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Lord Brooke of Alverthorpe: My Lords, I am grateful to my noble friend Lord Clarke of Hampstead for sponsoring the debate. This is the first of two debates today on trying to improve public services. The issues are about change and competition, but this debate has a strong European dimension. I shall follow a vein similar to that of the noble Lord, Lord O'Neill, and I share a good number of the points that he made. The European Union has been opening up postal services to competition to improve European postal services and develop single markets as far back as the mid-1990s. We cannot ignore that. We must come to terms with it and recognise that the current directives require even more changes and competition in the future.
Each member state is tackling this in its own way. The Swedish postal system has been fully privatised since the mid-1990s. Anyone who has been to Sweden will know that it is a typical Scandinavian operation. It is efficient, clean and customer oriented, but highly expensive. The Finns, the Dutch and the Germans have followed with variations on the privatisation
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theme. At the other end of the spectrum is the French model, now with question marks over its sustainability in the longer term. It is interesting that they are pushing to wait until 2009 before they get around to introducing the current directives.
There is also a big question mark over what will happen to the new accession countries' postal services over the coming years. I suspect that the structure and ownership of the enlarged European Union postal services will look quite different in 10 to 15 years' time, especially with the increasing pace of technological change.
I strongly support the efforts of the noble Lord, Lord Clarke of Hampstead, to get the Government to commit to a strategic policy for the Royal Mail that will stand the test of time. I trust that it will take fully into account the realities of what is happening in Europe, the regulator's existence and their role as part of that process.
As we enter this review period, will the Minister throw a little more light on to the role of Sir George Bain as adviser to the Secretary of State for Industry? As I understand it, he will not be producing reports, or a final report for the Secretary of State, to be published. How will his findings emerge? How will we get access to what he is analysing and recommending? When is his task likely to be finished?
My knowledge of the postal services is minimal compared to many of today's contributors—I look particularly at the noble Lord, Lord Dearing. My deeper interest was first stimulated through the European Union legislative scrutiny in this House. In 2000, we looked at the proposed EU directives for further liberalisation, and at a number of European postal services, particularly our own. We found, much to our regret, that UK services had deteriorated dramatically since last looked at by this House in 1996. Indeed, Post Office management itself accepted that it was widely missing its performance targets, that millions of items of its customers' business were going astray, and that it was defending a second postal delivery at midday, when most recipients had gone to work hours earlier. That, of course, has subsequently changed. There have been many other substantial changes, flowing from the Postal Services Act 2000 in particular.
It cannot be denied that the new management team's renewal plan, while it has been controversial, has financially turned the business around, and greatly improved service performance from its level at the turn of the millennium. Nevertheless, the Post Office faces a number of serious challenges. Previous speakers have enumerated most of them, so I will not repeat them. However, notwithstanding recent improvements, there will be a continuing and major challenge facing us on industrial relations. Like the noble Lord, Lord Clarke of Hampstead, I pay tribute to my noble friend Lord Sawyer for his tireless efforts in bringing some harmony and partnership into the fraught and unstable relationships which existed two or three years ago.
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All of us here want to see the postal services not only overcome the current challenges facing them, but to flourish and grow on a sustainable basis; not just at home in the UK, but into Europe. Make no mistake, European competitors certainly have designs and ambitions for growth in the UK, which we should not ignore. That means efforts to build better industrial relations and trust must increase if we are to be successful. It can be done.
I depart marginally from the main thrust of the debate, and speak as a partnership director—a non-executive director—on the board of a public/private partnership, NATS Ltd. I invite the Secretary of State, Sir George Bain, the postal unions and Royal Mail senior management to visit NATS, and see how our organisation is transforming itself and its industrial relations.
The PPP was formed in 2001, after a vigorous campaign of opposition from the unions in the industry, fully supported by all their members. The union density then was extraordinarily high—over 90 per cent—and I am happy to report that it is still at that level. The Government own the majority of the shares in the company, which is where I will pick up the point on which there may be disagreement with the noble Lord, Lord O'Neill. The shares are non-marketable and the staff were offered a 5 per cent stake, which is held in a tax-free trust fund. At present, the shares can be cashed only when the employee retires or resigns. The unions originally opposed the share concept, but virtually all staff took the opportunity of getting their hands on them.
For the first two years after the PPP was formed, industrial relations were, without question, fraught and were not helped by the airline industry's near collapse after 9/11 in the USA. But bit by bit, faced by very similar challenges to those of the postal services, confidence has been built up between all the parties. Safety continues to be paramount for NATS. The average delay per flight is now lower, notwithstanding a near 5 per cent per annum increase in air traffic. NATS's charges to the airlines have not gone up; they have gone down and are to be further reduced. Previous losses have been turned into modest profits in 2005, the net debt is being reduced and the first small dividend was declared last year. While non-marketable, the shares are independently revalued for Inland Revenue purposes twice a year. They have been on an upward swing from more than 80p to more than 110p. NATS is also in the early stages of implementing a £1 billion investment programme to upgrade the ageing technology infrastructure, long starved of funds by previous governments of all persuasions. For the first time ever, the unions are entering into a three-year pay agreement, a generous one that they never had under their former employers, the government and the CAA. It is my guess that fairly soon they will be seeking a greater percentage of shares for the staff. For the unions and for the staff that will mean greater involvement, more commitment, a stronger voice in the organisation and more influence over their own futures.
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I am not advocating that one size fits all structures, nor am I claiming that all is perfect in NATS. Far from it, but I do suggest that that reasonably successful model should be examined. There is a structure for dealing with non-marketable shares and those elements could be looked at and might be worth cherry-picking, in the phrase of the noble Lord, Lord Clarke. If we were to couple that with the saving proposal on how we dealt with the dividends with which he opened his speech, maybe we could then find an opportunity whereby employees of the Post Office and its management could use that element to try to persuade building societies that Post Office employees should have an opportunity to get on the housing ladder, as they are well below the level of house ownership in the UK. That is the kind of challenge that the industrial relations set-up should be facing, and it would give real, lasting benefits for the future.
12.33 pm
Lord Dearing: My Lords, I am grateful to the noble Lord, Lord Clarke of Hampstead, for initiating this debate and for giving it a focus on the public interest. That is helpful to me because, as a former chairman of the Post Office, I draw a Post Office pension and I have to declare an interest; but I had better concentrate on the public interest, rather than my own. I shall focus on two points; first, how we are going to earn our living in the world and how the Royal Mail can contribute to that; and, secondly, the social interest of having a genuine, national, pervasive network of post offices.
On earning our living in the world, I am not making this point in any political way, but the last year in which we had a surplus on our balance of payments on trade and services was 1997. Every year since then, there has been a deficit, and every year the deficit has increased. In 2004—the latest year for which I have figures—it was £40 billion. Looking ahead, I worry. China and India have only just begun to take their place in world markets and North Sea oil will not last for ever. I worry for our future and any opportunity to develop a world-class industry or service that can contribute to earning our living is welcome. I have little doubt that that challenges us to increase our efficiency and that what the Government had in mind in going down the liberalisation route was to give the spur of competition to the Royal Mail group to increase its efficiency. I note that, in providing this spur, they are acting two years in advance of Germany and three years in advance of what is likely to happen in France, Italy and Spain.
In doing that, we are opening up our market and giving a powerful invitation to others to come and seek to take their share of the biggest cherry that has been opened up in the mail world. I look at the competitors and their financial strength compared with our position. I turn to Deutsche Post. Of its financial strength, a financial commentator said words to the effect that it had cash burning a hole in its pocket. It spent £3.4 billion on acquiring the British company Exel in a year in which it had already spent £1 billion on another acquisition. I have looked at its balance
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sheet; it is awesome. I have no doubt that that balance sheet has been assisted by its ability to charge two to three times the price of a first or second class letter in this country. On its mail business, it seems to be earning the remarkably good return of 15 per cent before interest and tax. That is very nice if you can get it. No wonder it has the financial strength that is behind it as it comes into our market. Similarly, the Dutch are powerfully equipped. My concern is not that there has been market liberalisation, but that the Royal Mail can compete fairly and strongly with the other companies that are quickly coming into the market. I understand that last year direct stream access achieved a level four times that which Postcomm was predicting when it made its first consultation report. It is happening.
The Royal Mail's problem is that it has to increase its efficiency, but to do that it needs investment. It is massively underinvested compared with the Dutch and the Germans. That is reflected in its efficiency. It is a handicap. But with a balance sheet with a deficiency of £2 billion, where will the cash come from to do that and to develop an overseas business? Postcomm sees a glide path to eliminating the deficiency over the next four or five years. But the Royal Mail Group board is saying that action is needed now and there are formidable words to shareholders in the half-yearly account on its decision to continue trading, based on the assumption that the Government will address the balance sheet issue. It matters to us as a nation that we have an efficient business because overseas companies will contribute to the efficiency of the market, but their profits will be repatriated and that will not help our balance of payments problem.
I turn to the Royal Mail's overseas business. It has one: General Logistics Systems. It is not much talked about, but it has shown that, given a fair due, the Royal Mail can compete and earn money. My reading of its half-year accounts is that this year this overseas business will have a turnover of around £1 billion and a profit of between £80 million and £100 million. If we are concerned about earning our living in the world, the Royal Mail should be in a position to invest in that business and to engage in other partnerships to develop a real success—that nobody knows about. I believe that there is a workforce and a top management that can deliver. There is an issue about the Government being alongside the Royal Mail in ensuring that it has a balance sheet that enables it to compete fairly.
I turn to the Post Office. I agree with the noble Lord, Lord O'Neill, that we need two debates rather than one. The noble Lord, Lord Cameron, has spoken very informatively on the Post Office and I would like to see a debate on it. There is a major public interest in having a national post office network. I shall make three points. First, 40 per cent of the business went when the DWP changed its policy on the payment of benefits. There is one big bit of business left; it is called the Post Office Card Accounts, which people can use to draw on their social security benefits, if they so choose. Reference has been made to muddled
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messages to post offices and people about that account. I hear messages about how difficult it can be to open such an account. If the DWP ends those accounts, that will be another nail in the coffin of the post office network. It will be an added threat to the viability of the 7,000 post offices which depend on that £150 million of business. The loss of that business also means a reduced footfall in the shop and another blow to the future of a truly national network of post offices. I should like the Government to think very carefully and give some assurance that there will be a continuation of this form of payment of social security. People want it and I would say to the Government that we are here to serve the public.
Secondly, reference has been made to the payment of £150 million per year by the Government to enable these offices to continue. Perhaps I may say that in spite of that post offices make a loss of £100 million a year. It seems odd to me that the Government should be finding that £150 million by withdrawing shareholder money from the balance sheet, especially now that we know there is a £2 billion deficit. I wonder what would be said of a private sector company that did that. I think the Government need to recognise that this is a payment for a social purpose and that it should be funded by the state.
My third point picks up the reference to the review that is taking place on the future of the network. I understand that the Royal Mail has put proposals—I have not seen them—to the Government. I urge the Government to realise that there is a major social issue here, which is for them every bit as much as it is for the Royal Mail. I know that the Royal Mail has been very imaginative over the past two or three years in developing its services. It needs the Government to come forward with policies in the public interest to enable it to continue to serve. I hope that we shall have a debate on that before long.
To conclude, we have a business with workers and management who can deliver. The question is: will the Government give them the tools to do the job?
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