Royal Mail wants price cut for businesses
Royal Mail is pressing the industry regulator, Postcomm, to make radical changes to the universal service obligation, under which it must deliver mail to all the UK's 27 million addresses for the same price. It wants business post taken out of the deal to allow it to charge less for franked mail.
Postcomm is conducting a wide-ranging strategic review of postal services as competitors battle Royal Mail for a share of the market and all mail providers face a growing challenge from new communications media such as email. The review covers competition, innovation, regulation, governance and the structure of the universal service.
Royal Mail's proposals were revealed last Thursday 23rd August in Postcomm's interim report on the review. The regulator, which has allowed changes to the universal service in the past, gives a cautious response to the plans. It acknowledges that removing business mail from the deal would help Royal Mail to be more commercially flexible. But it notes: "We believe that to manage some potential risks, a phased approach might be an attractive way forward."
One concern is that Royal Mail's proposals could harm small businesses unable to take advantage of competition in the bulk mail market. "We need to ensure the service remains aligned with changing customer needs and the economic costs of providing it," Postcomm says. "The basic right to post a stamped letter anywhere in the UK for the same price will remain at the centre of the universal service."
Royal Mail sources have privately expressed concern about the financing of the universal service, which made a profit of GBP 27m in 2006/07. It is also concerned that if another operator were to offer end-to-end services, providing its own delivery system rather than relying on Royal Mail postal workers to cover the "last mile", it could lead to the service being "hollowed out" – with competitors battling for deliveries in urban areas, leaving Royal Mail with responsibility for the more costly rural collection and delivery. TNT, the Dutch group, is considering an end-to-end UK service and expects to decide within the next 12 months.
Postcomm said it believed a strong internally financed universal service was compatible with competition but Royal Mail needed to become more efficient and customers would have to accept the need for "a fair price" for postal services.
The letters market has been fully liberalized since the beginning of last year and Postcomm believes it has benefited from competition. One in five items is collected by an operator other than Royal Mail, though the state-owned service dominates delivery.
The report praises Royal Mail's improvement in meeting performance targets. Complaints are down and public trust is up, according to Postcomm, and postal prices are "fairly inexpensive".
But it says efficiency has not translated into lower prices, that modernization is well behind schedule and Royal Mail has fought the competition on price rather than innovation. "Although some progress has been made, Royal Mail is still a long way from achieving its own vision of becoming a modern and efficient operator."
Postcomm argues that the mail has a number of advantages over electronic communications and an innovative approach could see the market grow. "There is no reason why we should resign ourselves to the prospect of a contracting mail market if operators focus on how their products can add value for mail users."
Postcomm says it also wants to consider "alternative ownership and governance", drawing on the experience of approaches in some government-owned and non-privatized regulatory sectors.
But sources at the regulator indicated it was not re-opening the debate about privatization of Royal Mail, which it did not regard as an issue it should be involved with.
