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Universal service 'uneconomic'

The head of the Royal Mail has issued a stark warning that "cherry picking" from competitors threatens the future of the universal service, under which letters are posted anywhere in the country for the same price.

Chief executive Moya Greene told MPs that the universal service obligation (USO) cost £7.2 billion a year because of the high cost of delivering post to rural and remote areas of the UK.

She told the Business Select Committee that the USO was "essential" for most people, but it had a high fixed cost and needed internal subsidies to make the economics work.

"Low cost, high density areas are needed to cross subsidise suburbs and rural areas which are much higher cost.

"If you allow cherry picking you undermine the economics."

The decline in letter deliveries is running at 4-6% a year and competitors taking business off the Royal Mail in urban areas was making the USO "uneconomic", she said.

Officials from competitors Whistl and UK Mail denied they were cherry picking work, or that they threatened the universal service.

Union leaders echoed Ms Greene's warning about the future of the USO, blaming "unfair and unfettered" competition.

Dave Ward, deputy general secretary of the Communication Workers Union (CWU), told the MPs: "The sustainability of the USO faces its greatest threat."

As well as competition, postal workers were delivering to more and more addresses, while the number of letters was declining, he said.

Mr Ward added that unions could not understand why the regulator Ofcom was still to decide if it will bring forward a review of the USO from next year.

CWU general secretary Billy Hayes said he wanted Royal Mail's competitors to publish their employees' pay and conditions so there was transparency across the industry.

Ms Greene also pressed Ofcom to bring forward the review, adding: "The risks of waiting are far greater than accelerating the review. Once revenues to support the universal service are siphoned off and lost it is difficult to retrieve."

Nick Wells, chief executive of Whistl, which delivers mail in some cities in direct competition to Royal Mail, told the committee he believed Royal Mail needed to modernise, improve efficiency and change its labour relations policy.

He admitted he employs some workers on zero hours contracts, but said contracts were a mixture of fixed and flexible.

Ms Greene replied that as part of modernising the business, thousands of jobs had been cut and 20 mail centres closed.

Committee chairman Adrian Bailey (Labour, West Bromwich West), summed up much of the evidence: "Royal Mail has to cross-subsidise its more expensive rural deliveries by the more lucrative urban areas that enables it to have a standard price across the country.

"The competition, and its increased market share in urban areas, will affect profitability and capacity to keep a standard price for stamps and the USO."

Ms Greene agreed.

Ofcom will be giving evidence to the committee on December 10.

At Prime Minister's Questions, Alan Reid (Lib Dem, Argyll and Bute) asked David Cameron to give an assurance he will "never allow the USO to be watered down in any way".

Mr Cameron replied: "I know how important the universal service obligation is, particularly in constituencies like yours that include so many islands and far flung communities. It's very important it's maintained."

Shadow trade and investment minister Ian Murray said: "This stark warning from the chief executive of Royal Mail will be deeply worrying for the millions of consumers and small businesses who rely on Royal Mail's six-day delivery and essential services.

"Labour warned that David Cameron's Royal Mail fire sale would put vital services at risk, and Moya Greene's evidence today has confirmed our worst fears. It comes after taxpayers were short-changed by hundreds of millions of pounds by the botched sale.

"Ministers urgently need to clarify what action they will take to secure the future of postal services following the mess created by their botched fire sale."

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