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To: Martin Donnelly Bl SS
From: Peter Batten j
Department for Busi
Date: 49 April 2013 heovaton ails
Purpose
1. You are meeting Alice Perkins, Chair of Post Office Ltd (POL).
Key current issues
2. Alice is likely to raise a number of key issues including current performance, development
of post-2015 strategy and funding considerations, POL’s network transformation (NT)
strategy and progress towards mutualisation. An overview is below, and a speaking note
is attached as Annex A.
2012/13 Financial Performance
3. POL delivered a strong performance during 2012/13 and is expected to report results for
the full year that show revenue growth of 4%, up from £865m to £901m, and operating
profits rising 54% from £61m to £95m (or rising 5% if adjusted for the £30 million increase
in the Network Subsidy Payment). This maintains the trend established in 2011/12 when
POL delivered its first year of revenue growth in many years. POL is also expected to
outperform budget in both revenue and operating profit in 2012/13, with a particularly
strong performance in the latter — this should end the year c.£10m ahead of budget.
4. This performance against budget has mainly been driven by strong revenue
performances in Financial Services and Mails and Retail, offset by weakness in
Government Services (where expected volumes in existing contracts did not materialise).
Cost performance has also been robust, with staff costs, agent costs and overheads each
expected to end the year favourable to budget. This strength is echoed in the Crown
estate where POL is expected to see the losses of these branches narrow from £46m in
2011/12 to c.£38m this year (c.£2m ahead of budget expectations).
5. The ShEx POL team will continue to assess POL’s 2013/14 performance and budget
closely in light of this performance.
Post 2015 Funding and Strategic Plan
6. POL is developing its new strategic plan for the period beyond March 2015, which will
require funding in order to see through its reforms, including completion of the NT
programme (necessary to make POL financially sustainable). This will reduce POL’s
dependence on public subsidy but is also an important driver for mutualisation (which
requires the business to be commercially sustainable). A draft has been considered by
the POL Board, and was recently (verbally) presented to BIS. ShEx is appointing finance
and accounting advisers to provide support in assessing this new plan and we are also in
close discussions with finance to ensure this process feeds into SR discussions with
HMT. We expect the 15/16 funding ask to be between £200m and £250m (a decrease
from £330m in 14/15). We are seeking a funding agreement for at least a two year period
(to 16/17) to ensure we only need make one state aid notification. This also ensures we
are in receipt of state aid clearance for the period to 16/17 before the end of this
Parliament. HMT officials have indicated they are receptive to this (although this is not
formally confirmed).
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Mutualisation
7. POL’s mutualisation is inextricably linked to the successful delivery of its strategy. It is
both an enabler for certain initiatives, including NT, and an objective for a commercially
and financially sustainable business. Jo Swinson also has a high level of commitment to
mutualisation and is keen to meet Government's objective of seeing clear progress being
made before the end of this Parliament.
8. There has been good progress recently and the first phase of the POL Stakeholder Forum
(convened to define a Public Benefit Purpose of the business) is soon to be completed.
This will provide the foundation around which a mutual can develop, and POL plan to
launch public engagement over the summer to solicit wider views. We expect to see
other workstreams (e.g. Cultural Change, Finance, Governance) gain momentum once
this engagement, and the work of the POL Stakeholder Forum, has been completed in the
second half of 2013.
Network Transformation (NT)
9. The NT programme is fully funded to March 2015, and provides for up to 6,000 post
offices (around half the network) to be converted to new operating models (Main and
Local). These remove the element of fixed pay that a subpostmaster traditionally receives,
moving instead to a fully variable pay structure linked to in-branch transaction levels.
10.National rollout of NT began in October 2012, and at end of March 1,450 branches had
signed binding contracts to convert (meeting the stretch bonus metric). Of these, 507
have physically been completed, which is fewer than expected at this stage. The
company puts this down to the voluntary nature of the NT programme, and lukewarm
support from the National Federation of SubPostmasters (NFSP). McKinsey are currently
reviewing the 2010 strategy for POL and while their emerging findings are confirming that
the models are fit for purpose, they forecast that POL will only convert 3,400 branches by
2015 without changes to the NT implementation approach.
11.POL’s new strategic plan seeks to introduce a more planned basis for the conversions,
which may include compulsory change. This will present political challenges for Ministers,
which will need to be mitigated if they are to approve the required funding. A compelling
and positive narrative around POL’s future strategy is therefore crucial.
Crown Transformation
12. Staff in POL’s 373 directly-run Crown branches are paid significantly more than peers in
similar roles in other markets (e.g. bank clerks, franchise staff). This is a structural
weakness that has been a major factor behind the recurring losses experienced by POL’s
Crown branches in recent years. POL has offered Crown staff unconsolidated cash
bonuses tied to meeting financial targets worth up to £3,400 per person over the next
three years. This offer has been rejected by the CWU who recently successfully balloted
members for strike action. Strikes were held on Easter Saturday, and Friday 19 April.
However, around a third of branches did open and the strikes caused minimal disruption
to the operation of the Post Office network.
13.In February, POL announced plans to franchise 70 of the Crown branches. These are
branches that POL does not believe it can bring into profit. Franchising is a key pillar of
POL’s strategy to take the Crown network to breakeven by 2015. The CWU is
campaigning against the proposals, which it has linked to the strike action over pay.
14.More widely, POL has made good progress on reducing Crown losses from £46m last
year to an expected c£38m this year, outperforming budget expectations. POL will be
mobilising a number of further initiatives across the Crown estate during 2013/14 and
2014/15 which are expected to see the elimination of these losses.
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Front Office of Government
15.Despite POL winning a number of Government Services contracts since February 2011, it
is not generating the level of revenue anticipated in the 2010 strategic plan. This is due to
both lower than expected volumes and more challenging pricing, driven by high levels of
competition in certain market segments (e.g. POL recently retained its DVLA contract
against strong competition, but at markedly weaker rates than had been available under
its previous contract).
Current accounts
16.POL recently announced that it would be launching a Current Account in partnership with
its banking partner Bank of Ireland UK. The product launches on 13 May in a limited pilot
of 39 branches in Norfolk. It is expected that Jo Swinson will participate in the launch.
Annex A — Speaking notes
= I’m delighted to note the Post Office’s strong financial performance in
2012/13 which included a mix of growing revenues and cutting costs.
2012/13
Business = It is crucial that this is continued into 2013/14 and I do hope that Post
Performance Office Ltd has been ambitious in setting challenging targets for the
current financial year.
= It will be vitally important for my officials to be closely involved with
the analysis of the plan as the funding for the next SR is agreed.
= Weare in the process of appointing advisors to provide third party
Post-2015 assurance and assessment of the plan.
strategy and
funding = Key requirements for Government, as shareholder, will be to see the
successful completion of the network transformation process, coupled
with an achievable growth strategy, while at the same time crucially
ensuring a continued positive story to tell about the Post Office.
= Progress towards Mutualisation remains a key objective of this
Government.
= Mutualisation is closely linked to the successful delivery of POL’s
Mutualisation commercial strategy to build a sustainable business, in particular
Network Transformation.
= I would be interested to learn more about the company’s plans for
wider public engagement in the coming months.
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= Congratulations for achieving 1,450 signed contracts to convert to the
new models by end of March 2015. I hope that the Network
Transformation team is able to maintain this momentum over the
coming year.
Network = I was though slightly disappointed that at the end of the year only 507
Transformation
branches had been physically converted.
= Ensuring that branches move from contract signature to physical
conversion in a timely fashion is important for the integrity and
reputation of the Network Transformation programme.
= The ongoing dispute between management and the CWU is
obviously an operational matter for the company, but reaching break-
even in these branches by March 2015 remains the Government’s
Crown
Transformation (as shareholder) primary objective for the Crown network.
= I am pleased to note the progress over the last year towards meeting
this objective.
= As you know, Government can not simply award work to the Post
Office. I am pleased to note that Post Office Ltd has adopted a much
more competitive approach since February 2011, as evidenced by
recent contracts wins.
Front Office for I "lif pushed on lower transaction values] This is a commercial and
Government economic reality. Government cannot award work without
competition. Post Office Ltd has demonstrated it can compete
competitively and win contracts from Government, and I encourage
the company to build on the positive progress made over the last two
years.
Copied to: Cable MPST; Perm Sec MPST; SpAd MPST; ShEx Post Office Team