Mail shake-up will sting us says Consignia chief
A mass of "regulatory gobbledegook" will undermine any benefits Consignia reaps from a 1p rise in the price of stamps and leave the company #500 million worse off, its chairman warned today.
Adam Leighton said a new package of regulatory measures would be very damaging for Consignia and claimed there was "honey" in the headlines but a sting in the detail.
Regulator Postcomm is set to give Consignia the go-ahead to increase the cost of stamps by 1p from next April.
Customers will also be paid up to #14 per item for late mail under plans due to be announced later today.
The proposed scheme is the first to specify levels of compensation for late delivery of mail. Compensation has previously been at the discretion of the Royal Mail.
Postcomm is expected to say that if the delivery performance of Consignia continues at last year's level, compensation payments could cost the company #60 million.
Compensation of up to 100 times the cost of a first class stamp would be payable for lost or damaged mail, meaning that customers could receive up to #27.
Domestic users will be paid up to #14 per item for late mail while bulk mailers would be entitled to an automatic rebate.
Postcomm is also expected to unveil a series of price and performance proposals which would limit further revenue increases and introduce new standards of delivery.
On BBC Radio 4's Today programme, Mr Leighton said: "This is a great honey in the headlines, but the sting's in the detail. The 1p is very helpful, the compensation we're absolutely behind – if we don't perform we should be fined. But underneath all this is a load of regulatory gobbledegook."
Many products – such as special deliveries – which were currently not regulated would be now price controlled, he explained.
"The net effect is that about #130 million of revenue we thought we would get we will now not get.
"We are absolutely customer first and we are people first, but we're trying to recover the business and the headline here is #500 million for the Royal Mail.
He added: "Actually the result of this is we are #500 million worse off than we are today when you really get into it."
Consignia had been working hard to get the finance in place to execute its renewal plan but would now have to borrow more, Mr Leighton told Today.
"We're close to finishing and getting #1.8 billion of funding – we've got to go and find another #500 million from somewhere.
"There aren't many people going to lend a business that's going to lose #300 or #400 million a year another #500 million. So once again, if we can't persuade people that this is nuts then we're going to have to go after our cost base again."
Admitting that the business had been in "dire straits", he added that while it had finally been allowed to put its prices up the extra regulation would cost it more than it reaped from the price rise.
INDEPENDENT (LONDON, UK) 4th October 2002
ROYAL MAIL WARNS POUNDS 500M REVENUE CUT WOULD BE `FATAL' BUSINESS ANALYSIS ALLAN LEIGHTON, CHAIRMAN OF LOSS-MAKING POSTAL MONOPOLY, BRANDS REGULATOR'S THREE-YEAR PRICE CURBS AS `MISSION IMPOSSIBLE'
THE CHAIRMAN of the Royal Mail warned last night that it could go bust after the postal regulator announced "shocking" price curbs which will cut the company's revenues by almost pounds 500m.
Allan Leighton, the ex-Asda boss who now runs the postal system, described Postcomm's proposals as a "disaster" and said he would have no option but to appeal to the Competition Commission unless the regulator backed down.
"We are already attempting the turnaround of all time but this has made it mission impossible," Mr Leighton said. "Could we go bust? Well. Every business goes bust when it runs out of cash and it is hard to see how we can find the funds to live with these proposals."
But Graham Corbett, the chairman of Postcomm, dismissed Mr Leighton's apocalyptic warning as the predictable response of a regulated company faced with new price controls. "He is crying wolf very loudly. Frankly, it is absolutely absurd for the Royal Mail to have leapt to the conclusions that it has," Mr Corbett said.
Under Postcomm's proposals, the price of first and second class post will rise by 1p from next April but after that prices will be frozen for three years. In return for the 1p price rise, which is worth about pounds 170m a year to the Royal Mail, it has been given much tougher performance targets and will have to pay compensation to its customers if it fails to meet them.
Domestic customers will be entitled to up to pounds 27 compensation for each letter which gets lost in the postal system and pounds 14 for each letter which is delayed. Bulk mail customers will receive rebates on their bills on a pro-rata basis depending on the amount by which the Royal Mail underperforms its targets.
Since the Royal Mail, on its own admission, loses half a million letters a week and fails to deliver one in 10 letters on time, the compensation payments could soon add up to a big number.
So far, so good. The Royal Mail has no quibbles with the price freeze or the new performance regime. But, says Mr Leighton, the devil is in the regulatory detail. Royal Mail claims that hidden in the 100-page consultation document issued by Postcomm yesterday are some extremely onerous conditions which will cut its revenues by some pounds 460m over the next three years.
First, Postcomm's proposals are based on a calculation of what the average weighted price is of the 21 billion items of mail delivered each year by the Royal Mail. So, the more successful it is in promoting high-value services – such as the pounds 3.65 guaranteed-next day special delivery – the more it will have to cut other prices to keep to its weighted average. It reckons this alone will cost it pounds 300m in revenues.
Second, Postcomm has decided to extend its reach so that virtually everything Royal Mail delivers will be subject to regulation, not just items in the current "monopoly zone" which cost less than pounds 1 to post. Royal Mail estimates this will lead to a further pounds 130m reduction in revenues.
Third, Postcomm describes its proposals as a price freeze but in fact Royal Mail will have to hold prices to the rate of inflation minus 2.5 per cent. Since inflation is well below this level, Royal Mail argues that it is actually facing a price reduction which will knock a further pounds 30m off its revenues.
"The regulator is giving with one hand and grabbing back even more with the other. This is regulation gone mad," Mr Leighton said.
As if that were not bad enough, the Royal Mail is facing the end of its 300-year-old monopoly. From next January, 30 per cent of its market will be opened to competition when rival operators will be able to bid for the business of large bulk mail users – those who despatch more than 4,000 letters at a time. A further 30 per cent of the market will be thrown open from April 2005, when all bulk mail will be opened to competition. And from April, 2007, the entire market will be liberalised enabling anyone to send their post using any operator they want.
Rival national operators such as Deutsche Post and the Dutch post office, with which Royal Mail very nearly merged earlier this year, have already been given licences to start competing in the UK.
In preparation for this the Royal Mail, which is currently losing pounds 1.5m a day, has embarked on a pounds 1.4bn cost-cutting programme which involves 30,000 job losses and the closure of 3,000 post offices – one-sixth of the network.
The cost of the three-year restructuring plan, described by Mr Leighton as the most ambitious turnaround ever attempted by any business organisation, is put at pounds 2.4bn. Of this, pounds 1.8bn will be met by the taxpayer through the National Loan Fund and pounds 600m will be self-financing, paid for by the savings Royal Mail makes along the way. Mr Leighton says the price curbs put forward by Postcomm, requiring Royal Mail to find another pounds 460m from somewhere, amount to "an impossible burden and would fatally damage our chances of recovery".
He says Royal Mail cannot afford to take on more borrowings because it would not be able to repay them. Nor is it in a position to cut into its costs much further since it is already getting rid of 15 per cent of its workforce. "We cannot rule out further job losses but that would not be our first port of call," Mr Leighton said.
He says that he first spelt out to Mr Corbett the disastrous financial consequences of what Postcomm was proposing three weeks ago.
Mr Corbett says Royal Mail's calculations did not reach him until Tuesday night – 24 hours before his proposals were issued under embargo – and even then they took the form of a single sheet of paper.
Pitched battles between regulators and the companies which they police are not unusual. In fact, they have become a familiar part of the economic landscape since the privatisation of industries such as gas, telecoms, water and electricity began in the mid-1980s and the Government created regulators to mimic the competitive forces these state-owned monopolies would otherwise face.
But Royal Mail is different in one crucial respect. It now finds itself regulated and yet still state-owned – the worst of all worlds. As the battle raged in public yesterday between Mr Leighton and Mr Corbett, the one dog that did not bark was the Department of Trade and Industry, the Royal Mail's 100 per cent shareholder.
Behind the scenes ministers are said to have made their unhappiness with Postcomm plain and yet they cannot afford to be seen in public second- guessing the decisions of the independent regulator they set up.
Royal Mail has two months to persuade Postcomm to change its mind before yesterday's consultation paper turns into a set of final price controls. Mr Corbett shows few signs of rolling over. Indeed, he says: "If we had come out with a set of proposals which Royal Mail were happy with I would have been very disappointed."
Mr Leighton seems equally determined not to give ground. "This is an argument we cannot afford to lose. If anything, I am even more determined now to defend the organisation."
Let battle commence.
