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Postal Services Bill [HL]

My Lords, I thank my noble friend Lord Christopher for his references to my grandfather. Indeed I have reflected on the approach that he took to public ownership and I suppose that in a sense I continue in his tradition by sponsoring a Bill, which your Lordships are considering, that retains the Royal Mail in public ownership. So I am at least being consistent with my grandfather’s views. I shall, if I may, pick up just one or two points from the remarks made by one or two of my noble friends. I shall not be drawn on the references to TNT, as my noble friend Lord Clarke invited me to do, except to say that it gives a taste of what potential bidders are up against when they show an interest in this. However, I simply do not accept either the premise or the import of my noble friend’s remarks—although whether TNT is a suitable bidder will remain to be seen. On the specific question concerning GLS, I can say that the Government’s focus is on finding the right strategic partner for Royal Mail to help it modernise its core business in the UK, not on selling GLS. My noble friend Lord Clarke argued that, contrary to everything that I have said during our debates in this House, it is the global recession which is responsible for the fall in mail volumes. I agree that economic conditions will have an impact on postal volumes, particularly courier services for businesses, but Hooper found in his analysis that the traditional link between letter volumes and GDP began to fall away in 2003. Volumes have been falling since then. My noble friend also suggested that Royal Mail is now making more than its continental competitors. With respect, I think that he rather misses the point. Royal Mail’s margins are less than 1 per cent for its letters business. Deutsche Post and TNT are facing tougher market conditions but they remain more profitable than Royal Mail, with profit margins of 12 per cent and 14 per cent respectively, and even with the declines in profit levels recently reported. Before turning to the detail of these amendments—there are very many of them and I will ask the forbearance of the House if I respond with some substantial reasoned argument in the light of the case that has been made against the Bill—I should first remind the House of the objectives behind this legislation. The legislation arises from the Hooper report commissioned by the Government in line with our 2005 manifesto and urged on us at the time, incidentally, by the CWU. The Hooper report was not specifically about ownership. At its heart was the universal postal service and how to maintain it. That drives the entire report from start to finish. Hooper found a Royal Mail which was critical to our country but which was labouring under several huge burdens, including the decline in the number of items sent through the post due to the shift to new technologies and a substantial and volatile pension deficit. While the company had a modernisation plan, in reality chronic industrial relations and obstruction at local branch level by the CWU, as the noble Lord, Lord Christopher, has mentioned, have meant modernisation is too slow and too often bogged down in a draining attrition between union and management. Hooper made his recommendation about a strategic partnership to help drive essential change—the most controversial aspect of his report which was as a result of his analysis, not at the outset of it. He did not begin there. Of course some people find it easier to agree with the review’s other parts—on pensions and regulation—than on the need for a strategic business partner, but Hooper was clear that all his proposals were a package to be taken in total not as individual parts. The Government could have ignored Hooper’s findings and his recommendations. We could have found the nearest shelf, cleared a space, commented on the interesting nature of the report, patted Mr Hooper on the back and moved on. That response is not exactly without precedent, but what would have been the result? The Royal Mail we knew was in decline, with the universal letters delivery service under threat, put into the "too difficult" box because the Government of the day did not have the courage or the energy to take on the task. In the Government’s view that is simply not an alternative; it is a dereliction of duty. The Cabinet was not prepared to see that happen. I might say, I did not seek this issue. Incidentally, I did not seek a quarrel with anyone. The subject came on to my watch after I returned to Government. Our postal service is too important, however, for me to accept the advice from one ardent critic of the Bill which was to leave well alone and "manage decline". Our postal service and the public demand better than that. That is why we are discussing this package of change today. We cannot turn the clock back. We cannot wish away the internet, direct debit or any of the other liberating advances in technology that have freed up time for hard-pressed people. There is no going back. Life has changed. This is about a Royal Mail for the 21st century. There will be no managing decline sought by this Government if we can possibly do anything about it. Our goal is to put a publicly owned Royal Mail on a clear and swift path to modernisation and in so doing to secure the future of the universal postal service. That was our 2005 manifesto commitment, which said—perhaps it is as well to quote from it: ""Our ambition is to see a publicly owned Royal Mail fully restored to good health, providing customers with an excellent service and its employees with rewarding employment"." In other words, there were two parts to our manifesto: commitment one, keeping Royal Mail in public ownership, which we are doing, and, secondly, to restore it to good health. Simply to leave it at public ownership without taking the further measures to restore it to good health would be irresponsible and an abdication by this Government in respect of our 2005 manifesto commitment. As Hooper outlined, to deliver the modernisation it requires, Royal Mail needs commercial confidence to act freed from the perception of political interference and through constructive engagement with the workforce rather than the mutual suspicion that we have today; it needs expertise from a postal or other network operator with a sound commercial track record; and, finally, it needs access to fresh capital—hence the partnership approach for the company. My noble friend Lord Clarke’s amendments reject our and Hooper’s partnership proposals and instead would provide for the dissolution of Royal Mail Holdings plc and its replacement with a company limited by guarantee. Perversely, my noble friend’s suggestions remove the very important protections on future ownership of Royal Mail Group Ltd and Post Office Ltd enshrined in the Bill. In turning Royal Mail Holdings plc into a private company limited by guarantee, the amendments remove this company from public ownership and hence also remove Royal Mail Group Ltd and Post Office Ltd from public ownership. That is a rather surprising effect sought by my noble friend who, throughout, has been attached to 100 per cent public ownership. It is also counter to our key objective for the Royal Mail group of companies which is that they should remain publicly owned, with Post Office Ltd owned in its entirety by the Crown. I therefore could not support the amendments for that reason alone. However, there are other concerns. Typically the company limited by guarantee structure is used for smallish charitable bodies and membership organisations. We have some limited experience in a commercial environment, in Network Rail and Glas Cymru—Welsh Water—which are the usual examples used to illustrate the alternative to the Hooper recommendations. Neither Network Rail nor Welsh Water, unlike the Royal Mail, is in the public sector. They are private companies, and monopolies with fairly stable demand; all their earnings are determined by economic regulators, not by the choices of individual customers. They are run on a "not for dividend" basis and are accountable to a board of stakeholder members rather than to shareholders. Both those businesses rely heavily on contracting out the actual provision of services—in the case of Welsh Water it is 100 per cent. That is hardly right for Royal Mail. Whatever the merits of Network Rail and Welsh Water as a model for the railway and water network, I do not believe that the model would work in the increasingly competitive and fast-changing environment of the postal market. A successful Royal Mail needs a different model that addresses each of the issues. First, where does the needed investment come from? Funding for Welsh Water and Network Rail comes from regulated charges, government grants and external debt, but Royal Mail could not rely on these for its funding needs. Royal Mail is not a monopoly, but operates in a competitive market place. As Hooper made clear, it faces competition not just from the postal sector but from the broader communications market. It cannot meet its investment needs by hiking up prices. Customers would just switch, increasingly, to alternatives. And Royal Mail cannot tolerate more debt. Although it has an extensive property portfolio, its existing debt is already secured on this. There are no further assets to offer as collateral. However, the proceeds from a new private sector partner for Royal Mail would fund modernisation. The second issue that needs to be addressed is where the necessary experience to drive modernisation would come from under the alternative model being proposed. There needs to be a major step change in Royal Mail’s performance. Today’s constraints on progress need to be countered by effective management and significant change in the industrial relations environment and union practices. To get this, we need the practical, corporate experience of transforming a network company that only a commercial partner could bring. Bringing in more consultants or changing one or two of the senior management will not suffice. Thirdly, where would the impetus or the drive to modernise come from? I simply do not believe that a company limited by guarantee model would provide that impetus or that drive. Accountability to a group of stakeholders with disparate interests would not provide the strong and focused leadership that Royal Mail needs. That organisation needs to change and become more efficient, not stand still. "Stakeholders" would be no substitute for shareholders—the Government and a strategic partner—with capital at risk and a strong incentive to secure change. A company limited by guarantee model would depend instead on the regulator to drive change and improvement. Experience shows that effective regulation is vital but is not sufficient to drive necessary change in such a large and complex organisation. My view is that this amendment’s proposition is led by politics first and what is necessary for Royal Mail a distant second. We can all vote for all sorts of nice-sounding structures, but the bottom line is: do they offer a convincing chance of delivering the very urgent modernisation which a Royal Mail remaining in public ownership requires? I suggest that the answer is no. I accept that the thinking behind the amendment is not opposed to collaboration between Royal Mail and any outsiders, as such, but on what basis would such a partner enter the business or be incentivised to drive the modernisation that the company needs? The reality is that only a partner with an equity stake in the business will be motivated to help deliver the change needed in the timeframe required, because the business’s success would produce a return on its investment. I hope that your Lordships will understand why the Government, after due consideration and discussion last week that involved the Prime Minister, have concluded that the alternative approach outlined by the Bill’s opponents is unworkable and does not meet the challenges that Royal Mail faces. The best course for the Royal Mail to take is the one that this legislation sets out, as soon as the Bill is enacted and can be subsequently implemented. The Government’s rejection of the other amendments in this group, which cover the commencement of Part 1 of the Bill, flows from the conclusion that we have reached and that I have now described. We cannot afford to take a wait-and-see approach by building in a three-year delay, as the amendments suggest; we have been waiting many years as it is. The evidence is clear that we must act as soon as market conditions and the bidding process allow. We want to see Royal Mail become a leader in the postal market, not spiral into decline. To do that, we must not build in any further delay. Partnership offers a fresh start for Royal Mail. It is the best way to meet the requirements for transforming Royal Mail that Hooper highlighted and which the Government accept: commercial confidence, access to capital and experience of managing change. Action on pensions and regulation alone will not modernise the Royal Mail. That provides no incentive for Royal Mail to change or the external drive and push to make it happen. Only the full package of measures which the Government propose will deliver our objectives in full and secure the universal postal service. With all due respect for the sincerity of the amendment’s mover and supporters, I call on my noble friend to withdraw the amendment.