Royal Mail’s bosses always sounded embarrassed about missing targets for delivering regulated letters and parcels on time. But they never appeared fearful of what Ofcom’s investigation would bring. Now one can see why. It turns out that the fine for falling short of required service standards – and falling short by a country mile, note – is a paltry £5.6m.
To put the sum in context, Royal Mail’s revenues last year were £7.4bn and the company put the effect of strikes at £200m, a figure that carries a proper thump. Nor is this a case of a strike-related add-on from Ofcom. The regulator adjusted for industrial action, plus other special factors, and still reckoned Royal Mail fell below standards by “a significant and unexplained margin”. You bet: the adjusted figure for on-time delivery of first-class mail was 82% compared with a target of 93%.
Why such a small fine? Unhelpfully, Ofcom won’t explain its maths (other than a 30% discount for fessing up) for another few weeks. But, since the fining framework obliges it to weigh the harm to consumers against the need to keep the postal service financially viable, one can assume Royal Mail got off lightly because it’s broke. Last year’s operating loss was £419m. One can follow the logic that says there’s not much point adding to the financial pain, but the result is that, instead of wielding a large stick, Ofcom ends up hitting Royal Mail with a twig. From a regulatory-design point of view, that is not ideal.
Royal Mail still has a strong commercial incentive to raise its game on service, it should be said. A reputation for unreliability is bad for business, especially if it spills into the “tracked” service that is not included in the universal service obligation (USO) that Ofcom polices.
But, take another few steps down the post-privatisation evolution of the postal service, and we may soon have a system that does not oblige Royal Mail to deliver letters on a Saturday. Ofcom is looking at the idea of moving from six days a week to five for letters and will report to the government (parliament is the only body that can change the USO) in the new year.
Common sense says five days is the way to go for reasons argued here previously: letter volumes have almost halved in the past decade; research says consumers are more bothered about parcels; much of the rest of Europe has already tweaked its USO equivalents. If efficiency savings, which Ofcom estimated in 2020 would be £125m to £225m a year, could be recycled into making a five-day letter service more reliable – while also giving Royal Mail a fair shot at making a sustainable profit – that feels a better set-up.
But the parallel reform would surely have to be a regulatory regime in which penalties for underperformance are meaningful. Ofcom can warble all it likes about how it is holding Royal Mail to account and how £5.6m is a “wake-up call”, but it’s fooling no one. Rather, it feels as if the regulator is dancing around the postbox until the USO is reformed.
