Fulfilment Industry Policy

STATES OF JERSEY

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FULFILMENT INDUSTRY POLICY

Lodged au Greffe on 17th November 2006 by the Economic Affairs Scrutiny Panel

STATES GREFFE

PROPOSITION

THE STATES are asked to decide whether they are of opinion

(a ) to request the Minister for Economic Development –

( i) t o centralise policy regarding the fulfilment industry under a dedicated post for e-

commerce to offer more direct political support for the industry and promote diversification through the growing e-commerce sector;

(i i) t o u n dertake a further review of the fulfilment industry, in order to obtain a fuller and more

comprehensive understanding of its current and potential rôle in the Island's economy;

(i i i) t o d irect the Jersey Competition Regulatory Authority, in accordance with the provisions

of Article 9 of the Postal Services (Jersey) Law 2004, to investigate cross-subsidy between Jersey Post International Limited and Offshore Solutions Limited, and to report its findings to the Minister for onward transmission to the States;

(b ) to request the Chief Minister, following consultation as appropriate with other Ministers and the

Attorney General, to review the current mechanisms across all ministerial departments for appeals against ministerial decisions under statutory powers, and the mechanisms to deal with requests for reconsideration of such decisions, and to establish a code of practice in respect of such appeals and requests for reconsideration to ensure that they are just and fair, and to bring the code to the Assembly for approval by 30th April 2007.

ECONOMIC AFFAIRS SCRUTINY PANEL

The Report entitled The impact of the fulfilment industry on the local economy' (S.R.7/2006) of the Economic Affairs Scrutiny Panel, presented to the States on 30th October 2006 contained some 18 key findings, many of which were critical of the actions of the Minister for Economic Development in his development of policy and its impact upon the fulfilment industry. Indeed, we may see further knock-on effects on Jersey Post, the level of which we cannot gauge at the time of lodging.

Given the response of the Minister for Economic Development in his statement to the states on 7th November, the Economic Affairs Scrutiny Panel is concerned that its 4  recommendations are given proper consideration and are acted upon by the Ministers concerned. Hence this proposition has been brought before the Assembly.

(a) (i ) T h e Panel has found that there had been a lack of real political support for, and commitment to properly manage the growth of, the industry on the part of successive ED committees and the current minister. Much had been made of this new 4th arm of a diversified economy, but it had been largely left to its own devices.

O p p o r t u n it ie s to go out and pro-actively promote the industry as the way ahead in the global

supply of cheaper consumer products had been largely ignored. As a result, when the industry came under attack from U.K. small business organisations, the Economic Development Minister was forced into an untenable defensive position.

In a d d it i o n , there had been a history of misinterpretation and confusion over the policies that have

been applied to the fulfilment industry.

Nonetheless the Panel believes that the Island can still benefit from the massive potential growth in e-commerce and should maximise its efforts in this direction. The Economic Development Department should centralise policy regarding the fulfilment industry under an e-commerce Tsar' to offer more direct political support for the industry and promote diversification through the growing e-commerce sector.

(a) ( ii ) T h e Panel discovered that prior to 2005 no organisation had a clear idea of how large the fulfilment industry actually was. The Jersey Financial Services Commission (JFSC), which holds information on all companies operating in Jersey, does not record fulfilment companies as a separate category, but includes them as retailers', and so cannot determine how many there are. The information held by the Economic Development Department prior to 2005 was based on applications for staff under the RUD legislation, and thus only counted 3PS and WCC operations but did not count the number of customers of each 3PS.

A s a re s u l t of the growth of the industry, the Economic Development Committee, in late 2004

commissioned a study of the industry by the Statistics Unit. These figures formed the basis of a report from a consultant group, Oxera, in 2005. The Oxera analysis of costs and benefit of the fulfilment industry to the Island was produced in 2005.

T h e p an e l f o und that the 2005 Oxera report had seriously underestimated the actual and potential

benefits to the island of much of the industry, and that given the rapid development of this sector a fuller and more comprehensive study to inform future initiatives should be undertaken.

1. (i ii ) P r ior tothe introduction of the February 2006 policy, OSL'sbusinessmodelwas heavily geared towards encouraging branded retailers' to operate through Jersey, and therefore through itself and Jersey Post.Almost 20% of its business was from large U.K. retailers, and this wassetto grow. OSL's planning in2005 is illustrated in the report to the proposition Units 1 and2, L'Avenue Le Bas, La Rue des Près Trading Estate – re-assignment of leases' (P.104/2005), attached as an annex.

I t a s su m  e d that many new start-ups would fail, and that the large U.K. retailers would be best

placed to rapidly develop a fulfilment operation. It concentrated on companies operating into the U.K. market,

selling DVDs and CDs which at that time had the largest growth potential. This was seen as the easiest method to obtain more pick and pack custom for OSL, thereby driving up overseas postings through Jersey Post, and increasing stamp revenue.

T h e P a n e l ' s understanding is that the company will lose the majority of its customers, producing a

significant loss of revenue in 2007. Since it has yet to contribute a profit from its fulfilment activities to its parent company, Jersey Post, but does contribute through its mailing volumes to Jersey Post's profits, it has effectively been the recipient of a cross subsidy. It is almost certain that it will again not be profitable in 2007. Now that Jersey Post is incorporated and subject to regulation by the JCRA the Panel believes that such cross-subsidy is liable to be declared anti- competitive and stopped by the JCRA. Jersey Post has informed the Panel that OSL has reviewed its pricing structures to ensure cross subsidies do not occur in the future.

T h e P a n e l believes that Offshore Solutions Limited cannot survive the Minister's policy of

February 2006 without further cross-subsidy, which it believes to be anti-competitive.

It therefore calls on the Minister's powers to direct the JCRA to investigate and report on the cross-subsidy of OSL.

2. T h e Panelbecameawareof several specific incidents in whichcompaniesand individuals appealing to the Economic DevelopmentDepartment in respect ofRegulation of UndertakingsandDevelopment decisions have met with difficulty and frustration. Initially thereappearedtosome confusion astowhatappeal mechanisms were in place, andwhocouldorshould be operating them.

T h e Minister has now described the appeal process within the Department as being an appeal to the

Minister against the Minister's decision, based on new evidence submitted, followed by the opportunity to take the matter to the Royal Court as detailed in Article  6(7) of the Regulation of Undertakings and Development (Jersey) Law 1973.

T h e Panel does not feel that a situation in which the Minister reviews his own decision is entirely

reasonable. When the only further recourse is to take the matter through a potentially difficult and expensive court process, then there is no effective internal appeal mechanism, and this is against the operation of natural justice.

T h e P anel is also concerned that the letters accompanying the granting of time limited licences or licence

refusals made no mention of the appeal process, including that it was a time-limited process. Companies in receipt of time-limited licences would have been out of time within 2 months. The omission of any reference to the appeal mechanism by the Department is, the Panel believes, unreasonable.

T h e Panel was also aware of issues which had previously arisen regarding appeals to the Housing

Minister, and is concerned that sufficient consideration has not been given to appeal processes that are simple to access across ministries. The role of the Administrative Appeals process also requires consideration.

T h e Panel considers that it would be appropriate, in the new era of joined-up government, to apply a

standard method of appeals that will specify the procedure to be followed, ensure transparency, and ensure that the  people  affected by  decision  are made clearly aware  of  the existence  of  an  appeals mechanism and how to use it.

T h e P anel is unsure about the reasonableness, or even the legality, of Ministers both taking and reviewing

decisions. The Attorney General should be asked to rule on this matter.

Financial and manpower implications

If the dedicated post required in this proposition were to be an entirely new additional post, this might result in

additional annual costs of £120,000. However, the Panel envisages that this responsibility could be covered by the additional 8.5 staff and£1.4 million already allocated for the new Enterprise and Business Development Strategy and associated schemes.

ANNEX

UNITS 1 AND 2, L'AVENUE LE BAS, LA  RUE DES PRES TRADING ESTATE: RE-ASSIGNMENT OF LEASES (P.104/2004)

Lodged au Greffe on 7th June 2005

by the Committee for Postal Administration

THE STATES are asked to decide whether they are of opinion

(a ) to approve the assignment of a 21  year lease, expiring on 30th June 2016, currently between Mrs.

P. Parrington- Jackson as lessor and Jackson 's Garage Limited as lessee to the Committee for Postal Administration, in respect of Unit  1, 4-6 L'Avenue Le Bas, Rue des Pres Trading Estate, St.  Saviour, Jersey of approximately 21,539  square feet at a passing rent of£199,144 per annum (provided that the assignor has agreed to providing 2  months rent free immediately following assignment of the lease) and with rent reviews every 3  years to the greater of market value or the Jersey Cost of Living and with the next review being due on 1st July 2007;

(b ) to approve the assignment of a 21 year lease, expiring on 31st December 2009, currently between

Mrs. P. Parrington- Jackson as lessor and St. Helier Garages Limited as lessee to the Committee for Postal Administration, in respect of Unit 2, 4-6 L'Avenue Le Bas, Rue des Pres Trading Estate, St. Saviour, Jersey of approximately 18,232 square feet at a passing rent of£150,000 per annum (provided that the assignor has agreed to providing 2 months rent free immediately following assignment of the lease) and with rent reviews every 3 years to the greater of open market value or the Jersey Cost of Living and with the next review being due on 1st January 2006;

(c ) to authorise Jersey the Committee for Postal Administration, to pay – (i ) t h e r ents as they become due;

(i i) s t a m p duty amounting to approximately £18,000 relating to the registration with the Royal

Court of the assignment of the lease in respect of Unit  1, 4-6 L'Avenue Le Bas, Rue des Pres Trading Estate, St.  Saviour, Jersey; and

(i i i) s t a m p duty amounting to approximately £4,500 relating to the registration with the Royal

Court of the assignment of the lease in respect of Unit  2, 4-6 L'Avenue Le Bas, Rue des Pres Trading Estate, St.  Saviour, Jersey; and

(d ) to authorise the Attorney General and the Greffier of the States to pass the necessary contracts on

behalf of the Public.

COMMITTEE FOR POSTAL ADMINISTRATION

Note:  The Finance and Economics Committee's comments are to follow.

Jersey Post is currently experiencing rapid growth of its fulfilment operations, and it has a requirement to take on up to 40,000  square feet of warehousing accommodation to meet contracts which have been secured (subject to contract).

This significant business diversification is also seen as the key driver of profitability over the next few years as a producing other benefits to the Island's economy as a whole in terms of –

• n e w employment opportunities including some high value jobs;

• n o r th /south sea transport links; and

• n e w tax revenues.

In particular, Jersey Post has secured its largest fulfilment contract to date subject to suitable premises being sourced. The potential benefit to Jersey Post is significant with the volume of items processed for this customer forecast to reach 5  million items for 2005 and up 8 million items for 2006 (based on the clien'ts projected forecasts for United Kingdom sales only). In addition, this particular client offers the opportunity for Jersey Post's fulfilment business to expand into new markets within Europe which could see up to double the number of items processed (again based on the client's projected sales).

Warehouse accommodation has already been taken on at Rue du Port Elizabeth. This accommodation is being used to its full capacity and, whilst there are long-term opportunities for expansion in this location, they will not meet the shorter term requirements brought about by the imminent new business which Jersey Post's fulfilment business has secured. However, it is likely that Jersey Post would still require additional space at this location for its growing logistics operation.

In addition, Jersey Post has investigated the possibility of further developing its premises at Postal Headquarters, Rue des Pres. However, this option is not viable given both the impact such development would have on existing operations and the lack of space available at the site.

It is Jersey Post's view that, at this time, there are no other large-scale individual industrial buildings of sufficient size within the Island of Jersey which meet the immediate requirements of Jersey Post's fulfilment business. Whilst Jersey Post has been working with Sarre & Co. to identify suitable sites, the only alternative options are agricultural sheds which require permission for change of use and which are too small or poorly located for Jersey Post's requirements.

There are significant advantages of securing the site represented by Units 1 and 2, 4-6 L'Avenue Le Bas. These include: its availability, the close proximity to Postal Headquarters, suitable access for large vehicles, the provision of car parking, and the securing of Jersey Post's fulfilment business expansion needs for 2005 on one site.

The details of the leases for each of Units 1 and 2, 4-6 L'Avenue Le Bas, Rue des Pres Trading Estate, St.  Saviour, Jersey are in summary as follows –

Unit 1, 4-6 L'Avenue Le Bas, Rue des Pres Trading Estate, St. Saviour , Jersey:

1. a 2 1  year fullyrepairingand insuring lease from 1st July 1995to expire on 30th  June  2016
2. th e propertyconsistsof –

(i ) a g r ound-floor internal workshop of approximately 11,063  square feet;

(i i) a g round-floor showroom and offices of approximately 7,274  square feet;

(i ii ) f ir st-floor offices of approximately 549 square feet;

(i v ) f ir st-floor storage of approximately 2,653 square feet; and

(v ) an external yard area providing parking.

Unit 2, 4-6 L'Avenue Le Bas, Rue des Pres Trading Estate, St. Saviour , Jersey:

1. a 2 1  year fullyrepairingand insuring lease from 1stJanuary1988 to expire on31stDecember 2009
2. th e propertyconsistsof –

( i) t w o large bays of open plan warehousing with ancillary offices and extensive, fully fitted out

showrooms to the front of the premises being an approximate gross internal area of 18,232 square feet; and

(i i) an external yard area providing parking and access to the site.

Notes:

1. In orderto secure the current leases, Jersey Post has been required by the existing lease-holderto enter into a licence agreement in respect of the premises. Thisallows limited occupancy and prevents the leaseholder from offering either property to any other party for a period of15 weeks. If the leases are not assigned to Jersey Post by 3rd July 2005, then Jersey Post is obliged to reimbursethe lease holder £100,000, representing 15 weeks' rent, together with a fee of £30,000 for the exclusive negotiating period. It is Jersey Post'sexpectation that the revenue from businessconducted from the premises during the period of the Licence Agreement, regardless of the States' decision on this ReportandProposition, will cover these costs.
2. W  hilst  the  terms of the  leases  are  that  they  are  fully insuring and repairing  leases, a  survey  was undertaken on the premises in June 2004 byReynoldsCharteredSurveyors and Jersey Post has required that all significant matters identified in that survey will have been rectified by the existinglesseespriorto any assignmentof the respective leases.
3. W  henthe land onwhich the premises havebeenbuiltwere sold totheownerin1974, a restriction onthe use of the land was imposed. The consent of the Environment and Public Services Committee will therefore be required for the premises to beusedby Jersey Post for the fulfilment business.
4. T h e consentof the ownershallalsobesought to ensure that nogroundsexistforit to object to the proposed use.
5. Je r sey Post has been advised that consentunder the Island Planning (Jersey)Law 1964 forchangeofuse is not required.