Postal Services Bill

My Lords, Amendment 24PB, which stands in my name and that of my noble friend Lord Brooke of Alverthorpe, would insert a new clause related to the indebtedness of a potential universal service provider. In following the Bill’s progress, it has become clear to me that we have a willing seller. However, the financial model has not been revealed to us. We do not know whether it will be an IPO or some other type of financial structure. We also do not know whether there is a willing buyer; we will not know that for some time yet. We do know that it will be a regulated business, which is right. I think that many Members on this side of the Committee would identify entirely with the criticisms of Postcomm. Some of us believe that it has been positively damaging for Royal Mail services over many years and that it is completely non-commercial in its outlook. This amendment has been drafted against a background of not knowing what the structure might be. In any sale, however, whatever the structure might be, there is a real danger that the acquirer of Royal Mail might be burdened with enormous debt. We have to consider that possibility very seriously because an overburdening of debt will threaten the viability of the new organisation, certainly in the longer term and possibly also in the shorter term. This is not a new phenomenon but is often encountered in any kind of sale or takeover. Two recent and obvious examples in the private sector come to mind—the Kraft takeover of Cadbury and the Boots takeover some time earlier. In this case we are looking at a business that will be regulated, and there are some direct parallels. For instance, in moving to purchase BAA, Ferrovial was warned—perhaps that is too strong a word—by the Civil Aviation Authority, the aviation industry regulator, about the high level of indebtedness it would take on to implement the takeover. We all know the result. At that time, when considering its review, the CAA indicated that it might take that issue into account in reaching its decisions, which included price increases. I should declare an interest as a member of the board of National Air Traffic Services. After its recent review of NATS, the CAA imposed on NATS a maximum debt level that would protect it from over-ladening itself, a decision which was welcomed by many although not welcomed by some. It is protection for a company which is investing £150 million a year in its infrastructure and which will continue to need to do so. Although the amendment does not require Ofcom to impose a maximum debt level, Ofcom would have to publish guidelines on how the new USP’s indebtedness and valuation of assets will be calculated. As the regulator of a regulated company, Ofcom would then have to monitor the situation. If it judges that action has to be taken, this amendment will permit it to do so. It will also enable Ofcom, in publishing the regulations, to limit the debt burden that can be applied. In other words, it is a protective clause for a company that is currently wholly publicly owned but that, under the Government’s current policy, probably will not be in future. In the past few years we have seen the full extent of the problems in the banking and financial sector, where high levels of indebtedness have become a matter of concern. Many hold the view that indebtedness was a significant factor in the creation of the financial bubble, perhaps even more significant than subprime mortgages. In October 2004, a document entitled The Drivers and Public Policy Consequences of Increased Gearing was issued jointly by the Treasury and the Department of Trade and Industry—as I still call it. Way back then, there was concern about the ratcheting-up of the debt burden on companies and public bodies. The paper aimed to inform the Government and the regulators’ understanding of the issues associated with increased debt financing by companies in the regulated water, energy and telecom markets—in fact, in all regulated markets. Of course it could not give such guidance to the plc world. The paper also considered the reasons why utility companies had geared up, and outlined the possible public policy consequences of increased levels of debt financing. I should like to quote just a few of those reasons. The paper pointed out that since the mid-1990s some organisations had moved to high gearing ratios and new financial structures, and highlighted some risks where the position could often lead to an increased risk of default. That could transfer the risk of cost or revenue shocks to consumers or, potentially, even to taxpayers. In the case of postal services, the risk would probably be transferred back to the taxpayer, which is where the burden currently lies. In the absence of shareholder pressure—again, we do not know the structure of the new organisation—there may be weaker incentives for outperformers, with bondholders primarily concerned with ensuring repayment of the interest and minimising default risk. Another area of concern was the effect on those companies’ ability to deliver the necessary investment efficiently. Some commentators also raised concerns that access to the capital markets—and I agree entirely that if any business needs new capital, it is the Post Office services—might be restricted for firms with very high gearing levels. Indeed, the Hooper report highlighted the essential requirement of substantial new investment in postal services if our universal service is to survive. The regulators have taken some action as a result of the report. For example, BT is obligated by its licence to give the director-general of Oftel an annual undertaking that it is able adequately to fund its operations over the 25-year lifetime of its licence. It is also interesting to note that in the US—the great world of free trade—it is common for utility regulations to preclude high gearing; indeed a 60 per cent level is not unknown. The amendment does not set a particular level, nor does it seek to insist that Ofcom should set one. It simply enables Ofcom—or whoever the regulator may be—to monitor the situation and to make it clear that, if it is concerned and needs to, it has the power to impose a limit on indebtedness. That factor could be taken into account as the Government reach their decision on model of sale. So this could be called a probing amendment, and I look forward to the Minister’s response. I will listen with great care to how the Government intend to address this issue in the Bill.