UK Government

Department for Business, Innovation and Skills: Postal Services Bill Second Reading – Vince Cable Opening Speech – 27 October 2010

News   •   Oct 28, 2010 12:45 BST

Please check Hansard for the official record. This version does not include any interventions by Members of Parliament.

Mr. Speaker, I beg to move that this Bill be read a second time.

INTRODUCTION

Mr. Speaker, let me begin by making it clear why we are here: Royal Mail and the Post Office are two cornerstones of our society. They are different businesses, they are both essential to everyday life in the UK.

Royal Mail is responsible for collecting and delivering our letters. It provides the universal postal service which ensures the collection and delivery of letters and parcels from any postbox to any address in the country. And all at uniform, affordable prices.

The Post Office is an unrivalled network of shops, spread throughout the country. It allows people local access to essential services in the heart of their communities.

The aim of this Bill is to secure the future of these two great institutions and the services they provide and I look forward to the support of members opposite who have genuinely tried to secure the future of Royal Mail and the Post Office network before. They will no doubt agree with me that this must be the last and successful attempt.

HOOPER AND BACKGROUND

Mr Speaker, the sad fact is that the country that pioneered postal services in the 19th Century has been left behind in the 21st Century. The rise of email and the internet has led to a dramatic fall in the number of letters we send. The previous Government were well aware that problem. They commissioned an independent review into the future of the universal postal service, chaired by Richard Hooper. This review found that letter volumes were in structural decline, Royal Mail was in grave financial difficulty, and the universal postal service was under threat. Its conclusion was encapsulated in its title – “Modernise or Decline”. All sides of this House accepted the conclusion that the current system was broken. The company, the union, businesses and commentators – all agreed with the Hooper conclusion when he said “the status quo is untenable.”

But Mr. Speaker, the status quo then is still the status quo now. In fact, Richard Hooper has been clear that Royal Mail is now actually in a worse position. How has this happened? The previous Government endorsed Richard Hooper’s recommendations and acted on them. They put forward a bill which we in the Liberal Democrats and our coalition partners supported. But sadly it never reached this House and the future of Royal Mail was thereby not secured. The previous Government’s Bill would have allowed private sector investment in Royal Mail. It would have enabled Government to tackle the pension deficit. It would have reformed the regulatory regime for postal services. They are all measures with which we agree, and which form the basis of this current Bill. We agree with these measures because, as Richard Hooper says, they are essential if the universal postal service is to survive.

ROYAL MAIL’S FINANCIAL PROBLEMS

When I came into Government, I was left in no doubt of the real difficulties faced by Royal Mail. I asked Richard Hooper to update his report from December 2008. I wanted to make sure that the conclusions were still valid. They are. Mr Speaker, let none of us in this House be in any doubt as to Royal Mail’s predicament. Yes, there has been some progress and I recognise that. Unions and Management are now working better together. But its pension deficit has ballooned to over £8 billion. Royal Mail now has proportionately the largest pension deficit of any major company in the UK. In addition it loses almost £1million a day on its trading activities. It is an inefficient business in a market that is declining faster than anyone predicted. Hooper now forecasts that letter volumes could fall by as much as 40% over the next five years if nothing is done. That is why we are moving faster and further

WHY WE NEED THIS BILL

The question is what happens if we do not act? We, in this Government, believe we still need a universal postal service, collecting from all postboxes and delivering to all 28 million postal addresses six days a week. And we will still be required under EU law to fund the universal service if no one can provide it commercially. So the taxpayer could be left to pick up the pieces. We cannot predict how much this would cost, or when this would happen if no action is taken. But we know that it would not be cheap. We are not prepared to take this risk with taxpayers’ money. Not with the public finances in the state that they are in. That is why we are determined to press ahead with this Bill.

This is not simply just about making sure that taxpayers do not have to cover the costs. It is also about doing what is right for the future of the company and its employees. Richard Hooper is clear that if his recommendations are taken forward urgently, then Royal Mail does have a potentially healthy future. As my predecessor said, almost 2 years ago, “I believe that Royal Mail and the postal market can thrive in the future, provided that decisive action is taken now”. Well, we are taking action now.

The problems Royal Mail faces are problems we can address through this Bill. After all, it is the only company with the ability to visit all 28 million addresses on a daily basis. It has an unrivalled customer base. And it can build on its position as the leading provider of letters and parcels by providing a new range of digital products to its customers. This Bill is the only way to make that positive future a reality.

SUMMARY OF BILL

Mr. Speaker, I would now like to turn to the substance of the Bill itself.

Mr. Speaker, the Members of this House will find much in this Bill that is familiar. As I have said, in drafting this Bill, we have drawn on much the same evidence as the previous Government. The facts are not in dispute. We have also reached much the same conclusion – that the company needs private sector investment, the pension deficit must be tackled, and the regulatory regime must be reformed. But this Bill is not identical to that of the previous Government. We have taken the opportunity to learn from what has gone before and to develop a new Bill that builds on this Government’s commitment to employee participation. As the member for Wolverhampton South East said when he was minister for postal services “We need a longer-term plan, with a proper buy-in from the work force”. That is exactly what this bill hopes to deliver.

THE POST OFFICE

Let me turn in some detail first of all to the Post Office. As I have said, the Post Office and Royal Mail are different businesses. They face very different challenges. That means our approach has to be different.

The Post Office network is unique. It has around 11,500 branches across the country. It operates in places where other retailers do not. It offers services that other retailers do not. Above all, the Post Office plays an essential social and economic role in our communities.

For that reason, the Post Office will not be for sale. The Bill is absolutely clear on this.

But I am concerned that the current structure of the company is holding the network back. It seems to me that the Post Office is ideally suited to a Co-Operative Group style structure – where employees, sub postmasters and communities get a greater say in how the company is run. The Bill therefore includes a provision that would allow for a possible future mutualisation of the Post Office. Let me be clear that no firm decision on the mutualisation of the Post Office has yet been taken. And there would be a full public consultation before any move to a mutual structure. In the meantime, I have asked Co-operatives UK to explore options for how a mutualised Post Office would work best.

I know that this means setting out on a new course. And I know that before any changes can be made, the network will have to be put on a more secure financial footing. But, and subject to consultation, if it is the right outcome for the network, then I hope that the Post Office could make this transition before the end of this Parliament.

Mr. Speaker, let me further reassure the House on how we are going to put the Post Office on a more secure financial footing.

Communities up and down the country have rightly been concerned about the shrinkage of the Post Office network over previous years. Despite the efforts of members opposite - notably the shadow Chancellor - there has been remorseless decline over the last three decades. The last Government’s closure programmes shut 5000 post offices. I would like to commend Members on all sides of the House who fought against these closures.

Mr. Speaker, those days are over. I would like to echo the words of the shadow chancellor from some years ago. “We had a choice. One was to continue to watch decline turn to crisis and crisis turn to collapse, leaving it as someone else's problem down the road.” But this Government doesn’t believe in passing on problems so we are going to fund in the post office network. When I say fund I don’t mean set aside millions to buy off sub-postmasters when we close their business. We had the option of keeping the network on a care and maintenance basis and letting it decline – this is one we have rejected. I can today announce £1.34bn of new funding for the Post Office over the spending review period. Our funding will be used to reform the current network, to change the underlying economics, and so reverse the years of decline and secure its long term future. I am grateful; particularly to the Chief Secretary to the Treasury for understanding, even in a tough spending round. I repeat, there will be no programme of closures under this Government and the Post Office will be able to invest, improve its offer and win new revenue streams.

In addition to funding, we are also injecting new ideas. We have been re-thinking the role of Post Offices in providing Government and banking services, and we will be coming forward shortly with a fuller statement on the Post Office, setting out some new and positive ideas which I hope will command support on all sides of the House and in the country.

Secondly, I would like to reassure the House with respect to the relationship between the Post Office and Royal Mail. The Post Office is currently a subsidiary of Royal Mail. But they are already separate companies and they are very different businesses. As part of our plans for both companies, the Bill will therefore allow for the separation of Royal Mail and the Post Office. Separation will give the Post Office management greater freedom to focus on the branch network and providing new services.

But Mr Speaker, in this case at least, separation is not a first step towards divorce. The Post Office and Royal Mail will continue to work closely together. Each company needs the other. Post Offices carried out over three billion mail transactions for Royal Mail last year. The two companies are closely linked in the public mind, and are bound together by an overwhelming commercial imperative. There is currently a long-term contract in place between the two companies. And there will continue to be a long-term commercial contract in place. The Chief Executive of Royal Mail has said that it would be “unthinkable” that there won’t always be a strong relationship between the Post Office and Royal Mail.

ROYAL MAIL OWNERSHIP

Mr. Speaker, I should now like to turn to Royal Mail.

For the foreseeable future, Royal Mail will be the only company capable of providing the universal postal service. That means that if we want to continue to benefit from a universal service with uniform and affordable prices, we have to equip Royal Mail to survive, and indeed thrive. There is no choice. That was the conclusion of the original Hooper Review commissioned by those opposite and his recent update for the coalition.

Some Members of this House will say that Royal Mail can modernise and survive while remaining in the public sector. They will say that Government can provide the funding Royal Mail needs. That the modernisation agreement in place between the Union and the company is sufficient to stave off the decline in the market.

That is not a view I share. I didn’t share it in Opposition. And I don’t share it now. Nor is it shared by Richard Hooper, or the company itself. Mr. Speaker, let me be quite clear. Government is the wrong shareholder for this company. Given the government’s financial constraints, we cannot invest enough, quickly enough. We cannot invest flexibly enough. And every investment we now make has to be cleared by the European Commission under state aid rules.

Richard Hooper is also clear that Royal Mail cannot modernise properly, cannot take the decisions it needs to take, while it has the threat of political interference hanging over it. Private sector capital will bring with it private sector disciplines, which will allow the company to modernise faster to keep pace with the changes in the market. As the last minister for postal services wisely said, “Unless modernisation happens, the company will be ill equipped to deal with its challenges”.

The Bill will therefore lift the restrictions that currently exist on the sale of shares in Royal Mail.

This is a departure from the previous Government’s Bill. But Mr. Speaker I should remind the House that the purpose of this Bill is not the sale of shares in Royal Mail for its own sake, but rather the protection of the universal postal service and Royal Mail as the only company capable of providing it. It is therefore right that we allow the flexibility to seek the investment required to secure the future of both Royal Mail and the universal postal service.

So I see no reason at this stage for setting an arbitrary target for how much we must sell by when and by which method. These are critical decisions that need to be taken with proper advice and in the full knowledge of market conditions, assessing both value for money and the company’s needs. Of course, Parliament must be kept informed of these decisions, and this Bill requires a report to Parliament once a decision has been taken to begin a sale process. I hope to be in a position to report to Parliament on a sale process in the first half of this Parliament.

In the longer term, I do not believe that there is a need for Government to keep a stake in Royal Mail. But I will ensure that the Government has the flexibility to ensure the right outcome for taxpayers, Royal Mail, and its employees.

EMPLOYEES

Mr. Speaker, it is to the employees that I would now like to turn. The employees of Royal Mail are critical to its ability to modernise and thrive. It will come as no surprise to Members of this House, when I say that Royal Mail has a history of poor industrial relations. Members may have noticed that UNITE announced just two days ago that it would be balloting Royal Mail managers on industrial action.

This recent development aside, I have been heartened by some of the positive steps that have taken place to improve industrial relations. In particular, the agreement with the Communication Workers Union on the modernisation of the business. This agreement accepted that, unfortunately, there would be job losses associated with the modernisation of the business. It accepted too that there would need to be changes to working practices, and that mail centres would close. This plan has already been agreed with the CWU and the company is implementing it right now.

So, yes, there will be job losses. The company is losing money and the market is declining. This is regrettable, but unavoidable. But what happens if we don’t take action? What happens if Royal Mail fails and the market collapses? Which is the current trend.

I know the CWU have been here in Parliament today talking to many Hon. members about their views on this Bill. Both I and my Honourable Friend, the Minister for Postal Affairs, have met with the CWU to discuss Royal Mail. And we look forward to continuing to talk to them as we take this Bill through Parliament.

But I have one thing to say to them directly today: the worst thing for the union members, Royal Mail’s employees, would be to do nothing. This is the real threat to jobs at Royal Mail.

The employees of Royal Mail also deserve better than constant battles between the union and the management. They deserve to be properly engaged in the business that they work for, and to have a real stake in its future. That is the only way that we can break forever the cycle of antagonism and mistrust that has bedevilled the company.

The Bill therefore requires the creation of an employee share scheme, which will hold at least 10% of the equity in Royal Mail in the future.

This is very far from a token gesture, as some have claimed. It is nothing less that the largest employee share scheme of any major privatisation.

PENSIONS

The employees of Royal Mail will also be concerned about their pensions. They have good reason to be concerned. Royal Mail’s pension deficit is huge and growing and extremely volatile. Put simply, it’s not sustainable. Even the recent agreement between the Royal Mail Pension Plan trustees and the company is fragile. It requires that Royal Mail pay off its deficit over 38 years. That’s at least twice as long as any other UK company’s repayment plan. And The Pensions Regulator has already said that it has substantial concerns about this agreement.

The pension deficit threatens the very existence of the company. It is draining cash away from Royal Mail’s modernisation, and prevents it from undertaking the reforms it needs to survive. That is why the Government has to take action. As part of the sale, this Bill will allow Government to take on responsibility for the pension deficit. Not only will we address the deficit but we will also reduce the size of the Royal Mail pension plan to a more manageable level for the business going forward. The liabilities in the Royal Mail are over fifty times annual profits. By comparison the liabilities of the average FTSE 100 company are closer to one times profits. We intend to reduce the plan to about one tenth of its size today. We will do this by creating a new public sector pension scheme which will assume responsibility for paying out the past pension benefits of Royal Mail employees. In effect all members of the Royal Mail Pension Plan will have their past service moved to a new Government scheme like that of the NHS or teachers. It is the same solution to Royal Mail’s pension problems proposed by the Opposition in their 2009 Bill.

I know that honourable members will be concerned about the detail of the proposed pension arrangements and we will be providing a note to Parliament to explain the practical effect of these very complex changes.

But Mr. Speaker, I would like to reassure the House on two points today. Firstly, let me be clear that this is by far the best outcome for the employees of Royal Mail. The action we are taking in the Bill will ensure that all the benefits that employees have earned will be safeguarded. The benefits which will become the responsibility of Government will be protected on the face of the Bill. And all members of the Royal Mail Pension Plan will benefit from this support – Post Office and Royal Mail employees alike.

As a bottom line, the Bill places an obligation on Government to ensure that our action leaves members in no worse position than they were before. That means that the amount of benefits they receive will be as least as good as if the Government had not acted.

There will also be a restriction on Government’s ability to make any changes to the new public scheme in future which would adversely impact members. The Government intends to use this restriction to reflect as closely as possible the current protection members of the Royal Mail Pension Plan are afforded under Section 67 of the 1995 Pensions Act.

Secondly, this is not a cunning plan to massage the Governments accounts. The Royal Mail Pension Plan has a deficit of £8 billion. This is the cost to Government of implementing this solution on behalf of the company and its employees.

Let me be clear: the government is taking on liabilities, which are much bigger than the assets. I have seen reports in recent weeks that the Government will be selling off the Royal Mail Pension Plan’s £24 billion of assets. It is true that the surplus assets above the level needed to leave the ongoing Royal Mail Pension Plan fully funded will be transferred to Government. And it is true these transferred assets will be sold. This is because it makes no sense for Government to sit on a massive investment portfolio. I, for one, do not wish to see Central Government taking a huge investment risk with taxpayers’ money.

So yes, we will sell the portfolio of assets which will transfer across to Government. And yes this is likely to involve over £20 billion of asset sales over time. But the important point is that we will also be making payments to members of the Royal Mail Pension Plan for at least the next fifty years.

The Government’s support to the Royal Mail Pension Plan is subject to State-Aid approval by the European Commission. The House can rest assured that we will be going to Brussels to make this case in the strongest possible terms.

Let there be no doubt – this is a good deal for the employees of Royal Mail. In all important respects, it is exactly the same deal as for my predecessor’s Bill. But coupled with the legal requirement for employee shares, it is a much better deal for employees. It is a solution on which I hope that all sides of the House can agree.

REGULATION

Finally, Mr. Speaker, I would like to turn to the reform of the regulatory regime. At the heart of this Bill, just as the last Bill, is protection of the universal postal service.

Mr. Speaker, this Bill will maintain the universal postal service at its current level. That means six days a week delivery and collection at uniform, affordable prices. I would like to reassure the House that I have no intention of downgrading this service.

I know that some Members in this House have been concerned about their constituents receiving a reduced service. I share that concern. I have therefore ensured that the Bill contains new and stronger protections around the service than is currently the case. Stronger protections too than were in the Bill put forward by my predecessor.

Members may not be aware, but the Government already has the power to reduce the minimum requirements of the universal postal service without even requiring a debate in Parliament. Through the European Communities Act 1972, it can reduce them down to the minimum requirements of the European Postal Directive. That means five days a week and no requirement for uniform pricing.

I do not think that this is an acceptable situation. The Bill therefore puts in place three new safeguards. Firstly, the Bill ensures that no proposal to reduce the minimum requirements of the universal postal service can be proposed until the new regulator, Ofcom, has conducted a review of user needs. Secondly, any proposal to reduce the requirements of the universal postal service must be subject to a majority vote in both Houses. Thirdly, any reduction in the minimum requirements cannot change the uniform nature of the service. The Bill states that the service and the price must be the same across the whole of the UK. I hope members on all sides of the House will support these new protections for the universal postal service.

We will also be taking other measures to secure the universal postal service. The greatest threat to the universal postal service comes from the decline in mail volumes and the rise of email and the internet. It therefore makes sense for the postal sector to be regulated alongside the broader communications market. For that reason, this Bill will transfer responsibility for the regulation of the postal services sector from Postcomm to Ofcom. Ofcom has a deep understanding of the wider communications markets, and will be well placed to take decisions as regulator of postal services. The Bill will also give Ofcom a primary duty to exercise its function as regulator of postal services in a way which it considers will secure the universal postal service. And it will need to consider the financial viability and efficiency of the universal service in taking its decisions.

We want to ensure that the new regulatory framework is proportionate to the needs of the market. We want to allow for rapid deregulation where there is competition. All mail providers need to be able to operate in a fair and effective market as soon as possible.

As an ultimate protection for the universal service, the Bill does include provisions for special arrangements should a universal service provider be at risk of entering into insolvency proceedings. The arrangements would allow the appointment of a postal administrator whose objective would be to ensure that the universal service is maintained. We do not expect ever to have to use these provisions, but they provide an additional safeguard for the universal service. These measures mirror those that have been taken in the energy and water sectors.

CONCLUSION

Mr. Speaker, previous attempts at legislation on Royal Mail have not had a great history of success. There may be opposition to this Bill both inside this House and elsewhere though I think, after 20 years of false starts, that there is now a willingness to do what needs to be done.

Mr. Speaker, there is no easy way out. The problems that Royal Mail faces will not go away. And there will be no winners if we fail to act. Royal Mail’s employees will face continued uncertainty over their pensions and their jobs; customers will face a declining service; and taxpayers will continue to bear all the risk. Ultimately, Richard Hooper is clear that, without this action, Royal Mail will fail.

Royal Mail needs this Bill. The company says so. Richard Hooper says so. The previous Government said so. I say so. I therefore commend this Bill to the House.

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