MAKING THE CASE FOR REGULATORY INTERVENTION

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Letter to Branches




No: 514/14

8th August 2014

To: All Branches with Postal Members


Dear Colleague

MAKING THE CASE FOR REGULATORY INTERVENTION AND ACTION ON DIRECT DELIVERY COMPETITION

The purpose of this LTB is to provide CWU Branches and Representatives with a copy of a recent PEC document on direct delivery competition, which was unanimously agreed by the Postal Executive earlier this week

The document is an important contribution from the Union on the urgent need for regulatory intervention and action and the key policy positions contained in Appendix A of the document will now form the basis of a CWU submission to Ofcom later this month.

The document also explains that the Union will now raise the pressure on Ofcom and is seeking legal advice on the grounds for a judicial review on the basis that we believe Ofcom has abandoned it primary statutory duty to protect the USO, in favour of promoting competition.

This document will provide CWU representatives with a comprehensive overview of all the arguments associated with direct delivery competition and further clarifies the actions we want Ofcom to take. In doing this it also distinguishes the CWU position from Royal Mail in a number of crucial areas.

We would urge Branches to discuss the document at Branch meetings and use it to gain a greater understanding of all regulatory issues, including how we intend to position the efficiency debate.

Finally, you will see from the list of recommendations the Union will now plan a series of events in the autumn for local representatives to further strengthen our campaign.

Any enquiries on the content of this LTB should be addressed to the DGS (P) Department.

Yours sincerely


Dave Ward
Deputy General Secretary (Postal)


LATE PEC DOCUMENT


COMMUNICATION WORKERS UNION

                                                                                   

CIRCULATED TO THE DOCUMENT ‘A’
POSTAL EXECUTIVE ON
5th August 2014 PE. 131/2014


(For consideration at the
Postal Executive Meeting
On 4th August 2014)


MAKING THE CASE FOR REGULATORY INTERVENTION ON DIRECT DELIVERY COMPETITION

Introduction

In recent weeks the PEC has received documentation on the growing impact of direct delivery competition, Royal Mail’s submission to the Regulator and the CWU Campaign. These issues are fundamental to the future and it is essential that we continue to build a greater understanding of all regulatory matters and strengthen CWU influence over the direction both Royal Mail and the Regulator are taking. Therefore, the purpose of this document is as follows:-

To pull together the arguments and approach CWU will now take in direct discussions with Ofcom over the impact of direct delivery competition.

To further clarify CWU Campaign objectives and what we should be seeking as an outcome of any review undertaken by Ofcom into direct delivery competition.

The document should also be seen in conjunction with the key discussions currently taking place with the employer over the impact of parcel and letter volume decline and the growing pressure to address efficiency issues. As such, it is important that this document analyses in more detail where both Royal Mail and the Regulator are coming from on efficiency and the best way for CWU to tackle this.

Pulling together the arguments for Regulatory Intervention – Current State of Play

Ofcom’s primary statutory duty under the Postal Services Act 2011 is to secure the provision of the Universal Service. In doing this it must have regard for the Universal Service to be both financially sustainable and efficient.

In making the case to Ofcom that early intervention is required; the CWU must demonstrate that failure to act will compromise Ofcom’s ability to meet its statutory duties. There are three main issues we must focus on and support with evidence:

1. The threat to the financial sustainability of the Universal Service

2. The relative efficiency of Royal Mail.

3. The threat direct delivery competition poses to quality of service and general service standards.

These issues are discussed in more detail below.

1. The threat to the financial sustainability of the Universal Service

Direct delivery competition is damaging the financial sustainability of the universal postal service because TNT is cherry picking the low cost, profitable areas for delivery and in doing so they are reducing the revenues required to sustain the Universal Service.

Ofcom has so far refused to intervene on the basis that end-to-end volumes only represent 0.4% of overall mail volumes. However, end-to-end competition is increasing rapidly and volumes are significant within the local areas in which TNT operates. As TNT continues its programme of expansion the threat will increase. At the same time there must be a strong possibility that at some point as TNT’s delivery infrastructure expands, they will opt to switch all their remaining DSA work to their own delivery operation.

TNT Expansion

Recent reports state that TNT’s direct delivery service has taken up to a 20% share of Royal Mail’s volumes in the areas where it operates, which include amongst others Manchester, Liverpool, and parts of central, West and South London. We also know TNT has advanced plans to deliver in Birmingham, Bristol and Scotland. We anticipate an announcement probably in early September regarding one of these locations.

TNT is reportedly delivering more than 1m items of mail per week based on a three-day delivery model. This is a notable increase on the average volume of 345,000 per week TNT reported in December 2012 and the average volume of 600,000 per week reported in March 2013. Loss of revenues on the scale TNT Post UK is working towards would have serious implications for Royal Mail.

In December 2013 it was announced that Post NL, TNT Post UK’s parent company, had found an investment partner, Lloyds Development Capital (LDC) to expand end-to-end delivery operations further. TNT Post UK now has plans to cover 42.3% of total UK addresses by delivering in 8.5% of the total UK area by 2017.

Anecdotal evidence from CWU branches supports Royal Mail’s view that there has been a significant decline in mail volumes in local areas as a result of TNT’s activities. This is further exacerbated by the expansion of Amazon, which although not part of the current regulatory debate, will arguably have an even greater impact on future revenue and efficiency.

The gathering of robust evidence from CWU branches, representatives and members about the extent of Royal Mail’s decline in mail volumes in areas where TNT operates will help to reinforce the case for regulatory intervention on end-to-end competition. We will elaborate during the meeting on the structure and resource required to coordinate this information in the impact areas.

Threat to Royal Mail finances

Royal Mail has estimated that TNT’s growth strategy could reduce Royal Mail revenue by over £200m in 2017/18, based on TNT achieving a 20% local market share in all the areas where it is planning to expand to. We can also expect to see Royal Mail losing downstream access volumes and the revenues associated with this. Downstream access is a big portion of the market by volume in the UK, representing 47% of all delivered mail, which represents £1.5 billion of revenue for Royal Mail, so the impact of losing even a portion of this could be significant.

These losses of revenue will make it much more difficult for Royal Mail to offset the higher cost of delivery to hard to reach areas, posing a real threat to the universal one price goes anywhere service.

Access Pricing

At the start of the year Royal Mail proposed to change its access contracts to include zonal pricing and to introduce a price differential where forecasts of future mail volumes are provided. Ofcom had suggested that zonal pricing would allow Royal Mail to respond to the challenge posed by direct delivery competition – in its guidance on this in March 2013 – by ensuring competitors would pay a cost in line with prices in the areas they were not entering.
However, the proposed changes are now the subject of an investigation by Ofcom under its Competition Act powers following a complaint by TNT. The investigation process could take up to two years. This is denying Royal Mail one of the financial responses it could make to the threat of competition.

This heightens the financial risk posed and Ofcom must seek to conclude its investigation as a matter of expediency. Ofcom is also intending to conduct a general review into access this summer, which creates further uncertainty.

2. The relative efficiency of Royal Mail

The question of Royal Mail’s efficiency arises in relation to two strands of Ofcom’s work. Firstly, in establishing whether competition poses a threat to the Universal Service, and deciding whether to carry out a review into direct delivery. Ofcom has said that it will consider how Royal Mail can respond to competition and what financial position this will leave the Universal Service in.

Secondly, in discharging its duty to secure the provision of the Universal Service under the Postal Services Act, Ofcom must have regard to the need for the service to ‘become efficient after a reasonable period of time.’ Ofcom published two pieces of research it had commissioned on this subject earlier this year and has said that it expects to make a decision on how to measure efficiency in Royal Mail towards the end of 2014.

There is clearly a crossover between these two aspects of its work: how far Ofcom believes Royal Mail can or should go on efficiency to respond to TNT – and what assessment it makes of Royal Mail’s existing plans – will obviously depend on the measure of efficiency it is using and how this differs from Royal Mail’s productivity metric. The union therefore needs to engage with Ofcom on both of these work strands and we must recognise that the subject of efficiency improvements and the metrics used to measure efficiency will be central to the debate Royal Mail and the Regulator are having.

In relation to competition, Royal Mail’s submission states that it plans to make productivity improvements of 2-3% per year and that these are necessary simply to deal with volume decline and will not offset the impact of the projected revenue loss from TNT’s plans. It also argues that because of the USO it can never compete with TNT or other new entrants on cost, regardless of how efficient it becomes (Royal Mail estimates that their freedom to provide an every-other-day service by itself means a cost saving of 40%).

However, there are two key unknowns that we need more information on in pulling together our arguments. Firstly, we do not know how Royal Mail has reached its target of 2-3% productivity improvements per year and what proposed measures underpin this. This is something we are speaking to Royal Mail about. Secondly, while Royal Mail has told the union that Ofcom is putting pressure on it to do more to tackle the performance gap between different parts of its business, because Ofcom has not published an assessment of Royal Mail’s position we do not know what approach it is taking on efficiency generally, or in considering Royal Mail’s submission. Again, this is something we are seeking clarity on from Ofcom so we can understand how to influence it and what points we need to address.

Interestingly, what Ofcom has said previously is that the question of whether Royal Mail is less efficient than competitors is not relevant to its primary duty to secure the provision of the Universal Service – the question is what effect competition will have on the USO and whether its financial sustainability is under threat as a result. This is an important acknowledgment from the regulator that suggests it will not necessarily make crude comparisons with other operators on cost (at least when it comes to assessing Royal Mail’s submission).

What is not clear though is what Ofcom’s views are on how far Royal Mail says it can go on efficiency to respond to TNT and whether it will be arguing that it should be going further than its 2-3% target. We know that Ofcom thinks that using a range of different measures is likely to be the best approach to assessing efficiency – and that it would not rely on Royal Mail’s productivity measure alone because it does not take account of its financial costs – but we do not know what these will be, or how it will benchmark where Royal Mail would need to sit on these in order to be ‘efficient.’

The answers to these questions are crucial in allowing CWU to influence the debate. As part of this it is important to acknowledge that, like any business, Royal Mail will seek to improve its efficiency and that where we recognise there are genuine opportunities to do this, we should support this providing the right agreements are in place.

Royal Mail is already efficient

CWU must put forward a robust position in defence of Royal Mail’s relative efficiency and explain again the major changes that CWU members have already embraced. We will make clear that there is a limit to what any employee can reasonably be expected to do and that staff are and have been under significant workload pressure for years. In the past, there has been a disconnect between the Regulator and this reality. This time around the Regulator must take greater account of how hard CWU members are already working. We will position our arguments on efficiency as follows:-

Royal Mail has already achieved very significant efficiency and productivity improvements and the workforce has been central to this achievement by embracing large scale modernisation and transformation, which has seen a major reduction in jobs, Mail Centres and delivery locations, alongside a significant lengthening of delivery routes and improved ways of working.

Royal Mail has delivered year on year budgetary savings and through the agreed transformation programme the company has delivered annual productivity improvements of 4.4%, 3.2%, 1.7% and 1.7% in 2010/11 through to 2013/14.

The latest data from Ofcom shows Royal Mail’s own measure of efficiency improving productivity by 7% in the 5 years to 2013, even after taking account of changes in the product mix and volume decline.

Alongside the above mentioned points, the union also needs to argue that: (i) that Ofcom cannot look at efficiency in isolation from quality of service; (ii) that there is a connection between pay and conditions and quality of service; (iii) that proper account needs to be taken of the USO and the costs this places on Royal Mail; (iv) that volume decline and competition worsen Royal Mail’s efficiency, even where its underlying performance improves; (v) that we do not have confidence in Royal Mail’s measurements of efficiency (with doubts over traffic figures and whether it is understating actual performance); and (vi) that Ofcom should avoid simplistic comparisons with other European operators.

Finally, we must explore with Ofcom to what extent the comparison of labour costs and general terms and conditions is influencing its view on the relative efficiency of Royal Mail and whether or not it intervenes in direct delivery competition. We will argue it is fundamentally wrong for a Regulator to compare labour costs whilst taking no view on what constitutes fair employment standards and terms and conditions across the sector. We simply cannot accept downward pressure coming on our own members’ terms and conditions because of poor employment standards elsewhere in the sector.

Getting to the very core of all these efficiency issues must be a priority for the union.

3. The threat Direct Delivery Competition poses to Quality of Service and General Service Standards

Within its new regulatory framework in 2012, Ofcom removed the previous requirements for regulated postal operators other than Royal Mail to measure and report on quality standards for contract targets, saying this was no longer required as market forces would drive required service levels. This clearly results in an uneven playing field for competition, putting pressure on financial sustainability of the Universal Service, and it is likely to bring pressure from Royal Mail for reductions in its quality of service. The low quality of service standards demonstrated by TNT also have a direct impact on Royal Mail, with letter being dumped or wrongly delivered being put into Royal Mail’s postboxes.

Together with the impact the low quality of service has on the Universal Service, the evidence of significant failures from TNT’s delivery operations provides further support for the call for Ofcom to bring forward its review into this area of the market. One of the highest profile media reports of this came from Harrow in March when thousands of council tax bills were delivered late, forcing the council to write to 24,000 residents informing them of a ten day extension to the direct debit payment date.

More recently there have been media reports of large amounts of TNT mail dumped in both London and Manchester; bank and medical statements not arriving; and polling cards for local and European elections having been dumped and misdelivered in Barnet.

The CWU has also heard anecdotal stories from union representatives about problems caused by TNT’s absence of quality of service standards. For example, on 27th March 2014 we received reports of very high volumes of TNT’s mail in Royal Mail’s Northwood delivery office, which was apparently the result of absenteeism amongst TNT staff covering Northwood, creating resourcing and budget problems for Royal Mail in Northwood.

The gathering of further evidence from CWU branches, representatives and members about quality of service failures would help to reinforce the case for regulatory intervention.

Customers value and rely on a high quality, six day per week postal service. A Royal Mail survey published in February 2014 found that more than 8 out of 10 (81%) households surveyed over seven major UK cities agreed that, no matter who delivers the mail, they should deliver to their door six days per week. It is therefore important that standards are maintained and reporting requirements apply to all postal operators, not just Royal Mail and we will be calling for a level playing field on this aspect.

Regulatory Remedies

The previous section of this document highlighted the arguments the union must pursue in dialogue with Ofcom to strengthen the case for a full and early review of direct delivery competition and the threat it poses to the USO. Although achieving an early review will be a difficult task and is our immediate objective, we must also set out what we see as potential solutions if and when the review takes place.

To move our position forward we are preparing, with the assistance of the Research Department, our own submission to Ofcom and we anticipate this being completed before the end of August.

The CWU submission will be based on the key arguments set out in this document and the remedies we are calling for are contained in the list of measures at Appendix A.

Whilst none of these measures are simple solutions, the most effective and straight forward response to deal with the threat to the USO is for the Regulator to cap the level of competition and we intend to make this the centre piece of both our submission and wider political campaign. Moreover, rather than suggest that the Regulator defines a point in the future where it feels the limit has been met, we should argue that we are already at the limit and that the cap should be introduced now.

Judicial Review

To further strengthen our demand for regulatory action, we should also bring to the fore the call for a judicial review if certain conditions are not met. This would be if Ofcom fails to make a decision on Royal Mail’s submission by mid September, or decides against bringing forward its review.

It is important to note that this is far from straight forward and the bar for achieving a judicial review is a very high one. However, given the seriousness and urgency of the issue – with potential expansion from TNT into more cities later this year – we need to raise the pressure on Ofcom to act now and calling for a judicial review is one way of doing this.

The strongest grounds for a judicial review would appear to be that Ofcom was failing to comply with its statutory duty to secure the provision of a Universal Service. You will see that one of the recommendations to this document is that we now seek legal advice on how to proceed with a judicial review.

We should also argue for Royal Mail to support the call for a judicial review. This would rightly put the company under pressure and get CWU members firmly behind the position that the company must take stronger action.

Conclusion

The arguments and policies contained in this document make the case for regulatory intervention and action on direct delivery competition.

The document builds on the work the union has already undertaken and provides us with strong focal points and simplified messages that would be understood and supported by CWU members. At the same time adopting these policies distinguishes the CWU position from Royal Mail on a number of crucial points.

The following recommendations offer a comprehensive way forward in dialogue with Ofcom, Royal Mail and the next stage of the CWU Campaign.



RECOMMENDATION: 1 That we enter formal dialogue with Ofcom
and make a CWU submission (by the end of August) on the need for regulatory intervention and action on direct delivery competition.

RECOMMENDATION: 2 That the policy position set out in Appendix A be endorsed and that it forms the basis of the CWU submission and our dialogue with Ofcom.

RECOMMENDATION: 3 That we formalise the process for gathering information from CWU Branches, Reps and members on volume loss and TNT quality of service failures in the areas where TNT operates.

RECOMMENDATION: 4 That we seek legal advice on the best way to advance the grounds for a judicial review.

RECOMMENDATION: 5 That we plan a series of local reps events in the autumn to gain support for the union’s position and strengthen CWU Campaign objectives.

RECOMMENDATION: 6 That suitable publicity be given to the decisions of the Postal Executive and that a communication be prepared for delivery to members’ home addresses.




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



Appendix A
Making the Case for Regulatory Intervention and Action on Direct Delivery Competition – Summary of CWU Policy Position

1. In making the case to Ofcom that early intervention and action is required on direct delivery competition; CWU must argue that a failure to act compromises Ofcom’s primary statutory duty to secure the future of the USO.

There are three main issues we must focus on and support with evidence.

The threat to the financial sustainability of the Universal Service

The relative efficiency of Royal Mail.

The threat direct delivery competition poses to quality of service and general service standards.

2. In dialogue with Ofcom and Royal Mail the CWU must prioritise the debate on the relative efficiency of Royal Mail and the metrics used to measure this.

The CWU will challenge assumptions that suggest Royal Mail is not efficient by utlising the arguments contained in the document under the subheading ‘Royal Mail is already efficient’.

The CWU will stress to Ofcom that it is fundamentally wrong for them to compare labour costs in the efficiency debate, without taking account of what constitutes fair employment standards across the sector.

3. In calling for Ofcom to take action on direct delivery competition the CWU will pursue the following remedies:-

Ofcom should impose a cap to limit direct delivery competition at its current level.

Ofcom should swiftly conclude its investigation into TNT’s complaint over Royal Mail’s proposed access price changes and allow Royal Mail to implement a pricing structure to mitigate against the impact of cherry picking.

Ofcom must require all end to end providers to record and report on performance targets to ensure customers are properly informed when choosing a mail provider.

Ofcom must extend the mail integrity and postal common operational procedures codes to all direct delivery and access operators in the interests of consumer protection and common industry standards.

4. In pursuing regulatory action the CWU will call for a judicial review if Ofcom fails to respond to Royal Mail’s submission by mid September, or refuses to bring forward its review. The CWU will also call for Royal Mail to support the need for a judicial review in these circumstances.

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