Royal Mail: Government Briefing Paper

[lovejoy]

Dear Colleague

Royal Mail: Government Briefing Paper

The attached document has been forwarded to the CWU. The document is a Parliamentary Labour Party Brief sent to both Houses of Parliament. The content of the PLP Brief will be responded to and is provided to you as a background paper.

Any enquiries on this LTB should be forwarded to the General Secretary’s Department quoting the reference GS 11.0

Yours sincerely


Billy Hayes Dave Ward
General Secretary Deputy General Secretary (P)

PLP Brief

Royal Mail

From the office of Rt Hon Peter Mandelson, Secretary of State for Business, Enterprise and Regulatory Reform


14 January 2008


This brief applies to England, Wales, Scotland and Northern Ireland

This PLP contains;
• Key points
• Background
• Q&A
• The Tories


For more information contact BERR special advisers on 020 7215 0005

Key Messages

• The Government’s mission is to build a thriving and prosperous Royal Mail. A Royal Mail that is secure in public ownership, that is able to compete and lead internationally, and that preserves for the future the one price goes anywhere universal postal service.

• Since 1997, the Government has repeatedly demonstrated its commitment to Royal Mail and the Post Office network. This commitment has included:
- investment to enable the acquisition of European parcel companies;
- investment to fund modernisation of the Royal Mail;
- subsidy of the Post Office network;
- the Post Office retaining the contract for the POCA;
- the use of Government controlled reserves to support the pension fund;
- an expansion of the Post Office’s role into financial services.

• It is because of our commitment to a publicly owned Royal Mail that we are proposing changes to turn round the Royal Mail from an organisation in decline to one that thrives and prospers.

• This package of changes says:
- No to privatisation. Royal Mail will remain in public ownership.
- No to downgrading the universal service now or in the future.
- Yes to greater security on Royal Mail pensions. Sorting out the spiralling pension fund deficit so that the benefits of changes the Royal Mail makes go back into improving the business, not used to fund the pensions deficit.
- Yes to outside investment and management expertise in Royal Mail.
- Yes to a partnership with another major postal company so that the Royal Mail is able to compete and lead internationally as European postal markets liberalise.
- Yes to a new system of regulation that works with the company and workforce, and that puts maintenance of the universal service as the top priority.
- Yes to expanding the role of the subsidised Post Office network into financial services.

• No change is not an option because it would leave Royal Mail in a weak position. Our postal service faces huge challenges:
- New technology like email, the internet and social networking sites mean the volume of post we send is dropping year by year;
- Royal Mail faces a pensions crisis. Its huge and growing pension deficit is a drain on its finances;
- Profits are lower than in other countries and some parts of the service are now running at a loss. The Royal Mail lags behind international counterparts who have modernised earlier, some adopting a partnership approach.
- Relations between the unions and management are too often confrontational. The regulatory system isn’t working as well as it should.

• In the face of these challenges we cannot let the Royal Mail drift and do nothing. That would leave the universal service under threat and the pension deficit growing. It would leave the Royal Mail lagging behind its international counterparts. That is no future for Royal Mail. We need to save the Royal Mail by investing in its future. Outside investment and management expertise, action on the pension deficit and on regulation is the way to turn round Royal Mail and secure its future in public ownership.


The Tories

The Tories will the ends but not the means. They say the challenges facing the Royal Mail are “formidable” but they have no policy to address them.

They say they broadly welcome the strategic minority partnership outlined in Hooper but oppose the action on the pension deficit that goes with the package. The Tories cannot cherry-pick these recommendations. They come as a package or not at all.

It is not feasible to support the partnership approach without action on the pensions deficit, just as it is not acceptable that the taxpayer funds a “no strings” bailout of the pension fund without reform necessary for the Royal Mail to thrive and prosper in the future.


Background

1. The Government’s commitment to the Royal Mail
Since 1997, the Government has repeatedly demonstrated its commitment to a publicly owned Royal Mail.

• Over the past 7 years, since Royal Mail became a public limited company, we have made available funds totalling £3.5bn.

• Prior to 1997, management and unions were pressing for Royal Mail (then the Post Office) to be given greater commercial freedom (including the ability to make joint ventures and acquisitions). The Postal Services Act 2000 delivered this.

• The CWU were also pressing for independent regulation and a strengthening of the consumer representation body. The Post Services Act delivered this.

• The CWU wanted an RPI – x price control for Royal Mail’s monopoly services. Postcomm adopted this.

• The Government provided £500m in loans in 2001 to fund the acquisition of European parcel companies (notably German Parcel) that now comprise Royal Mail’s successful purchase European logistics arm, General Logistics Systems (GLS).

• In 2007, the Government agreed to provide £1.2bn in debt facilities to assist Royal Mail’s modernisation plans.

• Also in 2007, the Government agreed to the use of £850m of reserves on the Royal Mail balance sheet to support the pension fund.

• The Government put the requirement for the provision of the universal postal service into primary legislation for the first time.

• The Government is fully committed to a post office network that offers a broad range of financial services throughout the country, supporting both financial and social inclusion.

• We have strongly supported POL’s Joint Venture with the Bank of Ireland to offer a wide range of financial products.

• We have ensured that the Post Office retained the contract for the POCA, meaning that 4 million POCA users could continue to access benefits and pensions at their local Post Office.

• We are now working with the Select Committee on Business and Enterprise to examine what further services the Post Office should offer.

• It is because of our commitment to a publicly owned Royal Mail that we are proposing changes to turn round the Royal Mail from an organisation facing decline to one that thrives and prospers. We want to save the Royal Mail by investing in its future.
2. Saving Royal Mail by investing in its future

• The Hooper Report recommended that if the universal postal service is to survive:
- Royal Mail needs to forge a strategic partnership with one or more private sector companies;
- responsibility for regulation of postal services should move from Postcom to OFCOM;
- in the context of the package of changes, the government should take over responsibility for the historic liabilities of the pension deficit;
- no changes be made to the ownership of Post Office Ltd.

• The Government agrees with the analysis in the report. We intend to take forward its recommendations as a coherent package of measures in order to secure Royal Mail’s future, maintain the universal postal service for customers, and to tackle the pension deficit.

• This package of changes the Government intends to take forward says:
- No to privatisation. Royal Mail will remain in public ownership.
- No to downgrading the universal service.
- Yes to greater security on Royal Mail pensions. Sorting out the spiralling pension fund deficit so that the benefits of changes the Royal Mail makes go back into improving the business, not siphoned off to the fund the pensions deficit.
- Yes to outside investment and management expertise in Royal Mail.
- Yes to a partnership with another major postal European postal company so that the Royal Mail is able to compete and lead internationally.
- Yes to a new system of regulation that works with the company and workforce, and that puts maintenance of the universal service as the top priority.
- Yes to expanding the role of the subsidised Post Office network into financial services.

• This package of measures will offer:
- employees a future in a modern, efficient postal operator, with pension arrangements they can depend on;
- the public a guarantee of the future of the (now loss making) universal service;

• We will fulfil our manifesto commitment to “a publicly owned Royal Mail fully restored to good health, providing customers with an excellent service and its employees with rewarding employment”. Bringing in a partner through a minority stake in the Royal Mail’s postal business will help us deliver that goal. It will bring the Royal Mail more flexible access to capital, new opportunities to grow in Europe and internationally and to offer new services. It will provide a fresh new impetus to modernising the Royal Mail and securing the universal service.

• The Hooper Report says the status quo is untenable. The universal service is under threat. The choice we face is either downgrading the universal service as we manage decline or acting now to turn things round and secure the Royal Mail’s future in public ownership.


3. The challenges facing Royal Mail

• On an accounting basis, Royal Mail had a pension deficit larger than any FTSE 100 company at the start of 2008. The pensions deficit at last valuation stood at £3.4 billion and it is projected that it will have more than doubled by the time of its next valuation due this year. The size of Royal Mail's pension deficit, and its volatility, adversely affect its ability to finance and invest in its business.

• Last year, for the first time, the universal postal service was loss making by some £100 million. The universal postal service is now loss-making and Royal Mail faces grave financial problems. The explosion of digital communications has seen an unprecedented decline in the letters market – a trend that is accelerating and has a significant impact on Royal Mail’s revenues.

• The Hooper Report estimates that, last year, the shift of mail to new technologies cost the company £500 million in lost profits – five times more than the loss of revenue due to competition from other mail companies. While changes to regulation are part of the Government’s package, making the other mail companies go away is not the answer to the Royal Mail succeeding.

• Labour relations are extremely difficult which has hindered the progress of necessary change in the company. There is also strong tension between Royal Mail and Postcomm. Many believe that Postcomm is too focused on the introduction of competition, at the expense of the regulator's primary duty to protect the universal service, and Postcomm is frustrated at the slow pace of change in Royal Mail.

• Royal Mail is much less efficient and less profitable than its main European peers.

3.1 Royal Mail’s pensions deficit

• Royal Mail has one of the largest pension schemes in the country. Over 450,000 members,(161,000 current employees; 177,000 pensioners; 113,000 deferreds)

• Their pensions deficit is higher than that of any FTSE100 company.

• Royal Mail is balance sheet insolvent because of the pension deficit.

• In the year to March 2008, the company’s pension costs were £800m. Over £280m of £800m was the contribution to the cost of the pension deficit recovery.

• In 2007, Government made available £850m to the pension fund trustees to give them comfort that their members’ benefits were secure.

• The last full valuation of the scheme in March 2006 showed a deficit of £3.4bn.

• The deficit has increased by 75% (£2.5Bn) since 2006. And the deficit is expected to have more than doubled since its last valuation by the time of the next valuation due this year.

• Royal Mail cannot afford its growing deficit payments.

3.2 The international context

• National operators in mature mails markets, in European countries and US, are seeing a decline in the volumes of addressed letters (% for UK is for 2007/8).



• The rapid rise in digital media (broadband internet, email, mobile telephony, text messaging and digital broadcasting) is the main factor behind the recent fall in the volume of addressed letters across these markets.

• Leading operators in Europe (TNT and Deutsche Post) began modernising their networks in the mid 1990s in order to reduce costs and increase efficiency. By contrast, Royal Mail's distribution network is largely unchanged and its levels of automation are markedly lower than other leading operators who are able to sort, automatically, 85% of letters to the correct sequence for delivery, whereas at Royal Mail this procedure is carried out entirely by hand.

• Changes to national networks across Europe have been complex and taken a significant amount of time, between 8 to 10 years in Germany, France and Holland. There is an increasing trend towards private-sector investment.

• Full market liberalisation across the EU, agreed to occur across different countries in 2011 and 2013, will act both as a further pressure for businesses to modernise and an opportunity for strong postal businesses. The Government wants to make sure Royal Mail is able to take advantage of these opportunities.

• Modernisation has allowed other European operators to maintain a profitable business model. With a profitable core business and, where private sector investment has been involved, access to capital, the most successful operators have been able to diversify into related product areas and expand geographically. Where change takes place this process must be managed effectively between the management and unions. For example, at Deutsche Post, Germany, collective agreements were made and TNT’s business units negotiate directly with unions and other labour organisations representing its employees.

Royal Mail is lagging behind its international counterparts

• Royal Mail is less efficient and less profitable than its main European peers and operators who modernised earlier.

• In 2007/8, Royal Mail’s letters business was the least profitable postal company amongst its Western European peers, and the only one to make an operating loss.

• Companies such as Deutsche Post (Germany) and TNT (Netherlands) achieved profit margins of between 13% and 15% from their mail operations, even though they faced greater end-to-end competition than Royal Mail does in the UK.

• There has not been enough automation leaving Royal Mail doing a lot of jobs by hand which are done by machine in other countries.

• Other European operators, notably in Germany, France and the Netherlands have significantly restructured their networks in the last 10 years. While significant changes were made to Royal Mail’s operations between 2002-2005, these were just the first step in a process of change. Royal Mail has to bring in new technology. Compared to its European competitors, Royal Mail is far behind in employing modern, efficient sorting techniques.

• The Government believes that it is unacceptable for the UK to lag behind Europe.

3.3 Regulation

• Royal Mail and other postal operators are increasingly part of the wider communications sector, in competition with broadcasters, internet providers and telephone companies.

• Main competition to Royal Mail is coming from digital media not other postal operators. The Hooper Report says that in 2007/8 the impact on revenues was £500m because of new communications technologies and £100m because of competition within the mails market.

• The volume of letters carried by Royal Mail has decreased by 7% since 2005. Royal Mail used to handle 84m items a day, it now carries 79m. This decrease is not due to Royal Mail losing volume to competitors. Royal Mail continues to deliver 99% of mail in the UK and the level of end to end competition has decreased in recent years. Decreasing volumes for Royal Mail leads to decreasing revenues.

• Transferring responsibility for regulating the postal sector from Postcomm to Ofcom will reflect this reality. Ofcom has a deep understanding of these media. OFCOM will have a primary duty in relation to postal services to maintain the universal service.

• OFCOM has the experience of regulating markets undergoing rapid technological change and, in particular, creating a regulatory framework for a large company (BT) facing the challenge of modernisation and liberalisation.

• There is also strong tension between Royal Mail and Postcomm. Many believe that Postcomm is too focused on the introduction of competition, at the expense of the regulator's primary duty to protect the universal service, and Postcomm is frustrated at the slow pace of change in Royal Mail.

• Regulation is needed to ensure that the universal service is met. Regulation also protects consumers from excessive prices and can play a role in the modernisation of Royal Mail by creating incentives for it to become more efficient.

• There is no question of Government seeking to reduce the current universal postal service in the UK for delivery of letter 6 days a week at a uniform tariff.

• Government believes that competition brings benefits for consumers but that, in particular circumstances in future, competition may also pose a threat for the universal service. Ofcom will continue to promote competition in relation to the postal sector “where appropriate”.

• Hooper also recommends that the regulator should report on an annual basis to Parliament specifically on its responsibilities in ensuring the provision of the universal service, with a hearing before the BERR Select Committee. In turn, the regulator should ensure that, when monitoring Royal Mail’s obligations, there is a clear and specific focus on sustaining the universal service.


4. Expanding the Post Office into the area of financial services

• Some have suggested the expansion of the Post Office into financial services as an answer to the challenges Royal Mail faces. The Government is keen to work with Post Office Ltd to expand its financial services, based on its position as a trusted brand with a strong reach in both urban and rural communities. The Post Office already offers a wide range of financial services and we agree with those who argue that the Post Office should fully realise its potential in this area. The Government is fully committed to a post office network that offers a broad range of financial services throughout the country, supporting both financial and social inclusion.

• That is why we have strongly supported POL’s expansion in financial products. This covers:

Savings: Instant Saver / Growth Bond / ISAs / Child Trust Fund

Insurance: Car / Home / Pet / Life / Travel

Lending: mortgages / credit card / personal loans (small number)

Foreign Exchange: Largest provider of foreign exchange in UK

Access: In addition, the Post Office provides access to other bank accounts: access to bank accounts from other High Street banks (all except for RBS and HSBC) – currently 17 basic bank accounts and 9 current accounts which can be accessed at the Post Office offering millions of people the opportunity to carry out banking transactions through their local Post Office.

• To increase the Post Office’s financial services offering we have:

- Ensured that the Post Office retained the contract for the POCA, meaning that 4 million POCA users could continue to access benefits and pensions at their local Post Office.

- Announced in PBR08 that Post Office will provide the new Saving Gateway scheme to encourage saving from those on benefits

- Supported POL in developing new financial services products to increase the banking services it offers to customers.

- We are now working with the Select Committee on Business and Enterprise to examine what further services the Post Office should offer.

• But whilst these changes have the potential to offer a more prosperous future for the Post Office they cannot be the answer to the huge challenges that Royal Mail faces.

• POL represents around only 13.75% of the turnover of Royal Mail. The Post Office currently depends on a government subsidy of £150 million a year. And in order to maintain a network of around 11,500 branches providing easy access for whole population, particular in rural and urban deprived areas, there is likely to be a continued need for subsidy from Government, even after 2011.

Q&A

What is the Government proposing?
The Government is committed to retaining Royal Mail in public ownership. The Government, as part of the partnership approach, will address the pension deficit which has built up on the Royal Mail scheme and in this way ensure its future.

Postcomm will be abolished and the Government will give responsibility for the regulation of the postal market to the Office of Communications (OFCOM). OFCOM’s primary responsibility will be to maintain the Universal Service Obligation.

Why is such radical change needed?
The postal market in the UK and overseas is entering a period of structural change. The volumes of letters being sent is falling year on year. Since 2005, volumes carried by Royal Mail have decreased by 7%. Royal Mail used to handle 84m items a day, it now carries 78m.

The reason for the fall in volumes is that more and more people and businesses are switching to digital media – e-mail, the internet and mobile texting – to meet their needs. This switching is likely to increase in the future leading to further declines in mail.

The Royal Mail faces a pensions crisis caused by the fact that its pension deficit is ballooning. The pension deficit at last valuation stood at £3.4 billion in 2006 and it is projected that it will have more than doubled by the time of its next valuation due later this year.

Why bring in a partner?
This package of measures will offer:
- employees a future in a modern, efficient postal operator, with pension arrangements they can depend on;
- a guarantee of the future of the universal service;

Isn’t this a privatisation of Royal Mail? Aren’t you breaking a manifesto commitment?
We will fulfil our manifesto commitment to “a publicly owned Royal Mail fully restored to good health, providing customers with an excellent service and its employees with rewarding employment”. Bringing in a partner through a minority stake in the Royal Mail’s postal business will help us deliver that goal. It will bring the Royal Mail fresh investment, new opportunities to grow in Europe and internationally and to offer new services. It will provide a fresh new impetus to modernising the Royal Mail and securing the universal service.

Who is the partner?
The Government has not chosen a partner. Our intention is to explore partnership with interested parties who have experience of successfully transforming a network business comparable to Royal Mail’s.

Isn’t Royal Mail suffering because of competition?
The Hooper Report is clear that the main challenge to the Royal Mail is from the impact of changes in technology and consumer choices. His estimate is that, last year, the shift of mail to these new technologies cost the company £500 million in lost profits. That is five times the impact of business lost to other postal companies in our liberalised market. Regulatory change is an important part of the recommendations but making the other postal companies go away is not the answer to the Royal Mail succeeding.

What does it mean for employees’ pensions?
Royal Mail’s cash position is such that it would not be able to fund the pension deficit and on-going contributions without change. The Government’s proposal, as part of a partnership, is to take on the deficit. This will ensure the future for Royal Mail pension scheme.

How does this affect Post Office Limited? Will it mean post office closures?
The Hooper Report recommendations suggest no changes to the ownership of Post Office Ltd. The Government is providing £1.7bn to 2011 to support a network of around 11,500 branches. And we will continue to subsidise the non-commercial network beyond that time.

What about talk of 50,000 job losses?
The CWU said in their evidence that they recognised any process of modernisation would mean fewer people though there is no basis for any figure on this issue. A stronger Royal Mail is the best future for Royal Mail staff. We believe the recommendations offer the best chance of saving Royal Mail and securing its future for Royal Mail’s employees. Any process of modernisation should take place in full discussion with the workforce and trade unions.

Where does this leave the unions?
Relations between the current management and the unions have been fractious and difficult. We believe any partnership would offer an opportunity for employers and their unions to build a new relationship for the better. In any discussions with potential partners we will be looking for a partnership that has a good track record of working with unions. Most Royal Mail staff are members of either CWU or Unite. In its response to Hooper Unite said that they welcomed key elements of the Hooper report and wanted “to explore with BERR what the likely affect a minority partner will have on Unite members and the service to the public”. We want to discuss these proposals with the unions.

How can you justify the taxpayers taking on the liabilities of Royal Mail employees?
It is clear that the company cannot make the changes it needs to make while carrying the enormous financial burden of the pension deficit. The Report recommends that, in the context of a package of changes, the government should take over responsibility for the pension deficit.

• It guarantees the future of the universal service;
• It offers the tax payer an enhanced opportunity to see the value of their investment in the Royal Mail grow;
• And most importantly, for consumers – both social and business users – it will protect the universal postal service in the United Kingdom for years to come.

The Warwick agreement commits the Labour Party to a “wholly publicly owned” Royal Mail. Are you breaking this agreement?
We are retaining Royal Mail in public ownership and making this announcement today to secure its future. The recent NPF review said that:

‘The Government has established the Hooper Review to look at how the Royal Mail can succeed in a world where electronic and other forms of communication provide increasingly attractive alternatives to the mail and where there is more competition in postal markets.’

The Hooper Review has made its recommendations and we accept these, including partnership, as the only credible way forward to secure the future of the Company.

Why do you need more capital if Royal Mail hasn’t spent the £1.2 billion lent by the Government two years ago?
Some progress has been made and some of this money has been spent. But, as Hooper points out, this has been too slow and more far reaching automation and modernisation is needed as well as capital for the development of new products. With the taxpayer taking on a greater burden of meeting the cost of the pension deficit an experienced postal operator as a minority partner can provide both extra capital and much needed experience of changing a network or postal business.

Why are you making these changes when the Royal Mail is profit-making?
Royal Mail’s mid-year results does show a small profit but:
• Only one quarter of this relates to the Letters business, which is tiny compared to the £6.9 billion annual turnover
• The Letters business made a loss of £3m last year
• The universal service element made a loss of £105m last year

This is a poor return for the taxpayer which is why we are taking action: to give the business the confidence it needs to modernise and secure its future.

[Big Daz]

• Decreasing volumes for Royal Mail leads to decreasing revenues.

Remind me wasn’t it Royal mail that just announced increased profits against falling mail volumes?

[stokes11eg]

• Decreasing volumes for Royal Mail leads to decreasing revenues.

Remind me wasn’t it Royal mail that just announced increased profits against falling mail volumes?

Govenment Briefing paper?? one minute saying no to prvatisation, the next suggesting it?----They keep takloing ababout falling mail volumes,and the downturn in private letters etc. Well, I go back an awful long way, and aprt from Christmas and birthdays, very few people wrote hundreds of 'private letters a week! The vast majority of households in the old days, got very little mail, no bills as such, (Utilities paid by meters)-no bank statements(Too poor)
and no junk mail--no daily packets of e-bay!Who is kidding who?

[fmrPOSTIE]

spin

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[TrueBlueTerrier]

spin

spin spin spin spin spin

Yes - but to beat the government you have to play by the same rules and we all know that the PLP is run and controlled by spin doctors.

[Yahoorsur]

Well thats me convinced by that load of bullshit,time for me to stop pestering Mp's and 'welcome' these proposals

or on second thoughts :mfo