Chairman's statement - source: Postcomm annual report 2005-06

Making sure that the interests of mail customers are served better is at the heart of everything we do at Postcomm. We have always held a strong belief that this outcome is best achieved by challenging Royal Mail’s 350 year old monopoly through the introduction of competition into the UK letters market. The first step towards liberalisation was taken in April 2003, when a third of the market was opened to competition. However, it has only been over the past year that the momentum has started to build and the impact of our policies could begin to be assessed.

From 1 January 2006 any postal operator licensed by Postcomm can compete across the whole UK mail market. No other country in the European Union, outside of Scandinavia, has moved as fast as we have in completing the implementation of the EU Postal Directive. A new Directive will shortly be finalised and we will seek to ensure that what has been achieved in the UK informs and endorses the mail market liberalisation programme across Europe.

Feedback from mail users has confirmed that competition is delivering more product innovation, lower mail costs and greater responsiveness to their specific mail needs. During the last quarter of 2005, in a review of Royal Mail after liberalisation, the House of Commons Trade and Industry Committee concluded: “The evidence that liberalisation delivers an improved service for customers is compelling”. Royal Mail has also acknowledged that competition is prompting it to work hard to improve its quality of service and to drive down its costs.

In the end-to-end model the new entrant takes charge of the whole postal operation, from collection through to delivery. Operators choosing the third party access model handle the customer’s mail upstream, and then use Royal Mail’s network to deliver over the ‘final mile’. So far end-to-end competition is very little developed, and is confined to specialist niches such as high security mail items, but access volumes have grown during the 18 months to March 2006 from negligible amounts to volumes of 1.2 billion items a year – about 5% of Royal Mail’s total volume. Barriers to entry for new competitors remain significant but their initiatives have been well received by large business mailers.

During the past year Postcomm completed two major policy initiatives to support the development of a thriving and competitive mail market built around a successful and efficient Royal Mail providing the universal service.

After extensive consultation, we have set a new Royal Mail price and service quality control to apply for four years from April 2006. This provides for £1.2 billion of capital expenditure for Royal Mail’s letters business to increase significantly the pace of its investment in automation and help bring about a radical transformation of the business so it can succeed in a competitive environment.

The second major initiative aims to build customer confidence in the competitive market. To accompany the full opening of the market, we introduced a new licensing regime requiring all operators to handle mail securely and offer a reliable service. In addition, a set of common operating procedures has been agreed with all operators to help ensure that all mail reaches its intended recipient even if it is incorrectly addressed or misdirected.

Thus far competition has done a great deal of good for Royal Mail. Its quality of service is at a record high – a major turnaround over the past two years. Its profits have continued to grow and it is becoming more customer focused. Although new entrants initially targeted larger business customers, every mail user is benefiting from these changes and the universal service is in better shape than it has ever been.

Although much has been accomplished in the past year there are some significant obstacles to overcome.

Royal Mail enjoys massive scale economies and a unique VAT advantage, and it benefits from customer inertia, but to succeed in this competitive environment it will need to tackle its three major legacies – an under-invested network, difficult industrial relations and a massive pension fund deficit. New operators have none of these but they face major challenges in building a viable business, particularly in competing for the nearly 50% of business that is VAT-exempt.

We are, therefore, following market developments closely and are collecting information to assess the effectiveness of our policies. From July we will ask all our major stakeholders for their views on how the mail market is likely to develop in the years ahead, and for their assessment of whether Postcomm’s policies are fit for purpose for the medium to longer term. It would be surprising if we had got all the right answers at our first attempt, particularly because there are very few precedents to help us. We will consider most carefully the feedback from this consultation and take account of the lessons from market developments.

This has been an extremely eventful year and the workload has placed heavy demands on both my fellow commissioners and the Postcomm executive team. I conclude, therefore, with my sincere thanks for their strong commitment and hard work. We all feel rewarded by the growing evidence of the customer benefits that our policies are delivering.

Nigel Stapleton