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General Richard Shirreff: The aftermath of a Yes vote

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September 17, 2014 Comments (0) Views: 1485 News

Address Unknown: Scotland’s postal nightmare under Independence

The SNP have made their plans for renationalisation of Royal Mail Group in Scotland clear ever since privatisation of Royal Mail was first mooted, and state in their white paper: “On Independence the Scottish Government will begin the process of renationalising the Royal Mail in Scotland”. It goes onto allow a degree of flexibility by saying “Our approach to nationalisation will be considered in the light of circumstances at the point of independence, including the prevailing structure of the Royal Mail.”

This raises some interesting questions. First, how do you nationalise a public company listed on the stock exchange of a foreign country? Second, will we also undertake to shoulder our share of the burden of the £29bn pension liability, the responsibility of which the UK government divested Royal Mail ahead of privatisation?

All of which is secondary to the thoughts that must be on the minds of Scots Royal Mail customers, which is – will there still be the same level of service, at a reasonable price? In other words what will come of the Universal Service Obligation in an independent Scotland?

The answer in the government’s white paper Scotland’s Future is “Yes… [the USO] will be maintained at least at the level of service provision inherited from the UK on independence.” In answer to the question “Will the price of stamps be higher in an independent Scotland than in the rest of the UK?” the answer is: “On independence stamp prices will be the same as they are at the time in the rest of the UK. A Scottish postal service on public ownership would not need to generate profits for shareholders and so should be in a better position to ensure that postal services and deliveries meet Scotland’s needs. This applies to sending post and parcels within Scotland, to the rest of the UK and to other countries….It is our intention that postal charges to rUK will not be more expensive than to spend post within Scotland.”

This is more a supposition than a commitment, as the USO runs at an estimated £200m loss. The current agreement between Ofcom and the Royal Mail Group is for the USO to be a statutory obligation of RMG for ten years.

As for price, there has already been some hefty increase over the last couple of years as a result of Ofcom’s decision to remove price controls from Royal Mail, while keeping a watching brief to ensure that RMG does not return to profitability by price increase alone without increasing efficiency or impairing the current service provision. Ofcom reserves to right to intervene if issues of affordability should arise, especially for the vulnerable.

Generally though the agreement runs like this: RMG is allowed more freedom to decide on the price of a first class stamp, but with 55p cap set on second class stamps, though it is allowed to increase in line with the Consumer Price Index for 7 years from April 2012. From April 2012 the cost of a first class stamp was increased from 46p to 60p, and the cost of a second class stamp fro 36p to 50p. Then in April 2014 stamps were increased from 60p to 63p for first class, and from 50p to 53p for second class. Which gives us a rough way of supposing how much prices might have risen by at the time of actual independence in 2016.

However these prices will bear no relationship to the actual provision of the USO in Scotland, without the economies of scale provided by the rest of the UK where routes are on average more profitable, especially in England, and subsidise the cost of delivery in the remote parts of Scotland, where routes are heavily loss making.

Gert Zonneveld, an analyst at stockbroker Panmure Gordon said in This Is Money last week that for this reason an independent Scotland would face soaring stamp prices and could lose Royal Mail services altogether if  Scotland was forced by EU law to establish its own postal service.

‘If Royal Mail will cover Scotland it will need to generate an appropriate return on sales, which may result in a significant uplift in prices for users of the mail system in Scotland.’

Mr Zonneveld was the first City analyst to publicly accuse the Government of selling Royal Mail on the cheap in last year’s privatisation. He was openly criticised by business secretary Vince Cable, but ultimately proved right when shares soared on the London Stock Exchange.

Yesterday he said a new postal service in Scotland would ‘result in a complete recalculation of costs’. It is not currently known whether Royal Mail would automatically pull out of Scotland in the event of a ‘Yes’ vote.

Government sources said it would be up to the Governments of Scotland and the rest of the UK to decide as part of the independence negotiations.

But in time Scotland will be forced to establish its own provider under EU law.

Mr Zonneveld said it was likely that Royal Mail would be kept on in Scotland ‘as an interim agreement’.

Using the firm, which already has an established network of postboxes and around 12,000 staff north of the border, would also be a cheaper option for a new Scottish Government than establishing its own state-owned service from scratch.

Mr Zonneveld added: ‘There is no doubt that something will need to change. But would Scotland on its own with a mail system have higher prices that the rest of the UK? You have to say yes.’

It is not known how much more expensive Scottish stamps could be, but a recent Citizens Advice Scotland investigation found that some parcel firms were charging up to six times more to deliver in rural parts of the Highlands.

A report from regulator Ofcom showed that Royal Mail charges business customers 27 per cent more if they are in rural areas than in urban areas such as major cities.

A spokesman for Royal Mail said: ‘The Scottish independence Referendum is a matter for the Scottish people and we await the outcome of the Referendum. Any negotiations following the Referendum would be a matter for the UK and Scottish Governments.’

A spokesman for Ofcom said: ‘Ofcom is independent of both the Scottish and UK Governments and has no position on whether there should be any constitutional change.’

The Department for Business, Innovation and Skills, which rules on the universal service obligation, refused to comment.

Dave Ward, deputy general secretary of the Communications’ Workers’ Union, said: ‘It’s not clear what the implications would be on Royal Mail’s Universal Service Obligation in an independent Scotland, the pension schemes our members are enrolled in or how it would affect the roll-out of broadband services to the inaccessible rural communities in Scotland.

‘Independence would have a significant impact on the ability of these companies to invest in their networks.’

The UK Parliament’s business committee issued a report on 8th August looking at the implications of Scottish independence on business, stating that a separate Scotland would have to devote considerably expense to propping up the universal postal service.

The MPs said various witnesses in their inquiry called into question the sustainability of Scotland’s universal postal service given the highly rural nature of the country.

About 1m people live in rural Scotland, and 280,000 of these live in remote areas. The Business, Innovation and Skills Committee said the Scottish Government had not laid out a plan showing how the extra costs would be financed.

The MPs stated in the report: “We do not believe that the Scottish Government has set out a coherent body of evidence to show how it would maintain and pay for the Universal Postal Service in an independent Scotland. The risk to Scotland is that provision of the Universal Postal Service will come at significant additional cost, either to the taxpayer or to the consumer.”

Within the report, the MPs also called into question the Scottish government’s pledge to renationalise Royal Mail’s operations in Scotland following its breakaway from the union, reversing last October’s privatisation process.

The UK lawmakers said renationalisation might be an “attractive campaigning tool” ahead of September’s referendum, but the Scottish Government had not set out in detail how the costs of bringing the Scottish postal system back into public ownership.

“Included in that assessment must be an assessment of Scotland’s proportion of the historic pension liabilities currently held by the UK Government. Without that detail, the policy of renationalisation is nothing more than an uncoated aspiration,” the MPs added, referring to the £29bn of historic pension liabilities taken on by the UK government from Royal Mail ahead of its privatisation.

A further problem identified within the report was how cross-border postal rates would be arranged between Scotland and the rest of the UK.

The situation could become like mail going between Northern Ireland and the Republic of Ireland, where Royal Mail charges EU rates to send items between Northern Ireland and the Republic, but where An Post operates an all-Ireland rate, encouraging Northern Irish consumers to take their mail across the border to mail it to addresses in the Republic.

Scotland could be treated like the Isle of Man or the Channel Islands, where postage rates are lower for sending to and from the UK than Europe.

Or, mail sent between Scotland and the UK could be classified as full international post, the MPs report suggested.

However, the report warned that the Scottish Government had not set out any detail on how it would deal with the financial pressures on cross-border postage in the UK. “Given that this will place further financial pressures on a Scottish Mail Service, the provision of this detail is a pressing matter,” said the Committee.

The Committee’s wider report concluded that remaining in the Union would be in the best interests of Scotland.

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