Appendix: Government Report
The Government welcomes the Committee's report on its inquiry to identify the importance of postal services throughout Scotland and how these might change in the future. It is helpful to have the analysis, conclusions and recommendations which the Committee has drawn from its inquiry and the evidence submitted to it.
Responses to Conclusions and Recommendations
We have set out below our responses to the Committee's conclusions and recommendations under the headings adopted by the Report. We have listed these in the order in which they appear in the Report with our response set out below each of them.
Conclusions and recommendations
The Comprehensive Spending Review and Post Office Funding
1. We welcome the coalition Government's commitment to the continued provision of postal services and the future of the Post Office network as signified in the Postal Services Bill 2010-11 and in the Comprehensive Spending Review 2010. We particularly welcome the financial commitment to the Post Office of £1.34 billion over the four years of the Comprehensive Spending Review period, and the fact that this package of funding is designed to secure the network of Post Offices across the UK at its current level (11,500). Nevertheless, the network in Scotland is in a precarious position financially, with rural branches typically being less well remunerated and less economically viable - thereby many Post Offices in Scotland remain vulnerable to closure and customers face the threat of a demise in the provision of postal services. We recommend that the Government take note of the position of large parts of the network in Scotland, as highlighted in this Report, and take the appropriate measures required to secure a viable and sustainable network, equipped to deliver a range of postal services in Scotland. (Paragraph 20)
The Government welcomes the Committee's recognition of its commitment to the continued provision of postal services throughout the United Kingdom and to the future of its national post office network. In its policy statement 'Securing the Post Office Network in the Digital Age' published in November 2010, the Government set out a clear strategy for the future delivery of postal services which committed £1.34 billion of funding to 2015 to support modernisation of the network and to sustain it at around its current size. This includes some 1,400 post offices in Scotland, of which over 900 serve rural communities across the country.
Universal Service Obligation
2. The Universal Service Obligation (USO) is the cornerstone of mail and postal services in the UK. The six day a week delivery and collection service, and the universal tariff are fundamental to the future of postal services and the Post Office network in Scotland, and consequently, to ensuring the financial sustainability and viability of many remote and rural communities throughout Scotland. We therefore strongly resist any potential diminution of the USO. (Paragraph 40)
The Government shares the Committee's view of the importance of the Universal Service Obligation (USO) and we have therefore placed at the heart of our legislation the requirement for six days per week collection and delivery of letters at uniform and affordable prices - the same requirement as now. The Bill also puts in place new safeguards against downgrade of the universal service: first that any changes can only be made after Ofcom has conducted a review of user needs; secondly that any changes are approved by a vote in both Houses of Parliament at Westminster; and thirdly that prices must remain uniform and there cannot be different minimum requirements in different parts of the country.
3. We were particularly concerned with two clauses in the Bill. First, clause 32 (2) (b), which allows Ofcom to waive the USO if there are "geographical or other" conditions which it deemed to be "exceptional". Given its unique geography and the financial position of much of the existing network, we fear this has the potential to allow the regulator to categorise large areas of Scotland as "exceptional". We note that this wording is the same as the current legislation and welcome the Minister's assurances and his explanation that this, and other similar clauses in the Bill, do not mean that the USO is no longer applicable to parts of Scotland—either on the grounds of geography or economics. We recommend that this clarification be included on the face of the Bill and that this clause should only ever be applied to a very small number of addresses, similar in order to the current number. (Paragraph 41)
Clause 32(2) (b) gives Ofcom the power to waive the Clause 30 requirements for delivery and collection "in such geographical conditions or other circumstances as Ofcom consider to be exceptional". This wording is precisely the same as in Section 4(1)(a) of the Postal Services Act 2000. It stems from the Postal Services Directive, where Article 3 states "Member States shall take steps to ensure that the universal service is guaranteed not less than five working days a week, save in circumstances or geographical conditions deemed exceptional..."
It is important for the universal service and the employees of the universal service provider that Ofcom has this power. The universal service could be put under disproportionate strain if the universal service provider was required to, for example, charter boats to deliver letters every day to addresses on remote islands only visited by boat once a week. The employees of the universal service provider could be put at risk if they were required to deliver mail to addresses posing health and safety risks, including, for instance, dangerous dogs.
The Government reiterates the assurances given by the Minister for Postal Affairs in his oral evidence to the Committee and agrees that the number of exceptions should be kept to a minimum - but this system is only workable if we give Ofcom, as the expert independent regulator, the necessary discretion. The Government is not aware of any concerns with the way Postcomm have set up and run the existing system for exceptions and Ofcom have indicated that they have every intention of continuing with the Postcomm system.
4. Clause 34 allows Ofcom to designate more than one universal service provider. If this clause were used to allow the cherry picking of the most profitable parts of the network, this would impact the USO and be detrimental for Scotland. We welcome the Minister's assurance that this is not the Government's intention. We welcome the safeguards in the Bill which protect the USO, and which provide for more than one USO provider only in the most extreme circumstances, e.g. the bankruptcy of the Postal Services in Scotland of the existing USO provider. We recommend that the Government provide further clarity to that effect during the passage of the Bill. (Paragraph 42)
The Government reiterates the assurances given by the Minister for Postal Affairs in his oral evidence to the Committee that it is only under two extreme scenarios that there would be more than one universal service provider. The first is where the Bill ensures that if providing the universal service is found to represent an unfair financial burden on Royal Mail, then it would allow for more than one universal service provider to be designated if it was decided by the Secretary of State that procuring part of the universal service was the optimal way of addressing the unfair burden. The second scenario in which there could be more than one universal service provider is a special administration scenario - in which case Royal Mail would already be in extreme difficulties. In both scenarios, the viability of the universal service would be in danger and, as such, the Bill provides additional protection to ensure the universal service itself. We do not believe any further clarity is required in the Bill on this issue and that Clause 34(2), 34(3) and 34(4) are sufficiently explicit.
5. We note the importance of Ofcom in providing safeguards to the USO, but are concerned about the Bill's requirement for Ofcom to review the minimum requirements for the USO within 18 months. We fear this may be seen as an opportunity to decrease the requirements of the USO. While we appreciate the need to review the service, as customer needs may change, we recommend that further safeguards be put in place to guarantee that the needs of customers and small businesses who live and work in remote, rural or island communities, are met. Any change to the USO would have a disproportionate impact on these communities. We recommend that Ofcom not merely consult with stakeholders, but to undertake assessments of the social and economic impact of proposed changes before making recommendations. We therefore recommend that the Bill include a requirement for Ofcom to consult with representatives of key groups in these communities, including residential, small business and vulnerable users, before they make any recommendations to change the existing USO. (Paragraph 46)
It is important to be clear that the review Ofcom must undertake within 18 months of the Bill coming into force is not a review of the minimum requirements. The minimum requirements are clearly set in statute in Clause 30 and we have increased the safeguards against any changes to those through the inclusion of Clause 33.
The '18 month review' is a market assessment and will look at the needs of users to assess the more detailed products and services that Royal Mail must provide. At present these services are specified in Royal Mail's licence from Postcomm. As we are moving to a general authorisation regime, in future this detail will be set out in a 'Universal Postal Services Order' made by Ofcom. The review will inform any future universal postal service orders.
The Postal Services Bill must also be read in conjunction with the Communications Act 2003. Section 3(4) of that Act makes clear that in all they do (which will include postal matters once the Bill is passed), Ofcom must have regard to 'the needs of persons with disabilities, of the elderly and of those on low incomes' as well as 'the different interests of persons in the different parts of the United Kingdom, of the different ethnic communities within the United Kingdom and of persons living in rural and urban areas'. In this context 'persons' means businesses as well as individuals.
6. Private firms are making profit off the work of Royal Mail and the Post Office network in parts of the country that are unprofitable. If Royal Mail is going to provide this service at a loss in the unprofitable and difficult parts of Scotland, they should be able to charge the private companies a higher price. Royal Mail need to be able to negotiate sustainable terms for last mile delivery of private mail and parcels. (Paragraph 48)
The Bill is clear that Ofcom's primary duty is to secure the provision of the universal service. Furthermore, it requires Ofcom to have regard to the financial sustainability and efficiency of the provision of the universal service when performing their primary duty. Clause 37 sets a framework for the regulation of access to Royal Mail's network. And Clause 38 will enable the regulator to get better information about the costs of different aspects of Royal Mail's operation, ensuring that any access prices are evidence-based and do not create unfair subsidies. Government has been clear - competition is beneficial but it cannot be at the expense of the universal postal service.
Drawing on the framework set out in the Bill, Postcomm have recently published a consultation into the current access regime specifically to consider some of the basic operational aspects of access to Royal Mail's network.
Separation of Royal Mail and the Post Office
7. The separation of Royal Mail Group and Post Office Limited, and the future ownership of both organisations has been the subject of much political debate. Regardless of the ownership of Royal Mail, we see considerable advantages to a long, stable and robust relationship between RMG and POL, not least to facilitate proper business and financial planning. We recognise that the Inter Business Agreement (IBA) is a commercial agreement and we welcome the Minister's commitment not to put anything in the way of such an agreement. However, we recommend the Government take a more proactive approach to facilitating a long and robust IBA, through removing any obstacles: practical, legal or otherwise that may exist. Ideally, a ten year agreement should be reached prior to any sale of Royal Mail. We understand that this may affect the marketability of Royal Mail, but it is essential to the sustainability of Postal Services in Scotland. It is in everyone's interest, not least that of the consumers, that such an agreement is reached as soon as possible. (Paragraph 56)
Royal Mail and the Post Office already have a long term commercial contract to provide services to one another. And there is an overwhelming commercial imperative for Royal Mail and Post Office Ltd to continue this in the future. The Chief Executive of Royal Mail has said that it would be "unthinkable" that there won't always be a very strong relationship between the Post Office and Royal Mail. The Chairman of Royal Mail has said that before separation Royal Mail and Post Office would agree the longest legally permissible contract. The Minister for Postal Affairs committed during the Commons Report stage of the Postal Services Bill that the Government would ensure that Royal Mail honoured that commitment to Parliament.
The Government is opposed to legislation requiring a 10 year exclusive arrangement between Royal Mail and POL as it would face a significant risk of legal challenge as being incompatible with competition law. Guaranteeing a revenue stream for the Post Office would also face a risk of a successful state aid challenge. Article 101 of the Treaty on the Functioning of the European Union contains rules prohibiting anti-competitive agreements between undertakings. Article 4(3) of the Treaty on the European Union obliges member states not to jeopardise the attainments of the objectives of the Treaties. The effect of those provisions, together with article 102 of the Treaty on the Functioning of the European Union, is that member states cannot introduce measures that would render the competition rules ineffective. There is a wide range of case law on such issues.
It is important to note that a successful state aid or competition law challenge to the Post Office's commercial relationship with Royal Mail which struck down the contract would present a serious threat to the post office network.
The Network in Scotland
8. We welcome the Government's 'access criteria' which guarantee the geographic dispersal of the Post Office network, which are crucial in maintaining the network across the whole of Scotland. However, we are concerned that the Bill neither makes provision for the number of Post Offices nor sets out access criteria. This is of particular concern given that the Government could meet its current access criteria with a network of 7,500, but has stated that it is committed to preserving a network of 11,500 branches. We recommend that the Government give assurances to this effect during the passage of the Bill. (Paragraph 68)
The Government does not see the need for provisions in the Bill covering the number of post offices or access criteria. There is already a legally binding commitment to a minimum number of post offices as part of the recent £1.34 billion funding package for the Post Office. We believe that this Government funding commitment and our plans for the future of the Post Office are the best ways of ensuring that it will continue to provide a network of at least 11,500 branches and to meet the Access Criteria. The UK's post office access criteria are the strongest we know of in Europe taking into account our safeguards for urban, rural and urban deprived areas. No other country has specific provision for urban deprived areas.
Direct comparisons with other countries are difficult as some countries have criteria based on minimum distances, and others on population size. In Germany for example the requirement is for a post office every 80km2 - whereas in the UK 95% of the rural population must be within 3 miles of the nearest post office. In Australia, the requirement is for there to be a minimum of 4,000 postal outlets, including 2,500 in rural and remote areas. Although these requirements may be in legislation, they appear to offer less accessibility to post offices than in the UK.
9. The distinction between a closure programme and a readiness to let unviable post offices cease to trade may be a genuine difference of policy but it may result in similar or worse effects. After all, the closure programmes were undertaken with the declared intention of supporting the viability of the remaining offices. If the policy is instead to let offices close in an unstructured way, it is not necessarily any sort of improvement, nor does it offer much hope of sustaining the post office network in Scotland. A policy of "no closure programme" is only a cause for optimism if it is backed by a policy of support for the remaining network. (Paragraph 69)
As previously noted in response to recommendation 8 above, as part of the recent £1.34 billion funding package Post Office Ltd is required to provide a network of at least 11,500 branches. This, taken together with the requirement to comply with the Government's access criteria, constitutes a strong safeguard against an unstructured decline in the network. The access criteria for rural and remote and sparsely populated areas provide particular protection for the network across rural Scotland.
The aim of the Government's strategy and associated funding package is to transform the underlying economics of the post office network and enable the network to become financially stable over time.
10. We note the high number of Outreach services in Scotland. While this is better than no service at all, it is not a long term solution. We are deeply concerned about the reliability and quality of the service currently being provided by Outreach services. Long waiting times, unreliable arrival times and failures in the technology severely compromise the value of such a service. Significant improvements are required to makes Outreach services sufficiently robust in order to provide a reliable and satisfactory service. We recommend that the Government impress upon the Post Office Limited and on the regulator the need to ensure that such improvements are delivered as a matter of urgency. (Paragraph 75)
We note the Committee's comments about Outreach services in Scotland. Whilst Post Office Ltd recognises that individual sites have had some technical issues in the past, most of these have been ironed out. We understand that a recent analysis of availability of technical equipment at outreach sites showed well over 99% availability. If there are problems with equipment Post Office Ltd has arrangements in place for urgent engineer call out to resolve the issue.
11. We are also concerned about reports that the drop in the number of services provided by Outreach services led to a drop in the number of Post Office customers, as consumers were forced to take their business elsewhere, for example, to a bank or travel agent. We fear that this will become a vicious circle, whereby the reduction in the Post Office's footfall further threatens the financial viability of the service. This could lead to further Post Office closures, thereby increasing the need for Outreach services. If this cycle continues, the short term solution provided by Outreach services could, in the longer term, lead to a downgrading of the network and the level of service provision across Scotland. (Paragraph 76)
The Government notes the Committee's concern but would reiterate, as set out in the supplementary written evidence submitted by the Minister for Postal Affairs, that Outreach outlets offer an extensive range of services. In the majority of cases these are the same as those offered by the branch it replaced and in a significant number, over 300 nationally, the introduction of an Outreach service brought in services which had not been available at the post office it replaced.
It is also worth noting that Consumer Focus undertook extensive research into Post Office outreach services and published their report in September 2010. Their key finding was that 'It appears that the majority of consumers living in areas with Outreaches have adapted well to the new arrangements. While most consumers would have preferred not to lose their previous fixed counter branch, they were pleased that the community has retained access to post office services, and on balance report that Outreach services generally met their needs'.
12. We welcome the Minister's assertion that Outreach services are not part of the coalition Government's overall strategy for the network. However, we fear that 'Post Office Local' or 'Essentials', which is the Governments preferred option, may also represent a diminution in service, as while they meet 95% of customer requirements, they provide only 85% of Post Office services. While we welcome the potential for extended opening hours and for cost savings to be made, we fear that the trade off — a slimmed down and limited service—could lead to a significant downgrading of the network and the service to consumers. This has particularly severe consequences in remote areas, where travelling times and distances to a main Post Office may be prohibitively difficult and expensive. We recommend that in expanding the pilot or in rolling out Post Office local—the Government take the necessary steps to provide a full range of services at all branches. (Paragraph 81)
The Government believes that the Post Office Local model has the potential to play an important role in the future development and maintenance of the Post Office network. Independent research for Post Office Ltd in 2010 involving over 1000 customers at the pilot sites showed 94% were extremely or very satisfied with the overall experience at the Post Office Local site. As the Committee points out the greatly extended opening hours are attractive to customers looking for convenience amidst busy lifestyles. The product range of these pilot sites covers the vast majority of the Post Office's regularly used transactions. The customer research showed 82%, of customers being completely or very satisfied with the range of post office services offered with a further 10% fairly satisfied. In the research, the additional product that was most called for was the provision of Motor Vehicle Licences (which is currently only available at a minority of Post Offices).
It is recognised that a very small number of more complex or lengthy transactions may not be best suited for the Post Office Local format. However, within its overall network Post Office Ltd would always ensure that there is reasonable distribution throughout the UK of all the products it transacts (as is the case for products that are not, for a variety of reasons, transacted in all branches at present - such as Motor Vehicle Licences)
Overall, as Post Office Ltd continues its pilot processes for Post Office Local it will be looking to see whether other services can be added to the current extensive Post Office Local product suite.
Post Office and Postal Services
13. Small businesses are the life blood of small, remote communities in Scotland, both on the mainland and in the islands. The Post Office network and the provision of postal services are vital in enabling small businesses to exist and operate from these locations, and therefore also crucial for the viability and sustainability of the communities of which they are part. The Government should ensure that the Bill does not jeopardise the USO that customers pay the same price regardless of where they are sending the letter to and from within the UK, and that Royal Mail collect and deliver once every working day to every address. (Paragraph 86)
The Government fully recognises the importance of post offices and postal services in small remote communities and for small businesses based in such areas in particular. As noted in response to recommendation 2, the Postal Services Bill reflects the Government's commitment to the present USO provision and includes additional safeguards to protect it.
14. Online retailing is an expanding market which should provide a major source of revenue. Evidence suggests the customer would like to choose the method of delivery according to the standard of service as well as price. In particular this includes the time of delivery and the ease of pick up from a depot if the parcel is undelivered. The Government and the regulator should do all they can to encourage retailers to offer the online shopper the choice of which company delivers their parcel and to make it clear on their website that Royal Mail is an option. (Paragraph 91)
It is a commercial decision for retailers whether they wish to agree arrangements with delivery companies and the nature of those agreements. There is no role for Government in such matters and the regulator would only be involved if there were competition issues. Consumers who are not content with a delivery method should take up the issue with the retailer in question or might want to consider alternative suppliers.
15. Transparency of price is crucial for the parcels market in Scotland. Online retailers should make it clear if a surcharge will be added to remote areas at an early stage in the purchase transaction, and provide a comparison with the service offered by Royal Mail. (Paragraph 92)
The carrier and courier providers that are usually used to deliver parcels purchased online are not regulated as the sector is a highly competitive market. In such a commercial and highly competitive environment, it is for private carriers and couriers to review their own pricing structures in response to competitive pressures and market demands.
Customers will want to consider carefully delivery policies when making orders and where an extra charge is being applied they should take the matter up direct with the respective company, especially in those cases where they feel an extra charge is being wrongly applied or hidden. This should be done preferably before making an order, but where customers have only become aware of the extra charge after the order has been delivered, they should formally register their concern direct with the respective company. In cases where there is evidence that an operator is behaving in an anti-competitive manner, customers should be advised to raise the matter with the Office of Fair Trading.
16. We welcome the coalition Government's plans to use the Post Office network as a "genuine front office for government". This is an example of a step change of the type that is required to guarantee the sustainability and viability of the network. However, we are concerned that there appears to be a lack of joined up thinking across Government in this respect. In the past it has often been too tempting for a Government Department to save money from its budget by awarding a contract to a company which has submitted a lower bid than the Post Office, but which cannot deliver as high a quality of service throughout rural Scotland as the Post Office. In order for the Government's stated policy to be delivered effectively, the key service delivery departments in Whitehall and other public bodies need to be committed to the policy—and to implement it through their tendering, procurement and contracting processes. (Paragraph 101)
As noted by the Committee, this Government is strongly supportive of the Post Office building up its role as a 'front office for government', helped by the modernisation of the network that our injection of £1.34bn will fund.
The Post Office is working hard to develop new services that will be attractive to both central and local government, and Ministers from the Department for Business, Innovation and Skills and Cabinet Office have been working with government departments to identify new opportunities where the Post Office will be able to compete for future government business. However, services must be awarded in line with EU procurement rules as well as demonstrating value for money for taxpayers' funds. Departmental procurement processes should consider quality, as well as cost.
17. The provision of reliable and long term contracts between the Government and Post Office Limited is essential for the long term planning required to secure the network, and this policy needs to take immediate effect. If tangible benefits are not delivered soon, the risk of closure of many Scottish Post Offices remains. We were surprised to hear that successful pilots already undertaken had not been rolled out in a timely and effective way across the network, if at all. We recommend that the Government take urgent action to remedy this. (Paragraph 102)
The Government has committed to a viable future for the Post Office network, and ensuring that the Post Office is well placed to compete for new revenue streams will be an important part of this. Post Office Limited is working hard to develop its offer to both national and local Government to meet its ambition to become a 'front office for government'. We absolutely support the Post Office in this, and will encourage the wider roll-out of successful pilots developed through this initiative.
18. We also share the concerns of our witnesses that contracts for services which could be given to the Post Office are being awarded elsewhere. We understand the Government's commitment to the modernisation of the Post Office, and its desire to improve the competitiveness of the Post Office through this process. However, we recommend a series of interim measures be put in place to enable the immediate increase in the number of government services provided through the network. These include the provision and timely rollout of essential technology and the removal of any financial, legal or other obstacles which may prevent the network from providing a service. (Paragraph 103)
The £1.34bn of funding which Government has recently committed will enable Post Office Limited to invest in its network, including in technology. This will place the network on a more sustainable footing and improve the customer experience, helping the Post Office to compete for new revenue streams from Government services. The Post Office is working with both central and local government to develop the role it will play in the provision of services in the future, and is making good progress. For example, the Department of Work and Pensions has outlined exciting plans for working with the Post Office in the future, including three pilots and opportunities to support the Universal Credit reforms. However, Government is not able to simply award Post Office new contracts, which must be awarded in line with EU procurement rules and take into account value for money for taxpayers' funds.
19. We note that many government services in Scotland are provided by the Scottish Executive and local government. We urge the UK Government to work closely with all tiers of government in order both to facilitate, and remove any practical obstacles to, the provision of devolved and local government services through the Post Office network. (Paragraph 104)
The Post Office is working with both local and national Government to develop the services that it offers and the role it will play in the future delivery of services - including as they move increasingly online. This Government is committed to supporting this, and the Post Office is at the centre of discussions on how government and local authorities can deliver services in new and more efficient ways. We welcome the Committee's support and will continue to strongly encourage this engagement as suggested by the Committee.
20. We support links between the Post Office and the Credit Unions and would urge the Post Office to be more proactive in co-operating with the Credit Unions and other financial service providers to increase throughput. (Paragraph 107)
The Government shares the Committee's views on the importance of cooperation between Post Office and Credit Unions, and were clear in our November 2010 policy statement 'Securing the Post Office Network in the Digital Age' that we support a stronger link up between the two. Reflecting this, Government recently announced a significant package of support for the Credit Union sector. This includes funding set aside for a shared credit union banking platform, subject to a feasibility study, which would open up opportunities for the Post Office to provide Credit Unions services - such as banking transactions, bill payments and low cost credit services - to many more people.
Aside from this opportunity, Post Office Limited continues to make progress. For example, a service has recently been introduced in Glasgow and South Lanarkshire that allows people to collect their credit union loans at a local post office branch using Post Office's 'Payout' technology. Post Office Limited plans to build on this and is already in discussions with other credit unions about extending these services.
The Post Office has also recently issued guidance to sub-postmasters to clarify issues around local, individual arrangements between post offices and their local Credit Unions, thereby facilitating these individual arrangements where both parties wish to participate.
It is important to remember that this progress builds upon significant existing co-operation. For example, arrangements are already in place where Credit Unions can link up with the Post Office via the Co-operative Bank. Customers of Credit Unions who have signed up to this service can use any post office to withdraw and pay in cash and obtain a balance using a Credit Union card. Post Office Limited expects that around 170, 000 such transactions will be carried out in this way in the coming year.
Mutualisation and the future of the Post Office
21. The proposals for the mutualisation of the Post Office have appeal, because this would enable the public to have an element of ownership in the Post Office network. However, the proposals are vague at present. At the very least, the Post Office needs to be a sustainable business before any such plans could proceed. We will therefore return to a detailed consideration of this issue at a later stage. (Paragraph 115)
The Government considers that a mutually-owned Post Office could be ideally suited for the particular commercial and social functions that the Post Office network provides throughout the country. We also believe that mutualisation could help make the network more sustainable. But we fully recognise, as does the Committee, that before any changes can be made the network will need a secure financial footing, so that a mutual could be built from solid foundations. We would welcome the Committee's consideration of this issue after Co-operatives UK have presented options for mutualising the post office to Ministers in April.