Ann McKechin MP: Ofcom must investigate unfair competition

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Ann McKechin MP: Ofcom must investigate unfair competition in the postal services market

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Labour MP and BIS Select Committee member Ann McKechin calls on Ofcom to investigate the mail delivery sector

A few months on from the Government’s botched sale of Royal Mail, the commercial headwinds facing the business are getting stronger.

On the one hand, this is par for the course; the Group expect and welcome competition from other delivery companies now that they are a public company operating free of help from Whitehall. The decline in the posting of letters, coupled with the boom in parcel deliveries, was always going to disrupt the market and create opportunities for new entrants.

But competition must be on a fair and level playing field if Royal Mail is to maintain the universal service – something it is obligated to do by law.

Delivering mail six days per week across the entire UK for a single price does not come cheap. The universal obligation rests on Royal Mail’s ability to subsidise deliveries to remote, rural parts of the country through revenues gained in the UK’s compact urban centres, where volumes and margins are highest.

But this balance is being upset by direct delivery competitors such as TNT Post UK cherry-picking the easy-to-serve markets like London, Liverpool and Manchester for expansion. Having built up their competence as a ‘downstream’ competitor (collecting and sorting mail before passing it to Royal Mail for delivery), TNT is now evolving into an end-to-end, direct deliverer of mail in the UK. By 2017, the company plans to be delivering to 42% of UK addresses. Crucially, this 42% lies within only 8.5% of the UK’s total land area, highlighting just how neglected the more remote parts of the UK are under their plans. Only Royal Mail has a commitment to deliver a universal service, but its means to do so are slowly being eroded.

Direct delivery companies have several competitive advantages. In addition to being able to compete on price, TNT makes savings by only having to deliver ‘every other day’ (something which Royal Mail, as the universal service provider, is not able to do). TNT can choose to put mail it does not want to deliver back in to the Royal Mail network. This means it can bid for commercial contracts it has no hope of being able to fulfil, knowing that it can dump any overspill back into the Royal Mail network. TNT can also opt to only deliver business mail, saving it the more complex and expensive job of sorting and delivering hand-written letters and postcards, which Royal Mail must do in its role as the universal service provider.

It is clear that this state of affairs will only lead to the universal service becoming unsustainable. If Royal Mail shareholders find that it is becoming a brake on profits, and pressure on Ministers is sufficiently great, the obligation could easily be removed and mail only delivered five days per week (the minimum under EU law) to begin to put the business on a level playing field with the direct delivery firms. Both Royal Mail employees and customers would suffer: a recent Ipsos Mori poll carried out in Glasgow found that 80% of households wanted to keep the six day per week delivery, and two thirds said they were ‘dependent’ on getting deliveries six days per week.

The only solution to protecting this valuable social good is for Ofcom, in its role as communications regulator, to act swiftly and undertake a review of direct delivery services and their effects on the USO. Promising to do so ‘towards the end of 2015’ is not good enough – the activities of firms like TNT Post will be far better developed by then. The key is to act now and conduct a thorough analysis of the unfair advantages open to the direct delivery companies, and then regulate to ensure Royal Mail is not weakened further.

Ann McKechin MP is the Member of Parliament for Glasgow North and a member of the Business, Innovation and Skills select committee.

[Straight4ward]

Well said Ann McKechin, but does ofcom care?