country sheet: united kingdom - circabc - welcome · main divisions of npo mail, parcels, express,...

Country sheet: United Kingdom 949

Country sheet: United Kingdom

1.1 Summary

Mail market characteristics

(i) The population density is above the European average, but there are significant geographic

areas that are low density with difficult accessibility;

(ii) Downstream access is mandatory and access prices seem to be geared to cost of

(downstream) delivery;

(iii) Alternative local and regional delivery networks have not developed prior to full liberalisation

in 2006;

(iv) Royal Mail is exempt from charging VAT on all its services;

(v) Addressed mail per capita volumes are above the European average; as from 2005 it appears

that a long term decline has started in which addressed mail volumes fall by circa 1-3% per

year.1

Regulatory developments • The Postal Market within the UK has been fully liberalised since January 2006.

Postcomm is actively promoting competition and several aspects can serve as a benchmark to other EU Member States (such as interoperability in a multi-operator market, public consultations, market surveys, transparency and non-discrimination with regard to downstream access).

• Since 2001, there is mandatory access to the network of Royal Mail. It is up to third

parties to negotiate access with Royal Mail. If an agreement cannot be reached, either party can request determination of the terms of access from Postcomm.

• The first access agreement was reached in 2004 between Royal Mail and UK Mail.

As a result of the applied principle of transparency and non-discrimination, the access agreement with UK Mail was subsequently used as the basis for access agreements with a variety of other postal operators and (large) customers.

• Over the course of 2004 another type of access agreement was negotiated - based on

de-averaged zonal prices. This access agreement became the second standard access agreement. Additionally, there are variants for both the national and the zonal access contracts that enable operators to act as an agent and thus minimise the VAT charges they are required to pass to their clients.

1 Source – CS UK draft final Royal Mail Comments July 2008.

Annex II: Main Developments in the Postal Sector (2006-2008) 950

• Postcomm has regulated the minimum headroom between access products and their analogous retail products as a (minimum) percentage price difference as part of the 2006-2010 Price Control.

• Royal Mail Wholesale was established in April 2006 in order to manage all aspects of

Royal Mail’s interface and commercial arrangements with customers wanting to make use of Royal Mail’s postal facilities under Condition 9 of Royal Mail’s licence.

• Postcomm is considering the role of equivalence of treatment (in price and non-price

terms) between third parties and Royal Mail items accessing any part of Royal Mail's network in any future regulatory framework. Equivalence has a number of potential benefits. For instance, it could ensure that Royal Mail does not favour its own products over those of competitors, it enables competitors and Royal Mail to compete on the same terms, it could encourage end-to-end competition by ensuring that the size of the access margin does not squeeze the margin available for other pipeline activities and it should provide incentives to Royal Mail to ensure its costing system is transparent and fair. Postcomm is likely to propose that some form of equivalence should form a critical part of the overall regulatory framework for post 2010.2

• In addition to Postcomm, the UK has a consumer body called Postwatch. Postwatch

is an independent organisation to protect, promote and develop the interests of all customers of postal services. Postwatch will cease to exist in September 2008 and its functions will be absorbed into Consumer Focus.

• License requirements include the assurance of interoperability between postal

operators. The Common Operational Procedures govern this in detail, including prices to be charged for retrieval and repatriation. The procedures are designed to deal with any off-course mail and cover all mail carried pursuant to a licence by any licensed operator.

• Royal Mail is obliged to perform to set standards in relation to collections from post

boxes and deliveries to residential and commercial premises. Where deliveries are concerned, Royal Mail is also required to meet a target in respect of the percentage of mail that is correctly delivered.

• Postcomm monitors Royal Mail's compliance with these standards; and if Royal Mail

fails to meet them, Postcomm may consider investigating these failures. Ultimately, Postcomm can consider taking enforcement action - such as obliging Royal Mail to put matters right or imposing a financial penalty.

Market developments • Competition has developed fairly rapidly in the upstream part of the market. UK Mail

and TNT have become the most important competitors amongst the 20 licensed postal operators other than Royal Mail.

2 Second submission by Postcomm, the industry regulator. http://www.psc.gov.uk/postcomm/live/news-and-events/news-

releases/2008/funding-from-the-private-sector-will-help-royal-mail-deliver-a-valued-universal-service/Postcomm_Second_Submission.pdf


• Access volumes have grown to circa 20% of the licensed area and to 40% of upstream bulk mail volumes in 2007/8 (April-March) and are continuing to grow.

• In addition, there are mailing houses that provide a one stop shop of production, print

and enclosing and sorting who generate bulk mail that is injected upstream in the Royal Mail network.

• Competition from an end-to-end perspective has been slow to develop. The main

competitor is DX who focuses on B2B document exchange mail and B2C niche markets (around 70% of DX’s volume is generated outside the licensed area). Recently, TNT started trialling own delivery in Liverpool.

• Many postal operators have now introduced bar-coding that builds on the postcode

enabling bulk mailings to be sorted down to individual residences including the order that is required for delivery within individual post-person’s walks.

• Customers feel they have competitive choice, access to market information, and few

barriers to entry. Perceived quality of service is high, and has increased from last year, for all leading providers.

Other issues • Almost all rural branches are loss-making for Post Office Ltd (POL) and it takes

some £3 million a week to run the rural network, money which comes from the Government’s annual £150 million Social Network Payment.3 Postcomm expressed the view that there is a strong case for demerging POL from Royal Mail Group so that each business can focus more attention on their divergent problems.

• In the light of the significant changes in the postal market since the introduction of

the Postal Services Act 2000, the UK Government started an independent review of the postal sector in 2008. The terms of reference for the review are: • To assess the impacts to date of liberalisation of the UK postal services market,

including on the Royal Mail, alternative carriers and consumers; • To explore trends in future market development and the likely impact of these on

Royal Mail, alternative carriers and consumers; and • To consider how we maintain the USO in the light of trends and market

developments identified.4 • The results obtained so far suggest that there is a substantial threat to Royal Mail’s

financial stability and, therefore, the universal service and that the status quo is not tenable. No specific date for the final results has been set.

Discussion points • According to ECORYS the current access regime is likely to be conducive to the

development of access competition rather than to end-to-end competition. There is a variety of reasons behind this assessment, notably the low access prices (below retail

3 Source – Royal Mail fact sheet. 4 See www.berr.gov.uk/sectors/postalservices for more information about the review.


prices minus avoided cost), headroom regulation (maybe warranted to prevent margin squeeze) which hold the access prices artificially low (or the retail price of Royal Mail artificially high). Moreover, the access conditions (national geographic profile requirement) make the combining of own delivery with access unattractive. The VAT distortion (valid for around 50% of the market) almost does not apply if access is used (through the ‘agent’ contracts), but remains a key barrier to the promotion of effective end-to-end competition.5

• The sharp rise in access volumes has contributed to the financial deterioration of

Royal Mail’s performance in recent years. A potential reason for Royal Mail’s acceptance of this reduction in margins (the access prices were negotiated and not imposed by Postcomm) might be that low access prices avoid the bigger threat of end-to-end competition.

• Compared to the situation in other EU countries, Royal Mail faces regulation for a

large part of its products and services. Also, the UK is the only country in the EU that has chosen to regulate the minimum price difference between the access prices and the prices for comparable bulk retail products with the purpose to prevent a margin squeeze.

Summary information on market developments: Postal market segment / aspect Competition (market shares) Main competitors / remarks

Express NPO: 8% Many

Parcel (main players) NPO: 2% Many

Unaddressed NPO: 25% Many

Cross-border mail NPO: >90% (inbound)

NPO: 33% (outbound)

Outbound: DHL, TNT, La Poste,

De Post (BE), Swiss Post

Addressed mail (market share CPOs)* Ca. 20-22% access

Less than 1% end to end

TNT and UK Mail

DX

Population density (inhabitants/km2) 250

Total addressed mail market (items)* Ca. 21 billion items Licensed area,

incl. inbound cross-border mail

Addressed mail volume per capita* 347 Licensed area,

incl. inbound cross-border mail

Status of NPO State owned

Main divisions of NPO Mail, parcels, express, counter

and financial services

Note: The market share of CPOs refers to the combined market share of CPOs, with separate figures for

upstream (access) competitors and end-to-end competitors in domestic addressed mail delivery (excluding

international mail and newspaper delivery) in the licensed area (<350 grams in weight and <£1 in price).

* Figures refer to 2007/8 (estimates), all other figures refer to 2006/7.

5 As compared to an access regime that is based on less strict (national) fall to ground requirements (clearly, the positive

side of access is that mail volumes can be acquired through access before actually starting delivery through an alternative delivery network). For details on the negative relationship between access competition and end-to-end competition, see section 1.5.4.


Summary information on the implementation of the Postal Directive: Aspect Implementation and remarks

Universal service and its

financing

Collections and deliveries are set at six days per week. As the ‘cost’ of providing

the USO (as opposed to the benefits of being the USO provider) are a key factor in

the licensing regime (price control) for Royal Mail in the UK, the definition of the

USO is a crucial factor in regulation of the UK postal market. For that reason,

Postcomm is taking views on the USO as part of its strategic review. Royal Mail

would like the scope of the USO reduced to first and second class stamped mail,

standard parcels (and a registered and insured product as required by the

Directive) but is opposed to a reduction in USO activities or in service quality. The

NRA has recently undertaken a study to assess the costs and benefits to the NPO

of potential changes to the USO specification. From an accounting perspective, the

accounts for 2006/7 give an operating profit (before exceptional items) of £27m

(€40m), although it is understood that this figure includes the NPO’s additional

pension costs in terms of the funds forecast shortfall. Royal Mail’s 2007/8 Report

and Accounts show an estimated loss of £100m for the universal service and an

estimated loss of £200m for the price-controlled area in 2007/8.6

Reserved area The UK postal market is fully liberalised since 1 January 2006.

Licensing and network

access

A licence enables but does not require the delivery of addressed mail in the UK (no

licence is needed to offer international outbound mail services). The framework

was introduced on 1 January 2006 (the date of full liberalisation) and amended on

16 January 2008 and applies to all operators, but with additional requirements on

Royal Mail as the dominant supplier, which includes strict price and quality

requirements. The licensed area covers most types of mail (excluding unaddressed

mail) weighing less than 350 grams or costing less than £1.

Access to Royal Mail’s postal facilities is open to customers and other postal

operators alike on a negotiated basis and on transparent and non-discriminatory

grounds as per the terms of the Directive. According to Postcomm, the access

price should be based on the cost of downstream delivery.

Tariff principles and

transparency of accounts

Royal Mail is required to operate within the pricing framework defined in Condition

21 (previously Condition 19) of its Licence. Royal Mail’s price control is in the form

of RPI – x, across two baskets (a) Captive and (b) Non Captive, each with a price

rebalancing sub-cap element. The detail of the pricing framework is reviewed

periodically. Regulatory accounts are produced and published in detail.

Quality of services Condition 4 of Royal Mail’s Licence specifies service standards and levels of

compensation. The range of measures set is very extensive.

The national regulatory

authority

The NRA is the Postal Services Commission, Postcomm. Postcomm’s annual

budget is around £10m (€14m); they have circa 60 staff and are funded by licence

fees. Postcomm has a full set of regulatory powers. In addition, the UK has a

consumer body called Postwatch (2006/07, budget ca. £9m, ca. 94 staff).

Postwatch will cease to exist in September 2008 and its functions will be merged

with other consumer protection agencies.

6 Information from Royal Mail. Note that the 2007/8 regulatory accounts were not available at the time of writing this country

sheet.


1.2 General information

The UK has the sixth largest economy in the world by both PPP and nominal GDP. The service sector makes up the most significant share of GDP at 73% and is dominated by financial services, especially in banking and insurance. GDP growth has been estimated at 3.2% for 2004, 1.7% in 2005 and 2.7% in 2006. UK mail volume growth has traditionally moved in line with economic growth plus demographic growth rates. While other factors also impact mail volume growth rates, such as mail prices and the price of substitute products, these have historically been of relatively less importance. However, from around 2003 onwards this simple relationship has become more complex. Other factors, in particular new technology and the increasing use of such technology to substitute traditional mail with electronic forms of communication, are driving a wedge between economic growth and the demand for letters. This technology wedge has been increasing over time in the UK and is slowly eroding mail volume growth rates over time.7 8

Figure 0.1 UK addressed inland letter traffic trends versus economic and demographic growth trends

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Technology Wedge

Letter volumes

Economic growthplus household growth

Note: (1) Letter traffic growth rates adjusted for number of working days. (2) Economic growth refers to GDP

growth weighted by letter demand. (3) Data in chart uses three year moving average annual growth rates.9

The UK's overall population density is one of the highest in the world. About a quarter of the population lives in England's prosperous southeast and is predominantly urban and suburban, with an estimated 7,517,700 in the capital of London.

7 Source - CS UK draft final Royal Mail Comments July 2008. 8 See “The challenges and opportunities facing UK postal services – an initial response to evidence,” Richard Hooper, Dame

Deirdre Hutton and Ian R. Smith, independent review on behalf of the UK Government, May 2008, p.16. 9 Source - CS UK draft final Royal Mail Comments July 2008.


However, there are significant geographic areas that are low density, with difficult terrain/accessibility, particularly in the extremes of the country such as parts of Scotland, Wales and the North and South-West of England. This makes the provision of the USO and the potential for full end-to-end competition across the whole country a complicated issue.

Table 0.1 General country information (2007)

[COUNTRY]

Population (in million) 60.5*

Size of the country (1,000 km2) 242.9*

Population density (inhabitants/km2) 249.1*

Degree of urbanisation 89.7**

Number (and percentage) of inhabitants 5 largest cities 10.3 million (17%)

Sources: * UPU (2006), ** UN (2005), *** World Gazetteer (2008 estimation).

1.3 Regulatory developments

1.3.1 Postal law and regulation

The provision of postal services is regulated by the Postal Services Act 2000, which has subsequently been amended in November 2003 and by the Postal Services (EC) Directive Regulations 200210. Full market opening was introduced by Postcomm in January 2006 following extensive consultation with stakeholders. Prior to full market opening in 2006, the NRA had undertaken a number of consultations and arrived at decisions relative to market opening. These included the establishing of an industry code of practice for a) common operational procedures (between mail operators) and b) protecting the integrity of mail. The NRA has also been very active in terms of, • Conditions of the NPO’s licence; • Pricing – particularly in terms of prices by format and by geographic destination; • Exceptions to the USO; • Dealing with complaints from competitors. The NRA is currently undertaking a number of studies in the areas of cost and benefits to the NPO of changing the scope of the USO, potential separation of the NPO’s functions and volume and projections/market development in other countries.

10 Since its introduction in 2000, the Postal Services Act has been amended by: the Postal Services Act 2000 (Disclosure of

information) Order 2001, SI 2001 No 3617; the Enterprise Act 2002 Section 278(1) and Schedule 25 paragraph 42; the Postal Services Act (Modification of Section 7) Order 2002, SI 2002 No 200, and the Postal Services (EC Directive) Regulations 2002, SI 2002 No 3050.


In addition to the above, the NRA has commissioned work looking at the trading relationship between the Counters Business (Post Office Ltd) and the Mail Business (Royal Mail).

Table 0.2 Postal law and regulation

Postal law and

regulation

Date of

introduction

Remarks

Postal Services Act

2000 (Amendments to

the Act were

approved in

November 2003)

2000 Incoming cross-border mail is liberalised above 100g for a single item

Direct mail is liberalised above 100g for mailings over 4000 items

For magazines and catalogues no volume requirement exists as these

are unlicensed products.

Postal Services (EC

Directive) Regulations

2002

To implement the requirements of the 2002 Postal Directive in the UK

and to define the scope of the universal service.

Source: Postcomm website www.postcomm.gov.uk.

Although not part of “postal law/regulation”, The Consumers, Estate Agents and Redress Act 2007 will merge the functions of Postwatch (postal consumer’s body) with other consumer protection agencies. This will take effect in October 2008. For moving Postwatch’s functions to this new body, Postwatch needs to be formally abolished. Consequently, the Postal Services Act has to be repealed (in particular a number of sections have to be removed that deal with the duties and powers of Postwatch). There is a strong view from the NPO Royal Mail, but not necessarily customers, that the UK market is over regulated. According to Royal Mail, regulatory controls should be proportionate to address market dominance and the need to safeguard the universal service and therefore:

“Regulation of postal services in the UK should therefore be limited, justifiable in accordance with the

intention of the Postal Services Directive and proportionate to achieving legitimate aims – taking into

account the effect of competition in the market on the universal service and its financing.”11

In addition Royal Mail had the following comments to make:

“The postal market in the UK has opened up more quickly than most other major European countries

and the financial impact of liberalisation and regulation is potentially greater than in almost any other

sector in the UK during the 1980s and 1990s.

Extensive ex-ante regulation is now a threat to innovation, efficiency and quality of service and to Royal

Mail’s ability to self finance the universal service. The price control that covers 88% of Royal Mail’s

revenues now loses money, and the universal service is at risk. If Postcomm is to fulfil its primary duty

to protect the universal service and Royal Mail is to succeed in its ambition to provide a higher quality

11 Source – ECORYS questionnaire to Royal Mail.


universal service at affordable prices to consumers, a decision to minimise regulation needs to be taken

now. It is in the public interest to do so, and there is no legal obstacle to doing so.

Royal Mail believes that the regulatory framework creates a disincentive to postal operators, which

leads them to concentrate on price rather than innovation. Permitting cost-reflective pricing will facilitate

sustainable competition, which creates the right incentives for efficient entry. The current regulatory

framework enables competitors to enter the market with very little risk – in order to facilitate innovation

there must be incentives for all operators to invest. Deregulation will allow greater investment certainty

and so innovation, through enabling normal competitive forces to shape the industry.

Given post competes with other communications media, Royal Mail sees real merit in consolidating

postal regulation into a wider communications framework. There is now compelling evidence to reshape

the regulatory framework to minimise regulation and deliver fair prices, a viable and modern universal

service, and a competitive and innovative postal market.”1213

As might be expected other stakeholders hold differing views:

UK Mail

“The regulatory regime in the UK has generally worked effectively to create an environment in which

competition can start and develop. Perhaps most important in this has been the requirement on Royal

Mail to allow access to its postal facilities and the successive price controls on Royal Mail.

The independence of Postcomm has been generally strong, with little indications of political pressure or

interference. But competition in the UK is still limited with only 19 licensed operators (very limited in

terms of full bypass competition) and fragile in some respects (two licensed operators having ceased

operating in the last three years). In this respect, Postcomm’s reliance on ex-post action on anti-

competitive action by Royal Mail and increasing preference for ex-post regulation in general is a

concern.

Postwatch has done little to support or encourage the development of competition, instead

concentrating on complaints from social users of mail and Post Office closures. The replacement of

Postwatch by a new, muti-sectoral consumer body will create uncertainty and possible dilution on focus

on mail. And the related new legislation (to apply from October 2008) imposing mandatory redress and

complaint escalation is also introducing confusion.”14

TNT

“Compared to the rest of the EU, the regulatory regime within the UK has been fairly robust, although

given the lack of end-to-end competition the regime could be stronger in some areas. Prices in the UK

are low and often set by Royal Mail at un-commercial prices. Due to the prominence of the access

regime and the vulnerability to margin squeeze, ex ante regulation is likely to be needed for some

time.”15 In terms of the UK policy maker, it has been generally content with the way the market has been regulated although it did have the following comments: 12 Source – ECORYS questionnaire to Royal Mail. 13 Royal Mail also expresses views on these areas in its submission to Phase 2 of the Independent Review. 14 Source – ECORYS questionnaire to UK Mail. 15 Source: ECORYS questionnaire to TNT.


“One area the Department would like to see improve is the working relationship between Postcomm and

Royal Mail. [We] believe liberalisation must go hand-in-hand with ‘light touch’ regulation, to ensure fair

competition and the sustainable provision of a universal service.”

“It would appear that the UK is at the forefront of Postal Regulation with the EU which although may be

in more depth than other member states has been appropriate to date. Were the other Member State

not to progress and UK regulation did not flex with the market conditions (full liberalisation) over the next

two to three years, then if the status quo was to remain, this may seem heavy handed.” 16

1.3.2 Independent review of the postal sector

In the light of the significant changes in the postal market since the introduction of the Postal Services Act 2000, the UK Government started an independent review of the postal sector in 2008. The terms of reference for the review are:

• To assess the impacts to date of liberalisation of the UK postal services market, including on the Royal Mail, alternative carriers and consumers;

• To explore trends in future market development and the likely impact of these on Royal Mail, alternative carriers and consumers; and

• To consider how we maintain the USO in the light of trends and market developments identified.17

The results obtained so far suggest that there is a substantial threat to Royal Mail’s financial stability and, therefore, the universal service and that the status quo is not tenable. According to Royal Mail, they have met their efficiency targets for 2006/7 and the main reasons for the financial deterioration of its performance are the fact that access competition developed more quickly than expected for second class business mail (exacerbated by access headroom regulation), there is down-trading from first class business mail to second class business mail, changes in technology and communication patterns leading to a decline in mail volumes rather than the increase assumed for the price control and a misalignment of costs and prices.18 Royal Mail urges that the elements of a new regulatory framework should be introduced without delay. In short these elements are: a more narrowly defined but high quality universal service, less regulation (amongst others the removal of regulation of most retail and wholesale services including access headroom, and removal of requirements for lengthy regulatory approval for product development and product withdrawal), urgent resolution of the pension deficit and access to equity capital, while preserving Royal Mail as an integrated business and the current VAT regime.19 With regard to the deteriorating financial performance of Royal Mail, Postcomm argues that almost half of the deterioration is because mail volumes are tracking below the 16 Source: ECORYS questionnaire to DBERR. 17 See www.berr.gov.uk/sectors/postalservices for more information about the review. 18 Direct communication from Royal Mail. 19 Based on Royal Mail’s submission for Phase Two of the Independent Review of the Postal Services Sector, 19 May 2008

(see website Royal Mail).


expectations of both Postcomm and Royal Mail when the price control was finalised in late 2005. More than half is according to Postcomm however caused by Royal Mail not achieving their efficiency improvement targets of 3% per annum in the price control period (2006-2010)20. Postcomm points at the need for Royal Mail to have access to private capital and a stronger set of incentives to enable it to restructure and become more profitable.21

1.3.3 Universal Service Obligation

USO definition22 In June 2004, following a year-long review, Postcomm decided in generic terms, the types of services that should make up the universal postal service in the UK, and how this would be provided by Royal Mail’s current range of products. The five service areas are (but see below):

1. Priority and non-priority mail services (letters and packets) weighing up to 2 kilos - Royal Mail’s first and second class mail and bulk mail services (high volume business mail, pre-sorted and non-pre-sorted);

2. A non-priority service for parcels weighing up to 20 kilos – Royal Mail’s standard parcel service;

3. A registered and insured service – Royal Mail’s Special Delivery (next day) and Recorded (signed-for) products23 (this is because Royal Mail does not have a single product that meets the requirements of the Postal Directive). A range of support services to ensure the security and integrity of the mail – Royal Mail’s re-direction (up to 12 months), Keepsafe, Poste Restante, certificate of posting and business collections;

4. International outbound service – Royal Mail’s international public tariff and international signed-for products. The UK is also subject to the Universal Postal Union’s requirement to deliver mail coming from abroad.

At that time, it was decided that Royal Mail’s universal service obligation should also include at least one bulk mail product (high volume business mail), and stakeholders were consulted on which product or products that should be. In June 2005, Postcomm announced that it had decided to include both: • Mailsort 1400 (first and second class), which covers mail of all formats up to 2kg in

weight and pre-sorted according to the location of the 1,400 delivery offices; • Cleanmail (first and second class), which does not require users to have sorting

machines and is the “entry level” bulk mail product most often used by smaller businesses.

Special provisions for blind and partially sighted persons include free services for items that have been specially produced or adapted for blind and partially sighted people. 20 Royal Mail has commented that it does not accept this point – response to draft final country sheet UK. 21 The independent review of the postal services sector, second submission by Postcomm, the industry regulator,15 May

2008 (see website Postcomm). 22 Source: Postcomm Website www.postcom.gov.uk. 23 Recorded (Signed for) delivery is an add-on to mail sent using one of the ordinary mail products, such as stamped or

metered mail. If a recorded delivery (signed for) item is lost or damaged it has no entitlement to compensation for loss or damage other than that attached to the mail product used. The requirement to provide a registered and insured product is met by Special Delivery (Next Day) not posted on account. Source – response Royal Mail to draft final country sheet UK.


In addition to the above, collections and deliveries are set at six days per week, less public holidays. The actual decision resulted in the following services being required to be provided at a uniform tariff (Condition 2 of Royal Mail’s current Licence): • First Class mail not conveyed by other services listed (essentially stamped mail); • First Class Metered; • Second Class mail not conveyed by other services listed below (essentially stamped

mail); • Second Class Metered; • Standard Parcel; • Airmail Europe; • Airmail World Zone 1; • Airmail World Zone 2; • Surface Mail; • Special Delivery (Next Day) other than when sold to users having an account with the

Licensee buying the service using their account; • Cleanmail OCR 1st Class; • Cleanmail CBC 1st Class; • Cleanmail OCR 2nd Class; • Cleanmail CBC 2nd Class; • Mailsort 1400 1st Class; • Mailsort 1400 Residues 1st Class; • Mailsort 1400 2nd Class; • Mailsort 1400 Residues 2nd Class. As part of the study ECORYS took the opportunity to enquire of stakeholders their views as to the definition of the USO within the UK and how this compared to the Directive:

Royal Mail’s view on the USO

“Royal Mail’s view is that the USO should be narrowed to reflect a range of products where there is

currently less competition provided for in the marketplace and equating to the minimum legal

requirements of the Postal Services Directive and Act - namely stamped mail, standard parcels, a

registered and insured product (such as Special Delivery non-account) and international surface and

airmail. It is the provision of these services which is the minimum required by EU and UK legislation.

Royal Mail believes that stamp prices should cover the economic costs of providing this service. Royal

Mail does not propose significant degradation of the USO activities of daily collection and delivery.

These are enshrined in the Postal Service Act and any changes are a matter for Parliament, but any

significant degradation in perceived quality would put at risk mail’s competitive position against other

media.”24

TNT

“Although historically based, it may be that the number of days for deliveries and collections should be

reduced to five days (in line with the Directive) and the decision left with Royal Mail with regards to the

sixth day. In terms of products, there is an argument that only social mail should be included. Uniform

24 Source – ECORYS questionnaire to Royal Mail.


pricing / zonal pricing on bulk mail should be tackled as a separate issue (by statute, all universal

services must be priced on a geographically uniform basis). A big issue is for Royal Mail to be free to

operate the USO in a more efficient manner and for the USO to evolve taking into account the other

means of communication which are readily available compared with the time when the current concept

was developed.”25

UK Mail

“The definition of the USO in the UK is in some respects more extensive than the EU Directive, e.g. in

requiring delivery six days each week rather than five.

As the ‘cost’ of providing the USO (as opposed to the benefits of being the USO provider) are a key

factor in the licensing regime (price control) for Royal Mail in the UK, the definition of the USO is a

crucial factor in regulation of the UK postal market. For that reason, Postcomm is taking views on the

USO as part of its strategic review.

There may be grounds for a debate on whether changing the UK USO requirement for delivery to the

‘premises’ to one allowing delivery to another, agreed point would reduce USO costs in rural areas and

be acceptable to both sending and receiving customers.”26

As can be seen from the above there is some consensus from both the NPO and competitors that the scope of the USO within the UK could be reduced without compromising the UK in terms of meeting the requirements of the postal directives. In the Postcomm 2006 Customer survey 2006, conducted by Roland Berger, respondents – consisting of SMEs and individuals – stressed the importance of daily collection and delivery, affordable prices and geographical uniform tariffs.27 The scope of the product in the universal service was not a topic of investigation. The provision of Counter Services is not specifically covered by the USO definition, although the provision of access to postal services is included within Royal Mail’s Licence (i.e. how the customer accesses services such as insured or registered etc. is a matter for the NPO so long as there is availability). The NRA does not regulate post offices but does advise the Policy Maker on certain key issues. Within the Regulatory Accounts, the NPO includes within the accounting cost of the USO transfer charges from the counters business, at negotiated rates, for the provision of counter services pertaining to the relevant USO products and services. Postwatch (the consumer body) made the following comments:

“We consider it essential that consumers should have ‘easy’ access to all elements of the universal

service including those which are traditionally provided by Post Office Counters (essentially the sale of

registered/insured items and the acceptance of packets/parcels). However, we do not believe that these

services have to be provided solely by [physical] Post Offices. We would be perfectly happy to see

25 Source – ECORYS questionnaire to TNT. 26 Source – ECORYS questionnaire to UK Mail. 27 Roland Berger, The Needs of Postal Users – Customer Survey 2006, study for Postcomm, 20 December, 2006.


automated solutions introduced (in supermarkets, railway stations or wherever) if these could effectively

provide the services. Post Offices play a much wider role in society, with offerings far beyond these

universal postal services and we are concerned that their existence/funding should not be justified by

the small (but important) volume of postal service they provide.”28

In terms of the “cost of the USO”, the NRA has recently published a study called ‘Net costs of elements of the universal service’, which is available on its website. The aim is to assess the impact on the NPO of particular elements of the universal service, and although costs are included, the aim is not to estimate the total costs of the universal service but to establish “What impact do particular elements of the current universal service have on Royal Mail’s costs and revenues?” The consultants (Frontier Economics) indentify the scope of the report as “our work identifies areas where the universal service imposes net costs on Royal Mail.” The report concluded that:

“The largest net costs (both positive and negative) are associated with:

• the cost of providing Saturday collections and deliveries;

• the cost of providing the current 93% first class quality of service; and • a universal service two day mail product in place of the current two classes.”29

[And that] if the requirement were removed, Royal Mail could be expected to save over £320m of costs,

but only suffer a revenue reduction of around £55m. In contrast, there would be a significant revenue

reduction associated with a switch to a two day mail product. Without a radical restructuring of Royal

Mail’s operations it is unlikely that Royal Mail would be able to reduce its costs in line with the reduction

in revenues, and as a consequence Royal Mail could be expected to be between £44m and £278m

worse off under such a move.”

Royal Mail does not accept the results of the study.30 A previous study by the NRA (2002) estimated that the Net Avoided Cost was between 0% and 1% of turnover, and that if qualitative elements such as brand value were included there would be a net benefit to the NPO of £480 million. The work publicly available from the NPO (using the Entry Pricing Approach) now appears dated in that the modelling only assumes liberalisation down to 50g, whereas the UK market was fully liberalised from January 2006. The worst-case scenario in that publication gives a percentage loss of normalised profit of 108%.31. The NRA does not believe such a methodology is appropriate for estimating the cost of the USO. The entry pricing approach measures the cost to Royal Mail of market liberalisation rather than the cost of the USO. Since liberalisation Royal Mail has not repeated the exercise. Royal Mail now uses the Entry Pricing Approach internally to estimate its future market shares and volume forecasts and these are used as part of the regular Price Control review

28 Source – ECORYS questionnaire to Postwatch. 29 Source – Net Costs of Elements of the Universal Service – page 2 Executive Summary – Frontier Economics May 2008. 30 Source - CS UK draft final Royal Mail Comments July 2008. 31 Source – Post Office ESTIMATES OF THE COST OF THE UNIVERSAL SERVICE OBLIGATION USING THE ENTRY

PRICING APPROACH – Postcomm Website.


process as well as for planning purposes. Any published Royal Mail forecasts have been derived using Entry Pricing.32 From an accounting perspective, the latest results available33 give an operating profit (before exceptional items) of £27m (40m euro), although this figure includes the NPO’s additional pension costs in terms of the funds forecast shortfall. The Royal Mail 2007/8 Report and Accounts reports an estimated loss of £100m for the universal service in 2007/8 and an estimated loss of £200m for the price-controlled area in 2007/8.

1.3.4 Reserved area

There is no reserved area as the UK’s mail market was fully liberalised on 1 January 2006. New operators licensed by Postcomm can now collect and deliver any mail, from any customer. Preceding full market opening in 2006, the following postal services were opened to competition in 2003: mailings over 4,000 items, all mail collected by a consolidator and handed over to Royal Mail for final delivery, and all mail over 100 grams in weight.

Table 0.3 Liberalisation of postal services and the reserved area (2008)

Postal product Within reserved area

(Yes, no, partially or unclear)

Remarks

Bulk mail and consolidation No

B2B non-bulk mail No

Individual item mail No

Cross-border mail No

Unaddressed mail No

Parcel mail No

Express mail No

Source: Postcomm.

1.3.5 NRA

Postcomm - role Postcomm – the Postal Services Commission – is the independent regulator for the postal market and was set up by the Postal Services Act 2000 and is classified as a non-ministerial government department. Their stated role (Postcomm website) is to ensure licensed postal operators – including Royal Mail – meet the needs of their customers throughout the UK.

32 Source - CS UK draft final Royal Mail Comments July 2008. 33 Source - Regulatory Financial Statements 2006-07 – Royal Mail Website.


Areas covered by the NRA include: • Protecting the universal service; • Licensing postal operators; • Introducing competition into mail services; • Regulating Royal Mail; • Advising Government on the Post Office Network; • Complaints and redress procedures. Postcomm (the NRA) does not investigate individual complaints. Individuals are directed to the postal companies in the first instance, and then Postwatch (see below), the independent watchdog for consumer’s services in the postal sector. In October 2008, licensed postal operators will introduce a formal redress scheme for postal services, as required by the CEAR Act 2007. The scheme must be approved by Postcomm.34 Under the terms of postal licences issued by Postcomm they do have the authority to make enforcement orders where companies do not meet their licence conditions and are able to instigate criminal or civil proceedings where postal operators are working without a Licence. Postcomm has published its first stand-alone document setting out enforcement procedures relating to possible licence contraventions. The guidance explains procedures likely to be followed by the postal regulator when it considers complaints, investigates licensed operators, takes enforcement action and imposes financial penalties. Relationship with other Governmental organisations It also has a memorandum of understanding with the Office of Fair Trading, which aims to promote cooperation and coordination between the two when dealing with cases of anti-competitive behaviour for which they have overlapping powers. The NRA is required to provide an Annual Report to the Policy Maker and additionally provides a forward work plan for the Department to consider. Postcomm – staffing and budget Approximately 60 staff work at Postcomm. The annual budget of Postcomm was in 2005/06 £10,160,00 and in 2006/07 £9,968,000. The operations of Postcomm are funded by licence fees.35 Complaint and redress procedure The CEAR Act referred to in the section on postal law and regulation places a statutory requirement on Postcomm to make regulations on complaint handling standards which would apply to all licensed postal operators and enables the Secretary of State to require regulated service providers in the postal services sector (in the United Kingdom) to belong to redress schemes, providing resolution and redress for their consumers and to

34 Source - CS UK draft final Royal Mail Comments July 2008. 35 Source – ECORYS questionnaire to Postcomm.


award compensation where necessary. The NRA has recently completed a consultation on both and has published final proposals on complaint handling.36 The new procedure will take effect once Postwatch is abolished and its functions transferred to another organisation (as a result of the same CEAR Act). Postwatch In addition to Postcomm, the UK has a consumer body called Postwatch. Postwatch is an independent organisation, not attached to the Royal Mail Group or part of the Government. Postwatch was set up to ensure that Royal Mail and any licensed postal providers, give the best service possible to their customers. The role of Postwatch is to protect, promote and develop the interests of all customers of postal services in the UK. Postwatch campaigns for a better overall postal service for customers, advises Government, the Regulator and Royal Mail Group on consumer views, demands and needs. The aims of Postwatch are set out in its Forward Work Plan 2007/ 2008. Postwatch acts as the “voice of the consumer” in all postal matters to ensure customers get the best possible service. They have nine committees across the UK with offices in Scotland, Wales, Northern Ireland and six regions across England. Through its network of contacts, each region builds up a picture of postal service provision and customer needs in their area and ensures that these are properly represented at a national level. Operating in this way at a grass-roots level, Postwatch is able to gain local knowledge and gauge local customer needs and opinions. At a national level, Postwatch meets regularly with consumer bodies through their Counters Advisory Group to ensure they know what customers’ representatives are saying. They also conduct research to find out what their customers think about specific issues. They have regular contact with competitors to the Royal Mail Group through meetings with their Trade Association Forum and Mailers Consultative Group to hear their perspective of the postal market. This then enables Postwatch to put forward effectively the views of the business community to the Royal Mail Group, Postcomm and both local and national Government. Postwatch monitors Royal Mail’s performance and advises the Regulator on the appropriate action to take if Royal Mail fails to meet its performance targets or breaches its licence conditions in any other way. Postwatch will also get involved in issues at a local level such as the closure of specific post offices, problems on a local delivery round and trials of new products or services in an area.

36 See www.psc.gov.uk/postcomm/live/policy-and-consultations/consultations/complaint-handling-standards-for-licensed-

postal-operators/2008_06_complaint_handling_standards_doc_v1.0.pdf.


On an individual level, Postwatch can help with complaints about the postal service. If an individual customer has already complained to Royal Mail (or any other postal provider) and has received an unsatisfactory response, or needs help in formulating a complaint, for whatever reason, Postwatch is available to help. Under the CEAR Act, Postwatch will cease to exist in September 2008 and its functions will be moved to other UK consumer bodies. Postwatch – staffing and budget In 2006/07 Postwatch had a budget of around £9m (€13m) and employed 94 staff. These staff were divided fairly evenly between central functions located in London, Postwatch complaints and enquiries service in Northern Ireland (Belfast) and nine regional offices throughout the United Kingdom. Postwatch’s annual business plan (including resource bid) is approved by its sponsoring government department (BERR, formerly DTI). The funds are levied from Royal Mail (and to an insignificant extent from other licensed operators) by virtue of a licence condition imposed by Postcomm.37

Table 0.4 Regulatory powers NRA

Powers Yes/No/Unclear Remarks

Require data from USP Yes

Require accounting system Yes

Require new data studies Yes

Cancel unlawful rates Yes

Levy Fines Yes

Seek judicial order Yes

Set new rates for USP Yes

Require downstream access Yes

Require data from non-USPs Yes

Source Postcomm.

Information provision by licence holders Other Licence holders (other than the NPO) are also required, as part of their licence, to provide the NRA with quarterly revenue and volume data for both the Licensed and non-Licensed areas of their postal operations. There is a view that the requirement to provide data on the un-licensed area is questionable since the NRA does not get the equivalent data from non-licensed operators and therefore only gains a partial view of that segment of the market.38

37 Source - ECORYS questionnaire to Postwatch. 38 Source – ECORYS questionnaire to TNT.


1.3.6 Licences

The licensing framework sets out requirements on each licensee and aims to “strike a balance between protecting customers and encouraging new postal operators to come into the market.”39 A licence enables but does not require the provision of postal services. The framework was introduced on the 1st January 2006 (the date of full liberalisation) and applies to all operators, but with significant additional requirements on Royal Mail as the dominant supplier, which includes strict price and quality requirements. The licensed area covers mail weighing 350g or less or costing £1 or less, unless an exemption applies and as such companies planning to operate in that arena are required by the Postal Services Act 2000 to have a licence issued by the NRA. Minimum standards are set for mail integrity, common operational procedures, performance monitoring and reporting and complaints handling. Financial guarantees were required plus there was a £1,000 licensing fee plus an annual fee of £1,000 or a percentage of turnover where this is in excess of £10m per annum. However, in January 2008, the above was amended such that the annual fee of £1,000 and conditions were removed for all licensees with a turnover of less than £10m per annum in the licensed area and replaced by an application fee of £50 for all applicants. In addition the requirement for financial guarantees was removed, as was the requirement to provide information on how operators would comply with the mandatory mail integrity code. Postcomm advises that the licensing process can be expected to be completed within three months.

Table 0.5 Entry regulations

Instrument Services allowed under the

license

Conditions for operating

under the license

Number of licences

approved (2008)

Licences Addressed mail collection

through to delivery of items

weighing less than 350 g or

costing less than a £1. All

services that would otherwise

be prohibited.

Minimum standards on mail

integrity, common operational

procedures, performance

reporting, licence fees, ,

complaints handling, and

provision of information to the

NRA.

Additional requirements on

Royal Mail re price, quality,

product changes and provision

of the USO

22 (including Royal Mail)

Source: Postcomm.

39 Source – Postcomm website www.psc.gov.uk/postal-licences-and-operators/the-multi-operator-market/licensing-

framework.


The perception of some of the current competitors is that the licensing regime has worked well to date and (although perhaps “heavy for competitors”)40 that “it requires entrants to demonstrate appropriate commitment and professionalism without being a deterrence or barrier to entry or an excessive financial commitment.”41 However, even with the above comments, there are views as to if competitors should be licensed at all, and the following comment was made:

“Within the near future we would expect the Licensed Area to reduce and eventually disappear (other

than for Royal Mail), especially given that other operators dealing with mail out-with the boundaries

have no requirements for a licence.”42

In fact it could be argued that the current requirements are out-with those of the Directive in that they still remain at the pre-2002 levels of 350g and £1. The consumer watchdog (Postwatch) had more concerns and believed the system too complex. They also expressed the view that the NRA “has a very poor record of enforcing sanctions against Royal Mail”43 and that they were concerned by the NRA’s proposals to simplify the licensing application process. The NRA proceeded with the changes to simplify the licensing process despite a mixture of agreement and disagreement with them from Postwatch, the NPO, one trade union and some other licensed operators. Since making these amendments, the NRA has granted five new licences. At least two of the applicants would not have been completed if the licensing framework had not been amended.44

1.3.7 Access

Downstream access45 The amended licence granted to Royal Mail Group plc on 23 March 2001 stipulates that postal operators and customers can apply for access to the Licensee’s postal facilities (Condition 9: Access to the Licensee’s postal facilities).46 In the absence of an access code, it is up to third parties to negotiate access with Royal Mail. If an agreement cannot be reached, either party can request determination of the terms of access from Postcomm. The principles of transparency and non-discrimination are applied, meaning that if access is granted on certain terms and conditions to one party (customers and competitors alike), then other parties are entitled to have access on the same terms and conditions.

40 Source – ECORYS questionnaire to TNT. 41 Source – ECORYS questionnaire to UK Mail. 42 Source – ECORYS questionnaire to TNT. 43 Source – ECORYS questionnaire to Postwatch. 44 Source – Postcomm response 21st July 2008 to ECORYS. 45 With regard to the situation until 2007, this section is based on ECORYS (2007). 46 Further amendments were made to Royal Mail’s licence on 1 April 2003, 2 November 2005 and 25 May 2006.


Until recently, the only form of operational access in operation is that of “downstream access,” i.e. where mail is presented at inward sorting centres prior to final mile delivery. Of late (July 2008), Royal Mail has introduced a new service for outbound international mail based on extraction at mail centre. The following description is provided on the Royal Mail Wholesale website:

“The Service is only available for machine able letters and postcards addressed to international

destinations. The service allows Customers to design and produce their own personalised international

stamps for retail sale in the UK for delivery outside of the UK. All international stamp designs must be

pre-approved by Royal Mail. Mailing items bearing these international stamps can be posted into Royal

Mail post boxes before being extracted at Royal Mail outward mail centres and handed over to the

Access Customer. The Access Customer is responsible for the onward international conveyance of the

items. Maximum item weight is 20g. Item price is 14.39p plus hand over charges.”

National access contract The first access agreement was reached in 2004 between Royal Mail and UK Mail but only after very lengthy negotiations (circa two years) and only just prior to terms being imposed by Postcomm (after UK Mail had referred the matter to the NRA). Postcomm subsequently regulated the minimum headroom between access products and their analogous retail products as a (minimum) percentage price difference as part of the 2006-2010 Price Control. One aspect of the very detailed access agreement between UK Mail and Royal Mail is that additional charges may apply (above the access price) if the postings over a certain period do not fulfil the so called national geographic profile requirement.47 As a result of the applied principle of transparency and non-discrimination, the access agreement with UK Mail was subsequently used as the basis for access agreements with a variety of other postal operators and (large) customers. One of the most important reasons for TNT Post UK to opt for the now standard national access agreement (including the national geographic profile requirement) with Royal Mail was that in this way a potentially lengthy period of access negotiations with Royal Mail could be avoided. Zonal access contract Over the course of 2004 another type of access agreement was negotiated - based on de-averaged zonal prices.48 This access agreement became the second standard access agreement – as of January 2007 four access operators and three large customers have concluded zonal access agreements with Royal Mail.49 The above agreements are available to operators and customers (Customer Direct Agreement – CDA).

47 See also Condition 9 Access Services for Inward Mail Centres User Guide, www.royalmailwholesale.com. 48 As downstream access arrangements are not part of Royal Mail's universal service obligation, Royal Mail is not obliged to

charge a geographically uniform price. 49 Information obtained from Royal Mail.


In July 2008, Royal Mail introduced the Mail Extraction Agreement, which provides an egress service as opposed to an access to delivery service. Access contracts for agents Additionally, there are variants for both the national and the zonal access contracts that enable operators to act as an agent and thus minimise the VAT charges they are required to pass to their clients (VAT needs only be charged on the upstream services, not on the access charge that need to be paid to Royal Mail). Establishment of Royal Mail Wholesale In response to a number of complaints with regards to discriminatory behaviours as regards access negotiations and Condition 10 of Royal Mail’s licence (“Prohibition of obtaining unfair commercial advantage”), Royal Mail Wholesale was established in April 2006. The role of the new unit is to manage all aspects of Royal Mail’s interface and commercial arrangements with customers wanting to make use of Royal Mail’s postal facilities under Condition 9 of Royal Mail’s Licence. Condition 9 of Royal Mail’s licence specifies the Access “rules” for Royal Mail (as modified 25th May 2006). The full text can be seen at Annex 2. Shortened period for access negotiations Since the original negotiations, Postcomm has amended Condition 9 of Royal Mail’s Licence such that after the provision of all relevant information, Royal Mail has a period of three months to provide the terms of access. Cost will very much depend on the level of negotiations, systems requirements, data provision etc. However, new entrants to the access market do have the ability to take the “off the shelf” contracts already negotiated. Royal Mail Wholesale operates a web site (royalmailwholesale.com), which includes a section on pricing. All services that have been agreed to date are published, including relevant formulae, either within the pricing section or within the specific contracts. Non-price requirements The non-price requirements50 of the access agreements appear onerous (zonal identifier on each piece of mail, electronic interfaces, etc) and as such may act as barriers to entry for smaller operators wishing to compete in the market. Relation between access and retail prices Access prices are within the current price control (2006-2010) and are geared to upstream retail equivalents (where available) with a requirement that price margins (headroom) are maintained between these access and retail services, as were in force in April 2006. Downstream prices also include zonal prices, which are available to those using zonal access (customers or competitors who cannot meet certain fall to ground criteria). The zonal prices are also regulated to ensure that the prices for zone C are the same as the (averaged) prices in the national access contracts and also that the percentage difference 50 Access User Guide – Royal Mail Wholesale website.


between the access zone prices are maintained (i.e. between C and B, B and A, C and D, D and E). The access products, the analogous retail products and the relationship between the wholesale and retail prices are presented in Table 1.6, where it can be seen that the access prices depend on the level of mail preparation, format and machine readability.51

Table 0.6 Headroom at the lowest weight step between access prices and analogous retail product prices

Access

product

Weight

step (g)

Access

price (p)

Closest retail product Retail price Margin (p) Margin (%)

1400 letter 0-100 14.09 Mailsort 1400 2 Letter 21.02 6.93 32.97

1400 large

letter

0 - 100 17.94 Mailsort 1400 2 Large

Letter

26.79 8.85 33.03

1400 A3 0 - 100 38.50 Mailsort 1400 2 A3 55.94 17.44 31.18

1400 Packet 0 -100 48.15 Mailsort 1400 2 Packet 69.96 21.81 31.17

120 (letters) 0 - 100 14.66 Mailsort 1400 2 Letter

(residues)

21.71 7.05 32.47

120 large

letter

0 - 100 19.56 Mailsort 1400 2 Large

Letter

(residues)

28.29 8.73 30.85

120 A3 0 - 100 42.66 Mailsort 1400 2 A3

(residues)

61.70 19.04 30.86

120 Packet 0 - 100 53.35 Mailsort 1400 2 Packet

(residues)

77.17 23.82 30.87

120 (OCR) 0-100 13.80 Mailsort 120 2 (OCR) 19.17 5.37 28.01

120 (CBC) 0-100 13.69 Mailsort 120 2 (CBC) 18.94 5.25 27.72

700 (CBC) 0-100 13.69 Mailsort 700 2 18.64 4.95 26.56

Walksort

letter

0-100 13.41 Walksort 2 Letter 15.82 2.41 15.23

Walksort

large letter

0 - 100 16.71 Walksort 2 Large Letter 19.72 3.01 15.26

Walksort A3 0 - 100 37.65 Walksort 2 A3 44.41 6.76 15.22

Source: April 2008 prices from Royal Mail Wholesale websites; Presort prices based on 10,000 items.

Note: the Access 120 and 700 CBC prices are the same due to the gradual phasing out of the 700 product

(which is for walk sorting mail) as the level of walk sequencing increases.

As one would expect, the views of the NPO and those of its competitors with regards to the margin regulation referred to above are very different and as such both referred the issue to the NRA. See price regulation for views expressed. The downstream access element52 of the 2006/07 Royal Mail Regulated Accounts showed a loss (before exceptional items) of £44m (66m euro).

51 The main characteristics resemble the situation in France, where the upstream market has been liberalised since the 1970s

and large customers, mailing houses and mail consolidators can inject the mail in La Poste’s network at three different levels at discounted prices (see ECORYS 2005a, country information sheet on France in Annex II).


Table 0.7 Network access

Upstream/downstream Form of access Regulated?

(Yes, No, Unclear)

Upstream Access to street letter boxes Yes

Access to outward sorting centres Yes

Downstream Access to inward sorting centres Yes

Access to delivery offices Yes

Access to PO boxes Yes

Source: Postcomm

Note: Access to the Postcode Address File is also regulated and covered in the Royal Mail Licence under

Condition 22.

In section 1.5.5, we further elaborate on the impact of the access prices and headroom regulation on the development of competition. Access to the Postcode Address File Access is also available to the NPO’s Postcode Address file. The postcode system is alphanumeric and in addition to being a basic tool for the sorting and delivery of mail, UK postcodes are now at the heart of all companies that deal with their customers by telephone or over the internet. Many postal operators have now introduced bar-coding that builds on the postcode enabling bulk mailings to be sorted down to individual residences including the order that is required for delivery within individual postmen’s walks. The debate on ownership and availability of PAF will no doubt continue, but given that it is a postal facility developed and built whilst the NPO was a state monopoly, it is unlikely that current access availability will be lessened. Access to PO boxes Access to PO boxes within the UK also poses different issues to those in other member states. PO boxes are located within delivery offices and as such mail can only be collected when the delivery office is open. Hours may vary at each Delivery Office and in the main, may not be aligned with normal office hours. In other Member States, the PO box is a physical entity to which the holder will have a key and be able to collect mail at any time. Access to residential and business letterboxes is not restricted at all by either legislation or postal regulation.

52 Source - Regulatory Financial Statements 2006-07 – Royal Mail Website. Please note that the 2007/8 regulatory accounts

were not available at the time of writing this report.


Views of Postwatch The consumer watchdog (Postwatch) expressed the following views on the access regime within the UK:53

“It could be argued that Postcomm’s emphasis on access was simply a means to ensure that

competitors were active in the market as soon as possible, and that it has not in fact resulted in any real

competition (i.e. restricted to large mailers only). Indeed, some believe that it has actually hindered the

development of end-to-end competition and consolidated Royal Mail’s position as a monopoly provider

of final mile delivery.

However, access continues to be the most effective means of delivering competition in the current

market. The access regime has given large customers a viable alternative to Royal Mail (either using

consolidators or as licensees themselves through ‘customer direct access’ agreements) and it is

becoming a business model in its own right and a potential launch pad for end-to-end development.

We continue to support the regulation of access prices and associated non-price terms to facilitate

competition. Undoubtedly there will be continual growth in the access market as it is the only real form

of competition in the absence of a competitive end-to-end operation.

VAT remains a key barrier to the promotion of effective competition and Access has provided one

means to bypass the VAT requirements. Under the new arrangements, mail operators offering access

are no longer required to charge VAT on the whole cost of their access operations. Instead, VAT is only

required to be charged on the ‘upstream’ element of these arrangements – that is, the collection and

sorting services offered by Royal Mail”

1.3.8 Price regulation

Royal Mail is required to operate within the pricing framework defined in Condition 21 (previously Condition 19) of its Licence. The detail of the pricing framework is reviewed periodically. Royal Mail’s first price control was a two-year price freeze that began on 23 March 2001, the day the first licence took effect. In November of that year, Postcomm began public consultations on their second price control. The details of the second price control were finalised in March 2003 and came into effect, for three years, on 1 April 2003. Public consultations on the third price control began in March 2004 and continued until details of the control framework were finalised in May 2006. The third price control is for a four-year period, with effect from 3 April 2006. Postcomm issued a decision document in January 2008 on an interim review of pricing which came into force in April 2008. Type of price control Royal Mails price control is in the form of RPI–x, across two baskets: (A) captive and (B) non-captive, each with a price rebalancing sub-cap element. The aforementioned review 53 Source – ECORYS questionnaire to Postwatch.


has allowed Royal Mail to increase the sub-cap from 3% to 8.5% in the captive basket to those services where the price is at least 6% below fully allocated costs. The non-captive basked has had the sub cap also increased to 8.5% but without any restriction. The decision document also covers a request by Royal Mail, TNT Post and UK Mail for changes to the level and extent of access headroom, which was declined by Postcomm. Royal Mail had wanted to reduce the margin and the two Access operators argued that it should be increased. Postcomm concluded that:54

“Neither the ‘as efficient’ nor the ‘reasonably efficient’ tests provided clear evidence that changes are

needed to access headroom […] [and] that Royal Mail’s cost data is not sufficiently robust to make small

changes of fractions of a penny in access headroom with any degree of confidence, the implications of

which could be significant for the development of access competition.”

There have been a number of occasions where Royal Mail has applied for specific price changes, most notably Pricing in Proportion and Zonal Pricing for upstream products. The former was agreed and introduced in August 2006, whilst in respect of the latter Postcomm announced in December 2007 that it has rejected the proposals. All licence holders are required to maintain accounts that separate revenues and costs associated with postal operations within the licensed area from other activities and to provide these to Postcomm on an annual basis. Royal Mail prepares annual Regulatory Accounts which it publishes on the Corporate website www.royalmailgroup.com, although there is not a specific licence requirement to do so. The published accounts go into great detail in terms of analysis. Royal Mail is required under Condition 15 of its licence to maintain accounting records in line with Directive 97/67/EC as amended by Directive 2002/39/EC per Annex 1. Both Postcomm and Postwatch have previously expressed concerns as to the accuracy of the cost allocations. Royal Mail declared losses of £12m55 (18m euro) for the price controlled products and services in its 2006/07 Regulatory Accounts, down from a profit of £197m the previous year. This is in part due to a decline inland addressed mail volumes and significant customer down-trading to cheaper products, resulting in a decline in 1st class mail volumes of 7% and an increase in access volumes (switched from upstream products).56 The Royal Mail 2007/8 Report and Accounts reports an estimated loss of £100m for the universal service in 2007/8 and an estimated loss of £200m for the price-controlled area in 2007/8.

54 Review of Royal Mail’s pricing flexibility and the level of access headroom (the ‘Interim Review’ of the price control) -A

Decision and Direction by PSC page 29 para 4.16 and 4.17 – Postcomm website. 55 Source - Regulatory Financial Statements 2006-07 – Royal Mail Website. 56 Direct communication with Royal Mail.


Views of postal operators on Royal Mail’s price control In terms of the NRA’s position on price control, Royal Mail and its competitors put very differing views and perspectives forward:

Royal Mail’s view on the price control

“Condition 21, of Royal Mail’s licence, introduced an access headroom requirement into the control for

bulk mail products as a way to protect new entrants from margin squeeze. These margins were set

based on the relevant March 2006 retail and access prices, which mean that they vary significantly

between products and bear no relationship to the margin squeeze tests that competition law would

apply.

The implication of this somewhat arbitrary approach to headroom regulation is that Royal Mail is

restricted from offering lower prices to its largest bulk mailers – even if these are made possible through

upstream cost reductions – as to do so would force Royal Mail to lower the price of all related access

mail. Any competitive advantage Royal Mail might have had from upstream cost reduction would be

immediately passed to its competitors. It represents a barrier to innovation by Royal Mail but an

enormous advantage to new market entrants. There is no evidence to show that the new entrants need

this level of protection, nor that it is in the wider economic interest. Postcomm have, however, recently

rejected an application from Royal Mail to reduce headroom.”57

As can be seen Royal Mail is of a strong opinion that it is being prevented from competing on an even footing with its competitors from a price perspective, whereas the competitors views are some what different:

UK Mail’s view on the price control

“Royal Mail pricing policies are aimed more at squeezing opportunities for competitors than at

recognising the needs of customers. Pricing changes said to be to achieve “greater cost reflectivity” are

highly selective. Postcomm needs to strengthen controls on Royal Mail pricing where there is

opportunity for unfairly constraining the development of competition.”

“UK Mail believes Postcomm should change the price control elements of Royal Mail’s licence to

increase the ‘headroom’ between access charges and comparable retail prices and to extend the

‘headroom’ provisions to a wider range of retail services. Postcomm should also act more robustly in

investigating any anti-competitive action by Royal Mail in relation to access and strengthen (rather than

weaken) its ex-ante provisions on Royal Mail relating to access.”58

TNT’s view on the price control

“Royal Mail pricing is often irrational and un-commercial. Prices are only cost based if it suits Royal Mail.

Postcomm’s close involvement is essential as Royal Mail’s pricing policy appears geared to it retaining

its monopoly at the expense of genuine competition. In particular, TNT has real issues with Mailsort 3

prices being below access prices, with “loyalty” discounts offered through so-called “term contracts” and

with volume discounts for unsorted business mail.

In conjunction with other competitors, TNT Post has filed a formal complaint with Postcomm with regards to Royal Mail’s pricing policy in the aforementioned areas:

57 Source – ECORYS questionnaire to Royal Mail. 58 Source – ECORYS questionnaire to UK Mail.


“The resistance of Postcomm to ex ante headroom regulation on a full range of services is questionable.

In particular, it is essential that the headroom regulation be extended to cover all bulk mail products and

relevant unsorted mail products, given that the current control only relates to the Mailsort 2 product and

the relationship with access prices.”59

As would be expected, the main “battle ground” that will be fought over the next few years will be Royal Mail’s pricing policies and how the NRA deals with the issues. In particular it will be of interest to see how the next price control decisions are arrived at. Views of the policy maker In the UK Government White Paper on Post Office Reform, the policy maker elaborated on the price control policy.60 The main objective is that that all customers should be assured of a world class level of postal services provided at a reasonable price. Acknowledging that not all customer needs in the monopoly area can be met by a single tariff, the policy maker judged it is in the general interests of postal services that the Post Office should have greater freedom to offer commercial, competitive discounts to such users, provided that the flexibility is not used to reduce unduly the prospects for increased competition, or to undermine unfairly the viability of competitors’ activities in adjacent unlicensed areas. The policy maker had more concerns around the affordability of mail for the ordinary user and had concerns that business did not profit at the expense of the consumer.61 Given the above view, it may well be that were the current form of price control to continue that the price of the universal service to consumers may become a political rather than an economic debate. In section 1.5.5, we further elaborate on the impact of the access prices and headroom regulation on the development of competition.

1.3.9 Quality of service

Regulation Condition 4 of Royal Mail’s Licence specifies service standards and levels of compensation. The range of measures set is very extensive as per the following table.

59 Source – ECORYS questionnaire to TNT. 60 DTI, Post Office Reform: A world class service for the 21st century, July 1999. http://www.berr.gov.uk/files/file28804.pdf. 61 Source – ECORYS questionnaire to DBERR.


Table 0.8 QoS standards for Royal Mail’s services

Scheduled

Services

Performance

bands for

scheduled

standards

I II III IV

Standard (%) No automatic

consequences

(%)

Users receive

price reductions

or compensation

(%)

Postcomm

considers

investigation

(%)

1 Grouping 1 - Retail

first class 93.0 <93.0 but >92.0 92.0 to >88.0 88.0 or less

2 Grouping 2 - Retail

second class 98.5 <98.5 but >97.5 97.5 to >93.5 93.5 or less

3 Grouping 3 - Bulk

first class 91.0 <91.0 but >90.0 90.0 to >86.0 86.0 or less

4 Grouping 4 - Bulk

second class 97.5 <97.5 but >96.5 96.5 to >92.5 92.5 or less

5 Grouping 5 - Bulk

third class 97.5 <97.5 but >96.5 96.5 to >92.5 92.5 or less

6 Standard Parcels 90.0 <90.0 but >89.0 89.0 to >85.0 85.0 or less

7 European

International Delivery 85.0 <85.0 but >84.0 84.0 to>80.0 80.0 or less

8 Special Delivery

(Next Day) 99.0

Compensation in

accordance

with contractual

specification

Compensation in

accordance

with contractual

specification

94 or less

Standardised

measures

9 Postcode area

target % (delivered) 91.5 <91.5 but >90.5 90.5 to >86.5 86.5 or less

10 % of collection points

served each day 99.90

<99.90 but

>99.80 99.80 to >99.40 99.40 or less

11 % of delivery routes

completed each day 99.90

<99.90 but

>99.80 99.80 to >99.40 99.40 or less

12 % of items delivered

correctly 99.50

<99.50 but

>99.40 99.40 to >99.00 99.00 or less

Source: Postcomm www.psc.gov.uk/royal-mail-standards-and-prices/quality-of-service/.


The following table lists the more detailed services covered.

Table 0.9 Explanation of scheduled services

Scheduled services

referred to in table above

Generic products

Retail first class Stamped and metered 1c

Retail second class Stamped and metered 2c

Standard parcel Standard parcel

European International Outbound

Public tariff outbound international services within

the scope of the Unipost External Monitoring System

survey undertaken by International Postal Corporation

on end-to-end quality of service measures for

European cross-border international priority mail

Special Delivery (Next Day)

Special Delivery (Next Day) other than when

sold to users having an account with the Licensee

buying the service using their account

Bulk 1 PPI 1c

Mailsort 1

Presstream 1

Response services 1

Bulk 2 PPI 2c

Mailsort 2

Response services 2

Presstream 2

Bulk 3 Mailsort 3

Source: Postcomm www.psc.gov.uk/royal-mail-standards-and-prices/quality-of-service.

Performance Under the conditions of its licence, Royal Mail is obliged to use all reasonable endeavours to meet certain “quality of service” standards as above, covering a wide range of products, including first and second class mail, special deliveries (a registered, insured and express product) and most bulk mail services. If annual performance falls into band III of the table above then substantial automatic penalties apply. Postcomm monitors Royal Mail’s compliance with these standards and if they consider that RM has not used all reasonable endeavours to meet them, Postcomm can take enforcement action against it and/or impose financial penalties.62 These are in addition to the automatic penalties. In addition Royal Mail is required to measure, report and publish other aspects of performance in relation to delivery and collection times under Condition 4 paragraph 6 of its Licence, and in relation to the service given to access mail under Condition 4 paragraphs 8 and 9 of its Licence, although no standards are attached to these measures

62 Source – Postcomm website www.psc.gov.uk/royal-mail-standards-and-prices/quality-of-service/.


(non-standardised measures). Royal Mail provides Postcomm with monthly performance figures and publishes quarterly quality of service reports on its website. On 24 August 2006, Postcomm imposed a financial penalty of £9.62m on Royal Mail for breaching its licence by failing to properly protect the mail in its care in 2004/5. All licence holders are required to estimate and report levels of lost, damaged, stolen and interfered with mail under the Code of Practice for Mails Integrity. There is no requirement to publish this information, which is commercially sensitive. Under the Mails Integrity Code of Practice, which makes up Condition 8 of Royal Mail’s Licence, Postwatch and Postcomm receive an annual report containing estimates of lost, stolen, damaged and interfered with mail from Royal Mail, however the NPO prohibits the publication of mail integrity data or its divulgence to third parties. Postwatch are lobbying Royal Mail for it to be published.63 The range of targets imposed on the NPO by the NRA appears far more extensive than in many other Member States. Condition 4 paragraph 8 of Royal Mail’s Licence sets out requirements for measurement of performance and audit or validation thereof against standards, standardised measures and non-standardised measures. Performance measurement Research International is the independent company that measures the quality of service provided by Royal Mail for most of its Licence targets and non-standardised measures. Research International measures Royal Mail’s performance using a large panel of volunteers. A mix of both private individuals and businesses all over the country send test letters to each other and then log on the internet the dates when they posted and received this mail. Some 30,000 test letters are sent each month. The surveys are carried out in accordance with the requirements of the Comité Européen de Normalisation (CEN) standards for transit time measurement and are audited by independent auditors appointed by Postwatch.

“Currently, only the standard for the measurement of first class single piece mail (EN 13850) is

mandatory, but the other non-mandatory standards are also used for the Royal Mail surveys where they

can be applied. All of these standards require that “The measuring methodology shall be objective and

shall be audited,” and that “measurement shall be carried out by an independent performance

monitoring organisation.” These standards are followed carefully, and compliance is also covered by the

audit.”64

63 Source – ECORYS questionnaire to Postwatch. 64 Source - Research International’s response to the Postcomm consultation papers “2006 Royal Mail Price and

Service Quality Review - Initial Proposals, June 2005”, sections 9.68 and 9.69.


For those standards and non-standardised measures which are undertaken by the NPO, an independent reporter is appointed to test and give an opinion to the NPO and NRA on the suitability and application of the measurement methodology. As can be seen in Table 0.10, recent data suggest that Royal Mail is meeting the QoS targets, as further explained in the quote from the Royal Mail website below. No information is publicly available on the percentage of lost mail.

Table 0.10 Quality of service USP for the 12 months period ending 31 March 2007 (2007/8 results in parentheses)

Standard Threshold Performance USP Remarks

D + 1 Retail 93.0 94.0 (85.2)

D + 1 Bulk 91.0 93.2 (83.4)

% of lost mail There is no target for lost

mail or any requirement

under Condition 4

Not disclosed Information provided to

Postcomm and Postwatch

but not published

European International

Delivery J + 3

85.0 93.2 (92.4)

D + 3 Retail 98.5 98.9 (95.7)

D + 3 Bulk 97.5 98.3 (93.9)

D + 7 Bulk 97.5 99.5 (96.7)

Special Delivery

(Registered included)

99.0 99.0 (97.8)

Standard Parcels (USO) J

+ 3

90.0 94.5 (90.4)

% Postcode areas

achieving 91.5% 118 of 118

116 of 118 (0 of 118) The 91.5% floor target is

for D+1 retail mail

delivered in the postcode

area

% of collection points

served each day 99.90

99.92 (97.76)

% of delivery routes

completed each day 99.90

99.95 (97.35)

% of items delivered

correctly 99.50

99.66 (99.66)

Source: Royal Mail.

Note: The (worse) 2007/8 results were substantially affected by industrial action during 2007.

“In accordance with the Annex to Condition 4 and Condition 4.7(a) the performance during the

Christmas period - which is defined by the Licence for the year (06/07) as 4 December - 1 January - is

excluded from the full-year reported results.

For the full-year ending March 2007, 11 of the 12 Condition 4 Scheduled Services and Standardised

Measures were at or above the full-year Licence requirement. Most products (where historical


information exists) performed at best-on-record levels for the year. First Class Stamped and Meter at

94.0 was only 0.1 lower than the previous year’s best-on-record result.”65

For 2007/8 Royal mail provided the following quote:66

‘Figures released by Royal Mail confirm that, as previously announced, industrial action last year

damaged services for postal customers. However the 2007-08 Quality of Service report also shows that

the large majority of mail, including all bulk business mail, was performing at target or above target

levels as the financial year ended in March 2008.

Ninian Wilson, Royal Mail's Operations Director, said, "The immediate objective for everyone working in

the business is to deliver further improvements in Quality of Service to customers and restore the record

levels seen before last year's dispute."

92.2% of first class letters were delivered the working day after posting in the final quarter of the year,

compared to 79.3% in the third quarter and 78.4% in the second quarter, when industrial action first disrupted services. The dispute meant the full year first class performance fell below target at 85.2%.

1.4 The mail market

1.4.1 Mail market overall

The tables below provide figures on mail market developments per market segment.

Table 0.11 Size of the mail market in turnover (million £)67

Postal product 2005 2006 2007

Bulk mail and consolidation

Access mail1

Access mail – competitors revenue2

£1,810

£12

£1,648

£151

£7

£1,472

£325

£15

Other end to end mail3 £20 £20 £18

Individual item mail £2,8264 £2,809 £2,7555

Royal Mail “other”6 £1,380 £1,379 £1,407

Cross-border mail (outbound)7 £300 £300 £300

Unaddressed mail8 £1,305 £1,318 £1,330

Parcel mail

Express mail9 £3,644 £3,700 £3,922

Total £11,297 £11,332 £11,544

Sources:

1 Royal Mail Regulatory Accounts 2006/07

2 ECORYS estimate based on plus 3p per item

3 ECORYS estimate at an average of 50p per item.

4 Royal Mail Regulatory Accounts 2004/05.

65 Source – Royal Mail Website www.royalmail.com. 66 Source - CS UK draft final Royal Mail Comments July 2008. 67 Royal Mail has stated that it does not agree with these market definitions.


5 RM Regulatory Accounts 07 stamp + meter + ppi.


7 ECORYS estimate based on Postcomm 2007 CMR who sourced this data from the International Postal

Corporation Market Audit data from 2005.

8 ECORYS estimate at 10p per item.

9 Postcomm 2006 & 2007 CMR 2006 p.33 “The UK is a relatively large, highly fragmented and seasonal

market. The express market is worth around £3.7 billion and growing at a modest rate of 1-2 per cent per year.”

2007 p.26: “Overall, the express market is demonstrating growth of around 6 per cent per annum. ECORYS has

estimated the 2005 and 2007 values based on these comments. Postcomm had estimated the express market

to be £5 billion in 2007 but this does not tally with the growth percentage and the 2006 figure.

Table 0.12 Size of the mail market in turnover (million Euros)



Access mail1

Access mail – competitors revenue2

2,715

15

2,472

226

10

2,208

487

22

Other end to end mail3 30 30 27

Individual item mail 42394 4,213 4,1325

Royal Mail “other”6 2,070 2069 2,110

Cross-border mail (outbound)7 450 450 450

Unaddressed mail8 1957 1977 1,995

Parcel mail

Express mail9 5466 5,550 5,883

Total 16,942 16,997 17,314

Source:

1 Royal Mail Regulatory Accounts 2006/07

2 ECORYS estimate based on plus 3p per item

3 ECORYS estimate at an average of 50p per item.


5 RM Regulatory Accounts 07 stamp + meter + ppi.


7 ECORYS estimate based on Postcomm 2007 CMR who sourced this data from the International Postal

Corporation Market Audit data from 2005.

8 ECORYS estimate at 10p per item.

9 Postcomm 2006 & 2007 CMR 2006 p.33 “The UK is a relatively large, highly fragmented and seasonal

market. The express market is worth around £3.7 billion and growing at a modest rate of 1-2 per cent per year.”

2007 p.26: “Overall, the express market is demonstrating growth of around 6 per cent per annum. ECORYS has

estimated the 2005 and 2007 values based on these comments. Postcomm had estimated the express market

to be £5 billion in 2007 but this does not tally with the growth percentage and the 2006 figure.


Table 0.13 Size of the mail market in physical terms (million items)


Bulk mail and consolidation*68

Access mail

9,445

87

8,600

1,151

7,600

2,434

Other end to end mail69 39 39 35

Individual item mail* 9,091 9,036 8,50170

Royal Mail “other”* 2,115 2,114 1,988

Cross-border mail71 750 750 750

Unaddressed mail 13,045 13,175 13,30772

Parcel mail

Express mail73 911 925 980

Total 35,483 35,790 35,595

Note: Figures apply to the licensed area (including mail items under £1 and 350g).

Based upon the above estimates and approximations, volume growth in total appears to have stagnated over the last two years. Bulk mail (including access mail), which includes addressed advertising and transactional mail still appears to have generated some growth of around 3% per annum (but see 1.2 above). This is being offset by the decline in individual mail (based on Royal Mails stamp, meter and non bulk account mail). Unaddressed advertising is also generating growth, but it is believed by the Direct Marketing Association (Competitive Market Review 2007, Postcomm) that volumes may have reached a plateau in 2007. The express and parcel sector (which are combined above) appears to be the most vibrant with annual growth in the region now of 6% per annum74. The GDP at market prices for the UK was £1,303,57375 million for 2006, which implies that, if the above estimates are reasonable, the postal market contributed in the region of 1% to GDP. Based on a total addressed mail market of circa 21 billion items (including inbound cross-border mail and excluding outbound cross-border mail, parcel and express) addressed mail items per capita are circa 347. Mail market developments and trends per postal product group The following is an extract from Postcomm’s Competitive Market Review for 2007:76

68 Source – ECORYS estimate based on 2006 average prices. 69 Source – Postcomm 2007 CMR “other operator’s end-to-end. 70 Source – RM Regulatory Accounts 2007 stamp + meter + ppi. 71 Source – ECORYS estimate based on revenue and average price of 40p per item. 72 Source - ECORYS estimate based on 2005 plus 1% per annum. 73 Source – ECORYS estimate based on revenue and average price of £4. 74 Source – Postcomm CMR 2007 page 26 “Overall, the express market is demonstrating growth of around 6 per cent per

annum.” 75 Source - www.statistics.gov.uk. 76 Source – Postcomm CMR 2007 pages 8, 9, 11, 12, 20, 22-24, 26 and 27.


“The UK addressed mail market has been fully liberalised since January 2006 and, as of September

2007, there are 18 licensed mail providers (as at March 2008 there are 19) including Royal Mail.

Competition has so far taken two main forms in the UK, ‘access’ competition and ‘end-to-end’.

Access

Most competitors have entered the market by using third party access to Royal Mail’s delivery network.

This is known as ‘access’ competition, and it refers to the process by which an alternative operator

collects, sorts and trunks its customers’ mail to Royal Mail’s inward mail centres, turning it over to Royal

Mail for final delivery. Around a dozen of Royal Mail’s large customers also have ‘customer direct

access’ agreements whereby they arrange directly with Royal Mail access to Royal Mail’s inward mail

centres. Access customers and operators typically pay Royal Mail around 13p per letter for delivery.

End-to-end

A second type of competition in the mail market is end-to-end competition, where a competitor provides

the entire mailing process from collection to delivery. End-to-end competition is much less developed in

the UK licensed mail market to date, representing only 0.2 per cent of licensed mail volumes. While a

few operators currently offer end-to-end services, they tend to be local or high-value networks. There

are a few operators with stated ambitions to establish national end-to-end networks in the UK, and they

may achieve this either by ensuring items are of a high enough value or by having adequate drop-

density to make lower priced items profitable. End-to-end networks have been established in other

European countries with liberalised mail markets; however, these markets have been open to this type

of competition much longer than the UK.

International outbound

International outbound bulk mail from the UK is a market estimated to be worth £300 million annually.

Unlike the domestic, or internal, market operators do not need a licence to offer international outbound

mail services. Several of the large incumbent postal operators are competitors in this market in the UK,

including Deutsche Post (DHL), TNT, La Poste, De Post (Belgium) and Swiss Post. Postcomm

estimates that Royal Mail has around a 33 per cent share of this market.

There are also several consolidators specialising in international outbound mail, including BTB

Mailflight, Pharos and Mercury (now part of DHL), and many mailing houses offer international mailing

services. The Mail Consolidators Association (MCA) has around 20 members and represents the

consolidation industry, and there are many more competitors in this market of varying sizes outside the

MCA. The consolidators and mailing houses active in this market sector have the experience of

handling multiple mail providers in a competitive market that could benefit them in the liberalised

domestic market.

General business mail

General business mail refers to the day-to-day correspondence sent from or between businesses, and

tends to be single item, individual correspondence. Mail sent by small and medium sized businesses

(SMEs) tends to be general business mail, and it will either be stamped, postage paid impression, or

sent through franking machines. General business-to-business mail tends to be vulnerable to e-

substitution with the implementation of electronic systems between firms to increase efficiency and cut

costs. SMEs however, still appear to be highly reliant on physical mail for most of their transactions.

According to a survey by the Federation of Small Businesses, 69 per cent of SMEs still send invoices

through the post, 59 per cent use the postal system for the delivery of goods and services, and 88 per

cent send post every day. Competitors have begun to enter this end of the market over the last year,

and a few operators offer to take all types of mail with a minimum daily collection of 250 items. Hybrid


mail services are also very relevant to this type of mail, as small businesses can send information

electronically and pay to have their mail printed, enveloped and handed to Royal Mail for delivery

geographically near to its destination.

Transactional mail

Transactional mail volume estimates range anywhere from 6 billion to 10 billion items per year in the

UK. The portion of this that constitutes bulk mailings from large firms has been one of the main arenas

of the competitive postal market, and constitutes a substantial proportion of the 2.4 billion items in

access traffic handled by competitors last year. Transactional mail is estimated to be declining by

around 2-3 per cent per year, due largely to businesses encouraging their customers to move physical

bills and statements on-line. However, while businesses are trying to reduce the volume of physical

statements they send, they tend also to be committed to offering customers a choice of communication

channels, so the extent to which this drive in cost savings actually reduces transactional mail volumes

will depend on customer willingness to move these items on-line. Most large transactional mailers

expect to maintain 90 per cent of their transactional mail volumes in the medium term due to customer

choice. There is also evidence that many large mailers are integrating their transactional and advertising

messaging using inserts or printing messages on the white space of bills and statements. This adds

value to the bill or statement as a communication medium, and sales generated in this way offset the

expense of the transactional delivery. All these factors combined suggest that transactional mail

volumes will continue to decline gradually in the short term as observed over the past few years, at a

rate of around 2 per cent. UK experience and European data suggest that transactional mail is subject

to electronic substitution; however, it is also true that internet-driven sales do, to some extent, generate

physical, transactional mail. The use of advertising on transactional mail pieces is blending the uses of

mail. Perhaps it is because of the complementary nature of these media that a more significant decline

in physical transactional mail has not occurred.

Advertising

According to Royal Mail, 5.03 billion items of direct mail were sent in the UK in 2006, a decline of 2.1

per cent in volume on the previous year. In the past few years, direct mail has shown a slight year-on-

year decline, following strong growth from 1996-2003. This growth was driven by large advertisers such

as banks and retailers employing national direct mail campaigns to acquire new customers, however, in

the past few years, mass direct mailings have tended to give way to smaller, more targeted campaigns,

which are blended with other media. Direct mail is being used for retention and cross selling, which

amount to lower mailing volumes, although the return on investment of these campaigns may well be

higher. Declining volumes have fostered speculation about whether direct mail is approaching market

maturity and is destined for long-term decline, as happens in some markets in which products become

commoditised, or whether the decline is simply a result of changing posting patterns, with the medium

itself presenting further growth opportunities.

Unaddressed mail

Unlike addressed direct mail, the unaddressed advertising mail market has continued to grow through

2006, although at a decreasing rate. Although not part of the regulated mail market, it is interesting to

look at the door-to-door market, as it is a complementary medium to direct mail, and its continued

growth suggests there is sustained demand amongst advertisers for physical, through-the-letterbox

communication. Growth is predicted in door-to-door through 2007, although growth rates are considered

to have broadly reached a plateau. According to the DMA door-to-door Council, the door-to-door market

has sustained growth for a variety of reasons. Firstly, it is considered to be the most cost-effective way

to reach mass audiences, particularly considering the fragmentation that has been occurring in other


media such as television and press. On the other hand, it can be targeted to specific audiences when

postcode details are overlaid with demographic and lifestyle data, and it can be targeted to retail

catchment or government authority areas. Finally, the emergence of companies that monitor door-to-

door performance means that efficiency levels can be monitored and the reputation of the industry as a

whole has improved.

Publishing

Consumer magazines

Consumer magazines are paid-for magazines covering a wide range of interest areas, with around

3,400 titles currently in circulation in the UK. According to the Advertising Association, consumers spent

£2.09 billion on magazines in 2006. While the main channel to market is the newsstand, postal

subscriptions have been growing, and now account for 14 per cent of magazine sales, up from 3 per

cent 10 years ago. Publishers tend to promote subscriptions as they encourage regular readership and,

with sustained sales, they offer measurability and predictability. With continuing pressure on newsstand

space, subscriptions are expected to continue to grow. Some significant titles are around 50 per cent

subscription sales, including Good Housekeeping, Gardeners’ World, and the Economist.

Business-to-business magazines

There are over 5,000 business-to-business (B2B) titles in the UK, and 90 per cent of these are

distributed by post. Of those, 70 per cent are controlled (free) circulation. The B2B publishing model is

advertiser-driven, with publishers targeting named individuals in specific marketplaces. This is a

particularly price-sensitive market, and with its high reliance on postal distribution as a channel to

market, it is particularly sensitive to postal price rises. According to Postcomm’s discussions with

stakeholders, it is an area of the publishing sector that has been especially sensitive to electronic

substitution.

Customer magazines

Customer magazines are those produced by companies for their customers and they rely heavily on

postal distribution. There are around 1,000 customer magazine titles in circulation, and 72 per cent are

mailed directly to customers, with a total circulation of over 400 million. The remaining volume is either

distributed through the retailers’ own shops or increasingly via newsstands, other retailers or bundling

with other media.

Mintel, the market research company, estimates that over half of all posted magazines are customer

magazines and that, as of 2005, the industry spent over £350 million on postage.

Mintel expects continued growth in this market, and predicts that the customer publishing industry will

reach a value of £1 billion by 2010. Indeed, in the last 12 months the industry has seen unprecedented

growth at 16 per cent year on year with companies including Sony, RBS, Chestertons, ASOS and Virgin

Media investing in customer magazines as a marketing tool. Further growth is expected, in particular in

the public sector, automotive and retail industries. The particular challenge for the postal industry is the

recent trend away from postal distribution toward retail outlets. Publishers are experimenting with

various cost-saving measures, including reducing postal costs by increasing retail distribution,

especially as postal costs can represent up to half of the entire cost of producing a magazine. Most

customer magazines are not highly time sensitive, therefore the industry is more sensitive to cost than

time efficiencies.


Fulfilment

Fulfilment mail refers to the delivery of requested goods, from items bought mail-order to brochures and

tickets. This is a growth area of the market, driven mainly by internet sales. The IMRG14 recorded e-

retail sales in July 2007 to be 80 per cent higher than the previous year, reaching £4.2 billion for the

month alone. The on-line sales growth is projected to continue.

This market is a combination of items sent within the licensed area and parcel and express traffic, which

falls outside the licensed area. It is also to some extent a receiver driven market, demanding alternative

delivery services, unlike most other mail applications where services are driven by the sender. Finally,

the emergence of on-line generated sales requires operators to enter into co-operative arrangements

beyond traditional postal processes, integrating IT platforms and forming partnerships seen with internet

based service providers. Canada Post, for example, has an integrated on-line service with eBay

allowing customers to buy postage and print shipping labels on-line. USPS has a similar alliance that

allows customers to deal with postage directly on the eBay site, and also offers free next-day collection

of packages from residential and small business customers.

Express market

Closely related to the postal market, the express market is concerned with the collection and delivery of

time-specific items. It is estimated to be worth around £5 billion, or 1.3 billion items. Around 70 per cent

of this is thought to be business-to-business, while £1.2 billion comprises the business-to-consumer

market. Overall, the express market is demonstrating growth of around 6 per cent per annum.

International postal groups have a strong presence in the UK express market, Deutsche Post Worldwide

through DHL, La Poste through Geopost, UPS through Lynx Express and TPG through TNT Post UK.

Parcels are the primary service for most players in this market, but mail is a natural extension for some

players and is becoming a more significant component. Documents account for around 25 per cent of

express shipments in the UK. Next-day deliveries represent about 80 per cent of total revenues.

UK express parcel carriers tend to use one of two business models. The first is a franchise model,

where each depot is owned and operated by a third-party. The second model is a wholly owned, or

leased, network. Both can be effective, although the franchise model risks the franchiser subsidising

losses of the franchisees. The UK express parcels market traditionally has been related to consumer

spending, although structural changes such as the growth in internet sales and the liberalisation of the

postal market create changing dynamics in the industry. Customer demand for alternative delivery

options, growth in internet-driven sales, and opportunities in the liberalised postal market could impact

the structure of the express market and the wider mail market.

According to Postwatch, the increase in packet volumes as a result of increased on-line ordering has led to capacity and delivery issues. As packets are more difficult to process automatically and more difficult to deliver (e.g. not all packets will fit in a mailbox), this will have an impact on the technology used to handle mail items and related investment decisions, including how to organise redelivery or pick-up if no-one is at home to accept the packet.

1.4.2 B vs C

Table 0.8 and Table 0.9 present ECORYS estimates for postal market figures (both in turnover and in volumes) segmented along senders (businesses or consumers) and receivers (B or C) of mail.


Table 0.14 Postal streams in the market for addressed mail in turnover (million Euros)77

Postal stream 2006 2007

B2B £1,760m 2,640m euro £1,782m 2,673m euro

B2C £3,912m 5,868m euro £3,960m 5,940m euro

C2B £196m 294m euro £198m 297m euro

C2C £652m 978m euro £660m 990m euro

£6,520m78 9,777m euro £6,600m79 9,900m euro

Source: ECORYS estimate based on volume percentages

Table 0.15 Postal streams in the market for addressed mail in physical terms (million items)80

Postal stream 2006 2007

B2B 6,021 (27%) 5,913 (27%)

B2C 13,380 (60%) 13,140 (60%)

C2B 669 (3%) 657 (3%)

C2C 2,230 (10%) 2,190 (10%)

22,300 21,900

Source: Postcomm Competitive Market Review 2006 page 15 and 2007 page 11.

Note: Nota bene - the percentages have not changed for at least three years.

1.4.3 Market opening

As mentioned several times, the UK postal market has been fully liberalised as from 1 January 2006. As at July 2008 there are 21 postal operators81, including Royal Mail, that have a licence to provide postal services in the licensed area.

1.4.4 Cross-border mail

Competition in outbound mail is well developed and Postcomm estimates that Royal Mail only has around 33% share of this market, which it values at £300 million per annum. The main incumbent postal operators competing with Royal Mail are Deutsche Post, TNT, La Poste, De Post and Swiss Post.

1.4.5 Impact of innovation

E-substitution From the data available it does not appear possible to ascertain explicit impacts on any of the mail categories.

77 Licence area only. 78 Source – ECORYS estimate based on 2007 less 3% RPI. 79 Source – Postcomm CMR 2007. 80 Licence area only. 81 Source - www.psc.gov.uk/licensed-postal-operators.


Table 0.16 Impact electronic substitution

Postal product % change in total market volume (avg./year)

Bulk mail and consolidation Negative impact, in particular on transactional mail

B2B non-bulk mail n.a.

Individual item mail -2%

Cross-border mail n.a.

Unaddressed mail n.a.

Parcel mail n.a.

Express mail n.a.

Source: “The challenges and opportunities facing UK postal services – an initial response to evidence, May

2008,” An independent review of the UK postal services sector (www.berr.gov.uk/sectors/postalservices).

Note: A positive number indicates an increase of mail volume; a negative number indicates a decline of mail

volume.

It is likely that electronic substitution is having a downward impact on bulk mail (i.e. different mixes in terms of marketing campaigns and less transactional mail), which can be partially offset by the growth in the UK population. For the overall UK letters (addressed mail) market, the most likely scenarios suggest a long term decline in which volumes decline in the region of 1-3% per year.82 Royal Mail’s view is that the decline is in the region of 2-3% (see 1.2 above) and that their consumer panel data supports the view that direct mail is falling, and faster than addressed mail overall.83 The most likely area to be impacted is that of C2C individual item mail, with an estimated decline in volumes of 2%. Email and texting will have had an impact on general correspondence, but even the greetings card market is under attack from electronic substitutes such as greeting websites such as www.jacquielawson.com, which offer a worldwide service via email at a low annual subscription charge. New services UK Mail has plans for a number of new product developments, including ones that use new technologies. Perhaps the best (disclosed) example of this is i-mail.

I-mail offered by UK Mail

I-mail is designed for first and second-class post business users that are looking to lower costs, reduce

the administrative burden and minimise the environmental impact of their organisation. The service will

be available to all sizes and types of businesses and be of specific interest to SMEs, marketing

organisations and business and utility services providers.

Customers will be able to gain free access to the i-mail service direct from their Internet-enabled laptop

or PC. The i-mail print option will send an encrypted copy of a letter or document direct to one of UK

Mail’s national network of sort centres where it will be printed, enveloped and transferred into Royal Mail

82 Source: “The challenges and opportunities facing UK postal services – an initial response to evidence, May 2008,” An

independent review of the UK postal services sector (www.berr.gov.uk/sectors/postalservices) . 83 Source - CS UK draft final Royal Mail Comments July 2008.


for delivery by their postmen. Furthermore, customers will be able to send their mail requirements as

late as 6pm for nationwide delivery the next day.

UK Mail does not expect these developments to materially impact on UK Mail’s employment levels in

creating new jobs, as they are part of the continuing growth of UK Mail.84

TNT has launched TNT-it, a hybrid mail service plus they are piloting end-to-end deliveries in the North West. According to TNT, this will have a positive impact on employment levels, which could rise by several thousand over the next few years depending on the right commercial and regulatory conditions.85 Royal Mail introduced a number of new products during 2007, Royal Mail Tracked, an automated large letter product at standard tariffs, Cleanmail advance, Royal Mail Heavy Weight and Safeplace delivery option on Royal Mail tracked. Royal Mail Wholesale has introduced a number of new agreements, in particular the Agency and Mail Extraction agreements. It is possible that some of the above new products of Royal Mail are different pricing options, rather than innovative new products.

1.5 Market structure and competition

1.5.1 National postal operator/Universal Service Provider

Royal Mail Holdings (the parent) became a plc (Public Limited Company) on 26 March 2001, following the Postal Services Act. Ownership and legal structure86 Royal Mail Holdings plc is directly owned by HM Government and is the ultimate parent company of the Group. The Group primarily operates within the United Kingdom, having a number of subsidiaries, joint ventures, and associates, but also has presence in most European countries, mainly through General Logistics Systems B.V. (see Table 0.17 and Table 0.18).

84 Source – ECORYS questionnaire to UK Mail and Business Post website. www.businesspost.com. 85 Source – ECORYS questionnaire to TNT. 86 Source - Extract from Royal Mail Report and Accounts 2008 www.royalmailgroup.com.


Table 0.17 Principal subsidiaries

Principal Subsidiaries Company Country of incorporation % equity interest 2008

Royal Mail Group Ltd United Kingdom 100%

Post Office Limited United Kingdom 100%

Royal Mail Investments Limited United Kingdom 100%

General Logistics Systems B.V. Netherlands 100%

Royal Mail Estates Limited United Kingdom 100%

Romec Limited United Kingdom 51%

IRed Redefining Document

Management Ltd

United Kingdom 100%

Source: Extract from Royal Mail Report and Accounts 2008; www.royalmailgroup.com.

iRed Redefining Document Management Ltd was formed during the year to source, produce, procure and deliver all printed material being created by the Group.

Table 0.18 Principal associates

Principal Associates Company Country of incorporation % equity interest 2008

Quadrant Catering Limited United Kingdom 51%

Camelot Group plc United Kingdom 20%

G3 Worldwide Mail N.V. (Spring) Netherlands 24.5%

Midasgrange Limited United Kingdom 50%

Source: Extract from Royal Mail Report and Accounts 2008; www.royalmailgroup.com.

Note: The majority of the Board and voting power in Quadrant Catering Limited is held by the Group’s partner,

hence it is not a subsidiary.

Organisational status The following exhibit provides a description of the organisational structure of Royal Mail.

“Royal Mail is engaged in mail deliveries, sorting and distribution. It collects and delivers over 80 million

letters and packages to 28 million addresses every day, in line with its unique Universal Service

Obligation (i.e. ‘one price goes anywhere’). Royal Mail has a market share of more than 96% and

contributes 72.8% of group revenue. It is now a competing operator, licensed and regulated by

Postcomm, and employs 164,995 people. These are based in 69 mail centres, which conduct primary

sorting, and 1,400 delivery offices. (In 2003 there were around 92,000 delivery workers based in 1,200

delivery offices, and 80 mail centres, involving 42,000 workers; Beale, 2003). Distribution is mainly

concerned with the road transport of mail between sites. The mail centres in particular have received

significant investment in new technology. Operating losses were £3m. Current challenges include

investment in new mail sorting technology to upgrade and streamline operations.

The Post Office has a network of 13,852 branches in the UK, used by 2824 million customers each

week. As well as providing postal services, the Post Office offers 170 products and services, including

financial and banking services, travel services, telephony products, bill payment, postal orders and gift

vouchers, licence applications and lottery products. The 393 ‘Crown’ post offices are managed directly

by Post Office Ltd. and employ 9163 people. Crown offices conduct a fifth of all Post office Ltd business;


in 2007/8 the business lost £34m Current plans by the company are to continue to transfer more of the

crown offices to franchisees, such as the retailer WH Smith. The remaining, mainly smaller and rural

branches, are managed on an agency basis either by private businesses acting as sub-postmasters, or

franchise partners. The company estimates more than 80% of the rural network is unprofitable, and that

on a purely commercial basis the network as a whole would consist only of 3,600-4,000 offices. The

Post office contributes 9.7% Group revenue.

Parcelforce Worldwide provides an express and time-guaranteed parcels delivery service, almost wholly

(90%) to business customers. It contributes 4% group revenue and made its first ever profit, of GBP 17

million, in 2006. In 2007/8 it made a profit of £8m.”87

The Group also includes GLS whose aim is to be “the best European B2B parcel logistics & express system with global reach”. GLS employs 13,135 people across Europe, handles over 1 million parcels each working day through 655 depots and 32 hubs. The company has 21 subsidiaries and covers 36 states in Europe. 13.1% was contributed to Group revenue, with profits in 2007/8 of £114m.88 Postal network Information on the postal network is provided in Table 0.19 and the textbox below the table

Table 0.19 Postal network of the national postal operator

Royal Mail 2007

Number of post offices 14,219 (includes sub offices – agents) (13,852)

Number of postal agencies Large volume of outlets selling stamps

Number of street letter boxes 115,000 (115,400)

Source Royal Mail (2008 numbers in brackets sourced from 2007/8 report and accounts).

Royal Mail made the following comments:89

“The Government has recognised that fewer people are using Post Office® branches, partly because

traditional services, including benefit payments and other services are now available through other

means, such as online or directly through banks. It has concluded that the shape and size of the overall

network of Post Office® branches needs to change.

The Government carried out a 12 week national public consultation, on a range of proposed measures

to modernise and reshape the network and put it on a more stable footing. It published its Response to

that national consultation in May 2007. Post Office Ltd has now put in place a Network Change

Programme that will involve the compulsory compensated closure of up to 2500 branches, with around

500 of these being replaced with more efficient ways of serving the local community through “Outreach”

type service points. There are currently four types of Outreach service:

• Mobile Post Office® Hosted Service;

87 Source - European Foundation for the Improvement of Living and Working Conditions 2007 updated with numbers from the

Royal Mail Annual Report and Accounts 2007/8. 88 Source – Royal Mail Report and Accounts 2007/8. 89 Source – ECORYS questionnaire to Royal Mail.


• Hosted service;

• Partner service;

• Home Delivery service.

Regarding Crown Offices the key points to providing a sustainable network are:

• 373 of the current 458 Crown Post Office branches are to be retained under Post Office Ltd

management;

• A new programme of investment to modernise these branches, including the provision of

dedicated services for small business customers;

• A partnership with WHSmith Retail to relocate and invest in a further 70 existing branches in

high quality, accessible WHSmith stores, located in the retail sites where customers are

already shopping, and close to the existing branches;

• Further work to establish the future for a small number of branches where the option to work

with a franchise partner is still being considered.

Investment in a modern Crown Office network

The Crown Office network of 373 branches, together with the 76 branches operated by WHSmith, will

give Post Office Ltd a high quality flagship network, offering expert knowledge and advice to consumers

and small business customers alike. New ways of providing services are already being tested in a

number of branches, and will form part of a major, customer driven, refurbishment programme over the

next few years.”

It has recently been announced that a UK county council (Essex), is in negotiations with Post Office Ltd with regards to taking over a number of offices that were earmarked for closure. Revenues and market shares of Royal Mail per market segment Information on revenues and market shares are presented in the next tables.


Table 0.20 Division of turnover of the national postal operator per market segment

Postal product 2006/07 Revenue

(in million £)

2006/07 Operating

Profit

(in million £)

Revenue % of Total


DSA (Price controlled total only)

£1,472

£325

(£61)

(£44)

20.5%

4.5%

Other end to end mail Not measured

Individual item mail (includes B2B

individual item mail)

£2,755 (£18) 38.3%

Cross-border mail Do not disclose

separately

Unaddressed mail Do not disclose

separately

Parcel mail Do not disclose

separately

Express mail Do not disclose

separately

Balance £5,397 £327 36.7%

£7,194 (sum RM +

Parcelforce)

£204 (sum RM +

Parcelforce)

100%

Source: Royal Mail Regulatory Statements 2006/7 + Report & Accounts 2006/7.

Note: The mapping from the regulatory accounts to the analysis above is not precise. The balance row will

include some revenues and profits that will fall into the other categories.90

Within its Regulated Accounts for 2006/07, Royal Mail reported revenues and profits (before exceptional items) as below (see Table 0.21; note that these categories partially overlap):91

Table 0.21 Revenues and profits of Royal Mail

Area Revenue Profit

USO £3,459m £27m

Access £ 327m (£44m)

Price Controlled £5,959m (£12m)

Source: Royal Mail Regulated Accounts – RM Website.

With regards to the above it should be noted that the price control area spans both USO and non-USO services. In terms of the Independent Review of the Postal Services Sector and Royal Mail’s Response - Supporting Exhibits to Terms of Reference 1 & 2 – Slide 32 (www.royalmailgroup.com) provides the following analysis.

90 Source - CS UK draft final Royal Mail Comments July 2008. 91 Source – Royal Mail Regulated Accounts – RM Website.


91% of Royal Mail revenues is either price controlled or inside the USO. 88% of revenue is within the price control of which 48% is within the USO. A further 3% of revenues are within the USO but outwit the price control. In terms of the USO, the following analysis was provided (see Table 0.22).92

Table 0.22 Revenue en profit of the universal service

Area Revenue Profit

1st class stamp and meter £1,383m £67m

2nd class stamp and meter £733m (£130m)

Bulk Mail £442m £33m

Other £901m £57m

Total £3,459m £27m

Source: Unaudited Regulatory statements 2006/7.

And in terms of the Price Control Area, the following analysis (see Table 0.23).93

Table 0.23 Revenues and profits of the Price Controlled Area

Area Revenue Profit

Stamps £1,104m (£185m)

Meter £999m £116m

PPI £652m £51m

Presort and Cleanmail £1,472m (£61m)

Access £325m (£44m)

Other £1,407m £111m

Total £5,959m (£12m)

Source: Unaudited Regulatory statements 2006/7.

Backward integration Royal Mail recently made a press release giving details of a new initiative of creating a panel of “expert data partners” to improve the effectiveness of mail campaigns. The concept is to provide data solutions covering “acquisition”, “customer journey proposition (retention strategy)”, “data processing (including cleansing, suppression, management etc)”, “large database work (creating a single customer view from multiple corporate databases)”, and “online services for SMEs.”94. Alliances and partnerships Table 0.24 presents an overview of the main alliances and partnerships of Royal Mail in other EU countries.

92 Source – Unaudited Regulatory statements 2006/7. 93 Source – Unaudited Regulatory statements 2006/7. 94 Source – Royal Mail press release Royal Mail announces data services supplier framework to boost effectiveness of direct

mail campaigns for customers 24/01/2008.


Table 0.24 Overview alliances and partnerships (including acquisitions) of the national postal operator (2007)

Royal Mail Mail Express Logistics/Parcels

France Crie SA

World-wide G3 Worldwide Mail N.V.

(Spring) (JV)

Source: Royal Mail Note.

Note: The table above excludes GLS, also any subsidiaries unrelated to mail, express and logistics/parcels.95

Royal Mail also has a joint venture with the Bank of Ireland for the provision of foreign currency and financial

services via the Counters Network.

1.5.2 Competitor postal operators

In June 2008 there were 22 licensed postal operators in the UK, including Royal Mail. An overview of the competitors of Royal Mail is given in Table 0.25. It is understood that circa nine of these96 competitors use access, with the notable exception of DX who is operating its own network for B2B mail and niche B2C postal services. The three main competitors to Royal Mail may be perceived as being UK Mail, TNT Post UK and DX Group.

Table 0.25 Overview of main competitors on the postal market (2007)

Postal

operator

Market Volume mail

/ Turnover

Mail

# of

employees

Service level

(number of

deliveries per

week)

Coverage

FedEx UK

Limited (formerly

ANC Express

trading

name of ANC

Ltd)

Pouch services Not currently

operating in the

licensed area.

Now taken over by

Fed Ex

Citipost AMP Ltd

(formerly

Alternative Mail

& Parcels Ltd)

Niche B2B markets.

Downstream

Access (DSA) services

(consolidated, zonal

and national).

50 million

items world

wide

End-to-end in

London,

Manchester,

Birmingham,

Bristol, Edinburgh,

Glasgow and

Liverpool

City Link Post

(trading

name of Target

Express

Parcels)

Express,

Parcels;

B2C through DSA.

9 million

parcels

4000 plus Worldwide

National but on

zonal prices

95 Source - CS UK draft final Royal Mail Comments July 2008. 96 Source – Postcomm response to ECORYS 21st July 2008.


Postal

operator

Market Volume mail

/ Turnover

Mail

# of

employees

Service level

(number of

deliveries per

week)

Coverage

Challenger

Security

Services

(Admin)

Disguised mail

delivered by

Royal Mail

Couriers.

Now subsumed

within the DX

group

CMS (trading

name of

Royale

Research Ltd)

B2B (mostly London).

Research

distribution

worldwide.

DHL Global Mail

(UK) Ltd

DSA sorted

DSA Unsorted services

provided on a

national basis.

Some E2E (B2B).

Delivery in the

London area only,

though collections can

be anywhere in the UK.

National

National

Citispeed – A

business-to-

business end-to-

end delivery

service within 22

London postcode

areas.

International Mail –

Collection from

anywhere in the

UK, offering global

coverage.

Document

Outsourcing

Limited

Data Cleansing, 97Personalised

Lasering,

Enveloping and Mailing,

Electronic Archiving

Document Preparation,

Scanning,

Image Archiving to Web

or Media

Designed for

localised mail

entry (Zonal DSA),

where the

envelope pack is

created close to

the end point

delivery through

the recipients

letterbox. Mainly

Scotland

DX Network

Services

(Now part of The

DX

Group)

B2B through own

delivery

network (document

exchange, business

mail

and parcels).

50 million

items plus

1200

employees

2000

contractors

Provide nationwide

post 5 pm

collection/pre 9 am

delivery of mail to

over 27,000

business

customers through

a Document

97 Source - www.documentoutsourcing.com.


Postal

operator

Market Volume mail

/ Turnover

Mail

# of

employees

Service level

(number of

deliveries per

week)

Coverage

Exchange network

Intercity

Communications

B2B niche markets,

own delivery in London;

International courier

services.

Mailing House function

Central London

hand delivery

business-to-

business.

LDS Cambridge

Limited

LDS now offer a local

final mile service. It is

their objective to offer a

first class service in the

CB post code area.

However, the service

they currently offer is

somewhat different.

They currently offer a

stagger delivery service

in the CB1-5 area. They

can collect mail clients

have for this area and

we deliver it over the

following five working

days. So some will go

the day after the

collection, some the

next day, and so on98.

Lynx Mail

(trading

name of Red

Star

Parcels)

National DSA, bulk pre-

sorted mail, B2C

and B2B.

Parcels (via UPS)

Express (via UPS)

3500 National

National &

International

Now owned by

UPS

People Post 2 Not currently

operating in the

licensed area

Post 123 1 2 Manchester; parts

of M7, M8 and

M25 postcodes

only

98 www.ldscambridge.com.


Postal

operator

Market Volume mail

/ Turnover

Mail

# of

employees

Service level

(number of

deliveries per

week)

Coverage

Racer

Consultancy

Management

Services

UK and international

mail and courier

services;

B2B and B2C mainly

through Royal Mail (not

Access).

Some B2B (not in

licensed area)

through own network.

National &

International

Scot Post Local deliveries in the

Glasgow area

1 Glasgow G83

postcode with

aspiration to

expand

Secured Mail Ltd

National consolidated

and bulk mail through

DSA.

National

Secure Mail

Services

(Now part of The

DX

Group)

National B2C and B2B

through own secure

delivery network

(valuable items such as

bank cards, passports,

event tickets) – not in

the licensed area –

and through Royal Mail

(not Access).

25 million See DX National

DHL Express

(formerly

Securicor

Omega

Express)

Acquired by DHL

Express. Interim licence

to convey mail between

offices of HSBC and

between the offices of

Royal Bank of Scotland.

Pouch services.

National

The Mailing

House

Group

Bulk mail through DSA.

Business Reply

Mailing House

Areas: Midlands,

North West, North

East and Scotland

TNT Post UK

Ltd

Source TNT

Pre-sorted and

unsorted B2C and B2B

letter

mail with delivery

through DSA.

Unaddressed

1.8 billion

items

400 (+ 200

in

outsourced

activities

13,000

including

sub

contractors

6 days

Negotiated

National

National


Postal

operator

Market Volume mail

/ Turnover

Mail

# of

employees

Service level

(number of

deliveries per

week)

Coverage

Parcel and packet

delivery through own

network.

in

unaddressed

business

National and

International

UK Mail

Pre-sorted (bulk mail),

unsorted and

international B2C and

B2B mail through DSA.

£90m

1200m items

National

Zip Mail

Fully franchised

business in the

London/M25 area.

Collection from

M25 area;

consolidated UK

Next Day and

Economy, and

International postal

services;

whole street

delivery.

Source: Postcomm Licence Holders plus ECORYS analysis of websites.

UK Mail UK Mail is a Limited Company whose business model is combining the collection and overnight distribution capability of Business Post Group with an access agreement to use Royal Mail’s ‘everywhere, everyday’ final delivery to offer customers choice in collection-to-delivery mail services. The company has been trading since 2004 as part of the Business Post Group. There is little vertical integration at this stage, but this does form part of their medium term strategic development.99

“Business Post, the parcel and mail delivery group, is now handling one in 10 mail items posted in the

UK after winning contracts to deal with letters and packages for large business mailers. MBNA, the

credit card company, and Norwich Union, Britain’s largest insurer, were among new customers for the

group’s UK Mail postal operation, contributing to an increase in its share of the retail mail market from

7.5 per cent to 10 per cent in the last quarter of 2007. UK Mail collects and sorts post from bulk mailers,

before handing it over to Royal Mail for delivery over “the final mile” to homes and businesses around

the country. Other customers include BBC TV Licensing, Carphone Warehouse, Royal Bank of Scotland

and the Department for Work and Pensions. Mail revenues during the three months to December 31

were up 60 per cent on the previous year, the group said in an interim management statement following

the close of its third quarter. The parcels arm also grew over the quarter with underlying revenues up 6

per cent. This contrasted with the experience at Rentokil Initial, which blamed falling volumes at its City

Link parcel delivery service when it issued a profits warning in December. Business Post shares have

99 Source: ECORYS questionnaire to UK Mail.


fallen from a high of 514p in June, closing on Wednesday at 250½p, up 12p. The group will report

results for the year to March 31 on May 21.”100

TNT TNT is a private limited company with a business model combining access, end-to end and unaddressed. At this stage there is minimal vertical or horizontal integration. They have a separate unaddressed company whilst express is dealt with by a separately managed sister company and logistics are outsourced to a third party.101 TNT has often said that it is has the ambition to develop a delivery network in the largest part of the country with 2-3 deliveries per week, but that the current access regime makes it difficult to develop and operate such a network. Recently, TNT started trialling own delivery in Liverpool. DX Various competitors are active in the B2B market segment. At least five deliver through their own E2E delivery network, with DX Network Services having the largest market share.

End-to-end competition in the UK: DX Network Services/SMS102

DX is a privately owned company comprising both DX Network Services and Secure Mails Services that

was formed after both companies were taken over by the venture capital company Candover. The

company did buy the Challenger business but the latter is not operative. Established in 1975 DX first

established its Document Exchange Business, which now delivers over 1 million items daily. The items

are predominantly business documents, parcels and pouches. DX now operates both within the UK and

Ireland. DX Network Services Ireland Limited received confirmation of its authorisation on 24 March

2004 from the Irish regulator.

The business model is one of “exchanges” (4,500 across the UK) where customers deposit their mail in

a secure mailbox and which is collected by DX after 17.00. Inbound mail is delivered to the mailbox

before 09.00 the following day after posting. Customer base is reported to be 97% of the UK’s top 100

legal firms, most major banks, the big four accountancy firms as well as government agencies and

professional service companies. In total they have 27,000 members from 16,000 businesses in the

Exchange Network.

In 2001 DX was issued with an interim licence by the UK regulator enabling it to compete in niche

areas. During 2002/2003 the UK regulator awarded DX the first long-term licence allowing it to deliver

mail direct to the door of businesses, thus creating the first true end-to-end competitor to Royal Mail

outside of the reserved area in the form of DX Network Services. DX Network Services is a specialist at

delivering mail and parcels for organisations requiring regular distribution of time critical items within a

branch network or retail supply chain; located in the high street, retail parks and business intense

locations. The UK regulator opened the letter market to full competition from the 1st January 2006 and

in August of that year DX and Secure Mail Services were granted a licence.

100 Source: John Willman, Financial Times 18 January 2008. 101 Source: ECORYS questionnaire to TNT. 102 Source: Websites of DX and SMS, direct communication.


Established in 1991, Secure Mail Services (SMS) is a specialist mail company supplying timely, secure

and bespoke nationwide collection and delivery solutions for valuable mail and small parcels to a wide

range of businesses. Deliveries are available nationally on a next day, 2-7 day, timed and preferred

delivery basis. The goal of SMS is to set and maintain the highest standards of security and mail

integrity among mail delivery companies. Security is intrinsic both to SMS’ business processes,

premises, vehicles and depots as well as to the selection, training and behaviour of every person

working for the company.

SMS undertakes in excess of 25 million secure deliveries per annum with over 90% of these to

residential addresses. By volume, SMS is the second largest secure courier service, compared to Royal

Mail, in terms of deliveries to domestic addresses throughout the United Kingdom. Clients include

financial institutions, government agencies, educational establishments, ticket venues and secure

printers. Typically, their consignments consist of enveloped credit and debit cards, cheque books, UK

passports, visas and major event tickets.

Both DX and SMS have benefited (in terms of volume growth) from the Union unrest that has plagued

Royal Mail. DX and SMS have a combined turnover of circa £150 million (200 million euro) and directly

employ over 1,200 staff. In addition they employ nearly 2,000 subcontractors, primarily delivery agents.

Union membership is limited. Although the companies are run separately (other than head office

functions) a new service (Secure DX) has been recently introduced to maximise synergies between the

two businesses. In terms of future strategies, DX are focusing on 1) Growing Mail Volumes, 2) Building

on Customer Loyalty and 3) Efficient Network Management.

DX/SMS actively engage with Postcomm and to a lesser extent with Postwatch, the statutory consumer

body for the postal sector, both formally as required under their licence, and in the wider context of

policy formulation through meetings and responses to consultation documents. They have also played

an active role in the formulation and subsequent activities of the Mail Competition Forum. This is the

trade association set up in December 2004 to represent the interests of the new, licensed competitors to

Royal Mail.

In terms of Corporate Responsibility, the following statement has been made: “DX is a geographically

distributed network business, impacting on communities across the UK and Ireland. As a newly

independent company, we have reviewed our social and environmental risks and opportunities, and are

managing those which may impact our long term performance and reputation.” These cover Customers,

Employees, Equal Opportunities, Charitable Support, Health and Safety, The Regulator and Recycling

and limiting environmental impact. In terms of the latter, they have published the following: “We are

committed to recycling and limiting waste amongst consumables, paper, cardboard and plastic cups.

These are recycled at all of our sites. We maintain our small fleet of vehicles to minimise environmental

impact.”

1.5.3 Competition

According to the Royal Mail Wholesale website, access volumes represented 12.4% of the addressed market in 2006/2007 (April-March) and are forecast to be 20.2% in


2007/2008 (April-March). Consumer panel research results for 2007/8 show that access volumes for the year were 22% of all UK addressed mail.103. Postcomm provided that approximately 40% of the access volume comes from contracting with customers directly, with the remaining 60% from CPOs.104 However, Royal Mail provided that the split for 2006/7 was closer to 50% for each.105 The combined business of DX (now including Secure Mail) has estimated total end-to-end volumes of 75 million items per annum (the majority of which is outside of the licensed area).106

Table 0.26 Number of competitors and degree of competition

Postal product Market share % USP

2005/06

Market share USP %

2006/07

No. of CPOs

(2007)

Concentra-

tion ratio


Upstream

..Downstream

87%

>99%

74%*

>99%

8

5

C3: ca. 95%

C1: >99%

Other end to end mail

Individual item mail

>99% >99% 5 C1: >99%

Access / domestic addressed

mail market (licensed area)

Ca. 93% 87.6% 8 C3: >95%

Cross-border mail

Inbound

Outbound

>90%

33%

>90%

33%

1

4

Unaddressed mail 25% 25%

Parcel mail 2% 2%

Express mail 8% 8%

Total 65% 65%

Source: ECORYS estimates based on RM Regulatory Accounts and Postcomm 2007 CMR.

Note: * In 2007/8 access volumes constituted circa 40% of bulk mail volumes upstream (Royal Mail response to

the independent review, p.4) and 20.2-22% of total domestic addressed mail.

Royal Mail was unable to provide data regarding the table above, but did make the following comments and estimates derived from their Consumer Panel Results for Quarter 2/2007:107

• “Downstream Access continues to increase in market share and volumes handled - DSA now

accounts for 21% of all addressed mail;

• DSA also now handles 47% of all transactional mail - it is likely that we will soon lose our

majority share of this market to DSA;

• Direct Mail has continued to decline, falling particularly sharply since May 2007.”

103 Source - CS UK draft final Royal Mail Comments July 2008. 104 Source – Postcomm response to ECORYS 21st July 2008. 105 Source - CS UK draft final Royal Mail Comments July 2008. 106 Source – ECORYS estimate, based on information given by stakeholders. 107 Source – ECORYS questionnaire to Royal Mail.


For 2007/8 Quarter 4, Royal Mail also provided the following estimates from the Consumer Panel Results:108

• “In the financial year 2007/08 DSA accounted for 22% of all UK addressed mail;

• In March 2008 more than half of Transactional Mail and a quarter of Direct Mail was delivered

via DSA;

• Direct Mail volumes continue to fall at a faster rate than overall addressed mail (-7.5% in fiscal

year 2007).”

Given the relatively small network size that is needed to operate a B2B delivery network and that economies of density may be reached quickly, plus that the characteristics of certain B2B mail may lend itself better to specific customer orientated products, it may be expected that competition will develop rather more strongly in this market segment than in B2C. Downstream access does not currently have a strong influence on the possibility of operating niche E2E delivery networks for B2B. The main reason for this appears to be that the market is related to specific product, price and service level offers which cannot be offered if use is made of the current downstream access terms and conditions. It is understood that competitors looking at potential access scenarios in support of niche services have found the price proposals from Royal Mail to be not commercially viable against the current market offerings. Where competitors already have an end-to-end network providing for either parcels, express or B2B then it may be that competition will develop further in terms of niche B2C markets. In this case, an own E2E network allows competitors to offer specific services (such as delivery of valuable items, a fulfilment service, or the delivery of heavy mail items) for which they can develop a competitive edge vis-à-vis Royal Mail. The market in B2C is already vibrant in terms of parcels and express however it may be that this market competition extends further into the letter market over the next few years as niche opportunities are further developed. Switching The percentage of consumers switching suppliers still is rather small, as most of all large customers have switched suppliers or have entered into a customer direct access contract. However the volume of mail switched is fairly substantial.

1.5.4 Competition issues

Cross-subsidies Cross-subsidies are obviously a major issue and from two perspectives within the mail market:

1) The imposition of a USO requirement, which includes a requirement for a uniform tariff, on the NPO will by necessity require geographic cross-subsidies

108 Source - CS UK draft final Royal Mail Comments July 2008.


from the cheap to deliver areas to the more expensive areas. Royal Mail had submitted a request for de-averaged prices for its business mail, but this attracted a great deal of opposition from customers and competitors and was subsequently rejected by the NRA;

2) Cross-subsidies across products or services, particularly between the business and social mail should not exist with prices being cost reflective. This is a difficult area and relies on a robust costing process and systems, with accurate traffic recording at product and process level. It is unclear if there are still issues with regards to the NPO’s pricing structure in this context, although some competitors have previously raised complaints to the NRA.

A different issue is that of the post office counter network, which operations are subsidised with state aid clearance from the EC:

“Almost all rural branches are loss-making for Post Office Ltd and it takes some £3 million a week to run

the rural network, money which comes from the Government’s annual £150 million Social Network

Payment.”109

Predatory pricing The NPO has to operate within very specific price control formula and is policed by the NRA. Although some competitors have raised issues on the NPO’s pricing policies, it is not believed that predatory pricing per se has become an issue. Vertical foreclosure There is no evidence to date that vertical foreclosure has been an issue. Non-price barriers The main issues on non-price barriers appear to be within the access arena. The terms and conditions of accessing the NPO’s facilities may be perceived as onerous for all but the larger postal operators. At least one competitor (TNT) raised the issue of the “de facto” exclusivity clause in the national access agreement, and commented that “this prevents a rival operator from delivering any mail itself without facing significant financial penalties.” Basically the above refers to the requirement to achieve specific fall to ground distributions of delivered mail across the UK if the accessor is to benefit from nationally averaged prices i.e. if a competitor who has build substantial volumes of access mail were to deliver a high percentage of this mail themselves, it would skew the mail distribution such that the NPO would impose de-averaged prices on the remaining access mail.110,111 109 Source – Royal Mail fact sheet. 110 National Access Agreement – Royal Mail Wholesale website. 111 Royal Mail made the following comment “The national average price is available for a national fall to earth distribution. If an

operator chooses to deliver some mail itself such that it no longer meets this requirement then it cannot reasonably expect to benefit from national average prices which are no longer cost reflective. The implication from this assessment is also that the de-averaged price would be higher than the nationally averaged price but this would not necessarily be the case. For example, a competitor handling mail due for delivery in urban areas only would pay less than the nationally averaged price” Source - CS UK draft final Royal Mail Comments July 2008.


ECORYS agrees with the notion that the terms and conditions of the national access agreement makes it costly to combine access and own delivery as the fall to ground requirements go beyond the requirement of a proportionate distribution of mail in the five (less costly [2], average, more costly [2]) zones. This is also because a spread across the country is required. The first requirement (proportionate distribution across zones) is justified from a cost perspective, while the other requirement in our view is not. From a different perspective, the NRA had concerns on the introduction of the ‘The Consumers, Estate Agents and Redress Act 2007” and made the following statement:

The Consumers, Estate Agents and Redress Bill became law in July 2007. The Department for

Business, Enterprise and Regulatory Reform (previously DTI) introduced the Bill to create a new,

stronger and more coherent consumer advocacy body, and to improve redress in the energy, postal

services and estate agency sectors. Under the Act, Postcomm must make complaint-handling

regulations for regulated postal operators and is likely to be required to set criteria for, and approve,

redress schemes, of which regulated postal operators must become members. Postcomm recognises

the potential for the provisions of the Act to create new barriers to entry to the postal market. In making

complaint handling regulations and setting criteria for redress schemes, it will seek to minimise any

possible negative effects.112

In January 2008, Postcomm launched a consultation for Access review.113 Additionally, Postcomm invited operators and other stakeholders to submit their views on potential barriers to competition in delivery, including inter alia in April 2008.114 In the latter invitation, zonal access requirements were mentioned as potential barriers to competition by Postcomm. At the time of writing this report, no information on the results of the consultations was available. VAT Postcomm assesses that around 50% of the market business is unable to fully recover VAT on purchases (and financial services, representing the largest mailers, make up 43% of this).115 Hence, 50% of the market is not available to competitors due to the imbalance on VAT between the NPO and competitors. Royal Mail is exempt from charging VAT, while other operators are required to charge the full 17.5%, making it harder for them to compete on cost for the business of VAT exempt mailers, such as banks and other financial institutions. This is a significant barrier to postal market entry for new operators, particularly end-to-end operators, who make their own deliveries, and whose VAT liability remains unchanged.116 112 Source – Postcomm’s 2007 Competitive Market Review page 58. 113 Postcomm, Access review, consultation document, January 2008. 114 Postcomm, Review of competition in delivery in the postal sector, letter, 17 April 2008

http://www.psc.gov.uk/postcomm/live/policy-and-consultations/documents-by-date/2008/2008_04_17_CiD_Letter.pdf. 115 The independent review of the postal services sector, second submission by Postcomm, the industry regulator,15 May

2008 (see website Postcomm). 116 The VAT exemption provides an additional barrier to the development of E2E-competition, as postal operators with an E2E-

network experience have to charge 17.5% VAT on all service offered, including delivery. In comparison, operators making use of access to the network of Royal Mail do not have to charge VAT to their customers on the delivery services that are provided to Royal Mail. The net effect is that, in comparison to Royal Mail, operators using access only experience 17.5% disadvantage over the upstream services provided, while E2E-operators face 17.5% disadvantage over both upstream and downstream services.


However, since 2007 there have been developments within the access arena where a new contract has been negotiated. Previously VAT was required to be charged on the full cost of access arrangements with licensed operators (although previously there had been some confusion in the market which had been clarified by HM Customs and Excise). The new contract allows mail operators offering access not to charge VAT on the whole cost of their access schemes. Instead, VAT is only required to be charged on the ‘upstream’ element of these arrangements – that is, the collection and sorting services offered by Royal Mail’s competitors. The ‘downstream’ element – delivery – is provided on competitors’ behalf by the NPO, which is itself exempt from charging VAT on the services it supplies to customers. Royal Mail informs that there are 13 customers and 9 operators with national access agreements as at September 2007. Four of these operators have Agency agreements meaning they only have to charge VAT on the part of the mail process that they carry out themselves.117 The scheme and the new contracts have been agreed with the UK’s tax authorities. In its 2007 Competitive Review, the NRA made the following statement:

“On VAT, Postcomm continues to support a level playing field for all postal operators, with no significant

price rises for customers. It therefore believes that a reduced rate of VAT (of 5 per cent) should be

applied to all mail services. However, in light of the European Commission’s (‘the Commission’) ongoing

infringement proceedings against the UK, Germany and Sweden on the interpretation of the VAT

exemption for postal services, Postcomm has modelled the effect that different VAT exemption

scenarios might have on the UK postal services market.

The result of this modelling has shown that the imposition of the full rate of VAT on mail services (17.5

per cent) could result in around 5 per cent decline in Royal Mail volumes, while the imposition of the

reduced rate would only result in a 1 per cent decline.

Given that Postcomm’s preferred option of 5 per cent VAT applied to all services would require

unanimous Commission Member State agreement, Postcomm intends to wait for the outcome of the

current infringement proceedings before deciding whether to continue to support this option, or whether

there is another option available”118

In 2006, the European Commission sent formal requests for information to, inter alia, the United Kingdom on the VAT application of postal services.119 According to the European Commission the postal VAT exemption should only apply as far as the strict discharge of the universal service obligation is concerned.

117 Source – Postcomm’s 2007 Competitive Market Review page 29. 118 Source – Postcomm’s 2007 Competitive Market Review page 5. 119 Source – European Commission, Commission launches infringement proceedings against Germany, the United Kingdom

and Sweden, press release, 10 April 2006.


In July 2007, the European Commission opened second stage of infringement proceedings against the United Kingdom.120 Access to letterboxes Access to letterboxes may have two meanings. Where the letterboxes being referred to are those at the premises of households and businesses, these are not regulated and as such available to all. In terms of the letterboxes the NPO provides for customers to post mail (street letterboxes), then this would fall under Condition 9 of Royal Mail’s licence and be subject to those conditions that is access is open to negotiation. Royal Mail Wholesale has recently introduced a new service that gives customers of the service access to Royal Mail postboxes and Post Offices for stamped international letters and postcards.121 Mail redirection (misdirected mail) In the view of ECORYS, this potentially important entry barrier does not exist in the UK. To a degree, Condition 14 of the Licence regarding Common Operational Procedures also covers access as well as other operator end-to-end mail. These procedures are designed to deal with any out of course mail in a multi-operator market, which covers all mail carried pursuant to a licence by any licensed operator. Procedures are in place such that if a competitor’s item of mail is found in a Royal Mail letterbox or elsewhere within its network, or within the network of another licensed operator, there are processes established for that item to be returned to the operator with whom the item was posted. Address databases The Postal Address File (PAF) is readily available to both customers and competitors from the NPO. There have been debates/discussions in the past as to if the management and the maintenance of PAF should be established as a separate business from that of the NPO. Currently it operates as a ring-fenced business unit within Royal Mail. Change in address notifications (redirected mail) Change of address notifications have recently become an issue that the NRA has consulted on due to issues raised by the NPO’s competitors. In October 2007, the NRA made the following statement:

“Postcomm, the independent regulator for postal services, has published its proposals on Royal Mail’s

redirections service.

In the fully competitive market, where rivals of Royal Mail are also able to offer their own collection and

delivery services, redirection arrangements need to be broadened to allow those rivals to redirect mail.

Postcomm has consulted on how this could be achieved within the constraints of data protection rules.

Some of the recommendations Postcomm is making are:

120 Source – European Commission, Commission opens second stage of infringement proceedings against the United

Kingdom, Germany and Sweden, press release, 24 July 2007. 121 Source - CS UK draft final Royal Mail Comments July 2008.


• Royal Mail be required to share the redirections data with other licensed operators who wish

to provide a redirections service;

• Once an operator chooses to access redirections data, it must provide a redirections service

for its area of operations;

• Royal Mail share the data with other licensed operators from its business diversion service

(which Postcomm considers is essentially a subset of the redirections service);

• Other operators wishing to provide a redirections service should be allowed to update their

senders with the new address of their customers where the appropriate consent has been

given; and

• All licensed operators will be able to not redirect mail if they have explicit instructions to that

effect from the sender.

Every year, around 1.3 million households and businesses use Royal Mail's redirections service, and

there are approximately 800,000 redirections "live" on the company's books at any one time.”122

The NPO made the following comment:

The NPO does not accept that the NRA has the powers to prescribe access to this information; however

it proposes to develop a commercial product for other operators wishing to undertake physical

redirection of mail.123 Royal Mail also already offers a variety of commercial data products within the

data market for address updating and suppression, but these do not constitute a redirection service.124

1.5.5 Results of competition

The full market opening in January 2006 does not appear to have had any significant impact on the number of end-to-end competitors. According to ECORYS, it is likely that the current access regime, and to a degree possibly low access prices (Royal Mail says it “loses money” on the access prices), reduces competition in the end-to-end market to niche markets. However the access market continues to develop, even in a declining market.

“The UK addressed mail market was worth around £6.6 billion in 2006/07. Mail volumes amounted to

21.9 billion items, down 2 per cent on the previous year1. This is the third consecutive year of mail

volume decline in the UK.

While there is evidence to suggest that substitution has caused mail volumes to decline for the last

three years, there is also evidence of areas of growth in the market that appears to be offsetting a more

significant volume decline.

In 2006/07 2.4 billion items were carried under access agreements; this represents 11.8 per cent of total

operational mail volumes. This is an increase from 5.6 per cent in 2005/06. Alternative operators

handled around half of these items.

122 Postcomm statement 23rd October 2007. 123 Source – Royal Mail. 124 Source - CS UK draft final Royal Mail Comments July 2008.


Latest figures (cumulative volumes from August 2007) show that access mail accounts for 19 per cent

of Royal Mail’s revenue-derived volumes.”125

End-to-end competition is much less developed in the UK licensed mail market to date, representing only 0.2% of licensed mail volumes. While a few operators currently offer end-to-end services, they tend to be local or high-value networks. There are a few operators with stated ambitions to establish national end-to-end networks in the UK, and they may achieve this either by ensuring items are of a high enough value or by having adequate drop-density to make lower priced items profitable.126 Note that part of the activities of these operators are outside the licensed area (and therefore not included in figures regarding the licensed area): for example, around 30% of the volumes carried by DX would fall in the licensed area. Competition within the access arena is likely to continue although the two biggest players have different strategies. UK Mail seems to be content to remain in this sector, whilst TNT Post has stated its ambition to have its own delivery people and is trialling end-to-end in Liverpool. A recent addition to the access arena has been a contract that enables access competitors (or customers using customer direct access) to present the mail at the NPO’s facilities late at night, thus offering the potential for access customers to receive a next day service, rather than the two-day service that typifies a significant proportion of access volumes. The larger competitors are also now targeting non-bulk mail for the access market, which may offer larger margins to them. Typically they are still requiring a minimum volume of 250 items per day for these customers. Margins on end-to-end volumes may only be of a viable level in high-density conurbations, and as previously mentioned, current access competitors switching volumes from access to end-to-end may compromise the averaged access price they currently receive. According to ECORYS, the current access regime is conducive to the development of access competition rather than to end-to-end competition, because:127 • The low access prices worsen the business case for potential end-to-end

competitors;128 • The fixed relationship between retail and access prices (headroom) may be warranted

to prevent margin squeeze, but it may be holding the access prices artificially low (or

125 Source – Postcomm’s 2007 Competitive Market review; note that the estimated figure for 2007/8 (April-March) is that

access represents 20.2% of the total addressed mail volume delivered by Royal Mail. 126 Source – Postcomm’s 2007 Competitive Market Review. Page 11. 127 As compared to an access regime that is based on the retail price minus avoided cost with less strict (national) fall to

ground requirements (clearly, the positive side of access is that mail volumes can be acquired through access before actually starting delivery through an alternative delivery network).

128 For competitors, access prices equal the economic ‘shadow cost’ of the own E2E-network. The higher the access price, the more profitable development of an own 2E2-network is. If access prices are higher than the average delivery costs of an own network, developing an own network is profitable compared to using access. The reverse also holds true: if access prices are lower than the average cost of delivery by means of an own delivery network, using the own network is loss-making compared to the use of access.


the retail price artificially high) thus preventing greater end-to-end competition (or inducing more access competition);129

• The access conditions (in particular the national geographic profile requirement) make combining own delivery with using access unattractive;

• The VAT distortion (valid for around 50% of the market) almost does not apply if access is used (through the ‘agent’ contracts), but remains a key barrier to the promotion of effective end-to-end competition.

The headroom between Mailsort 2 products and the comparable access products are larger than the avoided cost for Royal Mail if (bulk) retail volumes are replaced by access volumes. Consequently, the sharp rise in access volumes has contributed to the financial deterioration of Royal Mail’s performance in recent years. A potential reason for Royal Mail to accept this reduction in margins (the access prices were negotiated and not imposed by Postcomm) might have been that through setting low access prices a bigger threat (that of end-to-end competition) could possibly be avoided.130 Compared to the situation in other EU countries, Royal Mail faces regulation for a large part of its products and services. Also, the UK is the only country in the EU that has chosen to regulate the minimum headroom between the access prices and the prices for comparable bulk retail products. The purpose of the headroom is to prevent margin squeeze of access competitors. The headroom is not a reflection of avoided cost. The positive effect of headroom regulation is that access competition is stimulated (prevention of margin squeeze). The drawback of the current access regime in the UK (as compared to a situation where there is end-to-end competition such as in Germany) is in our view that there is a danger that market developments depend more on regulation than on the relative merits of the market players (both in a static and dynamic perspective) and that innovations can only take place within the boundaries of the access regime. Headroom regulation clearly limits the room for manoeuvre of Royal Mail, but ending headroom regulation immediately may shake up the industry and force some market players to exit the market. If there is at least one credible end-to-end competitor in the addressed mail market, the risks associated with ending headroom regulation on access competitors would be much smaller:

• First, access competitors could then also negotiate access with this alternative end-to-end competitor;

• Second, Royal Mail would have a strong incentive to establish efficient access prices. If access prices were set too high, their competitive position vis-à-vis the end-to-end competitor worsens and if access prices were set too low this worsens the financial performance of the company.131

129 An exact comparison of retail prices between the UK and other European countries is problematic as a result of differences

in mail product specification, like weight category, between the UK and the other countries. Ignoring this problem, a comparison of tariffs for single item priority letter mail in the lowest weight category shows that the retail price in the UK is comparable in terms of PPP to the tariff in other main European nations, like France, Germany and the Netherlands.

130 However, given the existence of economies of scale, financial deterioration will to some extent also exist in case of end-to-end competition.

131 Note that this was the reason why Germany decided as from January 2008 no longer to regulate the price difference between bulk retail prices and access prices (the regulation of this difference was based on the principle of avoided cost).


1.6 Customer needs

With the market now fully liberalised within the UK, large mailers, large customers and to an increasing level, SME’s have a choice of service provider, particularly in terms of upstream activities. To this end, where customer needs are not being met, there is an option to switch supplier. This in itself is an incentive for providers to provide relevant levels of service. Royal Mail is probably the only provider that can provide a reasonably priced next day delivery option (i.e. not express) to all customers (either from an end-to-end or an access option). Social customers and SME’s are likely to have least choice now and into the future for reasonably priced services across all spectrums (1st and 2nd class letter post, parcels and express/registered/insured). Consumer satisfaction Royal Mail, Postcomm and Postwatch jointly undertook market research on customer satisfaction during 2007.132 The evidence indicated that the majority of customers were satisfied with the postal service they received: • The results included high satisfaction with the frequency and time of collections and

deliveries, affordability and access to post boxes; • Less than 10% of respondents stated dissatisfaction with Royal Mail; • The majority of customers perceive postal services as good value-for-money. However there were issues with regards to final collection times of 09.00 in some rural locations. The NPO has agreed to review postboxes with final weekday collection times before 12.00 and where possible move the time back closer to 12.00. Some changes have been made as a result of this exercise. In a separate survey Royal Mail achieved a Customer Satisfaction Index of 95% in 2007 for Post Office Ltd (counter services).133 The Post Office Ltd Customer Satisfaction Index for 2008 was 99.8%.134 Although some competitors undertake customer satisfaction/perception surveys, none were prepared to share the results. Business customer survey In 2007, Postcomm commissioned a survey of business consumers. The sample includes both SMEs and large mailers. Summary findings are included in the textbox below. 135

132 Customer Survey 2007 – Postcomm website. 133 Source: ECORYS questionnaire to Royal Mail. 134 Source - CS UK draft final Royal Mail Comments July 2008. 135 Source: Postcomm, 2007 Business Customer Survey, 30 October 2007.


Use of multiple sourcing

• Customers feel they have competitive choice, access to market information, and few barriers

to entry. However, in reality, there is still relatively limited multiple sourcing, with cumulatively

15 per cent of all respondents using more than one mail provider. Amongst the larger mailers,

those who have had competitive choice for longer, 35 per cent are now using multiple

providers;

• The level of multiple sourcing declines with the size of mailer; however, it is also significant

that competition does appear to have extended to smaller mailers. The use of alternative

providers is still concentrated among larger mailers, but it has begun to filter down to smaller

users.

Quality of service

• Perceived quality of service is high, and has increased from last year, for all leading

providers, with Royal Mail also showing an increase in perceived quality;

• Customers believe competition has improved their choice of supplier, and has improved

Royal Mail’s quality of service. Fewer believe that prices have reduced significantly this year.

RS Consulting study for Postwatch The consumer body (Postwatch) did commission a survey of SME’s by RS Consulting Ltd in 2007, in terms of the SME’s propensity to switch postal suppliers. Summary findings are included in the textbox below.136

The SME postal environment and attitudes to switching

• Even among SMEs mailing 250 or more letters a day on average, a third (32%) rule out

considering a switch from Royal Mail; over half (55%) of those with fewer than ten employees

do so;

• Among organisations mailing 250 or more letters per day and willing to consider switching

from Royal Mail, postal volumes do not correlate with organisation size;

• The proportions (20% overall) having already started to use an alternative supplier for some

or all post are closely associated with higher postal volume, not with company size. Larger

organisations are, however, somewhat more likely to perceive barriers to switching than

smaller ones;

• Interest in switching is overwhelmingly driven by seeking cost savings, but with the caveat

that quality of service must not deteriorate; only a small minority of SMEs are willing to

consider paying more to access higher quality services.

Understanding of and information requirements about alternative suppliers

• Knowledge of alternative suppliers, and their services, is low. Only 12% claimed to be

‘extremely’ or ‘very well’ informed. Results vary little by SME size. It does, however, vary by

postal volume: from only 2% of those mailing 250-499 letters a day to 25% of those mailing

1,000 or more letters;

• The most widely used information sources are those of the alternative suppliers themselves –

direct mail, sales visits and websites – and they have been more effective in targeting SMEs

with higher postal volumes;

136 Source: Understanding SME customer (≥250 letters per day) needs beyond Condition 2 requirements, RS Consulting,

study for Postwatch, Postwatch website.


• The current ‘reach’ of Postcomm and/ or Postwatch is limited. Only 9% of organisations

mention them, again with a skew towards those with higher postal volumes. However, having

been prompted by the survey, almost one-third (29%) claim to be ‘certain’ that they would use

Postcomm and/ or Postwatch in the future;

• The information most widely sought is ‘cost of services’, ‘details of services’ and ‘data on

delivery/ reliability performance’, and organisations with higher postal volumes particularly

emphasise these;

• Information on ‘number of complaints’ was only 7th in rank order of being considered ‘very

useful’, although still described as ‘very useful’ by 53% of SMEs.

1.7 Price performance

1.7.1 Tariffs

An overview of public tariffs is presented in Table 0.27.

Table 0.27 Public tariffs (in Euro)


Letter post 1st class £0.31 €0.46

£0.32 €0.48

£0.30 €0.45

£0.32 €0.48

£0.32 business €0.48

£0.34 social €0.51

Letter post 2nd class £0.22 €0.33

£0.23 €0.34

£0.21 €0.32

£0.23 €0.34


£0.24 social €0.36

Letter post cross-border £0.44 €0.66

£0.44 €0.66

£0.44 €0.66

£0.44 €0.66


£0.48 social €0.72

Parcels (5kg) £8.74 €13.11 £8.74 €13.11 £9.35 €14.02

Parcels cross-border (5kg EU) £24.24 €36.36 £24.24 €36.36 £25.60 €38.40

Recorded137 Plus £0.68 €1.02 Plus £0.68 €1.02 Plus £0.70 for a signed

for letter (Recorded)

€1.05

Insured item (and Registered)

(Special Delivery in UK – includes

next day guarantee)

100g £500 insurance

£4.05 €6.07

£4.10 €6.15

£4.05 €6.07

£4.10 €6.15

£4.25 – business €6.37

£4.30 – social €6.45

Bulk mail, 20g USP public tariffs for a

mailing of 500 items

Discounts on the

business rate tariff

above range from 12%

to 30% depending on

machineability, volume

and level of workshare

undertaken

(presorting)

Discounts on the



to 30% depending on



undertaken

(presorting)

137 Recorded (signed for) is not a registered product as defined under the Act and the Directive; in particular as it has no

guaranteed compensation provision. Recorded (Signed for) delivery is an add-on to mail sent using one of the ordinary mail products, such as stamped or metered mail. If a recorded delivery (signed for) item is lost or damaged it has no entitlement to compensation for loss or damage other than that for the ordinary mail product used. The requirement to provide a registered product is met by Special Delivery (Next Day). Source: information from Royal Mail.





As above As above



As above plus

additional range of

prices for packet and

large letter formats

As above plus

additional range of



Total

Source: Royal Mail

Royal Mail increased stamp prices as of the 7 April 2008 such that a first class basic weight letter now costs £0.36 (€0.54) and a second-class £0.27p (€0.40).

Table 0.28 Public tariffs (in PPP)


Letter post 1st class 0.41

0.43

0.40

0.42

0.43 business

0.45 social

Letter post 2nd class 0.29

0.30

0.28

0.30

0.29 business

0.32 social

Letter post cross-border 0.59

0.59

0.58

0.58

0.62 business

0.64 social

Parcels (5kg) 11.69 11.53 12.43

Parcels cross-border (5kg EU) 32.41 31.97 34.06

Recorded Plus 0.91 Plus 0.90 Plus 0.93 for a signed

for letter (Recorded)

Insured item (and Registered)

(Special Delivery in UK – includes

next day guarantee)

100g £500 insurance

5.41

5.48

5.34

5.41

5.65 business

5.72 social



Discounts on the



to 30% depending on



undertaken

(presorting)

Discounts on the



to 30% depending on



undertaken

(presorting)



As above As above



As above plus

additional range of



As above plus

additional range of



Total

Source: conversion rate based on Eurostat data.


Affordability Within the UK the cost of postage is given a weighting of 1 in 1000 in terms of the household budgets when analysing RPI, thus implying that from a financial perspective, even for the lowest income groups, postage costs will not be of importance. However, the price of stamps may be an emotive issue and as time progresses, and if stamp prices will be further increased in future, the level of significance will increase for all income groups.

1.8 Employment aspects

Employment Data on employment developments are presented in Table 0.29.

Table 0.29 Employment in the sector, in employees and [FTE]

Operator 2005 2006 2007

[USP total] (all RM Group)

[USP civil servant]

[USP flexible]

212,156

[no civil servants]

[n.a.]

208,866 201,496

Business Post (Incl. UK Mail) 2,300 n.a. n.a.

TNT Post n.a. 300 400

Total

Source: ECORYS questionnaires to Royal Mail, TNT Post and UK Mail.

Note: n.a. not available.

At the end of the financial year 2007/8 Royal Mail employed 198,724 people138 With regard to employment developments within Royal Mail, the European Foundation for the Improvement of Living and Working Conditions (2007) remarks:

“Restructuring has been a slow within Royal Mail and an ongoing process given workers’ strong union

organisation and disruptive capacity, plus relatively low basic pay which means workers’ earnings

depend on overtime and other allowances that may not accurately reflect actual work demands. Hence

central agreements may still meet opposition locally. Royal Mail wants to invest heavily in automation,

possibly cutting up to 40,000 jobs, introduce teamwork and convert many jobs to part-time.

One important development to note is that casual employment has been massively reduced in Royal

Mail, partly to improve motivation and service, but also in response to customer concerns about the

integrity of the mail. There is now around 500 casual staff compared to almost 20,000 in 2004.”

138 Royal Mail Report and Accounts 2007/8.


Table 0.30 Employment by universal service provider per segment, total and [% flexible]

Postal product 2005 2006 2007 2008

Mail (RM) 176,030 174,202 167,640 164,995

Express (Parcelforce) 4,363 4,092 4,178 4,464

Logistics (GLS) 10,768 11,045 12,137 13,135

Corporate 3,906 3,348 2,961 2,654

Post Office Ltd 12,145 11,327 9,990 9,163

Partially Owned Subsidiaries 4,944 4,852 4,592 4,313

Total 212,156 208,866 201,496 198,724

Source: ECORYS questionnaire to Royal Mail and 2007/8 Report and Accounts.

Note: These figures are for Royal Mail worldwide (in particular relevant to GLS figures.)

1.8.1 Employment conditions

There are some differences to the figures provided by Royal Mail and those of the study by the European Foundation for the Improvement in Living and Working Conditions. With regard to wages as a proportion of total cost, the Foundation reported a figure of 68% (see textbox below) and Royal Mail provided a value of circa 56% (see Table 0.31).

“Labour costs in Royal Mail are 68.3% of total costs. Basic pay is relatively low at around GBP 320 a

week, some GBP 70 less than the average, according to the union. Overtime and a plethora of

allowances improve earnings however. There have also been new bonuses. A bonus scheme was

introduced by the incoming chairman, Allan Leighton, in 2002 to support the 3-year Renewal Plan

designed to return the Group to profitability at a time when it was losing well over GBP 1 million a day.

Its successful completion in 2005, with profits of GBP 537 million, resulted in a payout of GBP 1,074 per

employee (at a total cost of GBP 218 million). A new ‘Share in Success’ scheme, now also paid to sub-

postmasters, paid GBP 418 in 2006 (GBP 90m in 2007, nil in 2008).139.In addition, a productivity

scheme was agreed with the union in March 2006 linking pay to increased efficiency over and above the

annually agreed increase in pensionable pay.”140

Table 0.31 Wages as proportion of total costs (in %)

Operator 2005 2006 2007

Royal Mail

- excluding POL

- including POL

56.1%

49.9%

57.5%

51.9%

55.9%

50.2%

Business Post (Inc UK Mail) 22/23% 22/23%

TNT Not disclosed

Source: ECORYS questionnaire to Royal Mail and UK Mail, respectively.

139 Source - CS UK draft final Royal Mail Comments July 2008. 140 Source European Foundation for the Improvement of Living and Working Conditions 2007.


Note: The % is lower in Post Office Ltd (POL), and therefore lower when Post Office Ltd is included, mainly

because many offices are managed by Subpostmasters and their costs are not in wages and salaries. These

costs are shown separately in Royal Mail’s accounts.

Within the Royal Mail Regulatory Accounts for 2006/07, “people” costs as a percentage of total costs for the “Priced Controlled Area” were close to 70%, although the latter does include a contribution to the pension deficit of £140m. Excluding the latter would bring the percentage to 67%. Royal Mail provided the following from the respective Report and Accounts:141

“2004/5 The productivity gains we’ve made have triggered pay increases for postmen and postwomen

with basic, pensionable pay now at least £311.50 a week – more than £60 or almost 25% better than

basic pay just before we launched the modernisation programme. Basic pay for our postmen and

postwomen is increasing again – up by £11.50 from 1 April, which is 3.8% on top of the basic,

pensionable pay of at least £300 a week our people are already getting. We want them to keep sharing

in the success of the Company and under a new bonus scheme, postmen and postwomen have the

opportunity to earn up to 50% of any savings above budget made by their unit and a further 10% if we

hit the new 1st Class target of 93.0%.

2005/6 We have improved basic pay for postmen and postwomen to over £310 per week and in March

2006 we agreed a groundbreaking productivity scheme with the Communication Workers Union which

will set the scene for higher basic pay. The scheme means that pay will improve as efficiency improves,

giving postmen and postwomen, for the first time, a chance to influence the size of their pay packet.

2006/7 The majority of front line staff received a 2.9% pay award effective from 3 April 2006 and an

additional 1.0% productivity payment from 5 June 2006.

2007/8 The majority of front line staff received an increase of 5.4% on basic pay and weekday overtime

from 1 October 2007.

Note that the October 2007 agreement with the CWU also included amongst other things a 50:50 share

of any additional efficiency savings above target made in 2007/8 and an increase of 1.5% in basic pay

from April next year, paid on delivery of the agreed reforms.

Training and investment in training The competitors who responded to the ECORYS questionnaire were not prepared to divulge neither their level of investment in training nor any employee satisfaction results. The NPO provided the following “Employee Survey “Great Place to Work” = 66% (2007),”142 and the following:143

In April 2007 the Engagement Index based on the ‘Have Your Say’ Employee Survey replaced the

‘Great Place to Work’ Employee Survey as a key non-financial KPI. The score for 2007/8, a year with

major industrial action, was 54%.”

141 Source - CS UK draft final Royal Mail Comments July 2008. 142 Source: ECORYS questionnaire to Royal Mail. 143 Source - CS UK draft final Royal Mail Comments July 2008.


Role of social partners, trade union, sector based collective agreements Both Postcomm and Postwatch undertake public consultation exercises on major industry issues that enables a wide range of social partners to comment and contribute to the decision making process. These partners will include the public, businesses, trade organisations, charities, unions etc. Currently (2008) the Government is undertaking a review of the postal services sector, which includes public consultation. The terms of reference for the review are; • To assess the impact to date of liberalisation on the UK postal services market,

including on Royal Mail, alternative carriers and consumers; • To explore trends in future market developments and the likely impact of these on

Royal Mail, alternative carriers and consumers; and • To consider how to maintain the universal service obligation in the light of trends and

market developments identified. Within the postal sector only Royal Mail is heavily unionised. The level of union membership amongst the Royal Mail’s competitors appears very low in comparison although some do have consultation groups to enable employees to contribute views etc. There is one main union for Royal Mail employees, the Communications Workers Union (CWU) and it has around 160,000 members across the Royal Mail Group. The postal department of the CWU is divided into six sections: postal, indoor (mail centres, distribution centres etc.); outdoor (mainly deliveries and collections); technical and central services (engineering and vehicles); parcels, logistics and catering (Parcelforce, Logistics, Quadrant); and clerical and cash handling (Post Office Ltd, Royal Mail administrative grades). Royal Mail also recognises the Communication Managers Association (CMA) for junior and middle managerial staff. The CMA is part of Unite, the UK’s largest union with over two million members in the public and private sectors. There is national-level collective bargaining over terms and conditions of employment, though these may differ (for example over issues like maternity leave) between the various businesses of the Royal Mail Group. However, nationally agreements often are delegated to local areas for implementation, which on occasions has resulted in local disputes. In the 2006 annual report, the Chairman Allan Leighton said:

“We know taking our people with us is central to our plans. We believe giving them a stake in the

company would be a huge incentive for our people to achieve the efficiency gains essential if we are to

compete successfully to retain and win customers in the face of tough competition and importantly we

know this is something they want and would respond to.”

Mr Leighton is believed to favour placing a majority stake of the state-owned business in a trust held on behalf of employees. In a communication to members (April 2006), the CWU said it views “all talk of shares as a stage-managed distraction from the crucial issues of your basic pay, pensions and Royal Mail’s plans for your future jobs. Shares


would be a short-term financial gain but would likely be eliminated by e.g. increases in pension contributions.”144 During 2007 there were further disputes and strikes which have been resolved and an article in the NPO’s staff paper suggests that flexible working is now being introduced across a number of units in an effort to improve productivity. The plans consist of seven strands, long and short days, efficient summer staffing, new technology, working in nearby offices, variation of hours, doing other work within the office, and innovative duty structures.145 Royal Mail made the following comment in response to this study:

“Royal Mail has made a two year proposal, in October 2007, which provides a stable base from which

the company, its customers and our people can move forward. The CWU’s acceptance of the proposal

means that Royal Mail can now go ahead with essential plans to modernise the business and make it

more flexible, efficient and able to compete properly in the marketplace. It also secures support for the

pension reform that is a major element in safeguarding the future of the business and our people’s

jobs.”146

In addition Royal Mail has introduced a “ColleagueShare plan” and provided the following:

“The five-year programme, agreed by the Government, will include an inaugural "phantom" share

scheme to reward Royal Mail’s 190,000 employees, worth up to £5,300 per employee over five years -

equivalent to a £1bn dividend distribution. ColleagueShare is the name for the Group’s phantom share

plan. The plan, introduced in 2007-08, is a five-year plan spanning the accounting years from April 2007

to March 2012 and comprises both a phantom share scheme and a related stakeholder dividend worth

up to £5,300 per person throughout the life of the plan. The ColleagueShares represent up to a total of

20% of the projected equity value of the Group. Additionally Royal Mail plans to pay a stakeholder

dividend dependent on the achievement of certain targets. The costs of the plan are being charged to

the income statement as an exceptional item throughout the life of the plan. Any long-term liabilities

arising in relation to the plan will be discounted at an appropriate high quality corporate bond rate.

These discounts will be unwound through the income statement during the life of the plan. The Group

will redeem all ColleagueShares by 2012. 147148

In the June 2008 issue of the Courier (Royal Mail staff magazine) it was announced that these shares had now increased in value from £1 each to £1.63 giving a value of £663.04 to those employees with the full allocation. Additionally, it was announced that a further 300 shares per entitled person would be issued shortly.

144 Source - European Foundation for the Improvement of Living and Working Conditions 2007. 145 Source – Royal Mail Courier. 146 Source – ECORYS questionnaire to Royal Mail. 147 Source – ECORYS questionnaire to Royal Mail. 148 Source - CS UK draft final Royal Mail Comments July 2008.


1.8.2 Productivity

Information on labour productivity is presented in Table 0.32

Table 0.32 Productivity (in items/FTE)

Operator 2005/06 2006/07

Royal Mail * 120k items per staff in post per

annum (SIP)

122k items per SIP

UK Mail + Business Post

(not comparable with RM due to

differing processes)

246k items per SIP per annum

Sector average

Source: Royal Mail: Sip from Table 0.30 (mail) and RM Regulatory Accounts volumes; ECORYS questionnaire

to UK Mail Note: * Figures for Royal Mail relate to labour productivity based on all sip in the mails arena but with

volumes from the price controlled area.

1.9 Technological developments and environment

1.9.1 External

As can be seen in Table 0.33, direct mail expenses as a percentage of total expenses in the communications' market is around 15-18%.

Table 0.33 Percentage of letter mail in the communications’ market (turnover)

2006 2007

Direct mail as a % of advertising

spend

18% 15%

Source-Postcomm, Competitive Market Review 2007 page 15 AA Quarterly Survey of Advertising Expenditure

June 2007.

E-commerce and postal services In its Spring 2008 publication “Commentary”, Postcomm has an article on hybrid mail, in which it claims that a number of operators are trialling the combination of electronic communications with the delivered letter. The advantages are claimed as being that the process is quick and convenient and reduces the carbon footprint as it cuts long distance freight as the physical mail is produced at locations close to the point of delivery. Hybrid mailers are quoted as saying that the service is likely to appeal to small and medium sized enterprises which have a small and irregular output, as it will reduce their investment in stationery, franking machines and stamps. Royal Mail has previously offered electronic to print services but withdrew from that market a number of years ago.


1.9.2 Internal

Figures for the percentage of letter mail and parcel mail benefiting from automated processing (e.g. sorting) are not available.

Table 0.34 Percentage of letter mail automatically processed by the NPO to the postman’s route (walksorted)149

2006/7 2007/8

Percentage Circa 60% Circa 70%

Royal Mail has agreed a five-year programme with its shareholder which aims to enable it compete more effectively with its competitors, starting per 2007.

“A £1.2bn debt facility, on commercial terms, has been agreed to modernise Royal Mail operations. This

modernisation programme will enable Royal Mail to capture the benefits of automation, by replacing and

upgrading obsolete sorting equipment, increasing the percentage of letters mechanically sorted to walk,

and increasing the percentage of flats sorted mechanically. Royal Mail will also standardise and improve

processes across mail centres, delivery offices and collections.”150

1.9.3 Environment

Within the UK there are minimum standards legislated for across a wide variety of environmental issues, which all companies will be required to adhere to or potentially face significant fines. Most major companies have environmental policies of some description; the statements presented in the various textboxes below were supplied to ECORYS.

Business Post Environmental Policy (for UK Mail)

“Business Post takes a responsive and proactive approach to environmental issues. Through ownership

and through responsible management Business Post will incorporate a specific commitment to:

• Ensure compliance with all environmental legislation;

• Ensure that sufficient means are provided to minimise pollution;

• Minimise our waste arising and promote recycling initiatives;

• Review the performance and effectiveness of our transport fleet;

• Have a responsive approach to residents living near our operations;

• Investigate promptly and thoroughly any complaint received;

• Have a systematic monitoring approach to audit and evaluate our operation;

• Discuss issues at Board level;

• Aim to minimise and reduce fuel usage.

Business Post takes all issues relating to the environment seriously.”151

149 Source - CS UK draft final Royal Mail Comments July 2008. 150 Source: ECORYS questionnaire to Royal Mail. Also see: Royal Mail’s Response to Postcomm’s Strategy Review, 9

November 2006, section 2.29. 151 Source: ECORYS questionnaire to UK Mail.


TNT “TNT is the leader in the Dow Jones sustainability index. TNT has a world wide Planet Me programme.

We operate “Code Orange” with appropriate targets to minimise the environmental impact of our

operations. We also encourage our employees to reduce their home life impact on the environment

through a scheme call “Choose Orange.”152

Royal Mail- Headline targets for 2010

Our overarching sustainability target is to reduce carbon dioxide emissions per item by a quarter

compared to 2004-05 levels.

Four other key headline targets support this target:

• Reduce normalised transport related greenhouse gas emissions by 20% from 2004-05 levels;

• Reduce normalised greenhouse gas emissions from building energy use by 10% from 2004-

05 levels;

• Reduce normalised quantity of containerised solid waste sent to landfill by 25% from 2004-05

levels;

• Reduce fresh water use of 5% from 2004-05 levels.”153

Corporate Social Responsibility strategy of Royal Mail Royal Mail has a Corporate Social Responsibility strategy, below is a quote from their 2006 report.

“We are facing a period of unprecedented change with the advent of competition; Corporate Social

Responsibility is a key component in supporting the business to be recognised as a responsible

organisation that seeks to optimise the beneficial impacts inherent in our business and reduce the

negative impacts to the essential minimum.

“Through improving our CSR performance and ensuring it is integrated into they way we work, we can

make ourselves more productive and competitive. We are working to reduce the number of accidents,

reduce our production of CO2 and help make our people healthier. We recognise that the route to

achieving and sustaining our goals is through our people and our relationship with customers, business

partners, suppliers, communities and other stakeholders.”154

Impact on mail volumes According to Postwatch, environmental sustainability is likely to gain further prominence and the mail industry will be required to demonstrate that in many situations hard copy material is indeed more environmentally friendly than electronic solutions in order to maintain volumes/profitability.155

152 Source – ECORYS questionnaire to TNT. 153 Source – ECORYS questionnaire to Royal Mail. 154 Source - Royal Mail Website CSR Summary Report. 155 Source – ECORYS questionnaire to Postwatch.


1.10 Sources

• Independent Review of the Postal Services Sector and Royal Mail’s Response - Supporting Exhibits to Terms of Reference 1 & 2 – Slide 32 (www.royalmailgroup.com).

• ECORYS 2005 CIS UK. • Postcomm’s Strategy Review The Postal Market 2010 and Beyond August 2007

www.postcomm.gov.uk. • Postcomm Competitive Market Review UK Postal Market 2007

www.postcomm.gov.uk. • Postcomm Competitive Market Review UK Postal Market 2006

www.postcomm.gov.uk. • Postcomm Access review A consultation document, January 2008.

http://www.psc.gov.uk/postcomm/live/policy-and-consultations/consultations/access/2008_01_Access_review_consultation_document.pdf.

• POSTAL SERVICES COMMISSION POSTCOMM’S REVIEW OF COLLECTION AND DELIVERY TIMES DECISION STATEMENT 11.08.2007 www.postcomm.gov.uk.

• Review of Royal Mail’s pricing flexibility and the level of access headroom (the ‘Interim Review’ of the price control) A Decision and Direction by the Postal Services Commission 10.01.08 www.postcomm.gov.uk.

• The independent review of the postal services sector First submission by Postcomm, the industry regulator 27.03.2008 www.postcomm.gov.uk.

• Regulatory Financial Statements 2006-07 Part 1: Audited financial information www.royalmail.com.

• Regulatory Financial Statements 2006-07 Part 2: Unaudited financial information www.royalmail.com.

• 2007-08, Royal Mail Wholesale Access Volumes and Revenues April 2007 to March 2008 www.royalmailwholesale.com.

• Postcomm Competition through Access agreements www.postcom.gov.uk. • Royal Mail Wholesale CDA Forum Presentation – Stephen Agar

www.royalmailwholesale.com. • Condition 9 Access Premium Agreement (Agency Operator)

www.royalmailwholesale.com. • Condition 9 Annual Report for 2006 www.royalmailwholesale.com. • ESTIMATES OF THE COST OF THE UNIVERSAL SERVICE OBLIGATION. • USING THE ENTRY PRICING APPROACH The Post Office April 1999 Paul

Liddiard, Richard Robinson, Frank Rodriguez. • Business Post Environmental Policy UK Mail Ian Paterson January 2008. • Postcomm Access Factsheet www.postcomm.gov.uk. • European Foundation for the Improvement of Living and Working Conditions 2007. • National Report To Postcomm and Postwatch 2006/07 Quarter 4 Report Royal Mail

www.royalmail.com. • Report and Accounts Year Ended 25 March 2007 www.royalmailgroup.com. • Royal Mail Group plc Regulatory Financial Statements 2004-05

www.royalmailgroup.com.


• Research International’s response to the Postcomm consultation papers “2006 Royal Mail Price and Service Quality Review - Initial Proposals, June 2005”, sections 9.68 and 9.69. www.postcomm.gov.uk.

• Research International Comments on the 2006 Royal Mail Price and Service Quality Review 31st August 2005 www.postcomm.gov.uk.

• Royal Mail Group - Analysis of Headcount, Staff Costs and Operating Costs 2004-05 to 2006-07 www.royalmailgroup.com.

• Phase one of the independent review of the postal services sector Royal Mail’s response – supporting exhibits to terms of reference 1 and 2 28th March 2008 www.royalmailgroup.com.

• Phase one of the independent review of the postal services sector Royal Mail’s response – 28th March 2008 www.royalmailgroup.com.

• POSTCOMM THE POSTAL SERVICES COMMISSION POSTAL SERVICES ACT 2000.

• SECTION 11 AMENDED LICENCE GRANTED TO ROYAL MAIL GROUP PLC ON.

• 23 March 2001 AND AMENDED ON 1 April 2003, 2 November 2005 and 25 May 2006 www.postcomm.gov.uk.

• Service Performance Report for Royal Mail Group – Postcomm www.postcomm.gov.uk.

• Delivering a postal service for customers the story so far Postcomm Factsheet December 2007 www.postcomm.gov.uk.

• Royal Mail press release Royal Mail announces data services supplier framework to boost effectiveness of direct mail campaigns for customers 24/01/2008 www.news.royalmailgroup.com/news.

• Royal Mail Group Fact Sheet www.royalmailgroup.com. • UPU Statistics www.upu.int. • The challenges and opportunities facing UK postal services – an initial response to

evidence,” Richard Hooper, Dame Deirdre Hutton and Ian R. Smith, independent review on behalf of the UK Government, May 2008, p.16.

• Postcomm website – www.postcomm.gov.uk. • Postwatch website – www.postwatch.co.uk. • www.statistics.gov.uk. • UK Mail/Business Post website www.businesspost.com. • Royal Mail Wholesale website – www.royalmailwholesale.com. • Access User Guide v4.3.1 www.royalmailwholesale.com/login/agreements User

Guides Download. • Review of Royal Mail’s pricing flexibility and the level of access headroom (the

‘Interim Review’ of the price control) A Decision and Direction by PSC www.postcomm.gov.uk.

• Royal Mail Regulatory Accounts 2004/05 www.royalmailgroup.com. • Annual Report & Accounts 2006 to 2007 www.royalmailgroup.com. • Annual Report & Accounts 2007 to 2008 www.royalmailgroup.com. • John Willman, Financial Times 18th January 2008. • Nathalie Thomas, Scotland on Sunday January 21st 2008. • ECORYS estimates. • National Access Operator Agreement v1.81 www.royalmailwholesale.com. • Postcomm statement 23rd October 2007 www.postcomm.gov.uk.


• ECORYS report Prospects for competition in the UK postal market for Postcomm 2007.

• ECORYS questionnaire to Royal Mail January 2008 to July 2008. • ECORYS questionnaire to UK Mail January 2008 to July 2008. • ECORYS questionnaire to TNT January 2008 to July 2008. • ECORYS questionnaire to DBERR January 2008 to July 2008. • ECORYS questionnaire to Postwatch January 2008 to July 2008. • ECORYS questionnaire to DS Network Services January 2008 to July 2008. • Post Office ESTIMATES OF THE COST OF THE UNIVERSAL SERVICE

OBLIGATION USING THE ENTRY PRICING APPROACH – Postcomm Website. • Research International’s response to the Postcomm consultation papers “2006 Royal

Mail Price and Service Quality Review - Initial Proposals, June 2005”, sections 9.68 and 9.69.

• Royal Mail Website www.royalmail.com. • Royal Mail Regulatory Accounts 2004/05. • ECORYS estimates. • www.statistics.gov.uk. • Understanding SME customer (≥250 letters per day) needs beyond Condition 2

requirements, RS Consulting, study for Postwatch May 2008 www.postwatch.co.uk. • The Press Association. Postal Competition 'Creates Jobs' - March 12, 2008. • Royal Mail Courier – the newspaper for Royal Mail employees April through to July

2008. • Postcomm Spring 2008 publication “Commentary” www.postcomm.gov.uk. • Royal Mail Group plc Corporate Social Responsibility Summary Report 2006

www.royalmailgroup.com. • www.documentoutsourcing.com. • www.ldscambridge.com. • Postcomm response to ECORYS 21st July 2008. • CS UK draft final Royal Mail Comments July 2007. • Royal Mail Report and Accounts 2007/2008.


1.11 Appendix I

Condition 15 Accounting Separation

1. The Licensee shall: (a) maintain accounting and financial records; and (b) ensure (to the extent that its own accounting and financial records do not do

so) that any related person of the Licensee or agent of the Licensee through whom the Licensee provides a universal postal service or any part of such a service maintains financial and accounting records, which comply with this condition.

2. Unless Postcomm has by direction in writing agreed otherwise, the records referred

to in paragraph 1 shall: (a) enable separate accounts to be maintained for the provision of:

(i) each of2 the licensed services; (ii) each of3 the non-licensed services which are part of a universal postal

service; (iii) non-licensed services which are not part of a universal postal service; and (iv) any service or activity not comprising the conveyance of postal packets.

(b) be such that if each of the separate services was carried on by a separate company incorporated under the Companies Act 1985 each of those companies would comply with subsections 221 (1) and (2) of that Act;

(c) be kept for a period of six years; (d) provide for the cost and revenue data reasonably attributable to each separate

service to be separately identifiable; and (e) be maintained using accounting systems operating on the basis of objectively

justifiable cost accounting systems which allocate cost and revenue data to each of the separate services in such a manner that:

(i) cost and revenue data which can be directly assigned to a particular separate service shall be so assigned,

(ii) common cost and revenue data, that is cost and revenue data which cannot be directly assigned to a particular separate service, shall be allocated as follows:

(aa) whenever possible, common cost and revenue data shall be allocated on the basis of direct analysis of the origin of the costs and revenues themselves;

(bb) when direct analysis is not possible, common cost and revenue categories shall be allocated on the basis of an indirect linkage to another cost or revenue category or group of cost or revenue categories for which a direct assignment or allocation is possible; the indirect linkage shall be based on comparable cost or revenue structures; and

(cc) when neither direct nor indirect measures of cost or revenue allocation can be found, the cost or revenue category shall be allocated to each of the separate services on the basis of a general allocator which shall be the proportion of all the costs or revenues


which can be directly or indirectly assigned or allocated which are so assigned or allocated to that separate service.

3. Unless Postcomm agrees otherwise in writing, the Licensee shall prepare, or

procure the preparation of, separate accounts from the records maintained pursuant to paragraph 1 for each of the separate services for each financial year.

4. The accounts to be prepared pursuant to paragraph 3 shall:

(a) be prepared consistently with Generally Accepted Accounting Principles in so far as those principles may reasonably be applied, or with such other accounting principles as Postcomm may approve in writing; and

(b) comprise a profit and loss account, a balance sheet, and a cash flow statement and notes setting out the accounting policies adopted together with a reconciliation to the audited accounts prepared by the Licensee and, where appropriate its subsidiaries, pursuant to the Companies Act 1985.

5. The cost accounting principles used for the purpose of paragraph 2 and the

accounting principles referred to in paragraph 4 shall be consistently applied and shall not be altered without the consent in writing of Postcomm.


1.12 Appendix II

Condition 9 of Royal Mail Licence - Access to the Licensee’s postal facilities

Part 1

1. This part of this Condition shall apply if Postcomm has not issued a determination in writing pursuant to paragraph 1 of Part 2 of this Condition.

2. If any person who is a postal operator or user applies for access to the Licensee’s

postal facilities the Licensee shall - (a) negotiate with that person in good faith with a view to agreeing with him terms

for such access; and (b) unless Postcomm agrees otherwise in writing, where the person applying for

access provides to the Licensee the information in connection with his application which meets the requirements of guidelines established in the manner set out in paragraph 6 then the Licensee shall, within the period of three months commencing with the full provision of that information, provide to that person, a statement of the main terms on which, subject to agreement on other terms and conditions, it would be prepared to offer to provide access to its postal facilities, which statement shall include terms as to – (i) price; (ii) weight and format of postal items that will be accepted by the

Licensee; (iii) minimum volumes to be provided by the person seeking access; (iv) sortation requirements of the Licensee; (v) presentation requirements; (vi) addressing requirements; (vii) points at which mail may be injected into the Licensee’s postal

facilities; (viii) times as which mail may be injected into the Licensee’s postal

facilities; (ix) the distribution of volumes of letters between postcode districts to be

assumed by the Licensee for the purpose of making an offer; (x) target delivery times for delivery by the Licensee and the percentage of

letters to be delivered within such targets; (xi) arrangements for compensation in the event of failure to meet delivery

time targets; (xii) requirements for interface with information systems; and (xiii) conditions relating to the security of the Licensee’s premises and

operations.

3. Terms agreed following negotiations pursuant to paragraph 2 shall – (a) provide that any access prices shall be based on a reasonable allocation of

costs; (b) be such that the licensee does not unduly discriminate between persons

having access to its postal facilities or show undue preference towards any


such person, and in this paragraph, the determination of costs shall have regard, as appropriate, to the Licensee’s obligations under Conditions 2 and 10(5) of this Licence.

4. If negotiations conducted pursuant to paragraph 2 fail to lead to agreement between

the Licensee and any person seeking access to the Licensee’s postal facilities pursuant to that paragraph and if Postcomm on the application of such a person – (a) has given the Licensee not less than 28 days’ notice in writing that it proposes

to give a direction to allow that person to have access to the Licensee’s postal facilities on such terms as may be specified in the notice; and

(b) has given to the Licensee the opportunity in that period of not less than 28 days to make representations to it in relation to its proposal to make such a determination; and

(c) after considering such representations requires the Licensee by a direction based upon the principles set out in paragraph 3 to allow that person to have access to the Licensee’s postal facilities on such terms as may be specified in the direction, then the Licensee shall allow such access on such terms.

5. The Licensee shall –

(a) except as Postcomm may by direction in writing provide otherwise; (i) as soon as reasonably practicable after entering into an agreement for the

conveyance of postal packets pursuant to, or in the manner anticipated by, this Condition, notify Postcomm and publish, in a manner which will ensure reasonable publicity for them, the main terms of the agreement (including the information referred to in sub paragraphs (i) to (xii) in paragraph 2(b) of this Condition); and

(ii) not commence the conveyance of postal packets under any agreement to which paragraph (i) applies before the expiry of one month from the date on which the main terms of that agreement are published in accordance with paragraph (i), and

(b) publish a report on or before each 31 March during the term of this Licence setting out for each period of twelve months ending on the preceding 1 January particulars of the access given to its postal facilities pursuant to this Condition including the number of agreements in being during the period for access to its postal facilities the revenue derived from those agreements and the number of postal packets carried under those agreements.

6. The guidelines referred to in paragraph 2(b) shall be produced by the Licensee and

shall be effective for the purpose of that paragraph when approved by Postcomm provided that – (a) where no guidelines have been produced by the Licensee or have been

approved by Postcomm, the guidelines shall be such guidelines as may have been published for the purpose by Postcomm; and

(b) guidelines established under this paragraph may be amended by the Licensee at any time subject to the approval of Postcomm.


Part 2

1. Paragraphs 4 to 7 of this Part of this condition shall apply if Postcomm – (a) has given to the Licensee, the Council and such other persons as appear to

Postcomm to be appropriate not less than 28 days’ notice in writing that it proposes to issue a determination pursuant to paragraph (c); and

(b) has given to the Licensee, the Council and the other persons to whom the notice described in paragraph (a) was given the opportunity in that period of not less than 28 days to make representations to it in relation to its proposal to issue such a determination; and

(c) after considering such representations has issued a determination in writing that the Licensee has established arrangements in relation to the use of its postal facilities by other persons (“an access code”) which comply with the requirements of paragraphs 2 to 5 of this Part of this condition.

2. An access code shall be such as to facilitate the achievement of the following

objectives – (a) the provision of a universal postal service in the authorised area and, subject

to that; (b) securing the interests of users of postal services, having regard to the interests

of individuals who are disabled or chronically sick, or of pensionable age, or with low incomes or residing in rural areas;

(c) promoting competition between postal operators; and (d) subject to the above, promoting efficiency and economy on the part of the

Licensee and other postal operators.

3. An access code shall contain distinct sections dealing with – (a) the physical and operational requirements to be complied with by persons

having access to and from the Licensee’s postal facilities, (b) charges to be paid to the Licensee by other persons having access to and from the Licensee’s postal facilities; and

(c) procedures by which the requirements referred to in paragraph (a) and the charges referred to in paragraph (b) may, subject to the approval of Postcomm, be modified at the instigation of the Licensee or of another person or of the Council for the purpose of the better achievement of the relevant objectives.

4. Except in a case in which Postcomm accepts otherwise, the Licensee shall –

(a) enter into arrangements in relation to the use of its postal facilities with other persons when requested by them to do so; and

(b) only enter into such arrangements if they are in conformity with any relevant provisions of the access code.

5. The Licensee shall not make any modification to the access code except –

(a) in accordance with the procedures established pursuant to paragraph 3(c); or (b) with the approval in writing of Postcomm, and shall furnish Postcomm with a

copy of any modification made.


6. The Licensee shall – (a) publish the access code as modified or changed from time to time in such

form and manner as will obtain appropriate publicity for it; and (b) send a copy of the access code as modified from time to time, to any person

who asks for one and makes such payment to the Licensee in respect of the cost thereof as it may require not exceeding such amount as Postcomm may from time to time approve for the purposes hereof.

7. The Licensee shall prepare and publish a report on or before each 31 March during

the term of any access code established pursuant to this part of this condition including, for each period of twelve months ending on the preceding 1 January – (a) a general survey of the operation of the access code; (b) particulars of the access given to the Licensee’s postal facilities pursuant to

the access code including the number of persons using its postal facilities, the revenue derived from access under the code and the number of postal packets carried under the provisions of the code; and

(c) the operation of the procedures for the modification of the access code.