1. The European Commission's proposals are the second stage in a process of liberalising postal services in the European Union. They seek to build on the 1997 Directive (97/67/EC). The proposals, which, if agreed, would come into effect from 1 January 2003, include a requirement to review progress in 2004 and to set a date for full and final liberalisation by 1 January 2007. EU postal services are estimated to handle 135 billion items a year, generating turnover of about 80 billion euro or about 1.4 per cent of the European Union's GDP. About two-thirds of this turnover is generated by mail services, including the reserved area. The remainder is generated by parcels and express services, which are already in the competitive area.

2. Directive 97/EC of the European Parliament and Council of 15 December 1997 established a harmonised regulatory framework for the Community postal sector, and defined the process for opening the postal market to further competition.

3. The 1997 Directive defined:

• the minimum characteristics of the universal postal service;

• the quality standards for cross-border services;

• tariff principles, and principles governing transparency of accounts;

• common maximum limits for those services which may be reserved by a member state to its universal service provider(s) to the extent necessary to ensure the maintenance of the universal service (effectively 350 grams and five times the standard tariff for an item in the first weight step);

• the principles to govern the authorisation/licensing of the provision of non-reserved postal services, and the separation of regulatory powers and operational functions in the postal sector.

4. The transposing of this postal directive into national law was required to be completed by February 1999. Some problems remain. They concern chiefly the adequacy of the arrangements for ensuring that the required regulatory authorities are legally separate from, and operationally independent of, the postal operators; and the extension of domestic postal monopolies to value added services.

5. The 1997 Postal Directive continued the process of gradual and controlled opening to competition of the postal markets foreseen by the Council in its Resolution of 7 February 1994 on the development of Community postal services. At that time the timetable was that:

• the Commission should present a proposal by 31 December 1998 for the further gradual and controlled opening of the postal market in particular with a view to opening cross-border and direct mail to competition; as well as on a further review of the price and weight limits;

• The Council and Parliament should decide on this proposal by 1 January 2000;

• The measures should take effect from 1 January 2003.

6. The Commission proposal was delayed mainly by the resignation of the previous Commission on 15 March 1999 and by the need for the new Commission to re-examine the issue.

7. The European Council of the Heads of State and Government, in March this year, recognised the importance of further opening the postal market and called upon the Commission, the Council and the Member States to act in accordance with their respective powers to achieve the following objectives:

• to set out by the end of 2000, a strategy for removing the barriers to postal services;

• to speed up liberalisation with the aim of achieving a fully operational internal market in these areas.

8. In the United Kingdom, the Postal Services Act 2000 is designed to achieve similar objectives.

• a full opening to competition of all special (value added) services (without price limit) — including express mail, delivery on appointment, tracking and tracing, and guaranteed time delivery;

• full opening to competition of outward cross-border mail [the de facto position in the United Kingdom];

• a review to be carried out in 2004 with a view to possible further liberalisation in 2007;

• special tariffs to be based on transparency, non-discrimination and on avoided costs;

• cross-subsidy of universal services outside the reserved area out of revenues in the reserved area, to be prohibited except as necessary to fulfil the universal service obligation (USO) in the competitive area.

11. It is the first two of these proposals which could potentially have the greatest impact on postal services in the United Kingdom.

12. The Commission sees the current proposals as a move toward the completion of the internal market for postal services while ensuring the maintenance of the universal service obligation. Further liberalisation is expected to allow the benefits of greater competition to improve the service levels, in terms of both quality and prices, available to posting customers. The focus is intended to be on markets where opening has already occurred and on the fastest-growing segments where the impact of competition on universal service providers can be offset by market growth. The Commission argues that the steps should be significant enough to create actual competition. The central concern surrounds the pace of reform. The Commission argues that timidity of approach will reduce the likelihood of real competition emerging and thus delay the delivery of improved quality of service and efficiency.

13. In our inquiry we sought to determine what effect the Commission's proposals would have on the United Kingdom Post Office, and whether or not they should be supported. We asked three questions:

(i)  What benefits would be likely to result from the proposed liberalisation measures?

(ii)  What problems could result from the proposed liberalisation, particularly in terms of maintaining a universal service with an affordable and uniform tariff structure?

(iii)  Are there any measures, not identified in the Commission's proposals, which would help to secure the Commission's stated aims for postal services?

14. This report is based on an inquiry conducted by Sub-Committee B (Energy, Industry and Transport). The membership of the Sub-Committee is given in Appendix 1.

15. We took written evidence from many of those who had supplied evidence to the inquiry in 1996. The witnesses are listed in Appendix 2. In addition we heard oral evidence from the European Commission, the United Kingdom Post Office, the Communications Workers Union and Communication Managers Association (CWU/CMA), the Mail Users' Association, the Direct Mail Association, TNT Post NV (Netherlands), the Minister for Competitiveness, Mr Alan Johnson MP, "Free and Fair Post", Senator Philippe Bodson, and in private, from Mr Graham Corbett and Mr Martin Stanley, Chairman and Chief Executive respectively of the new postal services regulator, Postcomm. We sought evidence from the Post Office Users' National Council (POUNC) but because this organisation was in the process of transmogrifying into the new Consumer Council for Postal Services (CCPS), set up under the Postal Services Act 2000, it felt unable to comply with our request. We are conscious that consumers' interests, reflected only in the evidence from the Consumers in Europe Group (CEG), are perhaps under-represented in the evidence, though not, we hope, in the report.

16. Appendix 3 sets out the terms on which written evidence was sought.

17. We should like to thank our Specialist Adviser, Chris Nicholson of KPMG, for the assistance he provided during the inquiry and towards the drafting of this report. We are also grateful for the assistance provided by the Posts Division of the Department of Trade and Industry.