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 My Lords, I beg to move that this Bill be read a second time.

I'd like to begin by paying tribute to the noble Lord, the late Lord Dearing. He was widely respected in this House, and as a former Chair of the Post Office Corporation, he would have been amongst the first to speak in this debate and indeed he told me he would.

In the conversations I had with him, I was struck by his extensive knowledge of the postal industry and his infectious enthusiasm. He will be deeply missed both within and beyond this House.

My Lords, we live in a digital age. As we send more texts and emails, we send fewer letters. The Mobile Data Association estimates that in 2008, we sent around 216 million text messages per day.

That same year, we sent five million fewer letters per day than we had done just two years ago.

The fall in mail volumes is happening across many modern economies but I do not accept that postal services are locked into an inevitable decline. I believe mail is still a critical part of our social fabric, our communication infrastructure and our economy. And for those reasons, I want to see Royal Mail modernised and made fit for the future.

The Government is fully committed to maintaining the universal service. Royal Mail is at the heart of that service. Only Royal Mail has the ability to collect and deliver letters anywhere in the country, six days a week, for a single, affordable price.

That's why the Royal Mail's service requires sustaining not abandoning - and sustaining with a vision that will ensure its commercial success.

It was for this reason, and with the strong support of the Communication Workers Union, my predecessor, John Hutton asked Richard Hooper to lead a review of the Royal Mail in 2007.

When Hooper's report was published late last year, I informed the House that the Government agreed with his analysis and had accepted his recommendations. We are committed to a publicly-owned Royal Mail, fully restored to good health. That is what we said in our last manifesto. And that is what our policy - if implemented in full through this Bill - will achieve.

The Postal Services Bill establishes a fair and modern regulatory framework. It ensures that Royal Mail remains in public ownership - while supporting modernisation through a strategic partnership. And it enables Government to tackle Royal Mail's pension deficit: a deficit already larger than any FTSE 100 company.

Why this Bill now?

My Lords, before I talk in more detail about the substance of this Bill, I must address some of the points raised during the debate that has followed publication of Richard Hooper's report.

First, some have suggested that we should allow more time for reflection. When it comes to making changes, my Lords, there is always an argument not to act but in this case, there has been extensive debate about the future of the postal sector, and Royal Mail in particular.

Many will remember the noble Lord, Lord Heseltine published a green paper, over 15 years ago. Our plans are very different from his, but since then, in addition to the Government's own 1999 White Paper and subsequent legislative reform, my noble friend Lord Sawyer spent a number of years considering industrial relations at Royal Mail and Sir George Bain advised us on relationships within the sector. And now Richard Hooper has done so too.

He conducted a thorough review of postal services, lasting twelve months. He and his panel had extensive discussions with the stakeholders and received their submissions. His recommendations were based on clear evidence. I pay tribute to the quality of their work.

Some may ask why we have not acted sooner. That is a fair question. Successive governments and past Secretaries of State have wrestled with the challenge of change in the Royal Mail. I am only the newest.

When this Government first came into office, we established Royal Mail as a commercial organisation with increased freedom to modernise and to respond to market opportunities. We have provided over £3.5bn in funding to support the business. But the fact is that while the marketplace in which the company operates has changed significantly, modernisation has not happened on the scale required, despite the money available.

Post Office Ltd:

My Lords, the second point I want to address is that many are confused about the distinction between Royal Mail and the Post Office. They see these services as seamless and so, in a sense, they should.

But these are different organisations, playing different roles and facing different challenges. It is important our policy should reflect those differences.

Royal Mail collects, sorts, transports and delivers post. Our Post Offices provide access to Royal Mail's services: letters, parcels and stamps. But they also deliver a much wider range of Government and financial services, playing a vital social and economic role in the communities that they serve.

Around two-thirds of post offices depend on a Government subsidy to survive. The Post Office network is not therefore purely a commercial concern.

The Communications Workers Union publicity campaign calls on us to "Keep the Post Public". Well I could not agree more. The Bill makes it clear that Post Office Limited will indeed remain entirely owned by the Government. Indeed it repeals powers in the current Postal Services Act which would let the Government sell part of the Post Office business. The Bill specifies that Royal Mail, too, will remain in public ownership. There is no question that either the Post Office or Royal Mail will be under the control of "foreigners" or anyone else, other than the Government as the CWU's propaganda claims.

The Bill - Ensuring a Universal Service:

My Lords, I would now like to turn to the substance of the Bill itself. In the political debate on these issues to date we have heard a lot about union policy and party policy - much of it incidentally misleading - but almost nothing about customers, what they want from their postal service and where the customers' interests lie.

Above all else, I believe customers want a universal service which is reliable, offers good value for money, is innovative and responds to their needs.

Our proposals seek to deliver that. Part 3 of the Bill sets the standard for the universal service. It requires Ofcom to ensure that the universal service is maintained. If Ofcom finds that there is tension between its functions in relation to post, the Bill is explicit in requiring the regulator to give precedence to the universal service. Competition can bring benefits for customers. But it must not be promoted in ways which threaten the universal service.

Fair, Modern Regulation:

Abolishing Postcomm and appointing Ofcom as the new regulator reflects the reality that Royal Mail faces tough competition from digital media. Ofcom is better placed to carry out a full market assessment and, in light of its findings, to remove regulatory burdens where that is appropriate. Ofcom will have competition law powers, so that it can act swiftly and effectively on evidence of anti-competitive behaviour.

Ofcom will also be given information-gathering powers to help establish Royal Mail's costs - and ensure that other companies' access to Royal Mail's infrastructure is regulated on a fair basis.

The Bill enables Ofcom - if at any point in the future it finds the universal service places an unfair burden on Royal Mail - to ask other postal companies to make a contribution towards the costs.

Together, these elements create a stronger, more objective evidence base, and set clearer regulatory criteria, to enable Ofcom to make sure prices are fair for postal companies and affordable for consumers.

Partnership:

My Lords, important though it is, clear and fair regulation alone will not be sufficient to secure Royal Mail's future. For that, the company will need to transform its business - so it can deliver the universal service - and do so quickly in a highly competitive communications market.

As Hooper made clear, the company faces many constraints.

It has relatively little room for manoeuvre on pricing - since any sharp increase in prices will simply drive customers away to digital communications and media, accelerating the decline of letters.

It has a large and volatile pension deficit.

And the company's industrial relations are characterised by a lack of trust and engagement. In 2007, my Lords, the embarrassing truth is that Royal Mail accounted for 60% of all the days lost to industrial action across our entire economy.

It is not uncommon for agreements reached at the national level then only to be obstructed at local level - an issue identified by my noble friend Lord Sawyer in his work in Royal Mail.

Looking at the performance of the company as a whole, the Royal Mail lags behind the best performing postal companies in Europe. For example, these companies use machines to put 85% of mail in the right sequence for delivery. And I mean 85%. In the UK, in contrast, this process is done entirely by hand, taking each postal worker between two and three hours to do so every morning.

Royal Mail does not make the profits required to modernise its business and, crucially, to diversify. Having posted a loss last year, the letters business has a profit margin so far this year of just 1%. Its already massive pension deficit is projected to increase significantly at the next triennial valuation. The company will not be able to afford any extra deficit recovery payments required - the size of payment would more than swallow any projected profits.

The company is already balance sheet insolvent; and if we do not act to improve its financial position, it will continue to face severe and mounting financial difficulties in the future. To the extent that there will be any surplus cash in the business, this would continue to be required to cover pension contributions. There would be no money for modernisation.

My Lords, the Hooper Review's judgement is that the introduction of a strategic partner will bring the capital, experience and confidence to help tackle these challenges, based on a track record of transforming a similar postal business.

We will assess potential partners against strict criteria. These criteria include a partner's ability to help transform the letters business, modernise Royal Mail's network and manage stakeholders successfully, including relations with the workforce and trade unions; a further criterion will be the financial terms they offer and their ability to finance it.

A partnership will provide the springboard on which Royal Mail can generate new revenue streams - by developing its parcels business for example - drawing on the resources and size of both partners.

Contrary to what many recent commentators would have you believe, the introduction of a partner cannot and will not threaten the level of the universal service. This will be set by Parliament and the regulator. It will be for Royal Mail and its strategic partner, then, to decide how best to deliver the prescribed level of service.

To make this possible, Part 1 of the Bill deals with restructuring Royal Mail Group.

It ensures that:
* Post Office Ltd must be owned in its entirety by the Crown; and
* Royal Mail - the company providing the universal postal service - must be publicly owned.

"Publicly owned" means the Crown must own more than half of the company at all times. This restriction could only be changed by primary legislation.

The Bill makes it clear that public ownership carries with it the voting rights and economic benefits appropriate to a majority shareholder in such a company.

One further protection could be to vest the Crown's shareholding in a public interest trust. Our view, however, is that this could raise significant issues of accountability and control. The Government of the day may be unable to ensure entirely and directly that the universal service was being maintained as its customers expect. But I will listen to other's views on this.

The Bill does not specify the size of a minority shareholding in Royal Mail before any commercial negotiation has taken place. Assuming that a partner were to make a direct equity investment in Royal Mail, however, we expect the partner would need to take around a 30% interest.

Some may also consider it desirable for Royal Mail employees to own part of the shareholding. This is something to be discussed.

My Lords, we should be under no illusion that attracting the right partner - or indeed any partner - will be easy. Richard Hooper has painted a stark picture of the challenges facing Royal Mail. While we believe the company has a profitable long-term future if the correct decisions are taken, the shrill nature of some of the current debate is making it harder to make this case to potential partners.

The tone and content of the opposition levelled at our policy is a clear indication - if one were needed - of the depth and severity of the industrial relations challenge at Royal Mail, and the risks it generates. All of this will make negotiating an investment on the right terms difficult.

There are points, of course, on which we will not compromise. The taxpayer must receive fair value for any stake we sell. Any partner must be committed genuinely to transforming Royal Mail.

We need to strike the right balance between giving a partner enough influence in running the company successfully, and making it clear that Royal Mail remains a public asset. The company must have the capacity to compete on the international stage.

All this needs to be reflected in the terms of agreement negotiated with a potential partner in parallel with the passage of the Bill through this House. The interest indicated so far suggests this may be possible but there are no hidden or surprise elements that will make it easy to achieve.

Pensions:

My Lords, Part 2 of the Bill enables Government to tackle head-on the Royal Mail's ballooning pension deficit. The pension scheme represents a major burden for Royal Mail in spite of recent changes made to address it.

In my view, it is inconceivable that the public will accept such a "bail-out" without the Government taking steps to ensure that the company does indeed have a transformed future. The fact is that it has not modernised sufficiently under present policies. There needs to be a step change and the public needs to see this.

The new arrangements will also require the approval of the European Commission.

Part 2 of the Bill also provides Government with the power to transfer the accrued rights of Royal Mail Pension Plan members to a new public service pension scheme.

The legislation protects past entitlements in full, so that no member's historic rights are adversely affected by the transfer.

At the point the historic liabilities are transferred to the new public scheme, we will leave the Royal Mail Pension Plan with sufficient assets to meet its liabilities.

We expect the new public service scheme to have 450,000 members. This includes 175,000 pensioners and 275,000 people yet to reach retirement age.

We estimate the total liabilities of the new scheme (as at 31 March 2010 - the likely date of implementation) to be £29.5bn. Assets transferred to Government are forecast to be £23.5bn. That means Government will absorb an expected deficit of £6bn.

The assets will be sold over a number of years to protect value for money for the taxpayer. Our proposals represent the best balance between protecting the universal postal service, protecting the members of the pension scheme, and protecting the interests of taxpayers.

Government will not take on the historic liabilities relating to pensions for Royal Mail's management. Royal Mail's 150 most senior managers are in a separate scheme. This will continue to be underwritten by the performance of the business. We believe it is right that the entitlements of those entrusted with the management of the business should indeed be dependent on its performance.

Conclusion:

My Lords, in conclusion, in the past few weeks, fact has had to fight with fiction in the national debate over the Government's policies and the Royal Mail's future.

If we're to secure and protect the universal postal service, there is no time, or justification for further delay.

We cannot ask the taxpayer to take responsibility for the pension deficit without assurance that Royal Mail will modernise.

An unreformed service is a drag on public resources at a time when every pound matters more than ever.

To transform as it must, Royal Mail and its people need support from a regulatory framework that is clear and fair.

They need the fresh investment, experience and confidence that only an experienced, strategic partnership can bring.

They need the full package of measures we are proposing.

My noble friend Lord Clarke of Hampstead will speak next. I have known him - he may not realise this - on and off for nearly 40 years, and I respect him.

I accept he has very strong reservations about this Bill. With a wealth of personal experience from his years as a postal worker, then Pension Fund trustee, he is passionate about the Royal Mail.

I can claim no such personal experience. But through this Bill, we are implementing the recommendations of an independently appointed panel - a panel which drew on the evidence, knowledge and experience of stakeholders and experts in postal services.

I am with Hooper. We can't hark back to a golden time of postal services - be it in Camden or Candleford - that no longer exists. Royal Mail is no longer the only way to communicate. The digital revolution has happened.

We cannot simply ignore these facts. Or put our plans in a bottom drawer, to wait for an even rainier day, while things deteriorate further. That is not what Governments are elected to do.

This Bill enables the clear, strategic action necessary for Royal Mail to respond to market changes, to deliver the universal service and secure a successful future. It may not be easy for some to accept the necessary change. But this Bill represents the fairest deal possible. That is why I commend it to the House, my Lords I beg to move.