Gerry Sutcliffe MP

UK Mail Show

My thanks to Neil Jackson and his colleagues at the Triangle consultancy, and to the host sponsors of the UK Mail Show, Deutsche Post Global Mail, Royal Mail, and TNT Mail for giving us this opportunity to address the key issues facing the postal sector.

It is a sector where competition can make a real contribution to the consumer’s priorities: namely quality, and reliability of service.

But if it is to keep growing, it is above all a sector in need of innovation: and if there is a single theme I wish to address this morning, it is the importance of innovation as a key factor in the future growth of postal services.

The Postal Services market, and in particular Royal Mail, get a lot of negative press. But I was delighted that the PM asked me to take this brief on, because as you know here from first-hand experience, it plays such a vital role in both the economic and social life of the twenty first century: an exciting challenge, not a poisoned chalice.

Taking on this brief has given me and my colleagues at the DTI the ideal opportunity to reflect on where this industry stands right now.

Currently, our postal sector operates in a framework that has established Royal Mail as a Government-owned company encouraged to operate commercially in a competitive market, and capable of providing a universal service.

The Act also established an independent regulator (Postcomm) to make sure Royal Mail did just that: and also that fair competition was developed for the benefit of consumers.

And finally, it established the Consumer Council for Postal services (Postwatch) to look after customer interests and give them a voice in the debate on the future of the postal sector.

In the four years since the Act good progress has been made: and I am confident that the framework that has been established is the right one for the future.

And so the fact that we have laid the foundations for the development of an innovative postal market, responsive to customer demand, is an achievement in itself, and a testament to the combined commitment of the industry, the regulator, the watchdog and the Government.

But if we are to move on from where we are today, we need to reflect on the issues facing each key player.

First of all, the national universal service provider, Royal Mail.

This company’s pipeline for the collection, sorting, distribution, and delivery of mail is the backbone of the postal service in the UK. Other companies can, and do, feed into it, but no one else has the capacity to deliver to the nation’s 27 million addresses.

If we are to deliver our key objective of a universal service, we need an effective, efficient national operator, capable of running its mails business on a sustainable commercial basis.

What of Royal Mail itself? Just consider: the Royal Mail delivers 82 million items per day, with 166,000 employees, working in 1,400 delivery offices, and collecting from both the premises of business customers and from 115,000 post boxes. If you want to learn about logistics, this is surely the company to work for!

Two years ago Royal mail was losing well over £1million every working day. But In the last financial year (2003-04) Royal Mail made a £220 million profit from operations.

But welcome though this is, turning the company’s finances around is just the first step – and not even possibly the toughest one.

Over the past year letter mail volumes - whose revenue sustains most of the costs of the postal pipeline - rose by less than 2%. This trend is not unique to the U.K – it’s common to developed economies the world over – so it’s a fact we have to take into account.

It was this very maturity of the market sector which drove much of our thinking in Government five years ago – and much of our thinking about competition.

Competition in postal services does not mean more players fighting over the same piece of cake: but it does mean there is a stimulant to drive up the level of innovation on the supply side, and so become more responsive to customer demand.

Don’t forget - innovation is as likely to come from the creative thinking of the operators, as it is from the clearly articulated needs of the consumer.

In this respect I see some parallels between this most traditional of service industries and the leading edge of high technology: like the mobile phone, none of us realised how much we needed one until they became available in the shops. What we need today is more mobile phones in the range of postal services.

I have said we should be proud of being at the leading edge of effective market liberalisation in Europe.

Being in that position gives us a unique opportunity to consider the issues, and come up with solutions which others can adopt and adapt according to local circumstances. That means leading by example, which in my opinion is one of the best ways to lead.
But we need some ground-rules to ensure that liberalisation on a European scale is a success. Operators need to raise capital to run their businesses, and consumers have a right to fair prices and reliability.

First, we need equal access and transparency. We welcome the presence of other operators in the UK market. It’s right that they should have access, on fair terms and conditions, to Royal Mail’s pipeline.

But conversely this means that we in Government will be making the case in Europe, not only for liberalisation, but also for the equal and reciprocal access that is such a vital component of any liberalised market which works effectively.

Put at its crudest: we are letting you play in our back-yard, so let us play in yours!

But for competition to be effective, we also need a level playing field, with national regulatory regimes sharing the same broad approach to key issues: like access and price control.

This will allow different national service providers to operate on a comparable basis in their respective domestic markets.

Let’s take a moment to consider one other key player in the postal sector, the Postal Services Commission, or ‘Postcomm.’

Postcomm is key to the success of this sector because we in Government took a step back from direct involvement in Royal Mail’s day-to-day business operated by Royal Mail.

We considered it was right for the company to operate as an independent business, with Government’s role as shareholder.

It is of course a business which operates under an obligation to provide a universal service. It is also a business which, at least currently, has an effective monopoly in its market, in particular in terms of its local delivery infrastructure.

As in other parts of the utility sector where there are universal service obligations, it is consequently quite right and justified that we have a regulator to oversee the terms and conditions of that universal service obligation. That indeed is the primary responsibility of Postcomm, enshrined in the legislation.

It also has a duty to further the interests of users of postal services by promoting effective competition between postal operators where appropriate.

It is in this latter respect that Postcomm, in its four years of existence, has established a reputation amongst its peers in Europe, for being tough, determined, and innovative.

It’s not easy. It requires a delicate balancing act - making sure Royal Mail delivers the universal service on a sustainable basis – while at the same time also ensuring new service providers have fair access to a liberalised market.

This leaves Postcomm with a dilemma. It rightly controls prices to ensure that all users of postal services in the UK have access to affordable tariffs. But if price control is too robust then although it will encourage Royal Mail to lower its cost base, it may deter other companies from entering the market.

This brings me to an uncomfortable possibility, but an issue which I think we need to confront, debate, and consider how best to resolve.

If we are to introduce the competition which in the long run will bring both choice and lower prices to consumers, we may pass through a transition period where prices are in fact allowed to rise sufficiently both to attract new players into the market, and to ensure that a universal service can be provided in a market where there is a multiplicity of players.

I don’t pretend any of this is easy, neither are we in Government offering immediate solutions. But these are issues which merit careful consideration as the process of market liberalisation develops.

To whose benefit should that process accrue? The consumer of course ! So let me turn to the third key player which grew out of the Postal Services Act, namely Postwatch.

Quality of service is rightly one of Postwatch’s primary concerns, and it’s kept them busy! Royal Mail’s massive organisational changes have perhaps impacted on the company’s capacity to deliver mail on time, and to meet its quality of service targets.

But as we look forward to what we all hope is a more stable period in this respect, Postwatch will be able to evolve.

Postwatch is unique, certainly in Europe, and possibly in the world, in being the only body specifically tasked to represent the consumer interest.

It knows about what consumers want, and this ought to give us some clue as to how innovative services might be developed to stimulate the growth of the market.

Because make no mistake, innovation is the key to the future growth of the postal sector. Postwatch is well placed to explore how innovation might stimulate that growth.

It will benefit from the development of Consumer Direct, a new service the Government has launched which is designed to empower consumers with the knowledge they need to both deal direct with suppliers of goods and services, and to resolve any disputes they may have with them.

This should free Postwatch up to concentrate on the more complex issues brought to their attention by the users of postal services: and to work closely with postal service providers not in an adversarial sense, but with a shared interest in providing high quality innovative services.

That, ladies and gentlemen, brings me full circle. One of the drivers for our White Paper, which is still true today, was the need to address the issue of how best to meet the challenge of a mature sector, where volume growth has slowed.

In a word, our answer then was: innovation. The answer today is the same.

What we need to ensure is the development of an environment where postal service providers operate within a regulatory framework which encourages the growth of competition and innovation, and where both are responsive to the needs and aspirations of the consumers without whom the market would not exist.

This is no easy task, but it is of crucial importance for the future of the sector as a whole. For that reason it is a goal worth fighting for. Ladies and gentlemen, thank you.