CWU BRIEFING ON POSTAL SERVICES BILL


KEY POINTS


INTRODUCTION

The Postal Services Bill had its First Reading on 27 January 2000 and was published on 28 January 2000. It will have its Second Reading on 8 February 2000. The Government hopes to commence the Committee Stage before the short recess.


OVERVIEW

The Postal Services Bill gives legislative effect to the 'balanced package' announced in the Government's White Paper of 8 July 1999 which in turn was the outcome of a two year Government review of the future of the Post Office.

Our fundamental objectives have been to achieve for the Post Office new commercial freedoms balanced by new regulatory disciplines in the context of full public ownership. Essentially these objectives have now been achieved and therefore the package as a whole is welcome to us.

The new commercial freedoms are significant and we particularly welcome the replacement of the onerous External Financing Limit (EFL) regime by a fairer dividend system, the ability to form joint ventures and make acquisitions, and the greater opportunity to borrow capital. However, we have some reservations about the new borrowing arrangements: the annual borrowing limit of £75 million without approval is low compared to the Post Office's revenue base; it remains to be seen how effectively the so-called 'fast track' arrangements work in relation to cases costing more than £75 million; and we see no reason why borrowing should be confined to the National Loans Fund and could not come from commercial markets. Also, it is not clear how much more flexibility there will be on pay matters if any changes have to be "within the necessary context of public sector pay policy".

The new regulatory disciplines are appropriate in the circumstances and we ourselves recommended the strengthening of the Post Office Users' National Council, the establishment of an independent regulator, and the introduction of a price cap on the monopoly activities of Royal Mail. However, we were deeply concerned about the proposal to reduce the letter monopoly, not to 350 grams as required by the European Postal Services Directive but, to 150 grams or 50 p. We saw this dramatic move in relation to the Post Office's loss of interest on previous EFL surpluses and the increased costs of the revised Horizon project, and had a real worry about whether the Post Office would be a net financial beneficiary from the package of changes. We welcome the abandonment of the 150 gram proposal and the reference of the monopoly to the regulator.

While the new balance of commercial freedoms and regulatory disciplines will be in the context of full public ownership as we wished, the model for this ownership – plc status - is not the one which we preferred and advocated. We wished the Post Office to be converted into an independent publicly-owned corporation (IPOC) and we remain convinced that an IPOC could delivery all the advantages of plc status if there was the political will. This has been confirmed by independent research which we have commissioned from the consultancy London Economics and the 'think tank' the Institute for Public Policy Research.

However, we found some encouraging remarks on Post Office Counters in both the White Paper and Stephen Byers' statement to Parliament. The White Paper talks of criteria for access to the network and of changes to the public consultation process on conversions and the Secretary of State said: "Where appropriate, new Crown Offices may be opened". All these points are most welcome.

In analysing the package in more detail, there are three complementary ways of looking at the document :


THE "BALANCED" PACKAGE

The package grants the Post Office a significant number of new commercial freedoms:

As a counterweight to these new commercial freedoms, there will be a set of new regulatory disciplines:

The Government believes that these commercial freedoms and regulatory disciplines represent a "balanced package". Whether other parties will see it that way will obviously depend on their position. The CWU believes that many of the commercial freedoms are somewhat circumscribed, while much of the regulatory regime – especially any proposed reduction in the monopoly – would represent a heavy burden on an organisation which has to maintain a universal service at a uniform tariff. Therefore, while much of the package is to be welcomed, we reserve judgement and await experience before accepting it as genuinely "balanced".


THE RELATIONSHIPS BETWEEN THE ACTORS

This "balanced package" will involve a new set of relationships between the various actors.

As regards the relationship between the Post Office and Government:

As regards the relationship between the Post Office and the regulator:

As regards the relationship between the Post Office and customers:


FINANCIAL CHECKLIST

In his statement to the House of Commons, Stephen Byers asserted: "Taken together, our proposals for greater commercial freedom will bring an extra £600 million into the Post Office over the next three years". He repeated this figure at his Press Conference on publication of the Bill. The figure needs some explanation and needs to be set against extra financial burdens.

It seems that the £600 million figure has two elements :

  1. £125 million a year reduction in the negative EFL – In fact, the levels of EFL applied in recent years would have been unsustainable in any event; the previous targets were only met by an unwanted increase in the price of stamps; and the money now left to the Post Office is vitally necessary to overcome years of under-investment.

  2. £75 million a year borrowing – In fact, this will not be money available to improve Post Office services, but loans to fund acquisitions and of course such loans will have to be repaid with interest.

To set against this extra money, there are substantial financial drains on the Post Office's resources :

  1. The revised Horizon project – the automation of Counters' offices – is likely to cost the Post Office some £100 million a year extra.

  2. By 2002, the Post Office will lose the interest on accumulated EFL surpluses, estimated to be £107 million in 1998/99.

  3. If there was a reduction in the monopoly to 50p (and 150 grams), it is estimated by the Post Office that this would mean a reduction of up to £100 million in profits.

  4. The current 'holiday' in respect of the Post Office Staff Superannuation Scheme (POSSS) is unlikely to continue which will require future payments by the Post Office into the scheme.

In all the circumstances, we believe that the net financial impact of the Government's proposals are not as advantageous to the Post Office as so far reported.

THE KEY PROVISION: SHARE SALE

For the unions, the most problematic provision in the Bill is Clause 56 which enables a partial share sale in Post Office plc in order to further a joint venture or partnership.

The clause provides for five conditions before there is a share disposal. Essentially these conditions can be summarized as follows:

The procedure for such a disposal of shares will be approval by both Houses of Parliament of a relevant resolution which will set out:

Following much consideration by Ministers and officials, the Bill places no limit on the volume of shares that may be sold. The current thinking of the Government is that the specification of any particular figure would unnecessarily limit freedom of action and might well be interpreted as a target for disposal rather than a limit on disposal.

However, the consequences of not specifying a figure are as follows:

  1. In theory, any amount of Post Office plc could be the subject of a future disposal. The political reality is that probably no more than 49.9% could be sold without the validity of the Act being called into question. However, this is precisely the option that we have campaigned so hard and so successfully to defeat.

  2. Since, in theory the Bill permits the sale of a majority of the shares in Post Office plc, the Bill cannot be drafted on the assumption that the Post Office will always be in public ownership and therefore, at various points in the Bill, it refers to "..when the Post Office company has ceased to be controlled by the Crown".


THE KEY PROVISION: AN ALTERNATIVE APPROACH

An alternative approach would be to have the relevant clause redrafted to specify a maximum figure – say 10% - that could be sold.

The advantages of this alternative approach would be that:

The disadvantage of this alternative approach would be that it would limit any joint venture sale to the figure specified in the Bill and, in particular circumstances, that proportion might not be enough to 'cement' the deal, BUT this eventuality is extremely remote and, if it arose, it would be possible to enact a short Bill raising the percentage of the shares that could be sold.

This alternative approach has been floated privately with the Post Office. Publicly the Post Office's position would be that the present formulation provides the maximum flexibility and therefore commercially it is to be preferred. However, the Post Office understands that a joint venture involving a share disposal in Post Office plc is unlikely and, if it happened, 10% of shares would probably be sufficient for the purpose. Therefore it would not want a public confrontation over any proposal to set a limit on a share disposal.


MINORITY SHARE SALE: THE POSITION OF THE POST OFFICE

At the meeting of the Trade and Industry Select Committee held on 14 July 1999, the Chair of the Committee, Martin O'Neill, asked the Post Office Chairman, Neville Bain about the possibility of "share swap arrangements". Dr Bain replied as follows:

"The third part to your question as I recall it, Chairman, is to say that happens if we go forward in a major deal itself?

"Let us just remind ourselves that the White Paper sets out very clearly the position in terms of borrowings, £75 million per annum for the smaller acquisitions, and if we have a significant case to go forward that requires additional borrowing there is a clear way forward with that as well. If it did require something that was, in your words, something akin to a share swap, it would not necessarily have to happen at the top level.

"In a normal commercial arrangement in my experience this would be most likely to be something below the Post Office plc top line and would be a joint venture of some sort at a secondary level. This would not necessarily mean at least in the first stage a share swap at all and certainly that would be a practical way forward. We would be able to do that within the confines of the White Paper.

"The only other thing that I have got to say is I guess in terms of the plc status that if we had full plc status we would have had greater flexibility of issuing shares in the case of a major acquisition but that is not included in the strategic plan and I think we have a framework that we can work with."


MINORITY SHARE SALE: PRACTICAL EXPERIENCE

Currently there is no experience anywhere in the world of a "share swap arrangement" between operators in the postal business. This is not surprising, given that so few postal operators are at present in the private sector or have plc status.

In the event that in future such an arrangement was thought desirable, it is most unlikely that Post Office plc would want to hand over a proportion of its total assets and equally unlikely that a future partner would want ownership of a proportion of the total assets. It is likely that a joint venture would be in a particular segment of the market – such as international parcels – and therefore there would be no need to bring into play the assets of the mails business and the counters network.

In the field of telecommunications, the only share swap arrangement of which we have knowledge is that between France Telecom and Deutsche Telekom. In this case, each company has given the other 5% of its shares. If the Post Office were ever to enter into a similar arrangement, 5% – 10% of shares would be sufficient for the purpose of cementing an alliance.

Staying with the telecommunications industry, we have found that much more common than share swap arrangements is the establishment of a joint venture for a particular range of services. In such cases, some of the assets of the two partners may be transferred into the new joint venture.

A good example is the current Concert joint venture between BT and AT&T. The JV provides global business services; it is jointly owned by the two parent companies; and the two companies have each transferred certain assets relating to their international operations.

In the future, Post Office plc is likely to enter into a number of ventures of this kind, but these would not require any sale or exchange of shares in the parent company.


SOME SPECIFIC RESERVATIONS

Other, more specific reservations about the Bill concern:

  1. The unlimited nature of the fines that could be imposed on Post Office plc in the event of failure to meet service standards (Clause 21).

    Although the same provision is included in the Utilities Bill and both Bills require such fines to be "reasonable", we feel that the special position of the Post Office is such that it would be unfair to subject it to the threat of open-ended fines.

  2. The absence of any specific reference to access criteria for Counters in the clause on social and environmental guidelines (Clause 32).

    We do not expect the criteria itself to be in the legislation, but we do believe that the importance of access criteria is such that there should be some specific reference in the Bill to the need for such criteria to be promulgated.


ROGER DARLINGTON
HEAD OF RESEARCH
2 FEBRUARY 2000

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