complaints handling; and to identify customers’
needs and concerns, including those of particular groups of consumers
such as small businesses, those in remote areas and the disadvantaged.
Role of POUNC in relation to the Post Office counters’ network
POUNC will have a direct interest in all aspects of the Post Office
counters’ business as it impacts on consumers. In conjunction with the
Regulator, POUNC will monitor the network. However, unlike the
Regulator, POUNC will have an interest in specific, often localised
counters issues not just those generic to the network as a whole. In
particular the Government proposes that POUNC should monitor the Post
Office's code of practice on closures, relocations and Crown conversions.
We also propose that POUNC will be able to comment and make
recommendations on the need for post office provision in particular areas.
We expect this to play an important part in protecting post office 5
provision in rural and inner city communities.
Relationship between POUNC and the Regulator
To avoid confusion and maximise efficiency there needs to be an
effective framework for collaboration between the Regulator and POUNC.
To achieve this the Government intends to place a duty on POUNC
and on the Regulator to agree and then publish a memorandum of
understanding. The detailed content will be a matter for the parties
to agree but the Government expects it to cover such matters as the
arrangements for consultation on specific decisions, the exchange of
information, and the co-ordination of work on consumer-related issues.
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45. The Regulator will be placed under a statutory duty to consult POUNC on
specific issues affecting the interests of consumers, including standards
of service; and on the Regulator’s strategic forward planning.
Access to information
46. Good quality, up to date information will be essential to an effective
POUNC. It will generate some information itself through its work in
dealing with consumers and their complaints, and through its research
activities. But it will also need access to information, both from the Post
Office and from the Regulator.
47. The Government intends that POUNC should have rights of direct access
to the information that it reasonably needs from the Post Office in order
to monitor and assess service standards and complaints handling
procedures; and to investigate and mediate specific unresolved
customer complaints. Other types of information — both information
that the Regulator already holds and new information which needs to be
obtained from the Post Office - should be obtained by making a request
to the Regulator where it cannot be gathered from the Post Office on a
voluntary basis. To facilitate this the Government intends to give the
Regulator the power to demand information on behalf of POUNC as well
as for itself, and the Government intends to make POUNC a body to
which the Regulator can disclose information. The Regulator will be
required to comply with or to facilitate all reasonable requests from
POUNC. There will be a reciprocal obligation on POUNC to provide
information to the Regulator.
48. The Government intends that POUNC will have the power to publish,
at their discretion, information in the interests of consumers, subject
to tests like those applying to the Regulator (see paragraph 32).
49. These are strong information gathering powers which will ensure that
POUNC has the information it needs to play a key role within the
regulatory system, consistent with the Government's broader vision
of consumer councils as independent, effective consumer champions.
50.
51.
52.
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Organisational issues
The Government wants to see a strong consumer body at the heart of
the regulatory system. The Government has concluded that, to maximise
its effectiveness, consumer representation in the postal sector needs a
strong national body which can speak on behalf of all users in a sector,
rather than fragmenting consumer representation and thereby dividing
and weakening the consumer voice. This is consistent with the outcome
of the consultation on consumer representation in respect of the energy,
water and telecommunications industries. A national body will, it
believes, best meet the consumers’ needs as postal services and the Post ©
Office develop in an increasingly global market.
The Government proposes to designate POUNC as that body. The new
POUNC will provide focal point for consumers for unresolved complaints,
championing their interests and ensuring that their voice is heard by the
Post Office, the Regulator and the Government.
In setting the fram ework for future consumer representation in the postal
sector the Government recognises the need for an appropriate balance
between issues of national importance and regional concerns and views.
The Government wants to ensure that a reformed POUNC draws its
strength from all parts of the UK in order for it to be truly representative
of all postal service users. The Government therefore proposes to give
POUNC a duty to ensure that regional needs are addressed efficiently
and effectively, and that its work is fully informed by an awareness of
regional issues. To meet this duty POUNC will be given flexible powers
to establish regional offices, and to appoint regional committees or
panels where these are needed to help address customer complaints and
other issues. These powers will give POUNC the flexibility to shape their
regional arrangements to ensure effective representation and to adapt
them over time as the market changes.
The Government is particularly concerned to ensure that POUNC takes
account of national identity in determining their organisational structure,
providing adequately for the representation of consumers in Scotland,
Wales and Northern Ireland. The Government proposes therefore to
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give POUNC an additional, specific duty to maintain offices and an
appropriate committee in Scotland, Wales and Northern Ireland.
54. These country committees, and the other regional committees, will
operate as part of a single public body, pursuing consistent strategy
and with the national council at its head. Appointments to the national
council will be made by the Secretary of State for Trade & Industry. The
national chairman of each of the Committees for Wales, Scotland and
Northern Ireland will also be appointed by the Secretary of State for
Trade & Industry. The Government intends that the national council will
appoint the chairmen of any other regional committees, subject to
consultation with the Government.
55. Representation at grass roots level is vital to a strong consumer voice.
Currently this is provided by a loose network of some 170 Post Office
Advisory Committees. Individually many of these POACs have done an
excellent job in representing local consumer interests but because they
have grown up in an ad hocmanner the network as a whole lacks clarity
and strategic direction. The Government believes that this lack of
strategic direction needs to be addressed and proposes that in due
course POUNC should be given a clear and exclusive role in determining
how best to provide for consumer representation at the local level.
56. The Government intends to introduce legislation to reform consumer
representation as soon as Parliamentary time permits. In the meantime
the Government will be consulting further with POUNC and the POUCs
on how best to take forward its proposals for strengthening the
consumer voice before finalising proposals for legislation.
Funding POUNC
57. As with the Regulator, it is intended that POUNC will be funded by a
contribution from the Post Office, and in due course any other licensees
as appropriate.
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CHAPTER FOUR
Objective 2 —-To maintain a universal
service of postal delivery throughout the
UK, and a uniform tariff
Maintaining and improving postal services
The Government believes that all customers should be guaranteed a
good level of postal services and is committed to a universal postal
service at a uniform tariff. The reform programme is intended to ensure
that standards of postal services are at least maintained and wherever
possible improved for all postal users. This will be achieved through
greater competition and strong regulation; and by guaranteeing certain
service standards in legislation.
Current UK position
. Current UK law (section 59(1) and (2) of the British Telecom munications
Act 1981) requires the Post Office “to provide throughout the United
Kingdom ... such services for the conveyance of letters as satisfy all
reasonable demands for them.” In carrying out its duty the Post Office
must have regard to efficiency and economy; the social, industrial and
commercial needs of the country; the desirability of improving and
developing its operating systems; and developments in the field of
communications and banking. Detailed service standards are not
prescribed and have in practice varied over time.
Definition of USO in EU Postal Services Directive
. The EU Postal Services Directive requires Member States to ensure that
users enjoy the right to a universal service involving permanent
provision of a postal service at all points in their territory. The Directive
further requires that tariffs should be affordable, transparent and non-
discriminatory. The Directive does not require a uniform tariff but allows
Member States to apply a uniform tariff throughout their national
territory if they so decide.
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The uniform tariff structure
4. Itis the Government's firm intention that a uniform tariff (ie the price
of sending a letter within the UK is the same irrespective of where it is
posted to and from) be maintained for those activities which fall within
the obligation on the Post Office to provide a universal service. Whilst
geographically averaged prices have developed through custom and
practice there is currently no definition of a uniform tariff structure in
UK legislation. The Government intends to rectify this position.
New statutory definition of USO and uniforrn tariff
5. For the first time in the UK details of the USO and uniform tariff
commitments will be set out in legislation when the Government
implements the EU Postal Services Directive. In the case of inland parcels
the Government intends to go further than the minimum required by
extending the obligation to 20 kilograms (instead of 10 kilograms),
thereby bringing the obligation into line with the Directive’s minimum
USO requirement for international parcels. Furthermore the Government
will include a uniform tariff structure for USO services. As now, there will
continue to be provision for derogations from the USO and quality
standards for exceptional reasons.
6. The USO service will be set out in the Regulations as:
e at least one delivery of postal packets to each postal address in the
United Kingdom every working day;
® at least one collection of postal packets from collection points
designated by the USO provider every working day;
e the provision of affordable postal services for the collection, sorting,
transport and delivery of letters of up to 2 kilograms in weight at an
affordable uniform public tariff for the whole of the United Kingdom;
e the provision of an affordable postal service for the collection, sorting,
transport and delivery of postal packets (excluding letters) up to
20 kilograms (subject to the minimum and maximum dimensions laid
down in the Universal Postal Union Convention and the Postal Parcels
Agreement adopted by the Universal Postal Union) at an affordable
uniform public tariff for the whole of the United Kingdom; and
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® the provision of a registered post service at an affordable uniform
public tariff for the whole of the United Kingdom.
The Regulations will also provide that the application of a uniform public
tariff shall not prevent the Post Office concluding individual agreements
on prices with customers.
At present, the Post Office provides free services for the visually impaired
under its Articles for the Blind Scheme. This is a special service which
allows for the free posting of non-print alternative form information, such
as braille, and specified goods both to and from visually impaired people.
The Government believes that there is a genuine need for such services
and the Post Office will continue to be obliged to provide them under the
reform programme.
Freedom to price commercially
Given the movements in the market discussed in Chapter 2, it is vitally
important for the Post Office to be able to price commercially to keep
and increase business customers, particularly in those areas where it is
most susceptible to competition. The freedom to conclude individual
agreements on prices with individual customers is in fact required by
the EU directive.
Maintenance of the systems used to deliver social mail is dependent
on the volume of mail generated by business. Without business mail
(including business to individuals and vice versa) the USO and uniform
tariff would be unsustainable without direct subsidy. It is critical,
therefore, that business users should be able to negotiate competitive
prices with the Post Office.
Royal Mail customers may currently qualify for discounts for pre-sorted
work (based on avoided average costs). Further price flexibility is a
logical extension of these current arrangements. Normal competition
rules will apply. Such price flexibility must not be used anti-competitively,
for example by excluding competitors through predatory behaviour or by
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designing discounts aimed at foreclosing the market. The Post Office
should not, therefore, charge different prices to different customers, or
categories of customers, for the same service where the differences in
prices do not reflect the quantity, quality or other characteristics of the
service supplied. But subject to this the Post Office will be free to
negotiate prices with individual customers taking into account volume
and other specific characteristics of any contract (eg timing of delivery).
The Regulator will ensure that the Post Office does not misuse such price
flexibility to price in an anti-competitive manner.
Ensuring that price flexibility works to the benefit of all users
11. The general public and other small volume users of the Post Office will
continue to benefit from a USO and a uniform tariff. Also the twin
pressures of competition and regulation will act to deliver efficiency
improvements and keep prices down. The Government therefore
believes that commercial pricing for contract, large volume users of
postal services should not lead to higher real costs for individual users.
Detailed quality of service requirements
12. Beyond the USO service standards guaranteed by statute the Regulator
will set and enforce detailed quality of service targets. These will be at
least as demanding as the current service standards provided by the Post
Office (see box below). These will be published; and the Post Office will
be subject to penalties for failure to deliver.
Current quality of serviee standanis
92.5 per cent of first class letters to be delivered the next day to posting
98.5 per cent of second class letters to be delivered within three days of posting
88 per cent of Parcelforce standard service parcels to be delivered within three
working days
Need for flexibility
13. It is intended that the detailed definition of service standards will change
over time, both as quality targets are enhanced; and if and when new
services are introduced to the USO. New products introduced by the Post
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Office to reflect the changing consumer demand will not necessarily lie
within the USO (especially those which are tailor-made for niche
markets). This will be judged by the Regulator on a case by case basis.
Delivering high standards
14. The Government is confident that its proposals will ensure that current
UK standards of service are maintained and enhanced; that services can
be adapted and improved over time; and that UK consumers will continue
to enjoy the most generous postal service specifications within the EU.
39
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CHAPTER FIVE
Objective 3 — To establish clear and
accountable relationships between
the Government, the Post O ffice,
the R egulator and POUNC
An arm's length relationship
. The Post Office was established as a statutory corporation by the Post
Office Act 1969. The Act broadly defines the Post Office's powers and
responsibilities, as well as the general responsibilities of the Government
in relation to postal services. However, as the postal market has
developed and the Post Office has broadened its business activities,
so the boundaries between the responsibilities of the Post Office and
the Government have started to look outdated. They now need tighter
definition and more transparent operation. For the Post Office, this will
mean clarity on those decisions and objectives which fall to the Board,
rather than the Government, and for which the Board should take
responsibility. For the Government, this will mean greater transparency
and accountability, which is a key principle of the Government's review
of utilities reguiation A Fair Deal to Consumers®
. The responsibilities in the postal sector will in future be clearly divided
between:
e the Government
~ as the Post Office’s shareholder, and separately,
~ as the authority responsible in the national interest for setting the
legal and regulatory framework and the social and environmental
obligations on the Post Office;
the Post Office - as a postal operator, including being the country’s
universal postal service provider;
e
e
the Postal Regulator - as guardian of consumer interests and promoter
of competition; and
the Post Office Users’ National Council - as promoter and advocate
of the views of the consumers.
e
3. Cm 3898, The Stationery Office, March 1998 (ISBN 0-10-138982-5).
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3. There will be a new arm’s length relationship between the Government
(as shareholder) and the Post Office Board. The Government will agree
the strategic direction of the Post Office. The Board will be responsible
for proposing and executing that strategy. The Regulator will undertake
economic regulation and promote competition. These responsibilities
are shown more fully in the section at the end of this chapter.
Reporting
4. The Post Office and the Post Office Users’ National Council are required
by the Post Office Act 1969 to provide the Secretary of State with their
accounts and annual reports, respectively, and the Secretary of State is
required to lay them before each House. These arrangements will
continue, and an obligation will be laid on the Regulator to report
annually to the Secretary of State, and this report will also be laid before
each House.
5. In addition, the Government undertakes to report annually to Parliament
on the progress of the reforms set out in this White Paper, particularly on ©
the functioning of the arm’s length relationship. The aim will be to report
once the Strategic Plan has been approved (though commercially
confidential details of the Plan will not be revealed). The report will
contain key financial information, including the profit target, a forecast
of the expected dividend for the year, and the outturn dividend and
borrowings for the previous year.
The Strategic Plan
6. The five-year Strategic Plan will be central to the new commercial
relationship between the Government and the Post Office. The Plan will
set out the high level strategic approach by which the Board will secure
the commercial success of the Post Office in the United Kingdom and
worldwide. Endorsement of the Plan by the Secretary of State will define
the strategic envelope within which the Post Office is free to manage
commercially, and set the framework within which the Government will
approve borrowing for major commercial strategies including acquisitions.
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7. Consequently, the Plan will need to balance two fundamental objectives:
first, it will need to be sufficiently high level so as not to draw
Government into second guessing the Board’s day-to-day management
of the business; and
® second, the Plan will need to be sufficiently clear on the Post Office’s
objectives and provide sufficient financial information to allow the
Secretary of State to endorse the strategic direction of the Post Office’s
activities, set the profit target and approve the framework for
borrowing with confidence.
8. Without seeking to place a straitjacket on the development of the content
of the Plan in subsequent years, the following elements are regarded
as core to achieving the dual objectives set out above. The Strategic
Plan should:
® include a statement of the overall commercial direction and goals;
® summarise the way in which the current Plan has evolved from the
last Plan, including a high level evaluation of the value added by the
new Plan;
analyse the commercial and regulatory environment in which the Post
Office operates, including the way in which the market is evolving and
the development of competitors’ activities;
set out the strategic response to the commercial and regulatory
environment, including principal strategic options, proposals for
e
meeting the universal service obligations and for managing the
nationwide network of post offices, key issues which need to be
resolved in the next Plan, and the resources needed — especially
people, technology and funding;
contain high level financial and performance projections, with
sensitivity analyses of the major risks;
e
e
outline possibilities and plans for entering into partnerships and
alliances; and
e
set out clear performance indicators which will enable the Post Office’s
performance, in achieving its strategic objectives, to be measured.
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The responsibilities of the key players are outlined overleaf.
43
44
The
Government
will
The
Post Office
will
The
Regulator
will
Responsibilities of the key players
In setting the framework for
regulation including the social and
environmental obligations:
@ Lay down the social and environmental
obligations to be placed on the Post Office.
@ Set the Universal Service Obligation
and the framework for a uniform tariff
in legislation within the context of the
EU obligations.
@ Issue Guidance to the Regulator on those
social and environmental objectives.
@ Appoint the Regulator and establish the
principles of the regulatory regime, but will
not be involved with other matters which
fall to the Regulator.
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@ Strengthen POUNC, and continue to
appoint its members, but not be involved
in other matters which fall to POUNC.
in appointing members, the Government
will seek to ensure that the membership
reflects the diversity of Post Office users.
@ Determine criteria for minimum access to
post office services throughout the country.
@ Retain prime responsibility as the UK's
postal representative within EU/WTO fora,
and for determining the legislative
framework.
@ Agree parameters with the Post Office for
the changes allowable in the pay of staff.
@ Prepare and present to the Government
its Strategic Plan, setting out in particular its
investment, acquisition and partnership
intentions (while continuing to meet the
Universal Service Obligation and the agreed
service standards set by the Regulator) and
financial forecasts (especially the profit
forecasts and need for borrowing).
@ Within this framework, manage the business
in a way that maximises performance and the
value of the business whilst at the same time
meeting all agreed consumer, social and
environmental objectives.
® Regulate the Post Office within the
framework set by the Government including
the requirement to take into account when
carrying out its duties the environmental
and social guidance from the Government.
@ Have a primary duty to protect the
interests of consumers
® Set standards of service.
# Monitor progress against the Strategic
Plan and report to the Government and the
Regulator on the achievement of its targets
so that the overall performance of the
organisation can be monitored.
@ Ensure that the organisation is financially
and commercially viable.
@ Maximise the shareholder value of the
organisation (subject to its other
obligations) and achieve the Government's
financial targets
@in consultation with POUNC, monitor
the Post Office’s performance against
the established service standards and
performance targets for the main services
offered by the Post Office, and impose
penalties for failure to meet the targets.
@ Regulate prices.
As owner:
@ Appoint the Chairman of the Post Office,
and the remainder of the Board (after
consulting the Chairman), seeking to ensure
access to the widest possible experience,
internally and externally
@ Determine the Board members’
remuneration, on the basis of advice from
the remuneration committee of the Board.
@ Approve annually a (five-year rolling)
Strategic Plan, including setting the
profit target for the organisation (thus
determining the expected financial return
to Government), and approve major
acquisitions but otherwise will not be
involved in normal management and
commercial matters which fall to the
Post Office.
@ Set guidelines on borrowing.
in both capacities:
@ Report annually to Parliament on the
fulfilment of the reform package in this
White Paper.
@ Ensure that investments are made
within the framework agreed with the
Government, examining the prospect for
forming partnerships and alliances with
other organisations, determining the
organisation's market focus, and ensuring
that it has the necessary management
expertise.
@ Set the prices of its services ~ subject to
requirements of the Regulator (within the
monopoly/universal service areas).
@ Promote competition through phased
reductions in the monopoly, subject to
ensuring the ability of the Post Office to
maintain the Universal Service Obligation
and a uniform tariff structure.
@ Ensure fair competition and in particular
to ensure that there is no undue cross
subsidy from the monopoly to competitive
market, and to ensure non-discriminatory
access to monopoly services.
@ Negotiate the details of pay settlements,
within the guidelines given, and make
arrangements for incentivising the
workforce.
@ Manage the Post Office network against
the guidance provided by the Government
on accessibility.
Monitor compliance with the USO.
@ Enforce the Post Office monopoly.
@ Monitor the network against the access
criteria.
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The Users’
Council will
‘© Be responsible for
all issues of customer
representation, and the
handling of complaints
about Post Office
services. (Ministers
would expect to be
able to refer all
complaints to POUNC
and not to be involved
in specific complaints,
except in the most
exceptional cases
involving the national
interest, when
consulted by POUNC.) -
@ Provide strategic
advice to the Regulator -
‘on consumer interests.
@ Provide advice and
information to
consumers.
@ Monitor complaints
and, where appropriate,
make representations
to the Regulator about
remedial action,
including the level of
penalty to be imposed
for a failure to meet
service performance -
standards.
@ Monitor and advise
‘on the size and make
up of the Post Office
counters’ network and
make recommendations
‘on the need for post.
office provision in
particular areas.
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CHAPTER SIX
Objective 4 —To equip the UK Post
O ffice to meet the challenges of the
changing postal market both domestically
and internationally
1. If it is to provide the services demanded by its users, the Post Office
needs to rise to the challenges presented by the changing market
environment, and have sufficient freedom and finance to develop its
commercial activities. This chapter describes:
@ the Post Office’s plans for restructuring its business to equip it to meet
the challenges (including the scope being given for the Post Office to
redefine the boundaries between its businesses);
e the Government's plans for facilitating the Post Office’s commercial
development; and
the changes the Government is making in the financial regime
(together with the principles that will be applied to the future
consideration of pay of staff within the Post Office).
POST OFFICE’S RESTRUCTURING
2. The Post Office is implementing a major review of the way it is organised
to face the marketplace. This follows a fundamental reappraisal of its
position in the markets in which it currently operates, and of its future
commercial ambitions. This initiative is being taken forward under the
banner ‘Shaping for Competitive Success’. The principal objective of the
restructuring is to ensure that the Post Office is best placed to respond
to evolving customer needs and market developments. The Post Office’s
ambition is to become a complete distribution company — connecting
people, transactions and places, building on the unique capabilities
it possesses.
3. Under the Shaping for Competitive Success initiative, the Post Office
will be restructured to help it deliver its commercial strategy, creating
a number of market-facing units, each of which will focus on a particular
market sector, bringing in, where necessary, managers with wider
experience to enhance existing skills.
These units will be responsible for ensuring the Post Office has a
comprehensive understanding of its markets, designing products
and services that meet the requirements demanded of it, drawing in
a flexible and creative way on the capabilities which the whole Post
Office possesses, to develop novel solutions which meet particular
customer needs.
The Post Office is also seeking to improve its efficiency ~ key to
successful competition as European markets open up in the growth
sectors — by continued investment in automation, new technology
systems and more effective operational units. For example:
Royal Mail is developing the next phase of its automation programme
for speeding mail through to delivery, and is looking to bring the
full benefits of automation into the international mailstream. It will
continue to invest in new mail centres, like the one recently opened
at Gatwick.
e Parcelforce is developing its operational effectiveness by deploying
state of the art operational systems, particularly track and trace
systems which allow continuous monitoring of packages as they travel
through the network. Towards the end of 1999, Parcelforce will open a
major new international hub operation in the West Midlands, and early
in 2000 will open a companion hub to handle its domestic express and
time-certain delivery traffic.
The Post Office also has a number of corporate-wide initiatives under
way to improve administrative efficiency, leading to reductions in
the level of expenditure on overheads and on support activities
(eg accounting and payroll systems) as well as a number of major
investments in information systems.
Employment relations
The Post Office remains a very labour intensive business, despite the
advent of new technology in some of the sorting and processing
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Post Office & form
functions. But the daily delivery round cannot be done by machine,
neither can the counter clerk or sub-postmaster be supplanted by a
machine. The Post Office is thus a very large employer (with around
200,000 direct employees, and a further 18,000 sub-postmasters
employing in turn around 40,000 other people). In the past the Post
Office has not had a good history of employee involvement and has
suffered from poor industrial relations over the years, but recently Post
Office management and unions have made strenuous efforts to improve
relations. The Government welcomes these efforts, but is anxious that
there should be a greater sense of partnership between management
and the workforce to enable the business to develop into the sort of
organisation envisaged in this White Paper. In particular, the increasingly
competitive environment will oblige the Post Office to increase
productivity and be flexible, requiring postal working practices to
become much more adaptable than before. The Post Office is committed
to motivating and training its staff to give the highest levels of service; and
to generally improving relations at the same time as introducing greater
working flexibility. The Government welcomes the initiatives aimed at
improving leadership, training and development, employee relations and
reward that have been launched. The Government is also considering
ways of providing additional pay flexibilities - see paragraph 34.
Boundaries between the Post Office businesses
7. The Post Office is realigning the boundary between Royal Mail and
Parcelforce, by transferring Royal Mail Priority Services (registered and
special delivery items) to Parcelforce (from April 1999), and the larger
Royal Mail packets (from April 2000 or possibly later). The two business
streams have revenue of approximately £145 million and £140 million
respectively. The changes are in line with the Post Office’s goal of
creating a better customer focus; the division between Parcelforce’s
business and that of Royal Mail has been arbitrary and the overlap
between them wasteful and confusing to customers.
8. The Government accepts that the Post Office should be able to
rationalise the internal boundaries between businesses within the overall
organisation on commercial grounds. However, it is vital that competing
10.
11.
businesses can be assured that this will not lead to undue and hidden
cross-subsidy from monopoly to non-monopoly areas. Approved and
transparent accounting structures must therefore be in place and
effectively monitored. This will be the responsibility of the Regulator,
but in this transitional period it rests with the Government.
Under the transfer of Priority Services, much of the operational activity,
at least initially, will continue to be carried out by Royal Mail. This
raises the possibility of the Post Office monopoly business improperly
subsidising wider Parcelforce business in the competitive arena. The
Government therefore asked its auditors for the Post Office to look at the
business case for the transfer; at the basis on which revenues and costs
would be treated under the new arrangements; and in particular whether
this was on a defensible basis from a competition point of view and with
accounting transparency. In the light of the advice from the auditors, the
Government has confidence that the arrangements are satisfactory. They
will continue to be monitored by the auditors until the Regulator has its
own arrangements in place.
COMMERCIAL DEVELOPMENT
It is widely accepted that the commercial future of the Post Office
depends on it being able to compete effectively with other service
providers to give customers increasingly up-to-date and efficient
services. The Post Office must therefore be equipped to develop the
business to provide the postal services that will be needed by customers.
This may well involve forging new alliances and commercial partnerships
with those having complementary skills.
The Post Office envisages a number of major developments (see box
over) to transform its business. The Government will help facilitate
developments of this nature by establishing the arm’s length strategic
relationship described in Chapter 5, so as to reduce unnecessary
restraints on the management of the Post Office, and by relaxing
financial restraints. In addition, the Government intends to modernise
the Post Office’s statutory framework.
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A dtivities in which the Post O ffice might become more involved could indude.
electronic commerce, hybrid mail and other ventures related to electronic messaging;
® customer management ventures to help businesses looking to improve the
services and support available to their customers from advanced technology,
eg on-line enquiry handling and customer database management;
e
providing a one-stop shop for a whole range of distribution activities,
increased involvement in the logistics market;
e
greater provision of international, end-to-end delivery services;
greater involvement by POCL in the electronic delivery of Government services; and
greater involvement by POCL in the delivery of financial services products.
12. The Post Office Act 1969 (as amended — principally by the British
Telecom munications Act 1981) allows the Post Office to provide:
© postal and related services;
e banking and related services; and
e services to British Telecommunications, the Government (and foreign
governments), local authorities, and certain bodies corporate which
have public duties.
13. The Post Office is obliged by the Act to exercise these powers in order
to provide services for the conveyance of letters that satisfy all
reasonable demands. The nature of what is generally described as the
Universal Service Obligation is considered more fully in Chapter 4.
14. When Parliamentary time permits, the Government will modernise the
definition of the areas of activity permitted to the Post Office to enable it to
develop its business to keep well abreast of market changes. The definition
will need to be sufficiently flexible to enable it to remain appropriate
throughout the lifetime of the legislation (or means will be needed to
permit updating of the definition without the need for primary legislation).
Meanwhile, whenever the Post Office needs the consent of the Secretary of
State to undertake new ventures in areas surrounding the traditional postal
market, the Government intends to interpret powers conveyed by the
1969 Act broadly and will continue to be willing to give consent, when
appropriate, under section 61 of the British Telecommunications Act 1981
15.
16.
17.
18.
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to wholly owned subsidiaries of the Post Office engaging in activities
beyond those in which the Post Office itself has power to engage.
Conversion of the Post Office into a plc under public ownership
At present, areas of responsibility and accountability are blurred between
the Government and the Post Office Board. This cannot be allowed to
persist if the Government is to ensure real commercial freedom for the
Post Office within the public sector. Unless there is a transparent
framework of accountability, within which the Post Office Board is clearly
accountable for the commercial success of the business, it is difficult to see ©
how things can be very much different than they have been in the past.
We propose that the Post Office remains a publicly owned business, but
in order to make the accountability framework as clear as it possibly can
be for a publicly owned business, the Government believes it is both
necessary and desirable for the Post Office to become a public limited
company under the Companies Acts.
The intention is to replace the current legal structure of the Post Office
which is unclear with a form of structure which is more appropriate to a
forward looking business; and which is clear and widely understood. The
Post Office as a corporation is currently governed by legislation which is
either unique to it or specific to nationalised industries. This legislation,
which interweaves the regulatory and ownership powers of the
Government, provides for intervention in the business which is no longer
consistent with the Government's aim for clarity in the respective roles
of the Government, Post Office and Regulator.
Transforming the Post Office into a public limited company will help
establish the clear separation of the functions of ownership and
management, whilst remaining under public ownership. As a public
limited company the Post Office and its relationship with the Government
(as owner) will be disciplined by the full range of company law. In
particular it will make it absolutely clear that the Directors owe their
duties to the company (not directly to the Government as owner) and will
require the Government as owner to exercise its interests effectively.
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19. In addition, and as a matter of practicality, plc status will enable the
Government to receive a proper dividend, rather than the Post
Office having to build up cash deposits on its balance sheet (see
paragraph 28 below).
20. There are precedents throughout the world for a Government-owned
pic. Ail the Nordic countries now use this model; as do Australia, New
Zealand and Austria. A similar change to pic status for the Post Office
will underline the accountability of the Directors and the new
commercial status of the public sector organisation. Without it the public
sector option will be much weaker.
21. It is intended to establish the publicly owned Post Office as a plc
through primary legislation as soon as Parliamentary time permits. As
was said in the statement to the House on 7 December, the Government
does not rule out the possibility of introducing private share-holding
into the Post Office - for example through the sale of a minority stake in
it or an exchange of equity with other businesses - at a later stage.
However at present wholesale privatisation would not be a realistic
option.
22. Primary legislation will be necessary to convert the Post Office into a
pic. The Government will propose that such legislation shall contain a
commitment that if there is any proposal to sell or exchange shares,
then there would need to be further approval of such a proposal by both
Houses of Parliament.
FINANCIAL REGIME
23. The Post Office, as a public sector body, is subject to the Government's
planning and control regime for public expenditure. In June 19984 the
Government announced a number of important changes to the public
expenditure control framework to make it more consistent with the
Government's fiscal rules and to promote longer-term planning. Whilst
the Government made it clear that it will continue to apply its fiscal
4 Cm 3978 Stability for investment for the long term economic fiscal strategy (ISBN 0-10-139782-8).
24.
25.
26.
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rules to the public sector, including public corporations,’ the reforms
recognised that certain, largely self-funding public corporations (known
as self-financing public corporations, SFPCs) — such as the Post Office —
should be given more flexibility.
Traditionally, the control of each Nationalised Industry’s expenditure has
been through a limit on the body’s requirement for external financing of
its activities - the External Financing Limit (EFL). Because the Post Office
has not had recourse to external financing in recent years (but has
generated a cash surplus) it has instead had a negative EFL through
which it has been obliged to invest a high proportion of the profits it has
generated each year in non-redeemable gilt-edged stock or National Loan
Fund deposits. Under the new framework the EFLs of SFPCs (including
the Post Office) are no longer part of the spending limit for Departments
and will be separately managed, and SFPCs have more flexibility to
manage their spending between years, within agreed limits.
Further reform of the Post Office's financial regime builds on this more
flexible framework. The Post Office has a good track record of
profitability and has been a net contributor to the public finances over
along period. The Post Office needs a more commercially structured
financial regime to enable it to retain a higher proportion of its earnings
to modernise its operations and to raise finance when required to invest
in the business.
Revised financial regime
The key features of the new financial regime will be:
e The Government will set a profit target for the whole of the Post Office —
business on the basis of the agreed Strategic Plan.
® The Post Office will be expected to invest an equivalent of a commercial
dividend each year. This will be set at 50 per cent of the Post Office’s
expected post-tax profits in 1999/00, and thereafter the level will be 40 per
cent of post-tax profits each year. This will in effect mean more than
halving the rate at which profits are removed from the business.
5 Note that, on national accounts definitions, borrowing by the Post Office scores within the Public
Sector Net Cash Requirement (previously the Public Sector Borrowing Requirement) which is 53
closely related to changes in Public Sector Net Debt.
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#The Post Office will, in the light of being able to retain 60 per cent of
its profits, be expected to finance from retained earnings the capital
expenditure required to maintain and enhance its existing business.
@ The Post Office will be allowed to borrow for growth investments
including acquisitions and joint ventures where these cannot be
funded from retained earnings, and subject to an approval process for
larger investments.
@ By 1 April 2002 the Post Office's balance sheet will be restructured.
Setting the profit target
27. \n the past the Government has set a number of targets for the Post
Office's individual businesses: return on capital employed and real unit
cost reduction for Royal Mail, return on capital employed for Parcelforce
Worldwide; and return on turnover for POCL. In future the Government
will set only one annual financial target — the profit target for the whole
Post Office ~ on the basis of the agreed Strategic Plan. It is essential for
the Government to set a profit target to ensure that price regulation does
not result in falling value. The Post Office's individual business targets
will be consistent with the overall profit target. Whilst the overall Plan
will be agreed by Ministers, specific business targets will be a matter
for the Post Office management.
Commercial dividend
28. As indicated above, the Government will expect the Post Office each year
to invest the equivalent of a commercial dividend in gilts or deposits with
the NLF. However the proportion of post-tax profits mentioned above will
be subject to a floor, which will be determined when the Strategic Plan
is agreed. This will provide an incentive for the Post Office to ensure its
Plan can and will be effectively implemented. It also gives some certainty
to the Government as owner, in the same way that private companies
aim to maintain dividends in the face of lower outturn profits. The
expected dividend will be announced to Parliament once the Strategic
Plan has been agreed. After the close of the financial year, the
Government will inform Parliament of the outturn figure. The outturn
External Financing Requirement (EFR) (which is the sum of the gilts
29.
30.
31.
32.
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postal
and
purchased/new NLF deposits less the new borrowings) will also be
announced after the close of the financial year, at the same time as
the Government's report (referred to in Chapter 5) and other financial
information is published.
Once the Post Office has been established as a publicly owned plc, (as
explained in paragraph 15) it will pay an annual dividend over to the
Government, rather than invest in deposits.
Borrowing for further investment
The Post Office will be expected to finance investment in the core
business from retained earnings. But this is unlikely to be sufficient
to allow the Post Office to grow into new markets and provide new
products. Borrowing will therefore be permitted for growth investment.
The details of the borrowing regime are:
(a) for cases costing more than £75 million a fast track, but rigorous,
Ministerial approval process will be required. Ministers will complete
this process within 28 days of a full business case being received.
The Government will approve Post Office requests for borrowing for
investment cases which are consistent with the Strategic Plan,
commercially robust, and pose no undue risk to the taxpayer;
(b) for cases costing £75 million or less there will be:
(i) timely notification to the DTI by the Post Office;
(ii) a need to go through the Ministerial approval process only where
a satisfactory return is dependent on further linked investment
being undertaken;
(c) borrowing under (b) will be limited to an annual limit of £75 million
in each of the next five years.
In principle the Post Office has powers to borrow from either the
Government (the National Loans Fund) or from the commercial markets.
lt has been argued that borrowing from the commercial markets would
impose additional disciplines that could offset the additional cost.
However the markets will regard such borrowing as being underwritten
(at least implicitly) by Government, and so such borrowing is likely to
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confer little, if any, additional discipline. The Government has therefore
decided that any borrowing will be from the National Loans Fund, as this
will be more cost-effective for the taxpayer. But in order to ensure that
the Post Office competes fairly with other postal operators in the private
sector; and to reinforce commercial disciplines, the Post Office will
borrow at a rate which is broadly comparable to the rate it would be
charged in the market without an implicit or explicit Government
guarantee. The Government will seek independent advice on the
appropriate rate.
Restructuring the balance sheet
33. The Post Office balance sheet currently shows over £1.8 billion invested
in gilt-edged stock or deposited with the NLF. Much of this represents the
accumulation of previous EFL surpluses. The Post Office does not, as a
rule, have access to these surpluses (since they are, in effect,
accumulated dividends which cannot be paid over to the Exchequer since
the relevant legislation does not require the Post Office to do so) but it
benefits from the interest payable, estimated to be £107 million in
1998/99. To place the Post Office on a more commercial footing, and one
where it can be better benchmarked against its competitors, the balance
sheet needs to be restructured. It is therefore proposed that the Post
Office should cease to hold, and have access to interest from, the present
level of accumulated EFL surpluses. To allow time to make the transition
to this new situation, it is planned that the change will take effect on
1 April 2002. During this period the Government will consider with the
help of professional advisers the appropriate shape of the balance sheet
to give the Post Office both the incentive to perform and the financial
scope to enhance its business.
Pay
34. The services the Post Office provides are for the most part, by their very
nature, labour intensive. Pay therefore forms a high proportion of the
organisation’s costs (over 67 per cent in 1997). The quality, reliability and
efficiency of post office services is very dependent on the work of the
nearly 200,000 staff it employs — literally across the whole country.
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postal
and
35. The reforms set out in this White Paper, including the introduction of a
profit target set by Government, and price regulation by the Regulator, all
impose real disciplines on costs. The market place in which the Post
Office is acting is increasingly competitive, and this too imposes real
pressures to increase efficiency and cut costs.
36. In order to be able to respond to the commercial pressures, the
Government believes it is right to allow the Post Office more flexibility
within the necessary context of public sector pay policy, to increase the
linkages between pay and productivity and performance. The Post Office
already offers tailored productivity schemes to reward staff for their own
particular contributions to more effective working. But in addition
(following consideration of outline proposals from the Post Office), the
Government and the Post Office will be looking at the possibility of
developing a general framework of parameters for overall pay
settlements, rather than requiring the Post Office to put forward each
settlement for approval. They will also consider ways to share long term
success of the business with staff, based on any increasing value of the
organisation. These areas will be explored further over the next few
months, with a view to implementation from 1 April 2000.
POTENTIAL FURTHER REFORMS
37. Events will continue to move rapidly in this constantly changing
commercial environment and further changes may be required to enable
the Post Office to grow and to meet customer needs, which are in the
best interests of the Post Office and its staff. The Government does not
rule out the possibility of making further changes to equip the Post Office
for success.
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CHAPTER SEVEN
Objective 5 — To support a viable
network of post offices so as to ensure
nationwide access to a range of public
and private sector services
1. The Post Office counters’ business poses a distinctive set of challenges.
The network of nearly 19,000 post offices makes up Europe's largest
single retail network and forms a familiar and valued part of the social
and commercial infrastructure of the country. Although they provide an
important point of access to the services of Royal Mail and Parcelforce
Worldwide — and in so doing play an essential part in enabling the Post
Office to fulfil its Universal Service Obligation — the key business
conducted at post offices today is in the delivery of such Government
services as the payment of pensions and other social security benefits
and the issue (through selected post offices) of vehicle licences. Indeed
POCL today relies on the work it carries out contractually for the
Government and its agencies for more than half its income.
2. Technological progress is however increasing the number of options
available to Government clients and their millions of customers for
carrying out these transactions. Thus for example over 30 per cent of
child benefit recipients have opted to have payments made directly into
their bank accounts by automatic credit transfer (ACT) and more than
50 per cent of new pensioners are making a similar choice. It is of course
right that customers should be free to exercise such choice, and it is also
right in principle that POCL’s Government clients should explore the
channels of payment they believe will best meet the needs of their
customers whilst striving for an acceptable balance of efficiency and
security in the provision of such essential services to secure best value
for the taxpayer.
3. The dilemma that this poses both for POCL management and for the
Government lies in the underlying financial structure of the business.
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In 1997/98 the business recorded an operating profit of only £33 million
on a turnover of £1.1 billion representing a return on turnover of 3 per
cent. But these figures tell only part of the story. Of the network of nearly
19,000 offices, only 600 are directly run and staffed by POCL (the Crown
offices). The remainder are franchised or agency operations usually run
in conjunction with another business. In rural areas this will typically be
the village shop, whilst in urban and suburban areas the associated
business is frequently a confectioner/tobacconist/newsagent or a
convenience store. In recent years post offices have appeared in a
number of large supermarkets, and examples of associations with petrol
stations and a wide variety of other businesses can also be found.
Further development of the Post Office counters’ network
It is primarily this sharing of overheads between combined businesses
that make the franchised and agency network an economically efficient
means of delivering Government and other services, compared with
stand alone, directly operated post offices. For customers, the
arrangement offers the convenience of a range of services under a single ©
roof and often longer and more flexible opening hours than is normal
with Crown post offices, and in rural or other areas access to cash and
shopping not otherwise available nearby. For the franchisee or sub-
postmaster, the attraction lies not only in the income derived from
carrying out work for POCL, but also in the footfall generated by
recipients collecting pensions and other benefits and those conducting
postal business who then stop to make other purchases.
There are other valuable synergies within the counters’ network (arising
especially from the association with the Benefits Agency and Girobank).
Many smaller businesses enjoy the convenience of depositing their
takings at their local post office. POCL then pays out this cash in the form
of pensions and other social security benefits. These matching inflows
and outflows of cash represent an efficient recycling of some £40 billion
cash circulating within the economy each year.
Despite its many strengths, the strong inter-dependency between post
offices and the mostly small, retail sector also brings to the network
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a particular vulnerability. If either side of a sub-postmaster’s business
underperforms or falls into decline, the sub-postmaster may decide
to call it a day. In such circumstances POCL sometimes has difficulty
in finding a replacement. Where, despite best efforts, one cannot
be found, POCL will normally try to put in place some form of fall-back
arrangement, for example a community office open for just a few
hours a week, to ensure that the community is not left without service.
Even so, the network is currently shrinking by some 200 offices a year.
Most of these losses occur in rural areas and reflect changing social
and demographic patterns.
7. It is clearly right that the network cannot be set in concrete and should
have the flexibility to adapt to the needs of its customers. At the same
time, the closure of a post office and its associated business can have a
major adverse impact on a community, particularly where it represents
the last remaining retail outlet. This can be as true of isolated housing
estates as it is of rural villages with particular hardship caused to the less
mobile sections of the community.
8. The key to sustaining the network lies in the confidence of individual
sub-postmasters that they have an ongoing viable business and a large
enough customer base to make a living. POCL already provides
important underpinning of the most vulnerable offices by a system of
payment which provides a guaranteed minimum level of income. A large
majority of the rural network particularly benefits from these guaranteed
floor payments. But clearly POCL can only sustain these financial
transfers from the more profitable parts of the network if the profitability
of the network as a whole is sufficient to accommodate them.
9. In recent years, POCL has made good progress in attracting new
business such as bureaux de change, travel and other forms of basic
insurance, and the National Lottery, to offset the gradual erosion of
traditional benefit payment work, as increasing numbers of recipients
choose to be paid through ACT. But this success needs to be seen in
perspective. The cumulative value of new business represents only a
fraction of the total value of POCL’s work for Government agencies such
10.
11.
12.
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as the Benefits Agency (BA) and the Driver Vehicle Licensing Agency
(DVLA). Any sudden withdrawal of this latter work would leave POCL
with an unbridgeable revenue gap, compounded for sub-postmasters by
a corresponding loss of footfall.
One element of the Government's help to sustain the nationwide network -
of post offices is to influence the rate of any migration of existing
Government business so that it does not run too far ahead of POCL’s
ability to develop new sources of revenue to replace it.
A second element reflects and responds to POCL’s need for a modern
on-line IT platform to serve existing clients as effectively and efficiently
as possible, as the basis for developing new business opportunities, and
to provide better services and access to customers. The Government
recently announced that agreement had been reached in principle with
ICL about the continuation of the Horizon project to computerise the Post
Office network and automate the payment of benefits.
The project initiated by the last administration, had suffered considerable
delays and set-backs, and was running three years late. When these
delays became apparent, the Government commissioned a major review
of the project to decide the best route forward given its huge importance
to the approximately 15 million people who collect their benefit cash
from post offices, the 28 million customers of the Post Office, and 18,000
sub-postmasters and others who keep nearly 19,000 offices running.
Against the background of this delay all parties were concerned to review
the project's future and find a positive way forward. This has now been
completed, and new agreements have been signed by ICL and POCL.
The changes to the Horizon project are aimed to put it on a suitable
footing for the future and allow the Post Office to move as quickly as
possible to the computerisation of Post Office counters’ services.
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15. The main elements of the agreement are:
First, the project to automate Post Office counters’ services will be
taken forward as planned as quickly as possible. For the first time
ever, post offices will have an up-to-date automation platform, helping
them to provide a better service to their customers, and representing
a major investment in the future of the nationwide network of
post offices.
e
In agreement with ICL the magnetic strip benefit payment card will be
removed from the project. Given the delays this is now an outdated
concept and the banks among others are already moving away from
magnetic strip in favour of the next generation technology — the smart
card. For the future, the Government intends that the Benefits Agency
will move from the traditional paper-based methods of payment toa
more modern and efficient way of paying benefits, using the existing
automated credit transfer system to make benefit payments into bank
accounts accessible throughout the nationwide network of post offices.
POCL and DSS/BA will be working together on plans to introduce the
new arrangements in 2003. This will mean that all benefit recipients
who wish to collect their benefits in cash at post offices will continue
to be able to do so both before and after the change.
® In the interim, the Benefits Agency intends to use bar-coding on order
books (as already operating successfully in some areas) to tackle
benefit fraud. This should provide potential savings of around
£100 million a year.
« The public sector parties and ICL are satisfied that the target of
achieving the computerisation of every post office throughout the
network by the end of 2001 is more realistic. This will give customers
a better service and help to secure a viable future for the network of
post offices.
This project represents a major investment in the future of the
nationwide network of post offices. We will be looking to the Post Office
to explore how it can build on this investment to earn new business and
offer more cost-effective services, in partnership with the private sector.
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16. A number of the Government's wider policy objectives represent
potentially important new areas of business for POCL. The first is the
universal availability of bank accounts and access to the accompanying
range of financial services. The post office network has an unrivalled
reach into both rural areas and urban deprived areas. Thus some 60 per
cent of rural parishes have a post office whereas less than 10 per cent
have a bank or building society. POCL has long associations with
Girobank (which now forms part of the Alliance and Leicester group). It
also provides banking facilities at post offices throughout the country on
behalf of the Co-operative Bank and Lloyds TSB. POCL's ability to expand
these services and develop new ones, eg based on smartcard technology,
will be significantly enhanced by the agreement to press ahead with the
Horizon platform.
17. Similarly, the unique reach of the counters’ network, coupled with the
Horizon platform, should mean that POCL is well placed to offer a major
channel to deliver the Government's ambitions to interface with citizens
in a modern, convenient, efficient and coherent manner through the
increasing use of IT.
18. The Horizon platform, together with an increasing familiarity on the part
of customers with simple computer technology, will offer to POCL the
prospect over time to deliver a range of services to customers through a
publicly accessible electronic network as an alternative or supplement to
the physical network of post offices.
19. The Government has repeatedly made clear its wish to see a thriving
nationwide network of post offices. There may be a difficult transition as
demand for traditional services declines whilst new services and new
ways of working may still be at an early stage of development. The
Government stands ready to play its part in easing this transition with an
eye in particular to supporting those post offices of special value to the
local community. The Benefits Agency will continue to use the counters’
network on the same basis as it does now until 2003, when the new
arrangements for paying benefits by ACT will be introduced over a two
year period. A number of other Government Departments and agencies
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also use the counters’ network for the delivery of their services. There is
an understandable wish on the part of these Departments and Agencies
to find the most cost-effective means of delivering their services to their
customers and giving their customers a range of choices for accessing
their services. But this needs to be balanced against the importance of
avoiding too sudden a change in POCL's financial circumstances, with
the damage that this would cause. The early progress with the Horizon
platform now in prospect should enable POCL to offer substantial
enhancements to the facilities they are able to offer these and other
clients, which should in turn increase the attractiveness of POCL as
compared to alternative delivery channels. POCL has recently signed
a three year agreement with DVLA. The three years will provide POCL
with the opportunity to offer the Horizon platform for at least part of
this period to streamline services to DVLA.
20. The future of the Post Office counters’ network lies above all in its
continued attractiveness to clients and customers as a channel for
accessing products and services and to sub-postmasters as a business
proposition. If, for whatever reason, customers stay away from an
individual post office, neither the Government, nor the Regulator, nor
indeed Post Office management will in the end be able to prevent its
closure. If local communities value the presence of a post office outlet, as
so many clearly do, their best guarantee of retaining it lies in making full
use of the facilities on both sides of the business.
Criteria for further development of the counters’ network
21. Against that background, the Post Office will continue to maintain
a nationwide network of outlets which will provide customers with
convenient access to Post Office counters’ services. It is recognised that
the precise shape and configuration of the network must be responsive
to commercial and social changes, and it must be a matter for Post Office
management to determine how its commitment to a nationwide network
is to be met. However, given the uneven distribution of population in the
United Kingdom, it is also recognised that some reassurance may be
required against a concern that the commitment could be met with
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substantially reduced access compared with now in less populous areas.
It is the aim of the Government and the Post Office to maintain access
to counters’ services in, for example, rural communities. POCL goes to
great lengths to maintain post offices in these circumstances, setting
them up in village halls, petrol stations, pubs and even domestic
premises when no other solution can be found. In response to that
concern the Government will for the first time set (as part of the
Government's guidance to the Post Office and the Regulator on
environmental and social issues) minimum criteria for access to Post
Office counters’ services, for example percentage of the population
within a certain distance. POUNC will monitor and will be able to advise
and make recommendations to the Regulator on the size and make up
of the network. This further measure will ensure that any evolution of the
network of post offices will take place with due regard to less populated
areas, as well as to those of social deprivation. The Post Office will
publish in its annual report information about how the network is
evolving in continuing to meet these aims and, in doing so, will comment
specifically on the network situation in rural and urban deprived areas.
This will enable the Government to consider any potential problems that
might arise, and examine whether any action can be taken.
Conversion of Crown post offices
The Post Office aims to bring the benefits of sharing of overheads to part
of the network of the post offices which it owns and runs — the ‘Crown
post offices’. The conversion programme was suspended in 1997 in the
light of concerns arising as a result of some of the early conversions.
The Government has now agreed a strategy, which reflects proposals
put by the Post Office to the trade unions, of retaining a core of modern,
strategically well-positioned, directly owned and managed Crown offices
that account for a significant value of the business done at post office
counters. Such a network provides POCL with direct contact with the
customer, and enables them to develop high standards of service and
products which their customers need. For the foreseeable future the Post
Office intends to manage the conversion programme so that at least
15 per cent of the total business transacted by the counters’ network is
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done at the remaining Crown offices. The strategy also recognises that
some further conversions will be beneficial to customers and the
business. The selection of offices for conversion will be driven by three
prime factors:
@ improvement of service delivery;
e cost effectiveness; and
@ ability to manage related staff issues.
POCL, following consultation with POUNC, also intends to make changes
to the public consultation process on conversions, aimed at providing
customers with specific details of the services being proposed, to provide
a more objective basis against which interested parties can evaluate a
proposal. Such changes will be incorporated in the Code of Practice on
the Network, agreed between the Post Office and POUNC.
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CHAPTER EIGHT
R oyal associations
The Royal associations are symbolic of the historic character of the Post
Office and of the essential role which it continues to play. They are also
an intrinsic part of the brand which the Post Office has built up over a
period of many years.
. The Government's reform plan will ensure that the Post Office will
continue to have a unique role in British life as a dynamic, competitive
business within the public sector. The Government is therefore pleased
to report that Her Majesty The Queen has graciously agreed that,
under the proposals for the Post Office set out in this White Paper,
the traditional Royal connections should continue. In particular
Her Majesty has consented that:
* adepiction 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; and
@ the Royal emblems, the Crown and the Cypher should continue to
appear on such items as post boxes, vehicles and business premises.
The Royal connections, important to customers and to stamp collectors,
will remain symbolic of the essential national role which the Post Office
will continue to play.
Printed in the UK for The Stationery Office Limited on behalf of the
Controller of Her Majesty's Stationery Office.
1045088916, 7/99, 39462, Job No J85781
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Stationery
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ISBN 0-10-143402-2
9 I 01°434027">