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poth
romeo to 136 POST OFFICE BOARD
Minutes of the meeting held at 148 Old Street
on 30 November 1999
‘je Bain Chairman
onevipe ‘ts Chief Executive
wichat 4 Close Group Finance Director
Jerry Cope Group Managing Director Strategy & Business
Development
wake Kinski Non-Executive Member
jonn Lloyd Non-Executive Member
wiles Templeman Non-Executive Member
Rosemary Thome Non-Executive Member
Jonathan Evans Secretary
Scott Childes Notes
Stephen Hill Notes
Richard Dykes, Group Managing Director, Mails Services
Stuart Sweetman, Group Managing Director, Customer and Banking Services.
Kevin Williams, Group Managing Director, Distribution Services
Others attending: David Miller, Managing Director Post Office Network,
for PO99/126
Dom McKenna, Director Mergers & Acquisitions, and
Rico Back, Managing Director European Parcels, for
PO989/127 to 129
MINUTES OF PO99/120
PREVIOUS MEETING
The Board approved the minutes and separate record
of proceedings of its meeting of 26 October 1999.
MATTERS ARISING PO99/121
POB(99)74.
@ The Board noted the matters arising from its meeting heid
on 26 October 1999
CHAIRMAN’S, PO99/122
BUSINESS.
(i) The Chairman had a number of issues he wanted to
cover, including : half year accounts, Government's
acceptance of the Strategic Plan, and Executive
Members’ contracts and bonuses; the accounts would be
discussed during the course of the meeting.
(ii) Alan Johnson, The Post Office Minister, had written to the
Chairman confirming, with some caveats, that the 1999-
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(iv)
POST OFFICE
UNAUDITED
ACCOUNTS FOR THE
HALF-YEAR TO
SEPTEMBER 1999
@
(i)
(iii)
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2004 Strategic Plan had been approved. The letter had
ist been feceived and needed to be considered in depth.
H meyer initial observations were that whilst it was good
ne ave agreement to the Plan, including clearance of the
e380 fregime for 1999/2000 (a post-tax profit target of
Om, and a dividend payment of £175m with a floor
Payment of £140m), there were some areas of concern
with Government apparently seeking further input and
discussion on a number of strategic issues
The Minister had also proposed a critique of The Post
Office by City analysts with expertise in the postal sector.
The analysis would look at the organisation as if it were a
listed company and whilst this could be helpful in
exposing how Government intervention hampered
development and day to day operations, it would be
important to ensure that the work did not compound
existing problems and divert management time and
attention.
A long awaited response to the Remuneration
Committee’s proposals on Executive Board Members’
1999-00 bonus scheme had now been received.
Structurally the new scheme would be an improvement on
its predecessor, but disappointingly included a
disproportionate element of penalty, The Remuneration
Committee would be approaching the DT! with suggested
improvements for next year's scheme
PO39/123
The half year accounts had been reviewed by the Board
Audit Committee on 26 November at which time
observations from Ernst & Young, The Post Office
auditors, had also been received.
In the half- year ending 26 September 1999, the Group
made a loss on operating activities of £423m. The trading
loss (after net interest receivable but before taxation) was
£386m. These figures included the exceptional charge in
respect of Horizon of £57 1m.
noted further that
The Post Office had not agreed with Ernst & Young's
stated position with regard to the accounting treatment of
the Horizon exceptional charge. The Audit Committee had
concluded that The Post Office had adopted the correct
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technical accounting practice which was also in the best
commercial interests of the organisation. A letter stating
The Post Office position, supported by the Board, would
be sent to Ernst & Young
The Audit Committee had noted three other issues which
(vill) Addressing issues around customer complaints was
already underway and progress on this would be reported
to the Board at its next meeting.
(ix) Agreed that the half year accounts be published that day
in the format set out in appendix 1.1 of the paper
(x) Authorised Richard Close to sign the letter of
representation
99 126
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CHIEF EXECUTIVE'S PO99/124
REPORT (POB(99)75) [orn nnnennnnnnnrncnaennaennaeecnaennacnnaecnmaceneseccnanas
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FINANCIAL
OVERVIEW
The Horizon exceptional charge would inc
£571m at the half year to £577m at the full year as a
(v) Excluding Horizon the current Group profit forecast was
£349m. It was recognised that in day to day operations it
was more important to focus on operating profit as a key
indicator of the strength of the busine
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(xv) Agreed that the following full year Group profit forecast
be passed to DTI:
© £340m
DEFINING THE PO99/126
FUTURE SIZE AND
STRUCTURE OF THE
POST OFFICE
NETWORK
(POB(99)76)
(i) The Board was not at this time being asked to agree to a
definitive Counters network but rather endorse the
principle and commercial rationale behind the defined size
and structure, which could then be used to inform the
likely debate with Government in the context of the study
being conducted by the Performance and Innovation Unit
(PIU).
(ii) The Board had previously endorsed (PO99/S0) the
proposal to move away from the recognised definition of
‘nationwide network’ based on numbers of physical post
offices, towards a two-fold formulation of accessibility
whereby:
« 90% of the UK population lived within one mile
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(iil)
(iv)
(vy)
(vi)
(vii)
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of post office counter services; and
* 99% of the UK population lived within five miles
of post office counter services.
In reviewing the size and structure it had been important
also to consider the commercial sustainability of the
network, as a consequence of funding Horizon and the
loss of income through the move to ACT, and the viability
of maintaining a network of offices with a diminishing
customer base. A key consideration was whether an
office was making a contribution over direct costs, and
whether closure and migration of customers to another
nearby outlet would provide a higher ongoing contribution
to the benefit of the network as a whole.
Based on this assessment, it was estimated that Counters
had a commercially sustainable network of 8,000 offices.
However, to ensure that the accessibility criteria were
achieved a further 2,000 outlets were required. A network
of 10,000 outlets would generate a profit improvement of
between £70-90m p.a, although it could be expected for
those benefits to reduce by up to £30m p.a as a result of
clients seeking lower and more competitive prices.
noted further that
Government recognised the need to address the
problems associated with the network and had instigated
the PIU review, due to report in the Spring. it was
important that The Post Office had a clearly defined
network strategy to inform the review. This would include
the conclusion that for its commercial purposes, The Post
Office needed a network of some 10,000 offices.
Government clients already regarded the revenue
Counters gained through contracts with them as a
network ‘subsidy’ and it was therefore inevitable that if the
cost of running the network reduced they would want to
see some of this benefit reflected in their charges.
The one-off cost of reducing the network by 8,000 outlets
was estimated at around £200m. Were The Post Office to
embark on such a closure programme, it was not certain
that at the end of it a business that added value would
remain. In addition it was unrealistic, given the political
implications, that Government would agree to reductions
on that scale. However this assessment of The Post
Office's commercial network need would be an important
starting position for discussions with Government about
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the need, and means of funding, a larger network.
(viii) The roll-out of Horizon terminals was due to continue
until 2001 and the business would look to optimise
installation into commercia ly justified locations.
(ix) The Post Office had accepted the Government's stance
on Horizon and would not re-open the debate when
putting forward its network proposals. However, the
impact of ACT could not be ignored and would justifiably
be highlighted
& Supported the proposals for determining the commercial
network of offices,
(xi) Agreed that a further debate, following the report of the
PIU, would be required to determine what value the
network would bring given the size and structure being
proposed
‘Action Return to the Board following the PIU study, with more
Stuart Sweetman developed proposals on how a commercially based
network could be progressed,
rrelevant
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ANY OTHER
BUSINESS
Meeting Dates d that next year's meeting dates were
ind that it was desirable that these dates
be aligned to ensure that Members received the most
recent available financial information. It was recognised
that Non-Executive Members might not be able to attend
every meeting
DATE OF NEXT PO99/136
MEETING
The next meeting was scheduled for 11 January 2000, at
148 Old Street.
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