The Scottish Government

INDEPENDENT REVIEW OF THE UK POSTAL SERVICES MARKET

Response by the Scottish Government

1. Scottish Ministers welcome the UK Government's decision to commission an independent review of the postal services sector within the United Kingdom. These issues are of particular importance to Scotland. Our geography and our proportionately larger rural and small business sectors render the continuation of the universal service obligation vital to maintain the drive against social exclusion, to enhance community cohesion and to support fragile local economies.

2. The Scottish Government agrees with many of the findings of the independent review panel's initial response to the evidence published on 6th May 2008. We believe that, if the universal service obligation is to survive, then the status quo is untenable. We also agree with the independent panel's view that " there have been no significant benefits from liberalisation for small businesses and domestic consumers".

3. The Scottish Government believes that the introduction of competition should remain subordinate to the Regulator's primary legal duty to protect the universal service. The nature and scope of the universal service must be of primary concern - how competition is then introduced should be subject to and consistent with this end. We need to see a greater realisation that unbridled competition in markets is not always the best way of securing universal service provision.

4. We note the panel's conclusion that "currently, only Royal Mail has the network needed to provide a universal service", that 60% of Royal Mail's costs are located in delivering the "final mile", and that Royal Mail is now losing money on the universal service itself. We agree with the Panel that this situation cannot continue.

5. Royal Mail's natural monopoly has acted as a barrier against full end to end market entry by alternative operators. Real competition in postal services - with rival operators developing an end to end service with a national collection, sortation and delivery network to rival Royal Mail - has simply failed to materialise. Nor do we believe that there is any prospect of end to end competition to Royal Mail materialising in the future, especially in Scotland's rural areas.

6. In postal services the UK Government has thus far relied on a single dominant legacy operator to maintain a universal service at its own expense. In the face of competition from alternative providers, the Royal Mail has increasingly regarded the USO as an unfair constraint on their ability to compete; and so the question becomes how best to fund externalities such as the social cohesion associated with postal services in more remote areas. Should it be via the general taxpayer or by customers of the relevant service?

7. The Scottish Government firmly believe that the USO should be funded by postal users. Since the cost of supporting the whole network is currently born solely by Royal Mail the loss of revenues resulting from access arrangements has made it increasingly difficult for the company to finance its universal service obligations by cross-subsidy. Therefore the Scottish Government believe that the UK Government should establish some additional support fund for the USO based either on a levy on all postal service operators or a supplement on the current access price charged by Royal Mail to its competitors. Since other operators use the USO infrastructure it is logical that they should help pay for its upkeep.

8. The cross subsidy for the USO should come from other postal operators rather than from cross subsidisation within Royal Mail Group alone. In particular, it should not be financed through a zonal pricing system which charges higher rates only in those areas where the Royal Mail maintains a dominant position due to the absence of competition. We believe that this is the best way to provide postal services in our remote islands or deprived urban areas without undermining the fundamental public interest in the maintenance of a universal service obligation and tariff.

Scottish Government

Enterprise , Energy and Tourism Directorate

May 2008