Sunday, 1 March 2009

A very long post - about the post

Very conscious that I don’t seem to have time these days to blog about the most important, or rather, the most controversial issues of the day.

But seeing as I’ve set myself the task tonight of trying to reach some conclusions on the future of the Royal Mail, in response to the legislation just announced by Peter Mandelson in the Lords and some rather persistent lobbying by the Communication Workers Union, I might as well do it in blog form. Although be warned, this is going to be one of the longest posts in the history of blogging.

Here are just some of the factors that have to be taken into account:

Modernisation. Some would say the postal workers, and the CWU, have resisted modernisation down the years. The union assures me they’re willing to modernise, but then tell me that if the delivery offices are automated, there will be job losses and full-time jobs will become casual, part-time jobs. They don’t want this to happen. The sorting offices – i.e. the main centres where post is first taken and then dispersed around the country - are already mechanised. At the delivery offices, however, postal workers spend the first few hours of their shift sorting out their rounds, by means of popping letters into pigeon holes and then arranging in delivery order. Then they go out and deliver them. They tell me they’re already under pressure to complete their rounds more quickly than they used to, and they don’t have time to stop and have a chat or cup of tea with people like they used to. It was suggested that this was part and parcel (if you excuse the pun) of the Royal Mail service, as sometimes they’re the only point of contact that lonely older people have. If the delivery process was automated, they would only have a few hours work a day. Doing two rounds a day might be an option, but would be too physically demanding, carrying heavy bags around for more than a few hours. The union’s argument is that the Royal Mail provides employment for unskilled workers, who – particularly in the current economic climate – would find it hard to get jobs elsewhere. Protecting these jobs should be a priority. My problem with this is that although the union says it supports modernisation, it actually ends up arguing against modernisation, on the grounds that it’s more important to protect jobs.

The pension deficit. There’s a huge deficit in the Royal Mail pension fund, possibly as high as £8bn. This is partly because the trustees took a pensions holiday for several years; that’s not the postal workers’ fault, but we can’t turn the clock back. It was said at the National Policy Forum that the deficit is 75 times higher than the current small operating profit made by the Royal Mail each year. The Government is prepared to fill this hole, but not to provide any extra investment on top of that sum.

Investment. Apart from the pension deficit, and the need for more money to be spent on modernising the delivery offices, the Royal Mail’s core business is declining by about 7-8% a year, because of the increased use of email, Skype, texting and other forms of new media. It’s highly likely this trend will continue, and possibly even accelerate.

Liberalisation. An EU Directive requires member states to liberalise postal services by 2011. The UK was quick to respond to this, opening up its markets to foreign competitors; other countries have not been so quick to do so. The result: the Royal Mail is besieged by foreign companies trying to take its business, but cannot (yet) do the same in other EU countries. These foreign companies, such as the Dutch-owned TNT, are winning the lucrative business – i.e. collecting bulk mail from big companies – and then using Royal Mail for ‘downstream access’ o i.e. the non-profitable bit at the end, delivering to individual households (what they call ‘the last mile’). There is also something called the ‘access headroom’ rule, which basically means if the Royal Mail offers a customer a certain rate to do its collection, then it has to offer its competitors a 2p lower rate. So if Royal Mail agrees to handle the Home Office’s mail at, say, 13p an item, it would have to offer the likes of TNT its downstream services at 11p an item. In theory this would enable TNT to also charge the Home Office 13p an item, pass on the ‘last mile’ work to the Royal Mail and then somehow make its profit on the 2p differential. This is, I assume, designed to stop the Royal Mail driving out competitors by charging them over the odds for downstream access.

The Universal Service Obligation. So the competitors are basically cherry-picking the lucrative part of the market, and leaving the Royal Mail to cover the USO – i.e. the obligation to ensure that anyone, anywhere in the UK, gets their mail delivered. It’s not profitable, and unless there is significant investment to reduce costs – e.g. by introducing automation at delivery offices and thereby cutting workforce costs – the only way it will survive is for the price of a stamp to increase significantly. In many European countries it’s already much higher than here.

Management. There have also been criticisms of Royal Mail’s management, both from Government and the workforce.

The Government took the view – which I support – that the status quo was not an option. It commissioned the Hooper Review which has made several recommendations, some of which have been welcomed by the CWU (e.g. proposals for regulation by Ofcom). The Government has also announced some measures to create more of a level playing field between the Royal Mail and its competitors, which I welcome.

The most contentious recommendation, however, is that a private partner should be brought in, with possibly a 30% stake in Royal Mail. It’s widely expected that this partner would be TNT.

I should say at this point that I don’t have an ideological problem with an outside partner coming in. I’ve worked in both the public and private sectors. I don’t subscribe to the view, ‘public good, private bad’ – or ‘private good, public bad’. The CWU reps I’ve spoken to over the past fortnight (at some length – a 90 minutes meeting in my office, and then another hour in Parliament, and then another chat at regional conference), do have an ideological take on it. They regard their work as an essential public service (which it is, in part) and want to continue as public servants. They believe that a private sector company would inevitably seek to make its profits by downgrading terms and conditions, and forcing more work to be done by fewer workers. I accept this isn’t entirely an ideological response: it is, to an extent, logical thinking. There seems however, to be a reluctance to accept that there exists a private sector company anywhere that treats its workers well, and isn’t solely obsessed with maximising revenue. I don’t agree.

So then the question becomes, is a private partner really needed? Can the Royal Mail continue as it is? The Government accepts it will have to bail out the pension fund, but simply isn’t prepared to contribute more; there are other, more pressing priorities for public spending.

I’m advised that there is some £600m in the Royal Mail’s reserves which could be used for investment/ modernisation. (Although some would no doubt argue that this should be put towards the pension fund deficit, thus reducing the burden on the British taxpayer.)

Another solution would be to allow the Royal Mail to borrow to invest. This, coupled with measures to level the playing field, could put them on a secure footing. At which point Peter Mandelson might well start to argue – in fact I’ve heard him do so - that bringing in a private partner isn’t just about an injection of cash, but about a change of culture, a harder-headed more commercial approach. And I’m sure the CWU would then point out that the Government already tried this by bringing in Adam Crozier and others to run the service, and it didn’t make much of a difference.

The conclusion I’m edging towards is that the Royal Mail does need both an injection of cash and a shot in the arm. We can’t continue to run the Royal Mail along current lines, where modernisation is resisted so that people can be kept in their jobs; but you can’t run a business or a public service as a job creation scheme. What I’m interested in finding out now is whether we do really need to bring in a private sector partner to achieve this. Can Royal Mail borrow the necessary funds? They’ve been promised a level playing field re downstream access, (although this has only just been announced and I need to look into the details). Will that be enough to halt the slide in their profits? What would be the impact of a private sector partner on the workforce and the business?

That’s enough for now, not least because I’ve got to read up on Fred the Shred for a radio piece I’m doing at 11pm. No doubt there are things I’ve missed out, or points I haven’t covered, particularly as I haven't had a chance yet to study what Peter Mandelson announced in the Lords on Thursday, so feel free to pull me up on them. I’ve agreed to meet the CWU again soon and there will no doubt be more discussions in Westminster this week.

I may also blog at some point about the politics of this. There’s sometimes a tendency amongst MPs to take the easy option when they’re being lobbied hard – to sign the EDM, to do what their party members are saying. Some are arguing that regardless of the merits of part-privatisation, we shouldn’t be doing something so controversial when we’re behind in the polls and only a year away at most from a general election. But – enough for now!

P.S. LabourList is covering this issue in some detail, pulling together various views - which I think will turn out to be one of the strengths of the site, i.e. when it comes to 'hot topics' engaging the party.

Have just remember another key concern of the CWU - that part-privatisation would inexorably lead to full privatisation under a future (hypothetical) Conservative government. But I think full privatisation will be on their agenda anyway. Implementation of the Hooper recommendation could, if it puts Royal Mail on a sounder commercial footing, put a halt to such plans.


Old Holborn said...

Kerry, you didn't write that

Who did?

bevanite said...

Thanks for the summary Kerry, that saved a lot of reading and research.
I would suggest that at the moment the Government needs to pick it's battles. The Royal Mail is a service that is cherished in the minds of the public... to start what could become, with a future Tory govt, a slippery slope to full privatisation may be a mistake. I don't agree that we should legislate according to high profile pressure campaigns, but in this case could the introduction of a foreign stake holder in the Mail play into the hands of spitefull and vile campaigns by the BNP?
Job creation and sustainability must be a priority for our Labour government in times of global recession. I think borrowing and a review, followed by rapid action, of efficiency in the service could suffice. Oh and a self gratifying final thought, perhaps a change to a 'People's Mail'?

Kerry said...

Good point Bevanite - maybe the Queen could take a 30% stake; she's got a few bob.

Ruskin said...

To open I must admit that I am a trade unionist and a member of the Labour party, something that should not be contentious but ! Firstly, whilst I can understand that Kerry may see that we are trying to protect jobs (thats what we do) there have been over 40,000 job losses in Royal Mail since the introduction of liberalisation,I think this clearly illustrates that the buisness and the union have worked together to introduce more efficent ways of working.
Secondly, and here's the rub, with regards to the part privatisation of Royal Mail, it has been suggested that there is a need for 30% of the buisness to be sold to raise money for investment.
1)There is a loan facility set up by this government to the tune of £1.2 billion, of which only £82 million has currently been spent, these are figures supplied by Peter in a statement to the House of Lords.
2)Peter again, this time at the BERR committee, stated that it would take hundreds of millions to modernise Royal Mail.
3)No statement has been made that this facility will be withdrawn, so I cannot see why we could not use this money, especially when the alternative is the part privatisation of the buisness.
4)The front runner in this is TNT, a company with not the best record on industrial relations, and who charge their domestic customers over twice the price for first class postage as we do in the UK.
5)There are many ways to measure efficency, and when you look at cost to the consumer, Royal Mail actually is doing far better than some of those who may scent profit in the air.

Plato said...

Is it just me or is this posting completely unlike all your others?

Those headings are a dead give-away. It reads like a Q&A response from Labour's press office.

How disappointing.

Robert said...

My god thats Mandy's writing.

Andy said...

Shouldn't you have flagged this up as a 'Guest Post'?

Campaigner said...

I am informed that the rather persistent lobbying by the Communication Workers Union is set to dramatically intensify!

Kerry said...

Where OH leads, all the other trolls follow.

Ruskin - I appreciate the unions want to protect jobs, and of course they're right to be fighting for their members. My concern however is that resisting modernisation to protect jobs in the short-term could jeopardise the service's survival in the longer-term. And are those 40,000 job losses the result of modernisation or losing business to the competition? (I guess a mixture of both, as sorting offices have been automated, and I suppose it depends whether you regard moving to one delivery a day as modernisation or a forced response to commercial pressures.) As for the loan facility funds, I've told my local CWU that I will try to find out what this is being reserved for, if anything.

Ruskin said...

It is not that the CWU are opposed to modernisation, but that this should be a negotiated process, that we have an input on. We recognise that there will be job losses and closures, but feel that the introduction of a foreign partner will see an over zelous thrust to introduce automation at a time of increasing unemployment, we know that jobs will go, but reducing labour costs is not the only way to assess efficiency.
Also, it will be the taxpayer who will pick up the social cost of these efficencies, through the benefits system, whilst the profits will flow abroad.
It is a point of interest that it is only in the last 12 months that we have seen falling mail volumns. The impact of liberalisation, and the promotion of competition by the regulator has produced downstream access, and this is how it goes,
1)the competition do the easy bit, approach bulk users who produce big volumns of cheap to process machinable mail. They sort them to geograhical locations then deliver it to the nearest mail centre, who move this about the country, sort and deliver it.
2) If Royal Mail offer the bulk user a discount, this has to be passed on to the competition, in so much as, if we offer our service to, lets say RBS to be topical, at 13p an item, we have to offer the same service to the competition at 11p, that sounds fair ?
3)Royal Mail do the work, and are also left with the less profitable manual work, that the competition cannot make a profit on.
4)Whilst this have minimal effect on the volumn of work processed by RM, it has dramatically cut revenues.
5) Royal Mail modernise or respond to commercial pressure, not much between the two to be straight, but what consumers have seen is the loss of the second delivery, closure of post offices, and the introduction of pricing in proportion, which has been developed so that price is more reflective of actual cost of processing and delivery, this has increased cost to individuals (both on packets and letters)whilst cutting costs for big buisness users, redistribution in reverse if you ask me.

The Grim Reaper said...

Mr Mandelson, I demand you untie Kerry at once.

Glomph said...

It seems by 'modernization' you are referring to the same process that has taken gas, electricity and public transport into the dark ages.

It is hard to understand how you could ignore such a startling example of Private bad/Public good that effects us daily. People like and admire the Royal mail because it works and is for the people (despite its name).

I doubt anyone would say the same for the trains, busses or phones. When was the last time 'it works' could be used to describe the trains? The 1960s? Imagine if getting a phone line was as simple as sending a letter.

None of the problems you outline would actually be solved by the proposed selling of a share. Yes maybe it will generate some revenue, but what is that worth? Compared to a shining example of the public sector serving the whole country.

There may be problems with foreign competition working the market for profit, but how does giving our service to them solve this? Come to an agreement with the EU/other companies. They seem to acknowledge the RMs value in 'the last mile'. So focus on this, just don't give in.

I can understand your support of the private sector in general of course it is a part of our society and functions well, but as an Labour MP I cannot see how the selling of of useful public services can be in line with your genuine philosophies. Are there not some things that are the role of the state? You may as well change party.

What next? Education? Health? Oh wait, I speak to late.

wilty said...

'Lines to Take' ring any bells? said...

Kerry McCarthy,you're on the verge of getting your own RMC smilie!!