Royal Mail evidence to the independent review of the postal services sector

Royal Mail has now submitted its second set of evidence to the Independent Review of the UK Postal Services Sector. The company’s submission is outlined in the letter below, which was sent yesterday, along with its evidence, to Richard Hooper CBE at the Review Panel. The Management Summary is also attached.

Dear Richard

We are pleased to submit our second set of evidence for the Independent Review of the UK Postal Services sector. As you know, Royal Mail and its people believe passionately in the one-price-goes anywhere Universal Service at the heart of a vibrant UK postal market – and your review will be central in determining whether it can survive. The Universal Service connects us all together, it creates the opportunity for businesses to connect to each other and to consumers, it allows everyone to participate in the growing internet economy no matter where they are. It is literally part of the social fabric of this country and preserving it is not just an important priority but an essential one.

The Universal Service is, however, now in the red for the first time, having made an estimated loss last year of around GBP 100 million. We therefore wholeheartedly agree with the sentiment expressed in the Review Panel’s first report earlier this month "that the status quo is not tenable". The Review Panel’s first report makes clear that a key part of the problem is the way in which the industry is regulated: the current regime was designed for a market in which volumes continue to rise yet the reality is that the overall UK postal market is declining, Royal Mail’s ability to compete with other mails operators is severely limited by regulatory constraints, and mail is increasingly competing with other communications media including broadband. It is clear that the postal services industry is not adequately responding to the fundamental market decline as the internet economy grows, and we agree with the Review Panel’s view set out in their interim report, "that the way in which the postal sector is regulated will need to change".

Our firm belief is that a healthy, efficient and profitable Royal Mail is critically important for the future of the Universal Service and for the industry as a whole. Our Shareholder has given us support and investment over the last few years but we recognise that Royal Mail must do all it can to accelerate its transformation plan and take radical action to modernise and reduce costs in order to underpin the Universal Service in a declining market. As you have already concluded in your initial response, the overriding criterion is to "ensure that a universal service is sustainable" which is underpinned by five criteria:

• A high standard of service for customers
• An appropriate regulatory regime to protect customers where barriers to entry mean that there is limited competition and choice
• A regulatory framework which encourages fair and innovative competition where no barriers exist
• A stable financial future for Royal Mail
• The incentive for Royal Mail to modernise its operation, making it much more efficient, and change its culture

Royal Mail wants to ensure that there is a clear, deliverable and sustainable solution to the issues facing the postal industry and it is our hope that all stakeholders commit to delivering it quickly. Royal Mail believes that the solution has 13 key elements which, if implemented, would secure the Universal Service and help create a vibrant future for postal services within the wider communications market:

1. Royal Mail accelerating the pace of our cultural and operational transformation in a declining market.
2. The Universal Service confirmed as a high-quality, six-day, first and second class service which is geographically uniformly priced with existing high quality of service targets.
3. The Universal Service comprising stamp mail with product and price regulation for stamp and meter mail only to allow Royal Mail to continue to champion and protect social customers and small and medium sized businesses who have no choice.
4. A new and enhanced approach to costing to provide even more transparency of Royal Mail costs to the regulator.
5. Competition law to be applied in cases of suspected market abuse by Royal Mail or another industry participant.
6. Removal of regulation of all other retail and wholesale business mail, including access headroom, to help establish a regulatory framework which encourages fair and innovative competition where no barriers to entry exist.
7. Removal of requirements for Royal Mail to pursue lengthy regulatory approvals for product development and product withdrawal (Licence Conditions 7 and 21).
8. Agreement, with the help of the panel, to be reached on the set of immediate measures that can be taken from this package of solutions to close to the maximum extent possible the £2.6 billion cash gap (which has resulted from Postcomm’s flawed assumptions in the current price control), in line with the regulator’s primary statutory duty.
9. Regulation of postal services to be incorporated within the scope of communications market regulation and an appropriate merits-based appeals regime to be introduced.
10. Royal Mail to remain an integrated business.
11. Urgent resolution of the legacy pension deficit.
12. Access to equity capital to enable Royal Mail to accelerate our transformation.
13. The VAT exemption regime should stay in place, in line with the EU VAT Directive which recognises the role of public postal providers – and within that the provision of the Universal Service – in every EU country.

We believe that change is not only vital but that it must be accelerated under the auspices of the Review Panel in order to sustain the Universal Service. Given the wide agreement among stakeholders that the current situation is untenable, in our view it is equally untenable to wait for the next price control in 2010 to set the future framework for regulatory change and resolve the outstanding cash gap of £2.6 billion. We recognise that some of these steps are likely to require legislative changes and will therefore take time to put in place but we hope that all stakeholders will support the Review Panel’s final recommendations and work together to implement them in the shortest possible time frame. This will provide much needed certainty for the Universal Service, for customers, for the industry as a whole and, importantly, our people.

Royal Mail is absolutely committed to continuing to deliver a sustainable and high quality Universal Service and we urge others to get behind us and make it happen before irreparable damage is done to something we all value so highly and which has such a vital role to play.

We look forward to continuing our discussions with you as the debate on the future of the sector unfolds. Despite all the challenges, we believe that there are huge
opportunities to be grasped and that there can be a bright future for postal services in the communications market of the future.

Yours sincerely,

Allan Leighton Chairman
Adam Crozier Chief Executive