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Royal Mail

Volume 747: debated on Wednesday 10 July 2013


With your Lordships’ permission, I propose to repeat a Statement made in another place by my right honourable friend the Secretary of State for Business, Innovation and Skills. The Statement is as follows.

“Today, I have laid a report in Parliament announcing that the Government have decided to proceed with a flotation of Royal Mail shares on the London Stock Exchange via an initial public offering.

A sale will initiate the final stage of the Government’s postal sector reforms. The overarching objective of these is to secure the universal postal service—the six-days-a-week service, at uniform and affordable prices to all 29 million addresses in the UK, which is vital to the UK economy.

Over four years ago, the independent review of the postal sector led by Richard Hooper concluded that the universal service was under threat. The previous Government accepted the review’s package of three main recommendations but the Bill to implement them, which would have permitted a minority sale of Royal Mail shares, was withdrawn. In 2010, Richard Hooper’s updated report confirmed his initial findings and that a package of measures was needed to secure the universal service. Through the Postal Services Act 2011, we have implemented two elements of that package by establishing Ofcom as the postal regulator and taking on Royal Mail’s historic pension deficit.

As set out in today’s report, we will now implement the third and final element of the Hooper recommendations by selling shares through an IPO in this financial year. We will retain flexibility around the size of stake to be sold, as this will be influenced by market conditions, investor demand and our objective to ensure overall value for money for the taxpayer. It is our intention to dispose of a majority stake, taking into account shares sold and those allocated to employees. The IPO will include a retail offer to enable members of the public to buy shares on the same terms as the big institutional investors.

At the time of the IPO, the Government will allocate 10% of the shares to an employee share scheme. These shares will be free to eligible employees, recognising that many might otherwise find them unaffordable, and I want to strengthen employee engagement by ensuring that employees own a real stake in the business. Employees must retain their shares for at least three years, giving longevity to the scheme. Our scheme will be the biggest employee share scheme of any major privatisation for nearly 30 years. Eligible employees will also receive priority in allocation if they purchase shares in the retail offer. I would like to reassure employees that ownership change does not trigger any change in their terms and conditions. The CWU will continue to be their recognised representative, and employees’ pensions will continue to be governed by the trustees. As part of a three-year agreement, Royal Mail is also prepared to give assurances on the continuation of a predominantly full-time workforce, a commitment to provide and enhance existing services to customers using the current workforce with no change to the current structure of the company in relation to these services, and no additional outsourcing of services

Royal Mail is now profitable and its overall financial position has improved. This is partly due to the Government’s action so far. But considerable credit is due to the management and the workforce who have implemented a modernisation plan. The challenge now is to maintain this positive momentum. In recent history, Royal Mail’s core UK mail business has swung between profit and loss. In the 12 years since 2001, it suffered losses in five of those years and over 50,000 jobs have been lost. Resting on the current level of progress is not enough.

Under public ownership, there is simply not the freedom to raise capital in the markets. A share sale will not only give Royal Mail commercial disciplines, it will also give Royal Mail future access to private capital, enabling the company to continue modernising and to take advantage of market opportunities such as the growth in online shopping, building on its success in parcels and logistics. Recent estimates indicate that this market is worth £76 billion in the UK.

There are various myths that need to be rebutted. Contrary to what is being claimed, Royal Mail, after a sale, will still be the UK’s universal service provider. This includes services to urban and rural areas and free services for the blind. Only an affirmative resolution in Parliament can change these minimum requirements. Free services for the Armed Forces are entirely independent of ownership, and Royal Mail is fully reimbursed for these services by the Ministry of Defence.

Ofcom’s primary duty is to secure the provision of the universal service. It also has duties to promote competition where that benefits consumers. However—and let me make this absolutely clear—should the two duties be in conflict, it is the universal service that takes precedence. In March, Ofcom published a statement on its approach to end-to-end competition, making it clear that should a threat to the universal service arise from such competition it has the powers to take any necessary action. While Ofcom is clearly the most appropriate body to assess and react to such threats to the universal service, the Government, as a safeguard, have retained powers to direct Ofcom with respect to certain regulatory levers such as reviewing the financial burden of the universal service and taking mitigating action to ensure that the universal service is maintained.

I confirm also that Post Office Limited will remain publicly owned, although we will continue to explore mutualisation. This Government have made a commitment that there will be no further closure programme. Royal Mail and Post Office Limited signed a 10-year commercial agreement in 2012 to ensure that they continue to be strong business partners.

The Government's decision on a sale is the practical, logical and commercial decision, that is designed to put Royal Mail's future onto a long-term sustainable basis. It is consistent with European developments, where privatised operators in Austria, Germany and Belgium have profit margins far higher than Royal Mail, and have continued to provide high-quality services.

Now the time has come for the Government to step back from Royal Mail and allow its management to focus wholeheartedly on growing the business and planning for the future. It is now time for employees to hold a stake in the company and share in its success. This Government will give Royal Mail the real commercial freedom that it has needed for a long time, and I commend this Statement to the House”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating the Statement. I should declare an interest as a former joint general secretary of the Communication Workers Union and, many moons ago, an apprentice in Royal Mail when it was called the GPO.

We opposed the Government’s privatisation of Royal Mail during the passage of the Postal Services Act 2011, and we oppose it today. Maintaining Royal Mail in public ownership gives the taxpayer an ongoing direct interest in the maintenance of universal postal services in this country; helps to safeguard Royal Mail’s vital link with the Post Office; and ensures that the taxpayer can share in the upside of modernisation and the increased profits that Royal Mail delivers. Despite that, the Government have pressed on regardless with this sale and they have failed adequately to justify why they must sell now.

On one side, there is an unusual coalition against this move: the Opposition; the Conservative-supporting Bow Group, which described this move as “poisonous”; the Royal Mail's employees, who are represented by the CWU; and the National Federation of SubPostmasters. The right honourable Michael Fallon, Member for Sevenoaks and Minister for Business and Enterprise, wrote to a constituent in 2009 saying that he, too, was opposed.

On the other side, there is the Government, which now includes the Minister of State. The Government are ignoring the huge changes that they acknowledge have taken place since the passage of the Act. Chief among them is the more than doubling of Royal Mail's profits to £403 million and the significant progress on the modernisation programme, which calls into question the assertions that there is no prospect of Royal Mail being self-financing in the future.

I noted carefully the Minister’s reference to the package that Hooper recommended; it is true that Ofcom and the pensions arrangements were part of that package. However, he did not recommend full-scale privatisation, but an injection of private capital.

We have a number of concerns. The Government are rushing to sell the business without making the case as to why the sale of shares in Royal Mail, through an initial public offering, must be carried out now; nor have they illustrated how a sale will deliver maximum value for the taxpayer. They have failed to show that the climate for an IPO now is a good one or how much capital would be injected into the Royal Mail business as a result. Instead, they are pressing ahead with a fire sale this financial year in a desperate attempt to cover the gaping hole in George Osborne’s failed economic plans.

There are further points that the Government have failed to address. First, there is the timing of the sale. No evidence has been provided to demonstrate that the Government will secure best value for money for the taxpayer from a sale at this point in the Parliament. Additional years of profitability may well increase the sale value in future years.

Secondly, there are unresolved competition issues. Legitimate questions regarding the fairness of competition posed to Royal Mail by other postal operators—given that other postal service operators are not subject by the regulator to the same high performance and service quality standards as the Royal Mail—have not been resolved. The different services required of Royal Mail by the regulator arguably put Royal Mail at a disadvantage compared to its competitors.

Thirdly, there are the funding needs of the business. To what extent will Royal Mail be able to raise capital from other sources to meet its funding needs if it enters into private ownership?

Fourthly, there is the impact on the Post Office network. In January 2012, a 10-year deal was entered into between Royal Mail and the Post Office under which Royal Mail would continue to use the Post Office to deliver a range of Royal Mail services. However, there are no guarantees that this arrangement will continue on expiry of the agreement.

Fifthly, there is the impact on consumers and businesses. Royal Mail assets could be sold off, generating large, short-term profits for the private company: for example, high-value urban centres could be sold off to be replaced by distant depots, making it worse for the consumer. What assurances can be given that regulation will be sufficient to protect consumers from being ripped off in the same way that they were after transport and energy privatisations?

Sixthly, there is the issue of postcode access for businesses. As part of the proposed sale, it has been reported that the Royal Mail maintenance of post-office codes is up for sale, with a wider negative impact on business. I would welcome the Minister’s response on that point.

Finally, in relation to employee ownership, we welcome the giving of 10% of the shares in the business to its employees. However, if that is such a good idea, and given that the Government are proposing fully to mutualise the Post Office, why is the share being given to Royal Mail employees not larger?

In conclusion, I have the following questions for the Minister. First, Royal Mail faces competition from other postal service operators which are not, as I have said, subject to the same high performance and service quality standards as Royal Mail, putting it at a competitive disadvantage. How will that not depress the sale price, and what will the Minister do about it?

Secondly, this cannot be allowed to put the Post Office at risk. What guarantees can the Minister give that a privately owned Royal Mail will renew the agreement under which the Post Office provides Royal Mail products, which is essential to the Post Office’s future?

The Minister said that the universal service obligation is fully protected; that it will take precedence; and that if things start to go wrong, Ofcom will renew the financial burden. What exactly does he mean by “renew the financial burden”?

We believe that this is an ill-thought-out process that will not benefit the taxpayer, the consumer or the employees, and believe that the Government should think again.

My Lords, I am sorry that the noble Lord, Lord Young of Norwood Green, takes such a negative view of the privatisation programme with Royal Mail. I agreed with hardly any of the points that he made and I will attempt to address them as best I can.

On the rationale for the sale, I reiterate that the Government’s overarching objective is to protect the universal postal service; that is one of the key aims of this privatisation. To do that Royal Mail needs future access to private capital and commercial disciplines to be able to continue its modernisation programme and seize the opportunities for growth. It is important, as I mentioned earlier, to focus on the market for online shopping. For example, it is vital that the Royal Mail is able to upgrade its sorting technology, improve the way in which the tracking of parcels gets through the system and update its methods of delivery—there are 40,000 Royal Mail vehicles, for instance. There are many good reasons, therefore, why it is necessary to raise this particular money.

In terms of doing that through a private sale, as opposed to finding funds from public money, if Royal Mail remained in public ownership, there would be competition with the education and health services in fighting for limited resources. There is a good reason for the move to private funds.

On the so-called “fire sale”, as my right honourable friend the Secretary of State for Business, Innovation and Skills said today in the other place, it must be the longest fire sale in history. At this stage, I pay tribute to the previous Government and to the noble Lord, Lord Mandelson, who is in his place, for what he did in the privatisation of Royal Mail. It was a process that he started and we are completing it.

It is not a fire sale; rather, it has been long in the planning. The announcement today follows more than two years of preparation since Parliament passed the Postal Services Act 2011. It is a commercial transaction, and the Government will follow normal commercial practices in setting the share price and delivering value for money. A further point to make is one that I mentioned earlier. Deutsche Post and Österreichische Post have enjoyed good profits as a result of their successful privatisation programmes, and we do not want to be behind the curve. That is another good reason for moving to privatisation.

On employee ownership, I am delighted to confirm once again that employees will be given 10% of the shares for free, while on top of that through the special allocation process they will have the opportunity to purchase further shares. We believe that that is a very good deal for the employees. The objective is to tie employees in and align them to the strategy of the company. Overall, as I have said, I do not agree with the noble Lord, Lord Young, in terms of all his queries. I believe that we are on the right track.

My Lords, my noble friend referred to this as being the biggest employee share scheme following privatisation for almost 30 years. The last one was that of the National Freight Corporation, which I handled myself. Perhaps I may remind my noble friend that the reaction on the Labour Benches and of the unions was exactly the same on the NFC as it is today to the Post Office, although I do not think that anyone would now remotely argue against the NFC.

Although I congratulate the Government on this decision, does my noble friend not feel that it is a great pity that it was not taken 25 or 30 years ago? Does he realise that if it had been, at this point, Royal Mail might have been leading in the international carriage of parcels rather than leaving it to the German post office to take that advantage? It is an enormous lesson for us, so perhaps I urge my noble friend that privatisation should come back on to the Government’s agenda. A number of other companies could be privatised—here I am thinking in particular of BBC Worldwide. That would be to the benefit of the public and of the people who are working for it.

I thank my noble friend for that comment. In harking back 25 years, he makes an extremely good point; hindsight is very nice. I cannot remember exactly where we were with Royal Mail 25 years ago, but I am delighted that we are where we are at the moment. I believe that the conditions are right to privatise. The chief executive of Royal Mail has done an excellent job in turning the business around, with profits of over £400 million. The climate and the time are right, and I believe that there is an appetite, but let us see what investors think about it.

My Lords, some of us on this side of the House who supported a minority shareholding did so because we wanted an improvement in the quality of the management. Frankly, we had despaired of that ever happening. That is because it takes particular skill for a manager to run a monopoly in a capitalist system at a loss, but that is what the managers of the Post Office succeeded in doing for a number of years. Circumstances have changed because the nettle of parcels has been grasped by the Post Office in a quite spectacular way. However, at the same time we now have day-by-day diminution in the volume of postal mail that requires to be delivered. The fact is that the length of the walk, the final mile that postmen have to go, is exactly the same regardless of the number of letters they have to carry. That is the most vulnerable part of the operation. It is not the parcels that will be the problem; it will be the cost of delivering letters. Frankly, the assurance that the Minister has given us this evening does not in any way give us comfort. All we can see is a weakening of the universal postal service when it becomes too expensive to subsidise under the economics of this flawed scheme.

The noble Lord may not be surprised to hear that I do not agree with his assessment. It is true, however, that since 2006, the fall in letter volumes has been as much as 25%. The market is changing and we need to keep ahead of it. I would remind the House again that Germany and Belgium are ahead of the game. The injection of private capital into Royal Mail will help with the change, but there is a double benefit in that, through legislation, the universal offering remains strong. It is set in stone, which is a very important point to make.

My Lords, as the noble Viscount will be aware, we on the Liberal Democrat Benches are very much in support of this. Indeed, the Liberal Democrat element in the coalition, starting with Ed Davey who was the responsible Minister in the early days of the coalition, are absolutely delighted to see this culmination now. As the noble Viscount rightly said, it is very nice to see the noble Lord, Lord Mandelson, in his place because it was he who started this process many years ago despite considerable opposition from his own side, which appears to continue.

Perhaps I may put three questions to the Minister. The noble Lord, Lord Young, raised a perfectly valid point when he asked whether the Government are satisfied—have they had advice from whoever is running the IPO for them, who presumably will have been taking soundings from the institutional shareholders who they are expecting to invest—that those shareholders will be prepared to put up the necessary capital to invest in Royal Mail, which was the whole purpose of the privatisation exercise in the first place? Are the Government satisfied that this structure will provide the necessary capital to continue the modernisation process in Royal Mail that we all know lies behind the whole privatisation drive?

Secondly—this is an important point—the Government have chosen to take the IPO route, which I must say was slightly surprising to some of us. We had assumed that the more likely result would be either some form of trade sale or a private sale. Can the Minister confirm that if the IPO was to fail for whatever reason—particularly listening to the noises that are coming from the trade union movement at the moment—the Government will continue the process of selling off shares in Royal Mail? If that happens, it is probable that the buyers would be a private equity group, who are less likely to be sympathetic to the interests of the trade union movement than would be the case under an IPO.

Thirdly, perhaps I may reflect for a moment on the 10% of shares that are going to the employees. As the noble Viscount will know, the Liberal Democrat element of the coalition has pressed for this strongly right from the start. Can he confirm the numbers that have appeared in the newspapers recently of the value of this to the employees of Royal Mail? The numbers that I have seen show that the average Royal Mail employee is being paid approximately £19,500 per annum, and on the likely price of an IPO, every employee will receive shares worth about £1,900 to £2,000. If those numbers are correct, that is clearly a significant sum to be put into the hands of the well deserving employees of Royal Mail.

In answer to my noble friend’s first question about the appetite of shareholders, the indications are that there is clear interest in purchasing shares in Royal Mail. I would not want to go further, because it is not my role to speak on behalf of investors, but my noble friend makes a very good point. The most important thing for Royal Mail is to have flexible access to capital to allow it to innovate and capture market opportunities, such as the strong growth in the parcel market driven by online shopping, as I mentioned earlier. That is what an IPO will deliver for Royal Mail. It should not have to come cap in hand to Government and compete with schools and hospitals when it needs to innovate or commit to future investment.

The second question concerns the IPO route as opposed to other methods. It is true to say that, having got to this point over a good number of years, the IPO route was clearly the preferred route. I am certain that other options were looked at. My noble friend’s question was, if the IPO route were to fail, would other methods be used? I do not wish to be drawn on that or to speculate, only to say that it is our firm belief that the IPO route is the right route and that is the route that we will be following.

The final question concerned employees. I am delighted to hear that my noble friend is very much in favour of giving 10% of shares free to employees. I will not be drawn on the actual valuation, because a prospectus will be produced in due course, which will set out the terms of the IPO. The valuation will, of course, depend on investor demand and market conditions at the time. What my noble friend has read in the papers, as he will probably know, is pure speculation.

My Lords, I think that the Minister will agree that many of those who retired from the Royal Mail worked very hard to get it into the very good shape that it is in just now. Has any consideration been given to allowing those who are in receipt of a Royal Mail pension—in other words, former sorting staff and postmen and postwomen—to buy shares? My thoughts go to the fact that in my previous constituency—although it is known as Glasgow North East, it was known as Springburn at one time—we have a lovely sorting office, which I pass every week when I come to the House of Lords. It is known as the St Rollox sorting facility. Several hundred people work there. They have changed their hours, adjusted to the new situation and worked very hard. I would be deeply saddened if any organisation took over and vacated the site at St Rollox and went somewhere else, which would mean that the loyal men and women—some of whom I am related to—who perhaps get up at four or five in the morning and walk to their work in the Springburn area, would lose their jobs. Some of the newer delivery companies, such as TNT and FedEx, tend to go into great industrial estates, but the only way to get to these facilities is by private transport and not public transport. Has any consideration been given to securing jobs in the communities in which they already exist?

I thank the noble Lord for those two points. His first question was whether it might be considered that shares be given to those who have worked for a long time for Royal Mail and that their hard work might be rewarded. It is fair to say that the employee share scheme is designed to secure the future success of Royal Mail and the universal service and we therefore consider it appropriate to include only the current workforce, who deliver the universal service and can influence and benefit from the future success of the company. Share awards will be made only to those employees who have been in employment for the relevant qualifying period, which happens to be a number of months. I listened carefully to the noble Lord’s second point; I know Springburn, so it is familiar to me. I am sorry to hear that there has clearly been some disruption to individual lives regarding the transfer of the sorting office. My only response to that is that it is very much up to the Royal Mail management to—

Maybe I have given the wrong impression. Everyone is fine in St Rollox. My worry is that, if some of these new companies come in, they might close the facility and move the machinery somewhere else.

It is useful to have the clarification from the noble Lord. In that case, my point is still the same. It is very much up to the Royal Mail management to look very sensitively at those personnel issues. I have no doubt that they will do that if there is a particular move in that way. Change, as we know, is always difficult and it affects individuals. The noble Lord makes a very good point.

My Lords, I welcome the affirmation in the Statement—the Minister has repeated the affirmation twice—that the Royal Mail will still be the UK’s universal service provider and that this will include services to urban and rural areas alike. However, may we be assured that not only will there be universal coverage but there will continue to be uniform pricing? Too often the residents of rural areas, especially remote and sparsely populated areas, face higher costs for public services. Can the Minister affirm unequivocally that a privatised Royal Mail will be required to maintain a universal pricing structure and that residents, whether of Westminster or of west Devon, will continue to pay the same price for the service that is offered?

In answer to the right reverend Prelate, through the Postal Services Act, Ofcom has the primary duty of securing the provision of a universal service. I can confirm that this will be secure in the hands of the privatised Royal Mail. What is protected is not only the six-days-a-week letter service to every address in the UK and free services to the blind, which I mentioned earlier, but also affordable prices, which are monitored by Ofcom. On the specific question, Royal Mail stamp prices for the universal postal service will continue to be regulated by Ofcom, which has a duty to ensure that they remain affordable. For example, Ofcom has put in place a safeguard cap on second-class letters and parcels to ensure that the service remains affordable for all users. I hope that that reassures the right reverend Prelate.

I am grateful to my noble friend for the Statement, which I very much welcome. Has he had an opportunity to read Richard Hooper’s report, which was commissioned by the previous Government and paves the way for today’s announcement? It identified some major hurdles to Royal Mail achieving its competitive position: the elimination of restrictive labour practices; increased levels of automation; and a culture change towards customers. Will he advise us on what progress has been made towards that? Will he also reflect on the point made by IMRG that parcel deliveries are going to increase by 70% over the next four years due to the growth in online sales, providing a real opportunity for a revitalised Royal Mail in the private sector, if it can sort out those inherent problems?

My noble friend’s questions allow me to say that there is tremendous market opportunity for Royal Mail when it is privatised. On the automation programme and the changes that the chief executive has brought about with the rest of the board of Royal Mail, there is extremely good progress to report. I am glad that my noble friend has endorsed that. As to the market itself, we know that there is a tremendous opportunity in terms of future online shopping opportunities, but it will be up to the Royal Mail board following privatisation to use the flexibility of private capital to look at the market and to take even greater advantage of the opportunities for the company.

I thank the noble Viscount for the Statement and fully applaud this decision, which is belated in the extreme. It is clear that one of the great rationales for this privatisation is the increasing competition and the threats from technology that the Royal Mail faces. The idea that a state-owned operation of this kind cannot face those challenges in the nimble way that is required in business today seems to be unarguable and I absolutely applaud the decision. However, I have two quick questions. I am not asking the Minister to name it, but is there a price at which the Government would not sell? Secondly, are there any considerations about potential foreign takeovers in due course?

My noble friend would probably be surprised if I gave an accurate answer to the first question, so I will pass on that one. In terms of the price, as I mentioned, the prospectus will be produced at some point between now and April 2014, which is the period during which we anticipate the sale will take place. Market conditions and investor demand will also be part of that aspect.

I raised a number of questions that the Minister did not answer and, before he sits down, I request that he addresses those in writing. I do not have time to reiterate them all. I also could not help but observe that the right reverend Prelate did not get an absolutely explicit answer on the uniform tariff and the universal service obligation. Maybe I missed something.

I will be very happy to write to the noble Lord, Lord Young, on any questions that I have not managed to answer.