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Re-opening the post: Postcomm and the quality of mail services

Sir John Bourn, head of the National Audit Office, reported today on the effectiveness of Postcomm’s regulation of quality of service. His report, which follows up on his 2002 report Opening the Post, finds that the overall value for money of regulation will be improved as it reduces burdens on Royal Mail while enhancing consumer protections.

Even in an age of increasing use of digital and electronic communications, the postal service remains of vital and growing importance to the UK economy. In this £9 billion market, the mail service delivers items ranging from utility bills and bank statements to promotional material and items purchased over the internet.

Quality of service is crucial. Royal Mail’s performance against its quality of service targets has recently improved. In 2003 – 04 it missed all its targets, in 2004 – 05 it met four, but in the first half of 2005 – 06 performance was above target for all but four products. Royal Mail’s underlying performance has also been improving since regulation was introduced. For example in 2001 – 02 it delivered 89.9 per cent of first class letters within one day against 93.9 per cent in the first half of 2005 – 06. Certain postcode areas, for example North West London and South East London, although showing improvement over the years, have not yet achieved the licence target levels over a full reporting year.

Postcomm regulate quality of service by setting targets for Royal Mail. It uses financial penalties to encourage Royal Mail to maintain a good quality of service. These include automatic revenue adjustments, compensation, and fines. In 2004-5, Royal Mail met only four of its targets and suffered automatic revenue reductions of £10 million and paid out compensation of £24 million. And Postcomm has recently levied financial penalties of £13.8 million on Royal Mail. Of this £271,000 was for poor quality of service at postcode area level, with the remainder being for lost mail and breaches in agreements that allow competitors access to its network. Royal Mail is appealing against the penalties.

The overall value for money of the quality of service regime put in place by Postcomm depends on the extent to which it protects consumers and does not over-burden Royal Mail. The regime currently in place (2001 – 2006) has shortcomings in protecting consumers and some elements of it over burden Royal Mail. The proposed regime (for 2006 – 2010) has an increased focus on quality from the perspective of the consumer, for example by including a target and associated financial incentive on mis-delivery of post. But there remains scope to improve implementation, which would further reduce regulatory burdens – for example, by reducing the length and detail of its investigations into Royal Mail. And the long term success of the regime will depend on its ability to cope with a rapidly changing postal market, so that Postcomm withdraws from detailed regulation where possible.

“The problem of regulating a monopoly such as Royal Mail is that it tends to involve advocacy, litigation and dispute. That is why competition is in the long run a less costly and burdensome way of protecting consumers. This report encourages Postcomm to minimise the costs and maximise the benefits in the short term while withdrawing from detailed regulation in the medium term. Later this week I will report on how the public sector can make substantial savings by more efficient management and purchasing of postal services.”

Sir John Bourn, 22 March 2006

Notes for Editors

  1. The Postal Services Commission (Postcomm) was established as the regulator for postal services under the Postal Services Act 2000. The Commissioners are appointed by the Secretary of State for Trade and Industry. Its Chairman is Nigel Stapleton, and the Chief Executive is Sarah Chambers.
  2. The Consumer Council for Postal Services (Postwatch), was established by the Postal Services Act 2000. It is responsible for representing the interests of users of postal services. Its Chairman, Millie Bannerjee, and the other 13 Members of the Council are appointed by the Secretary of State for Trade and Industry. Its Chief Executive is Gregor McGregor.
  3. In March 2005 Postwatch challenged Postcomm by way of a judicial review over its interpretation of Royal Mail's compensation scheme for bulk mailers (mail sent by large customers – eg businesses –may be pre-sorted to obtain a cheaper rate from Royal Mail). Judgment was given in December 2005. The compensation under review dated from 2003-04 when Royal Mail failed all 15 of its standard of service targets. Bulk mail customers of Royal Mail were due to receive automatic compensation of around £80 million. However, Royal Mail withheld compensation of around £40 million on the basis of the late payment of invoices in the year in question. The High Court ruled that Postcomm had not interpreted the scheme correctly. Royal Mail sought permission to appeal from the High Court judge, but this was rejected. It is now seeking leave to appeal directly to the Court of Appeal.
  4. In February 2006, Postcomm proposed financial penalties of £13.8 million on Royal Mail, of which:
  • £11.38 million is for Royal Mail's failure to meet its obligations to protect the mail. During 2004-05, around 14.6 million letters, packets and parcels in Royal Mail's care were lost, stolen, damaged or interfered with. The most significant weakness was the poor management of the recruitment and training process for non-contract (agency) staff; and
  • £271,000 is for Royal Mail's poor mail delivery performance across three London postcode areas SE, WC and E - where, during 2004-05, around two million letters were delivered late.
  • £2.16 million is for breaches in agreements that allow competitors access to its network.

Royal Mail is appealing against these financial penalties.

  1. Press notices and reports are available from the date of publication on the NAO website at www.nao.org.uk. Hard copies can be obtained from The Stationery Office on 0845 702 3474.
  2. The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office which employs some 800 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

Contact

NAO Press Office
+44 (0)20 7798 7400 or email pressoffice@nao.org.uk

PN: 22/06