Regulation
Click here for an introduction to utility regulation.
It is possible to argue that there is no need to regulate the postal industry. Unlike gas, electricity or telephones, there is no natural 'last mile' monopoly, and it is possible to imagine mail being delivered by competing operators, each striving hard to provide an excellent service. Royal Mail does, however, have a very strong position in the delivery market and this gives it large economies of scale and a certain amount of market power. It is therefore currently necessary to control Royal Mail's prices and service quality so as to ensure that it does not exploit its customers. This regulation has been done by Postcomm since 2000, when Royal Mail was given significant commercial freedom, although remaining state owned. Postcomm is being subsumed into Ofcom during 2011.
But the regulator has a duty under the Postal Services Act to "exercise its functions in the manner which it considers is best calculated to further the interests of users of postal services, wherever appropriate by promoting effective competition between postal operators". And competition certainly offers a number of important benefits. Competitors will always attempt to offer customers new services, greater reliability and lower prices, and so incentivise Royal Mail itself to become more customer-friendly and efficient. This should in turn help the whole industry see off competition from 'e-substitution' (email, viewing bank statements and bills on the web, and so on).
Concern is sometimes expressed that competition might mean that Royal Mail could no longer afford to provide the universal service - Royal Mail's supposedly costly obligation to deliver mail to (almost) every address six times a week. The universal service is of course anyway a legal obligation, under both European and UK law, so Royal Mail couldn't stop providing the service even if he wanted to. But even putting this on one side, it is important to remember that:
The political and regulatory dynamics of postal regulation are certainly very interesting. Although the Labour Government had established Postcomm as an independent regulator, Ministers would inevitably have mixed feelings when the regulator set about reducing postal prices (so as to encourage efficiency) and introducing competition, both of which lowered Royal Mail's profits - and hence both the value of the company and government revenue. Both activities were also very unpopular with the (somewhat short-sighted) postal union who happened to be the Labour government's largest donor! It was greatly to the Labour Government's credit - and to the credit of the regulator in the way in which it communicated with the Government - that HMG did not seek to interfere in Postcomm's decision making.
Sweden was the first EU member state to 'liberalise' (i.e. introduce full competition into) its postal market, followed by the UK. One or two other countries began to follow suit, and the Third European Postal Directive now requires all member states to liberalise by 2012. But it also permits member states subsequently to ensure the continued delivery of the universal service (i.e protect their incumbent operators), (1) through direct subsidy ('state aid') or (2) by forcing competitors to pay 'compensation' to the incumbent - i.e. tax competitors - supposedly to reimburse the (in truth non-existent) cost of delivering the universal service - or (3) by having them sub-contract the regional delivery of postal services.
The Germans cleverly found another way of protecting Deutsche Post (whose monopoly had led to them paying their staff very generously) by mandating a high minimum wage for postal staff which made it near-impossible for competitors to compete, because they of course wanted to employ staff at normal market rates. This and other devices were deprecated by European Commissioner McCreevy when announcing the coming into force of the Third Postal directive: "These include restrictive licensing requirements for new operators, abnormally high setting of minimum wages which create a disproportionate barrier to entry, predatory pricing, discriminatory access to the postal infrastructure, operational standards that limit interoperability between operators, etc. We hear calls for all sorts of prohibitive requirements or conditions to be imposed on new entrants that would make it effectively impossible for them to run their business. This is not my idea of a Single Market. We will use the means at our disposal to address such protectionist behaviour to see to it that what we agreed will also be implemented."
Against this background, the regulator decided in 2002 that there were clear advantages to be gained from permitting rival operators to offer mail services in competition with Royal Mail, hoping that this would galvanise the whole postal industry and so stave off the competition from email and the internet. Sadly, however, Royal Mail were very slow to respond to the threat of competition, and in particular did little to address the well-known inefficiency of their 'upstream' business:- collecting and sorting mail overnight in large 'mail centre' factories. There was certainly no sign that the company recognised the huge threat of competition from e-substitution. The unions in particular were much more worried about competition from other postal operators and about management's attempts to increase productivity. They called a number of strikes, which only served to encourage their largest customers to seek to communicate electronically with their customers, including by offering discounts if customers began to look at, and pay, their bills online.
The result was that Royal Mail lost over half of their upstream business, with several competitors successfully gaining contracts to collect mail from large customers, sort it and transport it to Royal Mail's local delivery offices. The upstream competitors then contracted with Royal Mail to deliver almost all their mail, paying an 'access price', set by the regulator, for this 'downstream' service. As a result, and in contrast to the upstream business, Royal Mail's 'downstream' delivery network remained strong and relatively efficient, and retained almost all its market share.
In parallel with this, total mail volumes have fallen as a result of e-substitution so that Royal Mail came under severe financial pressure, whilst remaining owned by a government with very little money following the credit crunch.
There was a particularly interesting episode in 2002 when the Government tried to persuade the Dutch company TPG to buy Royal Mail, only to find that TPG would not proceed with the acquisition unless Postcomm agreed to relax a recently announced price control and to postpone the introduction of competition for several years. Postcomm told Ministers that such decisions were incompatible with its statutory duties, but said that it would not object if Ministers were to decide to suspend the relevant legislation so as to facilitate their wider objectives. However, Ministers were reluctant to do this, and no doubt even more reluctant to face a gruelling battle with the union, and decided not to proceed with the privatisation.
There was another attempt to part-privatise the company in ... but the steadily weakening Labour Government did not have the political muscle to complete the task.
As the years went by, the combination of e-substitution, the loss of upstream business, and Royal Mail having failed to cut its costs far enough and fast enough, meant that the regulator decided to allow (but not require) Royal Mail to increase its prices. Unfortunately Royal Mail chose to take advantage of this short term palliative measure which inevitably drove yet further customers away and so risked encouraging the company into a form of 'death spiral'.
The post-2010 incoming coalition government government decided to re-activate its predecessor's plan to part-privatise Royal Mail, partly so as to raise some cash, but also in the hope that private sector owners will be more successful than Ministers in getting the company to tackle its deep-seated problems. The necessary legislation was passed in June 2011. But Royal Mail's financial performance continued to deteriorate, as mail volumes continued to fall, so it began to look very unlikely that privatisation could be achieved without subsidising the purchaser, which might run into state aid problems.
Another possible way forward might be to relax regulation in ways which help the postal industry compete with the internet, maybe by seeking to relax the Europe-wide universal service obligation - perhaps requiring deliveries on only three days a week - but this would be politically hard to sell, and would require the agreement of other member states.