Committee Reports > List of Committees > Joint > 1988 > Committee on Commercial State-Sponsored Bodies (5th Committee) > Report No. 02 - An Post

MEMBERS OF JOINT COMMITTEE

SUMMARY AND RECOMMENDATIONS

Financial Performance and Profitability

1.The Joint Committee on Commercial State-Sponsored Bodies welcomes the positive trend in An Post’s financial performance since the Company commenced trading at the beginning of 1984. From a net loss of £5.4mn in 1984 the company had a net pre-tax profit of £2.8mn in 1987. This is a positive development in view of the Company’s short operational life, and the legacy of inadequacies inherited at the time of its establishment. A major contribution to the improved performance in 1987 was The National Lottery Company from which An Post earned £1.1mn in management fees, in addition to normal postal user charges.

2.However, the Committee notes that there has been significant under-provision for the Company’s pension scheme, to a cumulative total of £7.4mn at the end of 1987. While aware of the underlying reasons for postponing full pension provision in the early years of the Company’s life, the Committee recommends that full provision for pensions should proceed as rapidly as is feasible. The Company’s assurance that this has now commenced is welcomed, as is the evidence in the 1987 Annual Report that close to full pension provision commenced in 1987. The Committee recommends that An Post’s accounting practice be altered so that the financial position inclusive of the necessary pension provision be more readily apparent in the published accounts.

3.The Company has informed the Committee that a number of activities operate on a breakeven rather than profit making basis. Individual parts of An Post’s overall activities may, therefore, merit more careful scrutiny as individual profit centres. In particular, the Committee recommends that accounting practice be altered so as to show the contribution of each major area of An Post’s activities to overall profit or loss.

4.In the cases of activities where no profit is being generated, a clearer view needs to be taken by board and management as to the reason for the Company’s involvement in such activities, particularly when these are ancillary rather than central to An Post’s core postal business.

5.The Committee recommends that more detailed information be given in the accounts regarding the composition of current liabilities. In particular, the categories “other creditors” and “accruals”, which together accounted for 56 per cent of current liabilities in 1987, need further explanation.

Of the total of £31mn of these two categories in 1986, approximately one quarter was accounted for by postal and money order liabilities. This item was not separately disclosed in 1987.

Postal Services

6.Irish postal charges remain among the highest in Europe, thereby constituting a cost penalty for existing companies and a disincentive to potential new investors in Ireland. The Committee would, therefore, encourage the Company to make all possible progress in reducing real postal charges. The Company’s commitment that future postal charge increases will remain below the rate of inflation is welcome. However, such a policy cannot be continued indefinitely. An Post will need eventually to adopt a more explicit view of what is an appropriate level of Irish charges, taking account of competition in Ireland and the level of postal charges in comparable countries.

7.The Committee’s view is that the consumer charges of Irish commercial State-sponsored bodies should normally be broadly in line with those of our main European competitors. Where economies of scale or other cost components necessitate charges in excess of these, the onus of demonstrating this necessity lies with the Company. This is especially so for those commercial State-sponsored bodies operating in a monopolistic environment, and it is the Committee’s intention to pursue this matter with all such companies subject to review by it. In the case of An Post, the Committee recommends that a schedule be agreed with the Department of Communications whereby Irish postal charges will be brought into line with the EC average over a reasonable period of time, say five years. Progress or otherwise on this matter should be addressed each year in the Company’s annual report, and any departures from the schedule should be explained in detail.

8.Notwithstanding the findings of the Company’s own research, there is a widespread public perception, with support from independent analyses, that the quality of the Irish postal service is still unsatisfactory. This is so particularly in relation to delivery times. For example, while the Company believes it is meeting its target of 90 per cent of internal letters delivered the following day, research by the Consumers Association has put this at 81 per cent. Such inadequacies, real or perceived, have been a major factor in the growth of private courier services in recent years. The Company, therefore, must address the quality of the postal service if it is to withstand the encroachments of competitors.

The Committee recommends that the Company publishes information in its Annual Report regarding the quality of the postal service. This should include a detailed breakdown of performance rather than simple national averages. The Committee intends to issue a questionnaire to the Company on a six-monthly basis requesting such information.

Competition and Cost Containment

9.An Post’s major competitive strength is its network of post offices and postal collection points. This constitutes a major barrier to entry into the Company’s core postal business by any potential competitor. However, this strength is also a weakness since it gives rise to a high level of fixed costs and to a need for large scale capital replacement. The Company must, therefore, continue to look to ways in which these costs can be contained, and its fixed overheads spread over a larger volume of business.

10.The Company’s plans to diversify to other areas such as retail banking and electronic mail are to be welcomed. These are, however, areas necessitating considerable capital investment. They are also markets in which strong competition from alternative suppliers is likely to be felt. Without rejecting these proposals, the Committee believes that it may be prudent to also look to some additional sources of possible revenue earnings. One such area would be overseas consultancy services.

11.An Post’s operations are of their nature labour intensive. Wages and salaries constitute about three quarters of annual current expenditure. In these circumstances cost containment inevitably involves labour cost containment. One approach to this will be more flexible working practices on the part of the workforce, and possibly greater use of regular part-time staff for peak working hours.

12.In this context the Committee has noted the positive attitude of the Postal and Telecommunications Workers Union (PIWU) towards flexibility, as reflected in the Partnership for Progress agreement. It also recognises that the union has invested a considerable amount of credibility with its members in this agreement, and is prepared to make it work. The Committee believes that this agreement provides a basis for good long-term industrial relations in An Post.

The Postal Monopoly

13.The Postal and Telecommunications Act 1983 gives An Post a monopoly on the carriage of “postal packets” within, to, and from the State. However, the precise scope of this legal monopoly in practice is unclear, and the status of some private courier operations is legally ambiguous. The Department of Communications should clarify the position in this regard.

14.Having considered the issue carefully, the Committee agrees with the Company’s view that increased efficiency rather than reliance on exclusive postal privilege is the best way forward for An Post, and the best way to produce efficient and cost effective services for the consumer. Therefore, any such clarification of the legal position by the Department of Communications should favour competition and should ensure that there is a “level playing field” for An Post and private couriers in those areas where their services overlap. This position will also be in keeping with the view of EC competition policy.

15.Some parts of An Post’s core postal business, notably deliveries in sparsely populated rural areas, are likely to be inherently unprofitable but are generally regarded as a desirable social service. In these circumstances, the economically ideal solution would be a system of State subsidies to compensate An Post for performing such a social service. However, this option is clearly not realistic under present budgetary conditions. Instead, under its legislation An Post’s postal monopoly is viewed as an alternative means of financing such services. This involves “cross subsidisation” from other postal users and is, in the circumstances, a reasonable second-best solution. More detailed information on the profitability of different parts of An Post’s services, as proposed in paragraph 3 above, would also facilitate clearer public policy decisions in this regard.

16.The Committee recommends that the Revenue Commissioners investigate an allegation made to it by the Irish Association of International Air Courier Services (IAIACS) that the Customs and Excise Service discriminates in favour of An Post’s Express Mail Service as against private courier/express traffic, and that this leads to a loss of revenue to the Exchequer.

Security

17.The Commitee recommends that the Company examine ways in which it can encourage improved security at sub-post offices, which are independent contractors to An Post, and which have been the main targets of recent crime directed at the postal service. The Committee also believes that the Company should encourage greater use of non-cash financial transmission systems which, as well as increasing internal efficiency, will reduce the risk of robbery.

18. The Committee has considered very carefully the view of the Postal and Telecommunications Workers Union (PTWU) that inadequate redress is available to postal workers injured in the course of a crime, and that this needs to be addressed as a matter of urgency. However, the Committee also notes that in this regard postal workers have the same right of access to the Criminal Injuries Tribunal as other members of the public, including other high-risk public sector occupations. Mutually satisfactory solutions to this issue should be investigated jointly by the PTWU and the Company, possibly also in consultation with other relevant public sector unions and organisations in such areas as the prison and emergency services. The Garda Siochana already have their own statutory compensation scheme.

Future Development and Capital Requirements

19.The Company estimates that it will require an annual outlay on fixed capital of £8mn over the next few years. This will be utilised for replacement of the vehicle fleet, construction and modernisation of buildings, and the development of new services. Given the deficiencies arising from many years of under-investment, together with the Company’s development plans, the Committee believes that An Post’s projected investment figure is likely to be conservative.

20.The Committee’s view is that An Post cannot realistically look to the Exchequer for additional funding over the next few years. Instead, it must look to alternative sources such as internal generation of capital, commercial loans, and also, possibly, private sector capital.

21.In 1987, internal cash flow was £6.25mn. The Committee’s view is that this can be improved upon through internal efficiencies and increased volume. Regarding external funds, An Post has a low gearing. It has, therefore, got additional borrowing capacity. The Committee believes that this borrowing capacity could be used for prudent commercial investments in relation to both rehabilitation of the Company’s existing capital stock and new investment opportunities.

22.The Committee does not see any scope for privatisation, in the whole or part, of the core postal business. However, it sees no inherent objection to an involvement of private capital in any additional subsidiary companies and new ancillary services developed by An Post.

I. THE COMPANY

a) Establishment of An Post

1.In 1979 the Posts and Telegraph Review Group reporting to the Minister for Posts and Telegraphs recommended the establishment of two new commercial state-sponsored bodies to operate the postal and telecommunications services. The Group’s recommendation was implemented in the Postal and Telecommunications Services Act 1983. This provided for the establishment of An Post and its sister company, Telecom Éireann. An Post was registered under the Companies Acts in December, 1983, and vesting day was 1 January, 1984. Apart from one share held by the Minister for Finance, all of its share capital is held by the Minister for Communications.

2.Postal services in Ireland have a long history dating back to the fifteenth century, and the independent Irish post office was formally established over 200 years ago in 1784. However, An Post itself has been in operation for only four years so the Committee’s review of its operations comes relatively early in its corporate life. The present structure and performance of the Company is heavily influenced by its inheritance from the past, and it must live with the results of many policies and decisions of its immediate predecessors.

b) Objectives of An Post

3.Under the Postal and Telecommunications Services Act, 1983, the principal objectives of An Post are:

“(a)to provide a national postal service within the State and between the State and places outside the State,

(b)to meet the industrial, commercial, social and household needs of the State for comprehensive and efficient postal services and, so far as the company considers reasonably practicable, to satisfy all reasonable demands for such services throughout the State,

(c)to provide services by which money may be remitted (whether by means of money orders, postal orders or otherwise) as the company thinks fit,

(d)to provide counter services for the company’s own and Government business and, provided that they are compatible with those services and with the other principal objects set out in this subsection, for others as the company thinks fit, and

(e)to provide such consultancy, advisory, training and contract services inside and outside the State as the company thinks fit”.

The Act endows An Post with a monopoly over the carriage of “postal packets” within, to and from the State, together with incidental services. The monopoly does not extend to telegrams, newspapers or parcels.

4.In fulfilling its objectives, the Company must adhere to specific commercial criteria. Under Section 13 of the Act it must ensure that:

(a)charges for services are kept at the minimum rates consistent with meeting approved financial targets, and

(b)revenues of the Company are not less than sufficient to:-

(i)meet all charges properly chargeable to revenue account (including depreciation of assets and proper allocation to general reserve) taking one year with another,

(ii)generate a reasonable proportion of its capital needs, and

(iii)remunerate capital and repay borrowings.

5.An Post, therefore, has a dual mandate:

-requirement (a) above sets its ‘public service’ objective, and

-(b) involves operation of a fully commercial state body.

A requirement to generate retained earnings is set out explicitly in (b) (i), and it is also implicit in (b) (ii) and (iii).

c) Corporate Structure

6. An Post has three operational divisions in accordance with its three main activities: letters and parcels, banking, and counter services. In addition, there are four corporate service functions: finance, marketing, personnel, and corporate affairs.

7.An Post National Lottery Company, established in September 1986, is the Company’s only subsidiary. An Post owns 80 per cent, the balance being held by the Minister for Finance. It operates the National Lottery under licence from the Minister for Finance, under the provisions of the National Lottery Act, 1986. The performance of The Lottery has not been separately examined by the Committee as part of this review.

d) Board of Directors

8.An Post has a 15-person board of directors, appointed by the Minister for Finance. The board has a non-executive chairman, and the chief executive is the sole executive director. There are five worker directors as required by the Postal and Telecommunications Act, 1983.

e) Relationship with Government

9.Within the terms and objectives laid down in the 1983 Act, the board of directors has the power and duty to determine and oversee the operations of the Company. Implementation of policy in individual functional areas is the responsibility of management. However, the 1983 Act reserves certain areas of decision to Ministerial initiative or sanction.

10.The Ministers for Finance and Communications both have roles, acting alone, jointly, or one with the consent of the other. The principal areas that give rise to a Ministerial role are: postal pricing; licensing of third parties to operate services covered by the postal monopoly; raising of Exchequer funding; the form of the annual accounts; setting financial targets; and maintenance of loss making services in the public interest. There is also a general power, not used to date, enabling the Minister for Communications to direct the Company, in the national interest, to take or refrain from taking specified actions.

11.An Post must submit its annual capital expenditure plans for consideration in the context of the Public Capital Programme, and its capital investment is considered to be part of that Programme. On a continuing basis, An Post advises the Minister for Communications of its operations and financial targets by means of a rolling five-year plan. An Post is also expected to conform with Government guidelines on public sector pay.

12.The 1983 Act allowed for Exchequer funding for current purposes in the initial years of An Post’s existence. Such funding occurred in 1984. The provision expired at the end of 1986.

II. FINANCIAL PERFORMANCE

a) Turnover

13.An Post had a turnover of £195mn in the financial year January - December 1987. It was the 28th largest company in Ireland in 1986 in turnover terms.

14.Turnover rose by 11.5 per cent in 1985, 9.8 per cent in 1986, and 5.9 per cent in 1987. These figures indicate substantial growth in business in real volume terms (Table 1), albeit at a declining rate in 1987.

TABLE 1

AN POST’S FINANCIAL PERFORMANCE, 1984-87

b) Profit and Loss Account

15.An Post’s accounts for the four operational years 1984-87, inclusive, show a gradual progression from a substantial loss to a profit. When the Company was established, it was expected that it would require five years to break even. The performance as per the accounts is, therefore, better than originally anticipated. However, this position is negatively affected by underfunding of the Company pension scheme.

16.Between January, 1984, and December 1985, losses of £7.2mn accumulated, most of which (£5.4mn) accrued in 1984. Of this £7.2mn, £5mn was offset by an Exchequer grant in 1984 so cumulative losses stood at £2.2mn in the balance sheet at the end of 1985. In 1986 and 1987 profits before tax totalled £3.5mn, the bulk of which (£2.8mn) accrued in 1987. After a tax charge of £1.2mn in 1987, this brought accumulated reserves to £0.1mn at the end of that year.

17.However, the performance of An Post is better indicated in the position before allowing for the 1984 Exchequer grant Adjusting for this item reveals accumulated losses of £4.7mn at the end of 1987.

18.Within An Post’s functional areas, poor financial performers include postal and money orders, which less about £2.7mn in 1986, and the parcels service, which has been losing £4mn to £5mn annually. An Post attributes the former losses to a high cost structure, brought about b commission rates payable to postmasters, and to inefficient manual processing methods. The losses on the parcel service are put down to poor quality of service and t inflexibility. It is not possible on the basis of the information available to establish the profitability of the various agency services.

19.As noted previously, the Company’s underlying financial performance is affected by underfunding of its pension scheme. The Company has been accumulating future liabilities which are not immediately evident in its profit and loss account or balance sheet. The Notes on Accounting Policies in the 1987 Annual Report and Accounts estimate that the accumulated shortfall arising from underfunding was £7.4mn at the end of that year. Thus the true accumulated deficit at the end of 1987 was £12.3mn as against the figure of £4.9mn referred to above. However, taking account of pension underfunding does not alter the improving trend in the Company’s performance although it means that the turnaround from loss to profit occurred in 1987 rather than in 1986. A Profit and Loss Account adjusted for pension underfunding is shown in Table 2.

TABLE 2

AN POST’S FINANCIAL PERFORMANCE*

(Adjusted for Pension Underfunding)

20.The Company is, of course, fully aware of the extent and implications of pension underfunding. This course was agreed with the Departments of Finance and Communications at the time of An Post’s establishment, in recognition of its likely initial difficult trading years and the extent of underfunding is fully acknowledged in the Notes to the Company’s accounts. The Company disclosed in evidence that it envisages a necessity for a claw-back in the region of £800,000 per annum over 8-10 years.*

21.The underfunding discussed above relates to pension entitlements that arise out of service since vesting day. Pre-vesting day entitlements are a liability of the Minister for Finance, who delegates their payment to the company. According to the 1986 Annual Report, “Payments made by the Company in accordance with such delegation are made out of the superannuation scheme and shall be reimbursed by the Minister for Finance in any year in which the income from the pension scheme is insufficient, because of the delegation, to pay the pensions of that year”.

c) Balance Sheet

22.An Post’s fixed assets of £56mn at the end of 1987 consisted largely of land and buildings (81 per cent) with the residual shared between vehicles (8 per cent) and furniture and fittings (11 per cent). Between 1984 and 1987, investment in new fixed assets was £25mn of which expenditure on buildings accounted for 43 per cent, vehicles for 28 per cent, and other equipment and machinery for 29 per cent.

23.Given the absence of profitability, a large share of investment to date has been externally funded. The Exchequer put up an initial share subscription of £4mn, and bank borrowings to the end of 1986 were £8.5mn. This left a balance of £12.5mn which was generated internally. None of the Company’s debt is guaranteed by the Exchequer, and so it is not part of the national debt.

24.An Post’s gearing has been increasing, but remains quite low: the ratio of debt to shareholders’ funds was only 19 per cent in 1986. The Company’s bank debt is short term, although it is being used to finance long term assets. Except in particular circumstances, it is generally prudent to relate the maturity of debt to that of the assets it is used to finance.

25.The components of working capital have fluctuated significantly, particularly in the case of cash. There is evidence in the accounts that An Post has funded long-term fixed assets by taking extended credit for short term payables. Creditors and Accruals accounted for 78 per cent of current liabilities in 1984, but fell to about 70 per cent in 1985 and 1986 after the bank debt was taken on. In the 1987 accounts, more details of current liabilities were presented than hitherto. At December, 1987, 56 per cent of these liabilities was accounted for by two categories described as “other creditors” and “accruals” for which no further explanation was available. The balance (34 per cent) consisted of a bank loan, trade creditors, taxation and social welfare, and other postage income.

TABLE 3

AN POST’S CURRENT LIABILITIES 1987 

26.As a share of current assets, cash has fluctuated, but has never fallen below 32 per cent on balance sheet date. This item does not include cash held by An Post as agents for third parties. In general, the cash-intensive nature of the business suggests a need for a maximum performance in money management terms.

III COMPANY OPERATIONS

a) Main Activities

27.An Post’s operations fall under three main headings:

-postal services,

-banking,

-counter services.

Each of these involves a mixture of activities, some performed on An Post’s own account and some on an agency basis for other organisations, mainly in the public sector. These are summarised in Table 4. The breakdown of revenue is shown in Table 2.

28.The continued predominance of An Post’s core mail activity is reflected in its income. Total revenue of £195mn in 1987 accrued 73 per cent from mail, 24 per cent from agency services, and 3 per cent from money transmission and other services.

29.An Post’s staff worked at 2,142 locations in 1987, a number little changed since 1984. There is one post office for every 1,600 head of population in Ireland. This compares with a ratio of 1:2,300 in Britain, and a standard set by Universal Postal Union of between 1:3,000 and 1:6,000. However, in any international comparison of this nature Ireland’s relatively low average population density must be taken into account.

TABLE 4

SUMMARY OF ACTIVITIES OF AN POST 

b) Postal Services

30.About two-thirds of mail revenue arises from postage metering machines and other bulk purchase arrangements, with the balance arising from sales of stamps. Mail traffic volume grew by 16.4 per cent from 1983 to 1987, compared with a fall of 8 per cent between 1978 and 1982. By way of comparison, the volume of Gross Domestic Product (GDP) rose by about 8 per cent between 1983 and 1987.

31.The overall growth in mail traffic involved a fall in parcels traffic, offset by growth in letters and other mail services. The new postal products, Postaim and Publicity Post, contributed to this growth, along with the Express Mail Service. The decline in An Post’s parcels traffic has reduced this to 50 per cent of the volume of a decade ago.

c) Postal Charges and Deliveries

32.Postal charges, averaged over all services, rose in nominal terms by 11.1 per cent between 1983 and 1987. After allowing for inflation, this represented a real reduction of 9.1 per cent. The only increase in basic postal rates, by 2p, occurred in March 1986. An Post believes that high charges were a prime cause of declining postal traffic prior to 1984. The Company states that its policy is to keep price increases below the rate of inflation, and in the course of oral evidence the chairman informed the Committee there will be no general increase in postal rates during 1988. Since 1983, annual growth in mail traffic in each year up to 1986 exceeded the Company’s minimum 3 per cent target, and the Company now believes that it has decisively reversed the previous downward trend. However, growth slowed to 2 per cent in 1987.

33.By European standards Irish postal charges are still relatively high. At 28p, the price of a stamp for an inland letter is the fourth highest of 19 European countries in 1988 (See Table 5). This represents an improvement on 1986 when An Post’s basic letter charge was the highest among this group of countries. The Department of Industry and Commerce Review of Industrial Performance 1986 noted that postal charges facing Irish industry were 36 per cent higher than the EC average. This is both a cost penalty on existing Irish businesses, and a disincentive to new companies to locate in Ireland. In particular, it could hinder efforts to attract new service companies in sectors such as finance and mail order.

34.An Post’s surveys indicate that it is currently meeting its target of 90 per cent of letters delivered in Ireland the day after posting. Research carried out by the Consumers’. Association in 1985 did not bear this out. It found an average next-day delivery of 81 per cent, with the greatest delays in long distance letters. A recent survey among its members by the Dublin Chamber of Commerce found fairly high levels of general satisfaction with the postal service. However, only 25 per cent of respondents believed that parcels were likely to be delivered on the following day. There is little question but that the inadequacies of the postal services, real or perceived, have contributed to the growth of private courier services. An Post informed the Committee that it wishes in particular to improve delivery times for long distance mail, and to offer later times of last posting particularly in the Dublin area.

TABLE 5

MINIMUM LETTER & PRINTED PAPER RATE IN NINETEEN EUROPEAN COUNTRIES

(To Nearest Half Penny Equivalents)

d) Banking Services

35.The principal area of banking activity consists of the four savings services. These are performed on an agency basis for the Department of Finance. For eight years to 1984 there was a net outflow of funds from the Post Office Savings Bank (POSB). A marginal reversal of this occurred in 1985, but the net outflow in 1986 was £26mn followed by a net outflow of £12mn in 1987. The other three services are Savings Certificates, National Instalment Bonds and Index Linked Bonds. Taking all three services together, there was an aggregate net inflow of £603mn in the four years since vesting day. Up to 1986, the net inflow grew rapidly to reach a peak of £259mn, but 1987 saw a much lower net inflow of £49mn.

36.An Post’s savings services are an important contribution to domestic funding of Exchequer borrowing. However, the Company gave evidence that the banking service is a break even operation, so it is not a drain on the Company’s resources but it is not a great money spinner either.

37.Alone of the four savings media, POSB deposits are subject to the DIRT tax. An Post blames this tax for the deterioration in the POSB’s performance in 1986. However, the exemption from the tax of the other three forms of savings has enhanced their attractiveness (Table 6).

TABLE 6

NET UPTAKE OF CERTAIN FINANCIAL INSTRUMENTS

e) Counter Services

38.The principal activity under this heading consists of services carried out for the Department of Social Welfare. Benefits and allowances paid over post office counters have been as follows:

39.Given the average increases in rates of payment that have been implemented in July of each year, the implied increases in the numbers of social welfare transactions are 0.1 per cent in 1985, 3.5 per cent in 1986 and 2.3 per cent in 1987. These figures do not reflect the total increases in the numbers of social welfare claimants, mainly because unemployment payments are made at employment exchanges to claimants who live within a radius of six miles.

40.Other counter services include the various agency services that are set out in Table 3. Sales of TV licences grew annually at an average rate of 2.4 per cent between 1981 and 1983, and at 3.3 per cent on average in the three years after vesting day. In 1984 and 1986, sales exceeded the targets agreed with RTE, while there was a small undershoot in 1985. In 1987, sales were on target. Agency work for Telecom Éireann will soon be lost, following a current rationalisation of services between the two bodies. This will cost An Post about £4mn per annum in revenue.

f) The National Lottery

41.Under the terms of its licensing agreement, An Post receives 1.1 per cent management fee of the gross value of ticket sales from The National Lottery Company. This relates to the use of An Post’s central management and administration in The Lottery’s operations. In 1987, The Lottery’s first year of operations, this came to £1.126mn. An Post also earns other revenues from The Lottery for its normal user facilities, including postal services and ticket sales through post offices. The overall impact of The Lottery on An Post’s financial performance is, therefore, very positive.

g) Competitiveness

42.An Post operates in a number of markets. In some - for example its agency work on behalf of RTÉ - it currently enjoys a monopoly position. In others - for example the operation of the POSB - it already faces considerable competition.

43.In all cases, even in those where the Company currently has a legal or administrative monopoly, a key issue for the future is whether An Post possesses any distinct commercial competitive advantages, or faces disadvantages, vis-a-vis present or potential competitors.

44.In all its markets, a key competitive advantage arises out of An Post’s nationwide network of offices and collection points. Central post offices in towns and other urban areas are An Post’s own property, whereas sub-post offices operate on an agency basis to the Company. In the case of many services, including the letter post and the agency work for the Department of Social Welfare, this network constitutes a significant barrier to new entrants. However, the geographical distribution and physical condition of much of its stock of fixed assets moderates the advantages derived from the overall size and geographical spread of that stock.

45.There are now many An Post post offices with too small a customer base. Coversely, there have been shortages of building accommodation in certain areas. There was a long-term lack of maintenance prior to An Post’s etablishment, so that many buildings are in poor condition. This lack of investment reflected the priority given to public investment in the telecommunications service as opposed to the postal service. Other consequences of this lack of investment are an ageing vehicle fleet and a shortage of modern computer and other electronic equipment.

46.An post is now burdened with excessive levels of cost. Other organisations not so burdened are in a strong position to compete on price with An Post, whether this competition is actual or potential. An example of the former is the money transmission services of the banks; an example of the latter is the threat of competition from other institutions for agency services for the public sector. The origins of most of these agencies lie in An Post’s former status as part of a Government department. They could now be threatened by credible lower-cost alternatives.

47.In relation to banking services, An Post stands in front of entry barriers rather than safely behind them. It cannot hope to compete fully against the other deposit-taking institutions until it overcomes its shortage of modern electronic equipment. Moreover, the manner in which the business is run at present means that the customer does not have a relationship with a particular branch, dealing as he/she does only with a local agent for a centralised body. It is unlikely that the POSB will be able to compete seriously with the banks as long as such practices continue.

h) The Postal Monopoly

48.Section 63 of the Postal and Telecommunications Act, 1983, confers on An Post the “exclusive privilege in respect of conveyance of postal packets” within, to or from the state, with the exception of newspapers, parcels and court documents. This privilege is granted to the Company -

“(a)in view of its primary purpose of providing a national postal service and of the general duty imposed on it by section 13, and

(b)in recognition of the fact that a privilege of this kind is appropriate having regard to the area and population of the State and the present state of development of postal technology, and

(c)because a viable postal system involves subsidisation of some loss-making services by profit making services.”

The Company may, with the consent of the Minister, grant licences to other postal service operators within this exclusive privilege, an option not so far exercised.

49.Breaches or attempted breaches of the postal monopoly are deemed an offence under the Act. Any person who “aids, abets, counsels or procures” such a breach may also be held to be guilty. The Act provides that any person proceeded against shall bear the onus of proving his innocence.

50.In written submissions, both the Department of Communications and An Post described the legal monopoly, but without comment. An Post management stated in oral evidence that “our response (to very determined competition) must not be to rely on monopoly powers … we must provide an efficient, reliable and cost effective service for our customers”, while “to rely on the monopoly would be suicidal”. To date, no legal proceedings have been brought against any party under the 1983 Act. In its submission, the Postal and Telecommunications Workers’ Union (PIWU) argued that private couriers operate illegally and that the law is being widely flouted. The union called for a firm public restatement of the desirability of retaining and rigidly enforcing the monopoly arrangement. In response to queries from the Committee, the Company took the view that “other people may be breaking the law, but it is not for us to say”.

51.The main practical issue regarding the monopoly relates to the role of private courier firms, both domestic and international. Whether these companies operate in breach of the 1983 Act hinges on whether they are engaged in conveying “postal packets”. The couriers’ position is that they operate in a distinct market, which is outside the terms of the Act. In support of this they cite An Post’s own separate Express Mail Service, which is advertised as “The Courier Service of An Post”. The legal position in Ireland has not been tested and so is still ambiguous.

52.The EC Directorate General on Competition Policy supports the couriers’ view. It has persuaded a number of member states to remove legal obstacles to private sector couriers on the grounds that these provide a different service from post, and it has expressed unease about the growth of the express mail services of national postal services. The most recent (16th) Report on EC Competition Policy states that the Commission is examining the situation in Ireland.

53.Private sector couriers also argue that there is not “a level playing field” in other ways. In a written submission to the Committee the Irish Association of International Air Courier Services (IAIACS) argued that customs clearance procedures discriminate between An Post’s Express Mail Service and private courier traffic, leading to a loss of significant revenue to the State. However, An Post informed the Committee that it has no special privilege in respect of customs importation.*

IV. PERSONNEL

a) Employment

54.At December, 1987, An Post had 8,392 full-time personnel. This represented a reduction of 559 (6 per cent) from the level of employment in 1986, and was the first significant change in the total since 1983. Postmasters (employed as agents) and their staff accounted for a further 3,000 people in each year since vesting day. An Post’s staff are predominantly engaged in operating the mail service (Table 7). Its operations are very labour-intensive, and employee-related costs accounted for 76 per cent of current expenditure in 1987.

TABLE 7

CATEGORIES OF STAFF EMPLOYED BY AN POST, DECEMBER 1987

55.An Post is committed to greater labour cost effectiveness. Staff costs were rising at about 10 per cent per annum up to 1986, with a static labour force. This figure was well ahead of inflation and of increases in other costs. Clearly, cost control to a considerable extent means labour cost control. An improvement in this respect was visible in 1987, in that staff costs rose by only 4.3 per cent. However, given the reduction in staffing in 1987, this implied a rise in per capita staff costs of 9.6 per cent.

A key dimension of labour cost control will be the introduction of more flexible working practices. One example of the latter would be a reduction in the necessity for overtime; another would be the practice, recently adopted in the British Post Office, of taking on regular part-time staff for peak day times, eg. lunchtime.

56.An Post’s wish to reduce the size of its payroll is embodied in the Partnership for Progress 1987-1992 agreement between the Company and the PIWU. This agreement came into effect on 1st August, 1987. In oral evidence, the company informed the Committee that it does not plan large scale redundancies, but that adjustments were sought that would take 600 - 1,000 people off the payroll voluntarily.* During 1987, about 500 people left voluntarily in accordance with a financial formula agreed between An Post and the Government. To facilitate staff reductions, schemes of early retirement, voluntary severance, career breaks and job sharing are available.

57.The Partnership for Progress agreement also aims to improve customer service and business efficiency through organisational and operational changes; to reward employees who contribute increased productivity; to share the rewards of increased competitiveness; to expand employment arising from increased business; to provide a sound basis for industrial relations; and to reduce staff numbers and overtime.

b) Industrial Relations

58.The PTWU represents 90 per cent of all staff in the clerk, cleaner and mail handling grades in An Post. The union’s position on planned staff reductions under the Partnership for Progress agreement is that it has invested its credibility with its members in the agreement, and is prepared to make it work. The union’s hope is that the agreement will provide a way for An Post to progress from being a ‘low pay, poorly motivated industry with bad employment conditions’. However, it believes that there is currently widespread suspicion, distrust and antipathy to the Company among its members.

59.In terms of man-days lost through strikes, the performance of An Post has been good. The Company, in its written submission, informed the Committee that the development of new agency work has been hindered by lack of co-operation from the trade unions involved. However, the Company subsequently stated that although this had been the case up to 1986, it no longer applies.

60.About 85 per cent of An Post employees are inherited from the pre-1984 Department of Posts and Telegraphs. Under section 45 of the 1983 Act their conditions shall not be less favourable “than those prevailing for the time being in the civil service”. Alterations in conditions of service that violate this provision can only be made through a collective agreement.

c) Security and Compensation

61.The business of An Post is undertaken predominantly on a cash basis, and the amount of cash that is held in post offices makes them attractive targets for crime. The 1986 Annual Report refers to a ‘sharp increase in cash stolen in armed robberies at our offices and from our vans during 1986’, and mentions that one employee was shot while on duty. The total amount stolen in robberies during 1986 was put at about £0.5mn by the Company.*

62.There are a number of distinct issues to the security problems faced by An Post. Firstly, there is a need to reduce the proportion of cash transactions in its business. This is a long term matter, and is only to a limited extent within the Company’s control. For example, it plans to facilitate direct lodgment of social welfare cheques into POSB accounts, but it cannot influence its account holders’ demand for cash.

63.Secondly, there is a need for improved security at post offices. However, under present arrangements the security of sub-post offices is the responsibility of the sub-postmasters. These are not employed by An Post. The Company will need to examine ways in which it can encourage sub-postmasters to improve their own security. The sub-post offices have borne the brunt of the recent cutbacks and they far outnumber the Company offices, by about 2,000 to 100.

64.Thirdly, there is the issue of compensation for An Post employees who are killed or injured during robberies. At present, Company employees who are in the immediate vicinity of raids where violence is used or threatened receive ex gratia payments of £100 in recognition of distress caused. No compensation is available from the Company for death or injury, and it does not operate any insurance scheme to cover such eventualities. This is a matter which the Company and the union could examine jointly. It is, of course, open to any An Post employee to sue the Company in the event of injuries sustained.

65.The PIWU also pointed out to the Committee that the position of its members worsened since 1986 as a result of changes in the national scheme of compensation for criminal injuries operated by the Criminal Injuries Compensation Tribunal. Until 1986 any member of the public, including employees of An Post, could make claims to the Tribunal for special damages and for pain and suffering. The former category included damages for financially quantifiable losses, such as loss of earnings and medical expenses. The latter included claims of a more general, but less quantifiable, nature for suffering and reduced quality of life. Since the amendment of the scheme in 1986, claims may be made in the former category only. An exception to this is the Garda Siochana, who are covered by a special compensation scheme specific to the force.

66.The PIWU sees this situation as an anomaly. Its view is that its members and Gardai should receive similar compensation in similar circumstances. However, having considered the matter carefully the Committee is of the opinion that this position is not fully sustainable. This opinion is based on two considerations. Firstly, the deterioration since 1986 is a countrywide one affecting the public as a whole and is not in any way specific to An Post employees. Secondly, it is difficult to see why post office workers in particular should be regarded as directly comparable to Gardai. While their job has a clear security risk, the same can be said of independent sub postmasters, members of the emergency services such as fire and ambulance men, and many other occupations. A more realistic approach to the matter may, therefore, rest in appropriate insurance or other compensation arrangements worked out directly between the PIWU and the Company, possibly in consultation with other interested parties such as the prison and emergency services.

V. FUTURE DEVELOPMENTS

a) Overall Strategy

67.An Post’s specific market objectives, as set out in its Annual Report, 1986, are:

(a)to expand the mail market by at least 3 per cent per annum up to 1991;

(b)to rebuild the parcels service;

(c)to develop banking services;

(d)to develop new agency and retail businesses.

68.The Company recognises that most of its mail markets have reached maturity, so that growth can only come from re-capturing market share, except possibly in the case of direct mail. The plans for new product areas such as direct mail are to be welcomed. However, in these and in the main postal market there will be a need to ensure a level playing field between the Company and its competitors. As noted earlier, the Committee believes that the nature of the postal monopoly and the legal status of private sector couriers should be clarified by the Department of Communications, and that any such clarification should enhance rather than inhibit competition. Similarly, in the parcels area there will be a need to attract business away from other companies, including Iarnrod Éireann’s Fastrack.

69.An Post’s plans for banking are currently with the Minister for Communications, and implementation of these will require the approval of the Minister for Finance. Among these plans are: the development of the money transmission services including the introduction of electronic funds transfer; the introduction of automatic teller machines at post offices; the introduction of direct credit facilities for social welfare payments into POSB accounts; and the introduction of standing order facilities on POSB accounts. Some movement in this direction is already evident in the personal lending facilities available through post offices on an agency arrangement with Bowmaker Bank. The Committee has some concern whether, with the rapid growth in private financial services of all kinds, retail banking is an area where An Post can or should be devoting increased resources. It also feels that the Company might look at additional, and possibly less capital intensive and less highly competitive, activities such as overseas postal consultancy.

70.In the proposals of An Post that are included in the Programme for National Recovery, items (a), (b) and (c) in paragraph 67 are listed, together with a proposal to provide an electronic mail service. An Post was granted permission to establish such a service in 1985, and expected to launch it in 1986 in conjunction with the General Electric Corporation. However, that decision was suspended because of adverse market conditions. In oral evidence, the Company described electronic mail as a threat to its traditional products, but also as an oportunity - possibly providing An Post with a potential new market. Any movement in this direction will have major capital investment implications for the Company, and the source of this capital will need careful consideration.

b) Capital Requirements

71.In order to rectify current deficiencies in its fixed assets, and to meet the needs arising out of its development plans, An Post anticipates fixed capital investment of £8mn per annum from 1987 to 1991. Up to £2mn of this may be required to replace the vehicle fleet. After allowing for essential new building works and repair of old premises, this leaves a relatively small allocation for new plant and equipment. An Post currently has no automated mail sorting equipment, and it is seriously short of the electronic hardware and software implied by its plans for developing banking services. The scale of what might ideally be required is indicated by the Company’s evidence that “in the case of banking ..... there is an opportunity to invest £11mn”. The Company’s projected investment figure is, therefore, probably conservative in the context of its development plans.

c) Sources of Capital

72.The annual investment allocation of £8mn appears in the Public Capital Programme for 1987 and 1988. In each year, £3mn is shown as internally funded, and £5mn as externally funded, with no Exchequer funding.

73.The sources of capital available to An Post under the 1983 Act are: (a) external borrowing, to a maximum of £58.5mn, of which £8.5mn may be guaranteed by the Minister for Finance, and (b) new share capital to be subscribed by the Minister for Finance, to a maximum of £50mn. So far, bank borrowings have reached £6.5mn and the Minister for Finance has subscribed £4mn in preference shares. The board of An Post has consistently urged the State to supply further share capital. For example, the 1986 Annual Report calls for State capital investment to fund the development of the banking business, while in its submission to this Committee the Company called for “some Exchequer support” for the capital spending element of the corporate plan. The chairman of the Company stated in evidence that “we still have not given up hope that we can convince the Government that An Post offers the State a highly attractive investment with a relatively short pay-off period”. He also indicated his belief in the necessity of reinvesting profits, if any, so that while he looked forward to the day when An Post would pay a dividend, he did not see that as imminent.

74.The Committee does not support any further injection of public finance into An Post in the short term. This position rests on a number of factors. Firstly, the position of the Exchequer finances means that other more pressing needs should take precedence over An Post. Secondly, there are alternative sources of funding which can be explored. Within the present legislation the Company has considerable scope for commercial borrowing. It also has the financial scope for this with a low present level of borrowings. In addition, the Company could explore the use of some of its existing assets for development purposes, eg. the lease or sale of under-utilised properties. Equally, lease rather than purchase of some capital equipment might offer a route forward.

75.The possible role of private capital in An Post must also be considered. Neither the Department of Communications or the Company addressed this issue in their submissions. The PTWU has made clear to the Committee its adamant opposition to any privatisation of An Post. It points out that there is no example anywhere of a national postal service that operates as a private sector enterprise. The Company’s representatives doubted that privatisation would be feasible for the general postal service. On the wider policy issue, they felt that this was a question for the Government rather than the board of An Post.*

76.The Committee agrees that privatisation of An Post’s core business is neither feasible nor necessary in the foreseeable future. However, against a background of public capital shortage and the need for capital investment in new services, it sees no reason for any fundamental objections to a private sector role in new ancillary services. This could involve either minority or majority holdings by institutional investors or by appropriate companies in new An Post subsidiaries or joint ventures. Such an approach would allow the Company to take decisions about investment opportunities on objective commercial criteria, freeing it from domination by present Exchequer budgetary considerations.

Acknowledgements

77.The Committee appointed Jim Fitzpatrick and Associates, Economic Consultants, as specialist advisers for the purpose of this inquiry. It wishes to express its appreciation of the assistance given by Dr Jim Fitzpatrick, Mr Andrew Somerville and Mr Patrick McCabe of that firm in the course of the inquiry.

The Committee is indebted to all those who provided evidence.

* Before allowing for the Exchequer grant (£5mn) of 1984.

* Evidence: Question 17.

* Includes postage within the EEC.

** Up to 50 grammes, all other foreign printed paper up to 20 grammes.

*Note: non-Government deposits, vis-a-vis residents.

* Evidence: Question 18.

* Evidence: Page 11.

* Evidence: Question 2.

* Evidence: Page 10.