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In a report to Parliament today, Sir John Bourn, the head of the National Audit Office, said that Postcomm, the new regulator of postal services, face a challenging remit as they seek to bring benefits to users of postal services through the introduction of competition, and pointed to serious risks to Postcomm’s strategy of improving services through competition and regulation.

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The National Audit Office concluded that Postcomm, aided by the new consumer watchdog Postwatch, have made a good start, setting out clearly what they are seeking to achieve, undertaking extensive consultations and issuing six licences in what was previously the Post Office’s monopoly area. But there are clear tensions between Postcomm’s objectives which lead to a number of risks.

  • There may be insufficient competition to generate an improved service to most customers. This risk could arise as a result of the strength of Consignia’s brands, especially Royal Mail, and from Consignia’s response to competitors. Potential competitors may be reluctant to enter the market especially were Postcomm to continue their initial strategy of issuing short term licences to new entrants as this puts them at a disadvantage to Consignia, which has a 15 year licence.
  • Postcomm may be constrained in promoting competition by its statutory duty to ensure the continuation of a universal service at a uniform price. Consignia currently provide a universal postal service, with collections and deliveries everywhere in the country, at a price that does not vary with distance. If it were to lose significant custom to its competitors, Consignia might find it hard to finance the provision of a universal service at current prices or service levels. Postcomm have been carrying out intensive research into this issue.

Postcomm are shortly to publish a consultation document containing their proposals for opening up the market to competition and so addressing these two risks. In doing so, they will need to show that their proposals will indeed encourage competition, whilst providing sufficient assurance that the universal service will not be damaged by what they propose.

The National Audit Office note that Consignia provides an extensive service which is relatively cheap and well regarded. But Consignia has rarely met its delivery targets in recent years, has experienced deteriorating profitability and faces serious industrial relations problems. Until there is effective competition, Postcomm will need to regulate Consignia’s prices and quality of service directly through the licence they issued to the company in March 2001. In carrying out this task, Postcomm run the following risks:

  • Consignia’s efficiency may not improve significantly. Introducing competition to other formerly monopoly markets, such as telecommunications, has shown that one of the benefits of competition is the pressure it places on former monopolists. Pending the development of effective competition, Postcomm will need to rely on creating incentives for Consignia to improve its efficiency, especially through the controls they place on the prices Consignia can charge. The risk Postcomm face is that these incentives may not be sufficient to induce Consignia to improve its efficiency.
  • Consignia may fail to meet prescribed standards of service. Under its licence, Consignia must meet prescribed standards of service, including delivering 92.5 per cent of first class mail the next day. It has recently failed to achieve this level of service, with its national performance only achieving 89 per cent of first class mail next day in 2000-01. In some postal areas, especially in London, performance is much worse. Postwatch monitor the achievement of service standards on Postcomm’s behalf and are seeking to develop the information they obtain so as to obtain an informed view on customer needs and whether these are being met. The National Audit Office’s surveys of domestic and business customers, undertaken for this report, should help them undertake this task.
  • The Department of Trade and Industry, as the principal shareholder, may not apply sufficient pressure on Consignia to improve its performance and respond constructively to competition. In the case of other formerly monopolistic industries, such as telecommunications and gas, the private sector shareholders have played an important role in imposing disciplines on the company, ensuring that they improve efficiency and respond constructively to competition. The Department may not be in a position to apply the same disciplines to Consignia as private sector shareholders would do.
  • The National Audit Office conclude that Postcomm’s success in handling all these risks will depend in part on the credibility of their actions. Key factors in establishing credibility include adherence to the principles of good regulation, being seen to act in an impartial and independent way, employing staff with sufficient experience and expertise, and obtaining sufficient robust and reliable information.

"My report concludes that Postcomm have taken some important steps to introduce competition and further the interests of users of postal services. But for their strategy to be successful, and to ensure that postal services improve rather than decline they need to address the risks I have identified. Postcomm’s proposals should be scrutinised with a view to ensuring that Postcomm are managing these risks successfully so that customers will indeed see improved services."

Sir John Bourn

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