TSO Publication_Bookshop:TSO Publication_Bookshop 29/10/07 11:51 Page 1 Cm 7529 Cm Smith R Ian | Hutton Deirdre Dame | CBE Hooper Richard sector services postal UK the of review independent An £26.60 2008 December 16 Kingdom. United the in service postal the universal maintain to Policies decline or Modernise TSO Publication Bookshop Updated 12.07.07 Modernise or decline Policies to maintain the universal postal service in the United Kingdom. 16 December 2008 Published by TSO (The Stationery Office) and available from: Online An independent review of the UK postal services sector www.tsoshop.co.uk Richard Hooper CBE | Dame Deirdre Hutton | Ian R Smith Mail, Telephone, Fax & E-mail TSO PO Box 29, Norwich NR3 1GN Telephone orders/General enquiries: 0870 600 5522 Order through the Parliamentary Hotline Lo-call 0845 7 023474 Fax orders: 0870 600 5533 Email: [email protected] Textphone: 0870 240 3701 TSO Shops 16 Arthur Street, Belfast BT1 4GD 028 9023 8451 Fax 028 9023 5401 71 Lothian Road, Edinburgh EH3 9AZ 0870 606 5566 Fax 0870 606 5588 BARCODE Cm 7529 £26.60 The Parliamentary Bookshop 12 Bridge Street, Parliament Square London SW1A 2JX TSO@Blackwell and other Accredited Agents Modernise or decline Policies to maintain the universal postal service in the United Kingdom. 16 December 2008 An independent review of the UK postal services sector Richard Hooper CBE | Dame Deirdre Hutton | Ian R Smith Cm 7529 £26.60 © Crown Copyright 2008 The text in this document (excluding the Royal Arms and other departmental or agency logos) may be reproduced free of charge in any format or medium providing it is reproduced accurately and not used in a misleading context.The material must be acknowledged as Crown copyright and the title of the document specified. Where we have identified any third party copyright material you will need to obtain permission from the copyright holders concerned. For any other use of this material please write to Office of Public Sector Information, Information Policy Team, Kew, Richmond, Surrey TW9 4DU or e-mail: [email protected] ISBN:9780101752923 Contents Acknowledgements 4 Headlines 6 Executive summary 8 Introduction 18 PART 1: SOME BASIC FACTS 22 A brief guide to the postal service 23 Not the Post Office 24 Who uses postal services? 24 Definition of the postal market 25 The letters process 27 The introduction of competition 28 PART 2: THE ISSUES 30 Post matters 31 What is the universal service? 32 What difference does it make? 32 Public opinion 32 Residential consumers 35 Small and medium-sized enterprises 36 Large businesses 37 The impact of liberalisation 38 The market has changed 39 The digital revolution 40 Cyclical change 41 Structural change 41 Challenges and opportunities 42 A positive future 44 Royal Mail faces severe difficulties 47 The significance of Royal Mail 48 The challenge posed by structural decline 48 Royal Mail’s ability to respond to market decline 49 Inefficiency 49 Pension deficit 54 Pricing 55 Labour relations 56 Relationship with the regulator 58 Royal Mail’s financial position 58 The universal service is under threat 60 PART 3: THE CHOICE 62 Modernise or decline? 63 The status quo is untenable 64 Short-term measures 66 2 2 A compensation fund 66 Degrading the universal service 67 Modernisation – in principle 67 PART 4: THE SOLUTION 70 Modernising Royal Mail 71 Modernisation in practice 72 What does Royal Mail need to modernise? 73 Commercial confidence 74 Access to capital 77 Access to corporate experience 77 Meeting these requirements together 79 Partnership 79 Post Office Ltd 82 Pensions 83 A new approach 84 Changes to the regulatory regime 87 A new regulator for a changing market 88 The role of regulation 90 Limitations on the role of regulation 90 The regulator’s duties 91 Regulatory tools 91 Formal market analysis 91 Regulatory powers 92 Cost transparency 93 RPI-X and promoting efficiency 94 A risk-based approach to regulation 95 Benefits of competition for the universal service 95 Impact of competition on Royal Mail’s revenues 95 Competition and the universal service constraint 95 The regulatory framework 97 The downstream access regime 97 The potential for deregulation 100 Value added tax 100 Shared responsibility but clear accountability 102 From policy to practice 104 Sustaining the universal service 104 PART 5: ANNEXES 106 About the report List of figures 107 Glossary of technical terms 109 Evidence to the review Summary of written submissions 115 End-to-end competition 155 Bibliography 157 About the review Terms of reference 162 Members of the panel 163 3 3 Acknowledgements We set out at the beginning of this independent review to engage a wide range of stakeholders with an interest in the future of the postal service. Our list included consumers and their representatives, postal companies, trade unions, political parties, government departments, the devolved administrations and regulators. We are immensely grateful for the countless hours which so many have given to answering our questions and explaining their respective points of view. Their comments, evidence and ideas are the foundations of this report. Thanks go to the following organisations for their written submissions to the review: Age Concern, Amazon, Citipost, Commission for Equality and Human Rights, Communication Workers Union, Direct Marketing Association, DX Group, E.ON UK, Federation of Small Businesses, H Bauer Publishing, Haymarket Publishing, Home Delivery Network Ltd, HSBC, IMRG, Institute of Directors, IPC Media, Lloyds TSB, Lovefilm, Mail Competition Forum, Mail Order Traders Association, Mail Users Association, MBNA, Merrill Lynch, National Federation of SubPostmasters, Neopost, Nordic Enterprise Trust, People Post, Periodical Publishers Association, Pitney Bowes, Postcomm, Postwatch, Redwood Publishing, Reed Business Information, Royal Bank of Scotland, Royal Mail, Royal Mail Pension Trustees, Scottish National Party, The Economist, TNT Post, UK Mail, UNITE, UPS, Williams Lea. We are also grateful to those who submitted evidence in their capacity as constituency MPs or as individuals. We greatly appreciate the time which many individuals and organisations took to discuss their experiences and analysis of the UK postal service with the panel and to present their policy proposals. We benefited from numerous meetings with Allan Leighton, Margaret Prosser, Adam Crozier, Alan Cook, Mark Higson, Ian Duncan, Alex Smith, Sue Whalley, Mike Prince, Andy McPhie and their teams at Royal Mail; Billy Hayes, Dave Ward, Jeremy Baugh and members of the postal committee at the Communication Workers Union; Commissioners, Nigel Stapleton, Sarah Chambers, Tim Brown and their colleagues at Postcomm; Millie Banerjee, Howard Webber and Ian Leigh at Postwatch; David Currie, Ed Richards and Peter Culham at Ofcom; Guy Buswell and Ian Paterson, Business Post; Nick Wells and Angus Russell, TNT Post, UK; John Coghlan, James Greenbury and their colleagues at DX Mail; Paul Reuter and Brian Scott at UNITE; Jane Newell and Gerry Degaute, Royal Mail Pension Trustees; and Richard Bradley and Phil Burns at Frontier Economics. Particular thanks go to Professor Martin Cave, Director of the Centre for Management under Regulation at Warwick Business School, for his advice on regulatory issues; and to Adrian King at Strategia for his international comparisons. We learned a great deal from visiting postal companies in the UK and overseas and are grateful for the time taken by people in all parts of the postal service to talk so openly about their work. Thanks go to the staff at the Royal Mail Centre at Greenford, the Princess Royal Distribution Centre, Northolt Delivery Office and East Finchley Delivery Office; to Harry Koorstra and his team at TNT Post, Amsterdam; John-Paul Forceville and his colleagues at La Poste, Paris; to John Allen, Chief Finance Officer, and his team at Deutsche Post, Bonn; Johnny Thijs, Chief Executive, De Post – La Poste, Brussels; Helge Israelsen, Chief Executive, Post Danmark, Copenhagen; Mary-Ann Gibbons at United States Postal Service in Washington DC; and to Dan G Blair, Chairman of the US Postal Regulatory Commission. 4 4 Many thanks also go to: Alan Alexander, Postwatch Scotland; Eric Austin, Onepost; David Barton, Royal Bank of Scotland; Simon Campbell, Via Post; Bill Cockburn; Graham Corbett; Mike Critelli and Tim Walsh, Pitney Bowes; Peter Davies, Lansdowne Partners; Lord Dearing; Steve Gill, Hewlett Packard; Richard Gillingwater, Cass Business School; Alan Halfacre, Mail Users Association; Paul Hatch, IPC Media; Professor Dieter Helm, New College, Oxford; Philip Hemard, Amazon; Chris Hemmings, Price Waterhouse Coopers; John Hughes, Regional Mail Services; James Kelly, Direct Marketing Association; Nicola King, Rothschild; Robert Langton; Ian Locks and Pru Jones, Periodical Publishers Association; Peter Luff MP (BERR Select Committee, House of Commons); Adam Mantzos, Brockley Consulting; Sir Callum McCarthy, Financial Services Authority; Ken McFarlane, Deloitte; Stuart McKinnon and Clive Davenport, Federation of Small Businesses; George Osborne MP, Alan Duncan MP and John Whittingdale MP, Conservative Party; Jana Osbourn, Women’s Institute; Jonathan Powell and his team, Morgan Stanley; Charles Reed, Reed Associates; David Sibbick, Mail Competition Forum; Neil Simpson, Publicis; Douglas Sinclair, Scottish Consumer Council; Mark Sitiver, DHL Global; Martin Stanley; Tim Stone, KPMG; Ben Story and Charlie Foreman, Deutsche Bank; Sarah Teather MP and John Thurso MP, Liberal Democrats; George