Reid and Teather on the Royal Mail and the Post Office

12.19.00pm BST (GMT +0100) Fri 16th May 2008

' . .The report also concludes that householders and small companies have seen no benefit from the opening up of Royal Mail to competition . . '

[May 15] Alan Reid (Shadow Minister, Scottish and Northern Ireland Affairs; Argyll & Bute, Liberal Democrat): It is a pleasure to serve under your chairmanship this afternoon, Mr. Weir, to discuss a subject that I know is dear to your heart. I applied for the debate after the panel that was set up to review the UK postal services sector published its initial report in response to the evidence submitted to it. I am grateful to Mr. Speaker for granting the debate.

I shall first talk about Royal Mail and later address the future of the Post Office. Royal Mail and its universal service obligation are part of the glue that holds the United Kingdom together. The delivery and collection of mail throughout the country at the same affordable price is very important. My constituency is sparsely populated and includes 26 inhabited islands, so it is definitely a beneficiary of the universal service. Small businesses in my constituency could not compete without it.

However, the interim report paints a picture of a bleak future for Royal Mail and the universal postal service if changes are not made. Paragraph 79 of the report, which is rightly highlighted in bold, states:

"We believe that there is a broad, emerging consensus among postal companies, business users, consumer organisations and the regulator that the status quo is not tenable: it will not achieve the vision we set out at the beginning of this paper. There is, therefore, a compelling case for action."

That is a wake-up call to all of us. The report also concludes that householders and small companies have seen no benefit from the opening up of Royal Mail to competition, but that big companies have seen clear benefits. It warns that Royal Mail's financial stability and thus the future of the universal service, with delivery to every home in the country at the same price, is under threat.

The report confirms what I and many other hon. Members have been warning for years: continuation of the present policies will inevitably mean the end of the universal service. In recent years, the service has worsened. The first delivery, by which mail used to be delivered by about half-past 9 in the morning, has ended. Delivery times for mail are now much later in the day-in some cases, as late as 7 o'clock in the evening. The price of posting mail has risen steadily. A second-class stamp went up in price by 12.5 per cent. last month, which is well above the rate of inflation.

An example from my constituency of a significant worsening of the service relates to deliveries to the island of Mull. For many years, the mail was delivered to the island on the first ferry of the day, at 8 am. Now it is delivered on the second ferry, at 10 am, which has a knock-on effect for the delivery time to people's businesses and homes. Royal Mail's excuse is a European transport directive that restricts its vans to 56 mph. However, that is only 4 mph below the speed limit on Argyll roads, and people familiar with the roads will know that their winding nature and the need to avoid all the potholes means that driving at 60 mph is impossible on most stretches anyway. I am not sure why that 4 mph difference means that mail cannot be on the first ferry.

As a result, the mail is not delivered to the shop in Fionnphort, at the end of the Ross of Mull, at the far south-west of the island, until almost 6 o'clock in the evening. Some houses outside the village do not get their mail until about 7 o'clock. Clearly, that is far too late for businesses to deal with the mail that they receive that day, but under Royal Mail's performance statistics, it counts as mail delivered on that day. There is no incentive for the company to deliver the mail earlier in the day-if it is delivered before midnight, it counts as delivery on that day.

The Mull and Iona chamber of commerce discussed the problem with Royal Mail, which revealed that three quarters of the mail could reach the first ferry of the day. The chamber of commerce's view was that it would rather receive three quarters of the mail during the working day than all of it after businesses had closed for the night. However, Royal Mail said that it could not entertain that suggestion, apparently because of performance targets. As I explained earlier, the targets set by Postcomm measure the day on which the mail is delivered, in theory even if it is only delivered at one minute to midnight.

That raises questions about the performance targets. Royal Mail seems to be driven by those targets rather than by the wishes of the customer. We need to make the organisation a bit more sensible, for example by having a target delivery time of perhaps 3 pm, rather than midnight as at present. We could even have a points system, with full marks for delivery before 3 pm and half marks for delivery between 3 pm and midnight.

I always stress to managers delivering any service that the islands need a degree of flexibility. Hard and fast rules that work okay on the mainland do not necessarily apply to islands. It is possible that some people on the island may have a different view from that of the chamber of commerce, so I want Postcomm to consider the proposal that Royal Mail should be allowed to deviate from the normal rules in any part of the country, following a public consultation and with the agreement of the local council. It should be allowed that flexibility as long as there is agreement, rather than slavishly having to follow national performance targets.

Lembit Öpik (Shadow Minister (Housing), Department for Communities and Local Government; Montgomeryshire, Liberal Democrat): I am interested in my hon. Friend's idea about greater flexibility. He is aware of the colossal post office closure programme that is affecting my constituency and others. Does he agree that it would be better to apply the same guidelines-based, rather than rules-based, approach in that case? People like me who are trying to save post offices such as Abermule, Berriew, Castle Caereinion and Garth Owen from closure could then appeal on the basis of a common-sense local decision, taking local criteria into consideration. It sounds to me as though that is what my hon. Friend wants to do in the case of the delivery service, but it makes sense to do it in the case of the closure programme as well.

Alan Reid (Shadow Minister, Scottish and Northern Ireland Affairs; Argyll & Bute, Liberal Democrat): I definitely agree with my hon. Friend, who makes an important point. As far as the closure programme is concerned, Royal Mail is constrained by the Government's saying that it has to close 2,500 post offices.

Mull is just one example of a worsening service, and there are many others throughout the country. Royal Mail's current strategy of constantly raising prices, combined with a worsening service, will inevitably lead to reductions in the volume of mail posted. That will get us into a vicious circle, triggering higher prices, leading to reduced volumes and so on, eventually making the entire business untenable and threatening the maintenance of the USO.

Russell Brown (PPS (Rt Hon Des Browne, Secretary of State), Scotland Office; Dumfries & Galloway, Labour): The hon. Gentleman has mentioned the increase in the cost of postage on two occasions-I arrived somewhat late, so it may have been on three occasions. Does he recognise that in comparison with other European countries, the cost is still one of the cheapest? For the service that it gives us, it is still good value for money.

Alan Reid (Shadow Minister, Scottish and Northern Ireland Affairs; Argyll & Bute, Liberal Democrat): I will take the hon. Gentleman's word on the comparison with prices in other countries, because I have not made such a comparison. However, I am concerned that if there are such price rises every year, the vicious circle that I described will be triggered.

Andrew Smith (Oxford East, Labour): I congratulate the hon. Gentleman on securing the debate. Does he think that the problems he has identified-cost and lack of responsiveness to local needs-would be better or worse if Royal Mail were privatised? I understand that his party's policy is to privatise Royal Mail and separate it from the post office network. Does he agree with that policy? If so, why does he think it would make things better?

Alan Reid (Shadow Minister, Scottish and Northern Ireland Affairs; Argyll & Bute, Liberal Democrat): Well, it would be inaccurate to describe my party's policy as privatisation. I support the policy of the party, which is to bring more private sector investment into our mail services, and I will come to that later in my speech.

In the early stages of its existence, Postcomm argued that the universal service obligation was a help to Royal Mail and gave it a competitive advantage. I am pleased to read in the report that Postcomm has now woken up to reality and in its evidence to the review, it accepts that

"without extensive change, the Royal Mail's business model will become unsustainable".

It goes on to predict that, without policy changes, Royal Mail's cash flow on its letters business could be in deficit by as much as £400 million a year in just four years' time.

John Grogan (Selby, Labour): Given the threat to the universal service obligation, does the hon. Gentleman think that there is a case for the other mail operators that are emerging to make a contribution-as Royal Mail does-to the universal service obligation?

Alan Reid (Shadow Minister, Scottish and Northern Ireland Affairs; Argyll & Bute, Liberal Democrat): I am grateful to the hon. Gentleman for that intervention and I completely agree with him; I intended to mention that point later.

The hon. Gentleman's intervention leads nicely on to the next part of my speech, which is to point out that Royal Mail is at a serious disadvantage compared with its competitors. It has to deliver mail to every home in the country. That obligation is often called "the last mile", although in the case of my constituency "the last hundred miles" would be more accurate.

The private sector clearly picks the profitable side of the business. There will never be competition to deliver mail to rural areas, which is the expensive side of the business. Going back to the Fionnphort example that I gave earlier, we will never see two mail delivery vans rushing nose to tail down the single track road to Fionnphort. That scenario conjures up an image of the driver of the leading van ignoring all the signs urging him to be a courteous driver and to use the passing places to allow overtaking. However, that scenario will never arise; deliveries to Fionnphort will always be left to Royal Mail.

It is evident that Royal Mail requires more investment if it is to continue to deliver the USO without constant and large increases in the price of a stamp, so there are some issues that I would like the Government, the regulator and the review panel to consider. First, there is what is known as the "access headroom" rule. Royal Mail is required by its licence to maintain a minimum gap, known as the headroom, between the prices that it charges retail customers and the amount that it can charge its wholesale customers to use its network. The access headroom regime has paved the way for the fast growth of upstream competition-a rate of growth that is far ahead of all predictions.

I understand that no other postal market in the world has an access headroom regime that imposes such competitive constraints on the universal service provider; nor is there a market that makes new entry to the upstream market so easy by enabling competitors to rely on the existing infrastructure of the universal service provider to deliver "the last mile". The UK's access headroom regime is something that must be looked at. It certainly appears to be very unfair to Royal Mail.

Another way of paying Royal Mail for delivering the USO relates to a point I made earlier; we should take advantage of the clause in the European directive that allows a charge to be levied on mail companies that do not deliver a universal service, and use the proceeds to pay Royal Mail for doing so. If those private companies are cherry-picking the profitable parts of the business, they should compensate Royal Mail adequately for carrying out the unprofitable parts of the business. At the moment, it appears that Royal Mail is cross-subsidising the universal service obligation from other parts of its business, which makes it harder for it to compete. Royal Mail desperately needs more investment and the Government must either provide that investment themselves or ensure that private sector investment is secured for the company.

I turn to post offices. My constituency has already suffered from the latest post office closure programme; several post offices in my constituency have already been closed, so there is no point in my revisiting that ground. Instead, I want to look to the future.

The post office closure programme in Argyll and Bute reported in January. As well as closing several post offices, the report contained one piece of good news. Post Office Ltd said that it wanted to reopen one post office, in the village of Otter Ferry, which had closed several years ago. That seemed to be good news. However, yesterday-four months further on-the Post Office told me that it was still working to try to restore the service to that community, but it was not yet in a position to confirm anything. That certainly worries me; four months have passed and no one has been found to take over the post office in Otter Ferry.

To add to those worries, the post office in the village of St Catherines closed suddenly in the middle of February. Again, the Post Office told me that the closure was only temporary and that it was planning to find somebody to take over the post office. However, three months later, the Post Office has again not managed to find anybody. I know that throughout the highlands and islands, there are post offices that are supposed to be temporarily closed, but they have been in that position for several years. It certainly worries me that, when a postmaster gives up a small village post office, it seems to be extremely difficult to find anybody to take over the business. That suggests that people looking at those businesses do not regard them as profitable, so I am worried that even after the closure programme we might continue to see a gradual decline of the post office network.

The key to keeping post offices open and profitable is clear-to ensure that the contract to pay pensions and benefits stays with the Post Office after 2010. We must not see a repeat of the TV licence fiasco, when the contract to renew TV licences was given to PayPoint, an organisation that lacks a rural network.

Russell Brown (PPS (Rt Hon Des Browne, Secretary of State), Scotland Office; Dumfries & Galloway, Labour): As the hon. Gentleman recognises, footfall is important. However, does he also recognise that the Post Office is having extreme difficulty in competing with the likes of PayPoint to win contracts? Let us take, for example, the fictitious "A Bank Ltd", or a fictitious utility company, which might allow people to pay their accounts at a post office. However, the price has to be cut to such a level that the postmaster or postmistress receives a greatly reduced payment for providing that service, which in effect means that the business is no longer viable for them. I suspect that is why we end up with temporary closures that become almost permanent; no one is interested.

Alan Reid (Shadow Minister, Scottish and Northern Ireland Affairs; Argyll & Bute, Liberal Democrat): That is an important observation. However, the key thing is that, where there are Government contracts, they must be given to the Post Office. The reason is that the Post Office is the only organisation that has a rural network. PayPoint has an extensive network, but only in towns. Let us compare PayPoint with the Post Office in my constituency. PayPoint has no outlet in the whole of rural north Argyll, nor does it have an outlet on several of the inhabited islands in the constituency. By contrast, rural north Argyll has several post offices and the inhabited islands to which I referred also have post offices, so when the BBC gave the TV licence renewal contract to PayPoint, it meant that people on several of the islands in my constituency and in rural north Argyll were not able to renew their TV licence over the counter. I do not want that situation repeated with the Post Office card account.

The way for the Post Office to compete with PayPoint is through the rural post office network; the Government must recognise that in specifying the contract.

Lembit Öpik (Shadow Minister (Housing), Department for Communities and Local Government; Montgomeryshire, Liberal Democrat): On the point about costs and internal costings, has my hon. Friend heard, as I have, from people in the Post Office that one or two of the privatised processors outside the Post Office now cost more, not less? In addition, there is the huge social cost in places such as Llanbrynmair, Carno and Trefeglwys, which are remote villages in my constituency. On top of everything else, people in those villages have to pay a lot of money in fuel bills to drive elsewhere for their postal service. Those additional hidden costs must be taken into account as well, because in many cases we are adding many pounds to the cost of simple transactions. That money could be saved if the Government made the political decision to protect things such as the Post Office card account. However, apparently for dogmatic reasons, they refuse to do so.

Alan Reid (Shadow Minister, Scottish and Northern Ireland Affairs; Argyll & Bute, Liberal Democrat): Yes, my hon. Friend is perfectly correct. There are social costs and extra costs that rural dwellers have to pay to travel to a post office in a town if their post office is closed.

Willie Rennie (Shadow Minister, Defence; Dunfermline & Fife West, Liberal Democrat): I thank my hon. Friend for his excellent speech. I am meeting representatives of Royal Mail in about ten minutes' time so that they can tell me which post offices in my constituency they wish to close. On my hon. Friend's point about more trade for post offices, Fife council recently decided to put more business the Post Office's way by allowing customers to use post offices to pay council bills, but Royal Mail does not seem to have taken that into account. Does my hon. Friend not think that it would be wise for Royal Mail to wait until the full effects of that extra trade, which is significant, are felt so that it can make a full assessment before deciding which post offices it does or does not wish to close?

Alan Reid (Shadow Minister, Scottish and Northern Ireland Affairs; Argyll & Bute, Liberal Democrat): My hon. Friend makes an important point. I was certainly pleased with the initiative proposed by Essex county council for the council and post offices to share services. Unfortunately, in my area, the proposal was made far too late to allow the council or community groups to put together a proper business plan. In the case of my hon. Friend's constituency, I hope that the Post Office will give Fife council time to put together a proper business plan. One way to secure the future of rural post offices is by sharing services with councils, community groups and other public bodies.

The key to securing the future of post offices is the card account. The Government must specify that whoever wins the tender must have a rural network, but we also need to develop the post office card account. Clearly, it has limited functionality at present, but it ought to be developed into a bank account with a full range of banking products. That is the road that France, Germany, Italy and other European countries have followed. It would allow small rural post offices to become profitable and to survive, and it would be of great benefit to people on low incomes who are often financially excluded. I urge the Government to develop the post office card account into a proper bank account with full banking facilities, and to ensure that the contract for paying benefits and pensions specifies a rural network.

I shall speak briefly about parcels. One of the complaints that I receive regularly from people in my constituency is that when they give their postcode when placing an order for something that has to be delivered as a parcel, they are directed to small print saying that an extra amount is charged for deliveries to the highlands and islands. That causes great consternation.

Clearly, the private parcel delivery companies are not keen on delivering to remote areas. Part of the problem is that they do not have depots in remote areas where parcels can be left if the people to whom they are being delivered are out. The Government and the review panel should consider allowing small sub-post offices to retain parcels that parcel delivery companies cannot deliver because someone is out.

At present, under the contract that small sub-post offices have with the Post Office, a parcel delivered by a private delivery company cannot be held anywhere in the shop. Even if the post office is in a corner of a shop, it is still against the contract to leave the parcel anywhere in the shop. Often, the post office-cum-shop is the only shop in the village, which means that if a parcel is being delivered to somebody in the village, there is often nowhere for it to be left if the person is out. I would like the Government, the regulator and the review panel to consider whether we could allow post offices to store parcels on behalf of private companies as well as Royal Mail.

Royal Mail and the Post Office are clearly in a critical condition, as the report demonstrates, but I still believe that with the right action they could be rescued. I conclude with three questions for the Minister. First, will he assure us that the universal service obligation will continue and will not be watered down in any way? Secondly, will he assure us that the present round of post office closures is the last, and that the remaining network has a secure future? Thirdly, the interim report says that the present set-up is unsustainable, so what action do the Government intend to take to ensure that Royal Mail services are sustainable in the long term?

. . Sarah Teather (Shadow Secretary of State for Business, Enterprise and Regulatory Reform, Department for Business, Enterprise and Regulatory Reform; Brent East, Liberal Democrat): I congratulate my hon. Friend the Member for Argyll and Bute (Mr. Reid) on securing the debate, which is timely. He spoke clearly about the impact of the universal service obligation on his constituency and the importance of post offices as a social hub. I represent a very different constituency-an inner-London constituency. It was interesting for me to hear just how important is it for a rural area to have a universal service obligation and the impact losing it would have on people's lives.

Although I represent an inner-London constituency, where picking up mail might appear to be easier, my constituents also feel strongly about this matter. They certainly share the same anger that has been spoken about today by many hon. Members, including the hon. Members for Isle of Wight (Mr. Turner) and for Meirionnydd Nant Conwy (Mr. Llwyd), whose constituency I hope I have pronounced properly-I have been practising it under my breath for five minutes. Both spoke about the impact of closures on their constituencies. There is a similar level of anger in Brent, where we have had a further six post office closures in the latest round, which is a 40 per cent. reduction since 1997. As my hon. Friend mentioned, the death of a post office often represents the death of a shop too. In an urban area, it can also represent the death of the local parade of shops because the post office ensures footfall and keeps local businesses alive.

A number of people have studied the impact that post office closures have on the local economy. In a study looking at Manchester, which is obviously an urban area, the New Economics Foundation suggested that closing a post office would result in the local economy losing about £270,000. In a rural area, it suggested that for every £1 of subsidy, between £2 and £4 is generated for the rural economy. It seems to be a false saving to make the closures. As I mentioned in an intervention on the hon. Member for Stroud (Mr. Drew), the closure programme generates just £45 million of savings.

My anxiety and that of a number of other hon. Members who have spoken, particularly in interventions, is that there does not appear to be a sustainable plan to keep the remaining post offices alive. I worry when I hear that just 7,500 post offices are required to meet the access criteria. If the post office network is losing money, what good reason do the Government have for keeping those post offices alive? I hope that the Government will commit to a sustainable plan and recognise the social value of the post office network. We cannot afford to lose another 3,000 post offices because we will undermine the whole of the network. There is no evidence to suggest that the 2,500 closures that are currently being forced through will generate the increase in footfall that the Government say is needed to maintain the financial viability of the network in the remaining post offices.

A number of hon. Members mentioned the consultation process, including the hon. Member for Isle of Wight. The hon. Member for Stroud talked about whether communities could be involved in bringing forward finances to safeguard post offices that are threatened with closure. However, it is difficult to do that when we are given only six weeks' notification. We need a sustainable plan and a rapid injection of funds-both into the post office network and Royal Mail-not just to allow it to survive, which frankly it has just about been doing for the past few years, but to modernise, innovate and compete. That point was made well by my hon. Friend.

Royal Mail has been starved of investment by successive Governments and unfortunately it was inevitable that it would struggle with the liberalisation process if there was no immediate injection of funds. It will be difficult for Royal Mail to modernise to allow it to compete. It continues to have a large pension deficit, as the hon. Member for Stroud pointed out, which goes up or down according to the state of the market. The deficit appears to be £3 billion or £4 billion and was caused by a decision made by the previous Government to take a holiday from payments when the equities market appeared to be performing well. There is a desperate need to invest in the infrastructure of the Royal Mail. At a time when the public purse is tight, particularly after a pre-by-election bailout, what are the chances that the Government will invest the dramatic amount of money required to ensure that Royal Mail can cope?

Furthermore, successive Governments have been unwilling to give Royal Mail permission to go to the markets and borrow for investment. Part privatisation would give Royal Mail that permission because it would allow for a change in the nature of the business. Our policy is that there should be a separation of Royal Mail from the post office network, as other hon. Members have mentioned. I will say why that is necessary in a moment. Part privatisation of Royal Mail would enable the sale of 49 per cent. of the shares and the proceeds of that sale could be invested into the post office network to give it the kick-start that is needed. That will not solve all the problems of the post office network, but it will at least allow a kick-start in investment and enable the network to be modernised as required. The remaining 51 per cent. of shares could be divided between Government and a John Lewis-style trust for the benefit of employees. The shares could be held in a trust for the current employees of the business to ensure that they have a stake in the future of the organisation and can share in its success and profits. Employees would have a share in improving the performance of the business.

I appreciate that some hon. Members disagree with that policy, but the truth is that the Government do not have another solution. I suspect that the postal services review was probably paving the way for recommending something similar, but so far the Government have refused to come forward with a policy that will lead to the sustainability of Royal Mail or the post office network. Separating the Royal Mail from the post office network is key to the survival of the network. My hon. Friend mentioned post offices acting as a depot for parcels, which would be particularly important in rural areas. Actually, that is important everywhere. How often have we had the frustration of having something delivered by a private company and finding that we have to go a long way to pick it up or have the persistent hassle of renegotiating times when it can be delivered? It would be so much easier and more convenient if a parcel could be delivered to a local post office and wait there for us to pick it up. That would provide a source of revenue for the post office and would be better for those of us who are trying to pick up things sent to us.

The lump sum created by the sale would also allow investment in modernising the network, as I said. There is currently a particular problem with Crown post offices. They are not hospitable places to be and considerable investment needs to be made in training, in the appearance of the branch and in the infrastructure. That would allow the post office to function more efficiently and would be welcome.

A number of hon. Members spoke about the need for new sources of income. The hon. Member for Dumfries and Galloway (Mr. Brown) spoke about the Post Office card account. The Post Office should be central to a new universal service obligation: that of providing basic bank accounts. I am relatively open minded about whether the Post Office itself should be the provider of that bank account or whether it should work in partnership with others. I would be interested to hear the Minister's views on that. There is a serious problem with financial inclusion and access to basic bank accounts. The policies the Government have so far pursued in trying to encourage other banks to provide such accounts does not seem to have been particularly successful. My proposal would marry together two different issues, provide a source of income for the Post Office, and recognise the value of the post office network as a public service.

My hon. Friend the Member for Argyll and Bute made a number of good points about Government services being given to PayPoint and the need to think about criteria for awarding contracts. That is key. When we think about the use of the post office, we need to understand it as a public service and ensure that things such as the rural economy are written in.

Several hon. Members spoke about the idea of a levy to pay for the universal service obligation for postal services. We deliberately left that open in our policy because of what we foresaw might happen if there was a failure to invest in Royal Mail. Judging by the interim report from the Postal Services Commission, it seems that such a measure will be necessary. I hope that the Government will think seriously about it because the universal service obligation must be protected. A levy may be a sensible way forward.