Funding Agreement
EXECUTION VERSION
,
22 _ October 2010
THE SECRETARY OF STATE FOR BUSINESS, INNOVATION & SKILLS
POST OFFICE LIMITED
ROYAL MAIL HOLDINGS PLC
ROYAL MAIL GROUP LIMITED
FUNDING AGREEMENT
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CONTENTS
CLAUSE PAGE
INTERPRETATION.
CONDITIONS
DELAYED PAYMENT
STATE AID CLEARANCES ....esecssssssessssesseessees
GOVERNMENT FUNDING FOR SERVICES OF GENERAL
ECONOMIC INTEREST
POL STRATEGIC PLAN
MAILS’ ACKNOWLEDGME!
HOLDINGS’ ACKNOWLEDGMENT.
FINAL CONTRIBUTION
10. I EMPLOYEE INCENTIVE ARRANGEMENTS
11. I SUB-POSTMASTER COMPENSATION CONDITIONS
12, ACCESS CRITERIA
13. JOINT VENTURES
14, I SEPARATION EVENTS
15. I PUBLIC CONSULTATION, COMMUNICATION AND EQUALITY.
16. CONSENTS
17. CONFIDENTIALIT
18. I NOTICES
19, ENTIRE AGREEMENT
20. GENERAL
SCHEDULE 1 DELIVERABLES
SCHEDULE 2
PART A FUNDAMENTAL CHANGE o..scsccsssssseserersenereseseerenenserareannyen
vr ene
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PART B POTENTIAL FUNDAMENTAL CHANGE,
SCHEDULE 3 CALCULATION OF SGEI PAYMENT...
APPENDIX A POL ENTRUSTMENT LETTER
APPENDIX B STRATEGIC PLAN:
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Funding Agreement
EXECUTION VERSION.
THIS AGREEMENT is made on as October 2010
BETWEEN:
qd) THE SECRETARY OF STATE FOR BUSINESS, INNOVATION & SKILLS of
1 Victoria Street, London SW1H 0ET (the Secretary of State);
(2) POST OFFICE LIMITED, a company incorporated in England and Wales
(registered number 2154540) and whose registered address is 148 Old Street, London
EC1V 9HQ (POL);
(3) ROYAL MAIL HOLDINGS PLC, a company incorporated in England and Wales
(registered number 4074919) and whose registered address is 100 Victoria
Embankment, London EC4Y 0HQ (Holdings); and
(4) ROYAL MAIL GROUP LIMITED, a company incorporated in England and Wales
(registered number 4138203) and whose registered address is 100 Victoria
Embankment, London EC4Y 0HQ (Mails).
WHEREAS:
(A) All of the issued share capital of Holdings is currently beneficially owned by the
Government, all of the issued share capital of Mails is currently beneficially owned by
Holdings and all of the issued share capital of POL is currently beneficially owned by Mails.
(B) The Secretary of State has requested POL to continue to provide a national network
of post office Branches across the United Kingdom and wishes to entrust to POL the
provision of certain services of general economic interest over that network.
(C) The Secretary of State has agreed to enter into this Agreement in order to provide
funding to POL to enable it to continue to provide services of general economic interest
across that national network.
(D) _ It is acknowledged by the Parties that POL will not have achieved a full conversion to
variable pay agency contracts in respect of all sub-postmasters before the conclusion of the
Funding Period, and as such, it is envisaged that further funding may be required to complete
this process for the Financial Years 2015/16 and 2016/17.
(E) It is acknowledged by the Parties that the Postal Services Bill (as introduced in the
House of Commons on 13 October 2010) contemplates the restructuring of the Royal Mail
Group, and in particular makes provision for the separation of POL from the Royal Mail
Group and potential move to mutual ownership of POL. Accordingly, the parties
acknowledge that certain obligations of Mails or Holdings pursuant to this Agreement shall
no longer have effect upon POL ceasing to be a wholly-owned subsidiary of that Party.
NOW THIS AGREEMENT WITNESSES as follows:
1. INTERPRETATION
Ll In this Agreement, including the recitals, Schedules and Appendices, unless the
context requires otherwise:
Act means the Postal Services Act 2000.
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Branch means any retail outlet of POL, including any post office counter at a retail outlet and
any other facility (including an “outreach” facility) designated for the transaction of business
with members of the public by or on behalf of POL.
Business Day means a day (not being a Saturday or a Sunday) on which banks are open for
general non-automated banking business in the City of London.
Code of Practice means the Code of Practice on Public Consultation and Communication
with respect to change in the post office network introduced on 1 April 2009 as amended,
varied, supplemented or substituted from time to time.
Cumulative SGEI Statement has the meaning given to it in clause 5.10 ((Government
Funding for Services of General Economic Interest).
Deprived Urban Areas means:
(a) the most deprived fifteen per cent. (15%) of super output areas in England;
(b) the most deprived fifteen per cent. (15% ) of data zones in Scotland; and
(c) the most deprived thirty per cent. (30%) of super output areas in Wales and Northern
Ireland,
based upon each country’s then current index of multiple deprivation.
Entrustment Letter means the letter in the form set out at Appendix A (POL Entrustment
Letter) from the Secretary of State to POL and countersigned by POL.
Financial Year means an accounting period of POL commencing on or around I April in any
calendar year and ending on or around 31 March in the following calendar year.
Fundamental Change means the occurrence of any of the events listed in PartA of
Schedule 2 (Fundamental Change).
Funding Period means the period from 31 March 2012 until 29 March 2015.
GCA Contract means the agreement dated 5 March 2009 between POL and the Secretary of
State for Work and Pensions for the provision of Government Card Account Services.
Government means Her Majesty’s Government.
Milestone means:
(a) in respect of the SGEI Payment payable on 1 April 2012 (or the first Business Day
thereafter), the requirements referred to as Milestone 1;
(b) in respect of the SGEI Payment payable on 1 April 2013 (or the first Business Day
thereafter), the requirements referred to as Milestone 2; and
(c) in respect of the SGEI Payment payable on 1 April 2014 (or the first Business Day
thereafter), the requirements referred to as Milestone 3,
in each case in Part 2 section 4A (Milestones and Milestone Test Dates) of the Strategic Plan.
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Milestone Test Date means, in respect of each SGEI Payment, the date specified in Part 2
section 4A (Milestones and Milestone Test Dates) of the Strategic Plan for the achievement of
the Milestone applicable to that SGE] Payment.
Order means the Post Office Network Subsidy Scheme Order 2007 (SI 2007/962) made
pursuant to section 103 of the Act as may be amended or replaced by any subsequent payment
order increasing the maximum amount payable under it in any twelve (12) month period.
Parties means the parties to this Agreement.
POL Working Capital Facility means the £1,150,000,000 working capital facility provided to
POL pursuant to the terms of the credit facilities agreement between the Secretary of State
and POL dated 17 October 2003, as amended and restated on 16 May 2007, amended on 18
April 2008 and further amended and restated on 24 March 2010.
Potential Fundamental Change has the meaning given to it in PartB of Schedule 2
(Potential Fundamental Change).
Relevant Payment has the meaning given to it in clause 3 (Delayed payment).
Remedy Period has the meaning given to it in clause 3 (Delayed payment).
Required Payment Date has the meaning given to it in clause 3 (Delayed. payment).
Royal Mail Group means Holdings and each of its subsidiaries.
Rural Areas means those communities which are not Urban Areas.
Separation Event means any event by virtue of which POL ceases to be: (i) a wholly-owned
subsidiary of Mails; or (ii) a wholly-owned subsidiary of Holdings.
SGEI Payment means a payment by the Secretary of State in a Financial Year of an amount
calculated in accordance with Schedule 3 (Calculation of SGEI Payment) to compensate POL
for the net cost of: (i) maintaining a network of post offices in accordance with clause 12
(Access Criteria); and (ii) ensuring the provision of services of general economic interest over
that network, in each case during that Financial Year.
SGEI Statement has the meaning given to it in clause 5.10 (Government Funding for Services
of General Economic Interest).
SGEI Supporting Statement has the meaning given to it in clause 5.10 (Government Funding
for Services of General Economic Interest).
State Aid Clearance means, in respect of any payment to be made to POL under this
Agreement, confirmation by the European Commission that such payment is compatible with
the requirements on state aid of the Treaty on the functioning of the European Union.
‘Strategic Plan means POL’s strategic plan in relation to the provision of services of general
economic interest as set out in Appendix B (Strategic Plan);
Urban Areas means communities with ten thousand (10,000) or more inhabitants in a
continuous built up area.
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VAT Amount has the meaning given to it in clause 5.13 (Government Funding for Services of
General Economic Interest).
1.2 In this Agreement, except where the context otherwise requires:
(a) a reference to a person (which shall include any individual, firm, company,
corporation or other body corporate, government, state or agency or any association,
trust, fund or partnership (whether or not having separate legal personality) shall
include, as appropriate, its successors, permitted assignees or transferees;
(b) a reference to an enactment or statutory provision shall include a reference to any
subordinate legislation made under that enactment or statutory provision and is a
reference to that enactment, statutory provision or subordinate legislation as from
time to time amended, consolidated, modified, or re-enacted;
(c) words in the singular shall include the plural and vice versa;
(d) references to one gender include other genders;
(e) a reference to any agreement or other instrument (other than an enactment or statutory
provision) shall be deemed to be a reference to that agreement or instrument as from
time to time amended, varied, supplemented, substituted, novated, assigned or
restated;
(f) a reference to a clause or Schedule shall be a reference to a clause of, or Schedule to,
this Agreement;
(g) a reference to “includes” or “including” shall be construed without limitation to any
events, circumstances, conditions, acts or matters specified after those words;
(h) references to dates which do not fall on a Business Day shall be construed as
references to the immediately subsequent Business Day;
(63) the headings are for convenience only and shall not affect its interpretation; and
@) references to this Agreement include this Agreement as amended or supplemented.
13 The Schedules and Appendices form part of this Agreement and shall have the same
force and effect as if expressly set out in this Agreement, and any reference to this Agreement
shall include the Schedules and Appendices.
2. CONDITIONS
21 The obligation of the Secretary of State under this Agreement to make any SGEI
Payment is conditional on:
(a) all necessary State Aid Clearances having been obtained for the making of that
payment; and
(b) the Milestone having been achieved.
2.2. Each obligation of POL, Holdings and Mails under clauses 5 (Government Funding
for Services of General Economic Interest), 6 (POL Strategic Plan), 7 (Mails’
acknowledgement), 8 (Holdings’ acknowledgement), 12 (Access Criteria) and 15 (Public
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Consultation, Communication and Equality) of this Agreement, and the obligations of POL
under the Entrustment Letter, in each case in each of Financial Years 2012/13, 2013/14 and
2014/15 (respectively), is conditional on the conditions referred to in clause 2.1 having been
met in respect of the SGEI Payment for that Financial Year, save that to the extent the
condition in clause 2.1(b) is not met and (at the absolute discretion of the Secretary of State)
only part of the SGEI Payment for that Financial Year is paid, then POL shall perform such of
its obligations under this Agreement and the Entrustment Letter as shall be determined by
POL and the Secretary of State to be appropriate having regard to the funding constraints to
which POL will be subject and to POL’s obligations under clause 6.1 (POL Strategic Plan).
23 In the event that POL fails to achieve any Milestone by the Milestone Test Date, the
Secretary of State shall have no obligation to make the SGEI Payment until POL has achieved
the Milestone. Should POL not achieve the Milestone within 3 months following the
Milestone Test Date, any payment (or part thereof) by the Secretary of State of the SGEI
Payment shall be at the absolute discretion of the Secretary of State.
Deliverables
2.4 On the date of this Agreement, POL, Mails and Holdings shall deliver (or ensure that
there is delivered) all those documents listed in Schedule 1 (Deliverables) in a form and
substance satisfactory to the Secretary of State (acting reasonably).
Fundamental Change
25 Without prejudice to the accrued rights and remedies of the Parties, the obligations of
the Secretary of State to make or facilitate any payments in accordance with this Agreement,
the obligations of POL, Holdings and Mails under clauses 5 (Government Funding for
Services of General Economic Interest), 7 (Mails' acknowledgement), 8 (Holdings’
acknowledgement), 12 (Access Criteria) and 15 (Public Consultation, Communication and
Equality) of this Agreement and the obligations of POL under the Entrustment Letter, shall
immediately terminate upon the occurrence of a Fundamental Change.
2.6 If on the date on which any payment is due to be made by the Secretary of State to
POL under this Agreement a Potential Fundamental Change exists, the Secretary of State
shall be entitled to withhold such payment until such time as:
(a) a Fundamental Change occurs, whereupon clause 2.5 shall apply and the Secretary of
State shall have no obligation to make that payment; or
(b) the Potential Fundamental Change ceases to exist, whereupon the payment shall
become immediately due and payable, together with interest from the due date until
the date of actual payment at a rate equivalent to the rate of interest then applicable to
drawings by POL under the POL Working Capital Facility (as amended from time to
time).
2.7 Until the date on which the last SGEI Payment is due to be made by the Secretary of
State to POL under this Agreement, POL shall promptly disclose to the Secretary of State any
matter or thing of which its board of directors becomes aware after entering into this
Agreement which constitutes, or which in the reasonable opinion of its board of directors is
reasonably likely to give rise to, a Fundamental Change or a Potential Fundamental Change.
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3. DELAYED PAYMENT
If any SGEI Payment to be made by the Secretary of State to POL under this Agreement (a
Relevant Payment) is not made on or by the date on which it is required by clause 5.6
(Government Funding for Services of General Economic Interest) to be made (the Required
Payment Date), then during the period between the Required Payment Date and the end of the
tenth (10") Business Day thereafter (such period being the Remedy Period), the Parties shall
continue to comply with their respective obligations under this Agreement and the Secretary
of State shall make the Relevant Payment within the Remedy Period.
4. STATE AID CLEARANCES
41 The Secretary of State agrees to:
(a) prepare as soon as reasonably practicable, in consultation with Mails and POL, an
application for State Aid Clearance for all arrangements under this Agreement
requiring such State Aid Clearance, including any payments to POL under clause 5
(Government Funding for Services of General Economic Interest), in respect of each
of the Financial Years 2012/13, 2013/14 and 2014/15.
(b) pursue such State Aid Clearance application in good faith and expeditiously;
(c) keep Mails and POL informed as to the progress of such State Aid Clearance
application;
(d) permit representatives appointed by POL to attend meetings with the European
Commission in respect of such application, to the extent permitted by the European
Commission and deemed appropriate by the Secretary of State;
(e) discuss with POL any written notifications to the European Commission in respect of
such State Aid Clearance application before they are submitted; and
( discuss with POL any written notifications from the European Commission in respect
of such State Aid Clearance application promptly upon their receipt.
4.2 As at the date of this Agreement the Secretary of State is targeting the obtaining of
the State Aid Clearance referred to in clause 4.1 by 31 March 2012 and the Parties shall use
their reasonable endeavours to obtain the State Aid Clearance by such date, it being
acknowledged that a mere failure to achieve that target is not of itself a breach of this clause
4.2.
5. GOVERNMENT FUNDING FOR SERVICES OF GENERAL ECONOMIC INTEREST
5.1 POL undertakes to the Secretary of State that it will for the duration of the Funding
Period: (i) maintain a network of post offices in accordance with clause 12 (Access Criteria);
and (ii) provide across that network the services of general economic interest entrusted to it
by the Entrustment Letter.
5.2 Subject to clause 2.1 (Conditions), the Secretary of State agrees to make to POL in
each of the Financial Years 2012/13, 2013/14 and 2014/15 a SGEI Payment in the amount
specified in clause 5.6 to enable POL to maintain the network and to provide services of
general economic interest over the network.
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5.3 The SGEI Payment for each of the Financial Years 2012/13, 2013/14 and 2014/15
shall be made in a manner or manners to be determined by the Secretary of State in his
absolute discretion (but having consulted with Holdings, Mails and POL as to the impact
thereof (if any) on their profit and loss accounts and the tax treatment of such payments).
5.4 The Secretary of State agrees:
(a) to submit for approval of both Houses of Parliament as soon as reasonably practicable
any order amending or replacing the Order to increase the maximum amount payable
under the Order in any period of twelve (12) months in order to make any payment
under this Agreement which it is determined by the Secretary of State in accordance
with clause 5.3 will be made pursuant to section 103 of the Act;
(b) to submit for approval of the House of Commons as soon as reasonably, practicable
any payment under this Agreement which it is determined by the Secretary of State in
accordance with clause 5.3 will be made pursuant to section 8 of the Industrial
Development Act 1982;
(c) to keep Mails and POL informed as to the progress of such approval(s); and
(d) to notify Mails and POL in writing as soon as reasonably practicable after such
approval(s) have been obtained.
5.5 If and to the extent that the Secretary of State determines to make any part of any
SGEI Payment by way of paying such amount to Holdings or Mails for the purpose of its
being applied in subscription for shares in POL, any such payment to Mails or Holdings shall
be held by Mails or Holdings, as applicable, upon trust to apply it immediately for the purpose
for which it was paid.
5.6 The amount of the SGEI Payment payable in each of the Financial Years 2012/13,
2013/14 and 2014/15 shall be calculated in accordance with Schedule 3 (Calculation of SGEI
Payment), but subject always to the aggregate amount of all SGET Payments during the
Funding Period not exceeding one billion one hundred and fifty-five million pounds
(£1,155,000,000). Each SGEI Payment shall be made by way of payment on 1 April (or the
first Business Day thereafter) of the relevant Financial Year of the amount specified in clause
5.7 (subject to adjustment in accordance with clause 5.11).
5.7 The amount payable on account of the SGEI Payment (subject to reconciliation in
accordance with clause 5.10) in:
(a) the Financial Year 2012/13 shall be four hundred and ten million pounds
(£410,000,000);
(b) the Financial Year 2013/14 shall be four hundred and fifteen million pounds
(£415,000,000); and
(c) the Financial Year 2014/15 shall be three hundred and thirty million pounds
(£330,000,000).
In ascertaining for any purpose of this clause 5 the amount or maximum amount of any SGEI
Payment no account shall be taken of: (i) any VAT Amount which may be payable under
clause 5.13; or (ii) the benefit of any interest receivable on any amount held by POL prior to
its expenditure.
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5.8 The Secretary of State acknowledges that, without prejudicing his discretion to
determine the method of payment of the SGEI Payment referred to in clause 5.3 above, it is
his current expectation that:
(a) two hundred and ten million pounds (£210,000,000) of the SGEI Payment for
Financial Year 2012/13;
(b) two hundred million pounds (£200,000,000) of the SGEI Payment for Financial Year
2013/14; and
(c) one hundred and sixty million pounds (£160,000,000) of the SGEI Payment for
Financial Year 2014/15
will be made by way of a payment under a network subsidy scheme introduced under the
Order provided that: (i) the necessary statutory instrument to permit such payment has been
approved by an affirmative resolution of each House of Parliament; and (ii) any necessary
consent to the making of such statutory instrument has been given by the Lords
Commissioners of Her Majesty’s Treasury.
5.9 It is acknowledged by the Parties that any part of the SGEI Payments received by
POL under a network subsidy scheme pursuant to section 103 of the Act (currently expected
to be the amounts specified in clause 5.8 above) would be treated as revenue in POL’s
accounts, which has an impact on POL’s operating profit. Should any SGEI Payment (or part
thereof) be made in any Financial Year in any manner which would result in it not being
treated as revenue in POL’s accounts then any target operating profit applicable for any
purpose to POL or, prior to a Separation Event, the Royal Mail Group as a whole in such
Financial Year shall be reduced by the amount of any SGEI Payment (or part thereof)
received in any such manner in that Financial Year.
5.10 Within three months following the signature of POL’s accounts in respect of each of
the Financial Years 2012/13, 2013/14 and 2014/15, POL shall provide to the Secretary of
State a statement (the SGEJ Statement) setting out in writing the actual amount of the SGEI
Payment for that Financial Year and a cumulative statement (the Cumulative SGEI
Statement) setting out the cumulative amount of the SGEI Payments from the commencement
of the Funding Period, together with supporting calculations and a clear explanation of how
the actual amount of the SGEI Payment has been calculated. Each SGEI Statement shall be
accompanied by a statement (the SGEI Supporting Statement) from an independent firm of
financial advisers confirming:
(a) that the SGEI Statement has been properly prepared in accordance with the
requirements of Schedule 3 (Calculation of SGEI Payment) and any additional
conditions imposed by any relevant State Aid Clearance; and
(b) that while carrying out its financial analysis for the purposes of providing the
statement referred to in paragraph (a) above, they did not discover any inconsistency
of POL’s use of the SGEI Payments as against the terms of this Agreement or of any
applicable State Aid Clearance.
For the avoidance of doubt, the independent firm of financial advisers will not be responsible
for determining whether the allocation of costs in paragraph 3 of Schedule 3 (Calculation of
SGEI Payment) is appropriate or whether the profit in paragraph 4 of Schedule 3 (Calculation
of SGEI Payment) is reasonable. POL agrees to use reasonable endeavours to engage such
independent firm of financial advisers on the basis that, if requested by the Secretary of State
and on such terms as the financial advisers may agree:
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(c) an accountancy firm nominated by the Secretary of State shall be entitled to discuss
directly with the financial advisers the manner in which the SGEI Supporting
Statement has been prepared; and
(d) the financial advisers shall provide to the Secretary of State all notes and other work
products produced by them in the preparation of the SGEI Supporting Statement.
5.11 If following the end of the Funding Period the Cumulative SGEI Statement in respect
of Financial Years 2012/13, 2013/14 and 2014/15 shows that the aggregate actual amount of
the SGEI Payments over the Funding Period is less than one billion one hundred and fifty-five
million pounds (£1,155,000,000) POL shall, within ten (10) Business Days of receipt by the
Secretary of State of the Cumulative SGEI Statement referred to in clause 5.10, reimburse to
the Secretary of State, without deduction, an amount equal to the difference.
5.12 POL shall use each SGEI Payment only to meet the direct and indirect costs
associated with: (i) maintaining a network of post offices in accordance with clause 12
(Access Criteria); and (ii) ensuring the provision of services of general economic interest over
that network (as entrusted to it pursuant to the Entrustment Letter), as described in Schedule 3
(Calculation of SGEI Payment) (or to make any reimbursement required to be made by POL
pursuant to clause 5.11) and only for purposes permitted by any State Aid Clearance
applicable to it.
5.13 It is the mutual opinion of the Parties that the SGEI Payments received by POL will
not (and POL agrees not to take any steps with the intention of procuring that they will)
constitute, for VAT purposes, the consideration for any taxable supply and that, accordingly,
the receipt by POL of such SGEI Payments should not give rise to any liability of POL (or
any other member of the Royal Mail Group) to account for VAT in respect of any such
receipt. Notwithstanding the foregoing opinion, if it should, at any time (whether or not a time
falling within the duration of this Agreement), be determined by Her Majesty’s Revenue and
Customs that such SGEI Payments (or any of them) must be treated as the consideration for
taxable supplies made by POL (or, as the case may be, by any other member of the Royal
Mail Group) and that in consequence POL (or such other member of the Royal Mail Group) is
liable to account for VAT in respect of the receipt of any of such SGEI Payments (the VAT
Amount), POL shall notify the Secretary of State of that determination within five (5)
Business Days of being so advised by Her Majesty’s Revenue and Customs and the Secretary
of State shall, as soon as reasonably practicable following notification of such determination,
make a payment to POL, in addition to all amounts otherwise payable by the Secretary of
State to POL under this Agreement, of a sum equal to the VAT Amount, against production of
a valid VAT invoice.
5.14 If Her Majesty’s Revenue and Customs issues a determination as referred to in clause
5.13, the Parties shall (acting reasonably) consult as to what action to take regarding such
determination. If the Secretary of State disagrees with the determination he may, within ten
(10) Business Days of being notified by POL of such determination, give written notice to
POL that he requires POL (or any other Party) to obtain a review by Her Majesty’s Revenue
and Customs of that determination; and POL (or such other Party, as the case may be) shall
promptly request (the form of that request being subject to reasonable review by the Secretary
of State) Her Majesty’s Revenue and Customs to undertake such review. In the event that the
review results in POL obtaining a refund of any VAT Amount, or not being required to pay a
VAT Amount, in each case in respect of which the Secretary of State shall have made a
corresponding payment under clause 5.13, POL shall promptly refund to the Secretary of
State the amount of such corresponding payment.
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5.15 The Secretary of State acknowledges the expectation of the Parties that ongoing SGEI
Payments will be required to be made to POL following the end of the Funding Period to the
extent that POL may be requested to continue to provide services of general economic interest
following the Funding Period.
6. POL STRATEGIC PLAN
6.1 POL shall from 1 April 2011 use its best endeavours to procure the delivery of the
Strategic Plan within the financial parameters of the SGEI Payments provided pursuant to this
Agreement and (unless otherwise agreed by the Secretary of State or required by the terms of
any State Aid Clearance) POL shall not apply any SGEI Payment for a purpose inconsistent
with the Strategic Plan or make any material deviation from the Strategic Plan.
6.2 Until the occurrence of a Separation Event, unless POL and the Secretary of State
agree otherwise, POL undertakes in favour of the Secretary of State to apply in the normal
course any funds representing an aggregate out-performance of POL’s net cashflow over the
Funding Period relative to the net cashflow envisaged in POL’s financial forecasts within the
Strategic Plan to reduce POL's borrowings under the POL Working Capital Facility, subject
only to the fiduciary duties of the directors of POL. The Parties acknowledge that following
any Separation Event the method of reimbursement will need to be reviewed and potentially
amended.
7. MAILS’ ACKNOWLEDGMENT
TA For so long as POL remains a wholly-owned subsidiary of Mails and Mails remains
wholly-owned by the Crown, Mails agrees that it shall (insofar as is lawful and consistent
with the fiduciary duties of the directors of Mails in the context of Mails’ insolvency and
appropriate for a parent company in its position) take all necessary steps, including
minimising any downside for POL, and take responsibility for requiring that POL takes all
necessary steps, to execute the strategy agreed upon for POL wholly within the financial
resources made available to POL by this Agreement.
72 For so long as POL remains a wholly-owned subsidiary of Mails and Mails remains
wholly-owned by the Crown, in the context of this clause 7, Mails agrees that it will consider
in good faith any request to make available to POL inter-company debt facilities, where such
request is received from POL or the Secretary of State during the Funding Period.
8. HOLDINGS’ ACKNOWLEDGMENT
For so long as POL and Mails remain wholly-owned subsidiaries of Holdings, Holdings
acknowledges the steps required to be taken by Mails under clause 7 (Mails’
acknowledgement) and agrees to take all necessary steps appropriate for a parent company in
its position (and acknowledging that Mails is the principal material asset of Holdings) to
procure that Mails takes those steps.
9. FINAL CONTRIBUTION
9.1 Mails and POL acknowledge that the SGEI Payments to be provided by the Secretary
of State pursuant to this Agreement represent the Secretary of State’s final funding
contribution in respect of POL’s obligations over the Funding Period to: (i) maintain a
network of post offices in accordance with clause 12 (Access Criteria); and (ii) ensure the
provision of services of general economic interest over that network in accordance with the
Strategic Plan as entrusted to it by the Entrustment Letter.
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10. EMPLOYEE INCENTIVE ARRANGEMENTS,
10.1 POL shall develop and implement an incentive scheme, to be approved by the
Secretary of State, for its senior executive team in a manner which is designed to ensure, and
is consistent with ensuring, the delivery of the Strategic Plan.
10.2 POL confirms that:
(a) the terms of any bonus arrangements specific to POL (or those parts of any group-
wide arrangements which are related to the performance of POL) are designed to
incentivise and reward the performance of POL;
(b) the terms of such bonus arrangements are robust, subject to annual review and
designed not to provide rewards where POL’s business has not performed
satisfactorily against the relevant target; and
(c) accordingly, no such bonus arrangements will pay out in respect of any Financial
Year during the Funding Period in which POL seeks and obtains new funding from
the Secretary of State, over and above that anticipated in this Agreement, as a result
of a failure by POL to perform in accordance with the requirements of the Strategic
Plan (other than as a result of a change in Government policy or other reasons beyond
POL's control). Any future bonus arrangements following any such Financial Year
will be discussed with the Secretary of State at the time.
ll. SUB-POSTMASTER COMPENSATION CONDITIONS,
11.1 As part of its obligations to deliver the Strategic Plan, POL shall ensure that it
complies with the provisions of clause 12 (Access Criteria) and confirms that the Strategic
Plan has been developed on the basis that no community loses access to services of the type
contemplated in clause 12 (Access Criteria) other than due to circumstances beyond POL’s
control.
11.2 POL shall ensure that as of 1 April 2012 (or such earlier date as may be agreed
between the Secretary of State and POL), all new agency contracts entered into between POL,
and any sub-postmaster shall be on such terms as to ensure that such sub-postmaster has no
right to receive: (i) fixed pay; or (ii) any compensation payment for termination of such
agency contract (other than in respect of a breach by POL of the terms of such agency
contract or applicable law).
11.3. POL shall ensure that (save as required by law or contractual requirements) following
1 April 2012, no compensation payments may be paid to any sub-postmaster upon
replacement of such sub-postmaster’s existing agency contract, unless such replacement
agency contract complies with the provisions of clause 11.2.
12. ACCESS CRITERIA
12.1 Without prejudice to its obligations pursuant to clause 5.1 (Government Funding for
Services of General Economic Interest), POL shall throughout the Funding Period provide a
network of at least eleven thousand, five hundred (11,500) Branches which:
(a) provide access to all of the following services:
(i) postal services;
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(ii) basic cash and banking facilities and services offered in accordance with the
GCA Contract;
(iii) bill payment facilities; and
(iv) information about other services which may be available from POL outlets
from time to time,
provided that a maximum of five hundred (500) Branches (such Branches to be determined by
POL in its absolute discretion) shall not be required to provide the service contemplated in
clause 12.1(a)(ii) (Access Criteria) above; and
(b) enables the following criteria to be met:
(i) Nationally:
(A) ninety per cent. (90%) of the UK population are within one (1) mile
of the nearest Branch;
(B) ninety nine per cent. (99%) of the UK population are within three (3)
miles of the nearest Branch;
(ii) In Urban Areas:
(A) ninety five per cent. (95%) of the total population within Urban
Areas across the UK are within one (1) mile of the nearest Branch;
(B) ninety nine per cent. (99%) of the total population within Deprived
Urban Areas across the UK are within one (1) mile of the nearest
Branch;
(iii) In Rural Areas: ninety five per cent. (95%) of the total population within
Rural Areas across the UK are within three (3) miles of the nearest Branch;
(iv) In each postcode district: ninety five per cent. (95%) of the population in
each individual postcode district are within six (6) miles of the nearest
Branch.
12.2 In applying the above criteria POL shall in addition take account of geographical
constraints such as rivers, mountains and valleys, motorways and sea crossings to islands so
as not to impose undue hardship when considering the appropriate Branch network.
12.3. Reference to “Branch” in this clause 12 shall mean a Branch providing the services
described in clause 12.1(a).
13. JOINT VENTURES
13.1 POL agrees that it shall only enter into joint ventures with third parties for purposes
consistent with the delivery of the Strategic Plan and provided that the joint venture is
structured on the basis that it would not (according to Government advice) be classified as
part of the public sector under relevant Treasury rules.
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14. SEPARATION EVENTS
14.1 The Secretary of State commits to considering, prior to effecting a Separation Event,
the potential impact of such Separation Event on the deliverability of the Strategic Plan.
14.2 No Party (other than the Secretary of State) shall be liable for any breach of this
Agreement if such breach would not have occurred but for the occurrence of a Separation
Event.
15. PUBLIC CONSULTATION, COMMUNICATION AND EQUALITY
15.1 POL shall at all times comply with the Code of Practice.
15.2 POL acknowledges the commitment recorded in the resolutions made during its board
meeting of 21 January 2008 that any individuals taking any decision or exercising any other
function on POL’s behalf should do so having due regard to the need to observe factors which
comprise the statutory equality duties and that appropriate steps be taken to inform all people
making decisions or exercising functions on POL’s behalf of these equality duties. POL shall
ensure that this commitment is maintained in the performance of its obligations under this
Agreement.
16. CONSENTS
The Secretary of State hereby consents, for all purposes of the articles of association of
Holdings and any other document or arrangement under which its consent or approval is
required, and Holdings hereby consents, for all purposes of the articles of association of
Mails, to the execution and performance by Holdings, Mails and POL of this Agreement and
the documents and arrangements to be entered into pursuant to, or otherwise contemplated by,
this Agreement (other than any agreement contemplated in clause 13). Each of the Secretary
of State and Holdings agrees that such consents will take effect notwithstanding any failure to
comply with any procedural requirements of such articles or other documents in connection
with the obtaining of such consents.
17. CONFIDENTIALITY
17.1 Each Party undertakes to each other Party that, subject to clause 17.2, it shall treat as
strictly confidential all confidential information. For the purposes of this clause 17,
confidential information shall mean:
(a) the provisions of this Agreement, the Entrustment Letter and the Strategic Plan; and
(b) the negotiations relating to this Agreement, the Entrustment Letter and the Strategic
Plan.
17.2. Clause 17.1 shall not prevent the disclosure by a Party of any confidential
information:
(a) to those of its officers (including auditors), employees and agents as it considers have
aneed for such information in the performance of their respective functions and who
shall in each case be made aware by such Party of its obligations under this
Agreement and shall be required by such Party to observe the same restrictions on the
use of the confidential information as are contained in this clause 17;
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(b) to its professional advisers who are bound to such Party by a duty of confidence
which applies to the confidential information disclosed;
(c) to the extent required by applicable law or by the regulations of any regulatory or
supervisory authority to which such Party is subject or pursuant to any order of court
or other competent authority or tribunal;
(d) which shall have entered the public domain or ceased to be confidential other than as
aresult of a breach by such Party of its obligations under this clause 17;
(e) which was already known to such Party prior to its disclosure to such Party other than
as a result of a breach by such Party of an obligation of confidentiality;
(f as such Party, acting reasonably, considers necessary in connection with any
investigations, inquiries, or actual or threatened proceedings in connection with
Holdings, Mails or POL or any of their respective directors;
(g) in the case of Holdings, Mails or POL, to the extent that its board of directors acting
reasonably, considers disclosure necessary from time to time in its statutory accounts;
(h) to the extent that the Secretary of State, acting reasonably, considers disclosure
necessary from time to time in the published accounts of the Department of Business,
Innovation & Skills or Her Majesty’s Treasury;
(i) to the extent required by any Parliamentary obligation;
(O) to the extent required for the purposes of any examination pursuant to section 6(1) of
the National Audit Act 1983 of the economy, efficiency and effectiveness with which
the Secretary of State has used his resources;
(k) to the European Commission for the purposes of obtaining State Aid Clearance; or
ra) with the prior written consent of the other Parties.
17.3 If a Party becomes required, in circumstances contemplated by clause 17.2(c), (f) or
(g) to disclose any confidential information, such Party shall, to the extent permitted by law,
give to each other Party such notice of such disclosure as is practicable in the circumstances
and shall, to the extent permitted by law and practicable in the circumstances, consult with the
other Parties as to the extent of such disclosure.
18. NOTICES
18.1 A notice to be served pursuant to or in connection with this Agreement shall be in
writing and, unless otherwise stated, served in person or sent by pre-paid first class post, fax
or any electronic method of communication as agreed by the Parties to the relevant Party at its
address or fax number set out below, or such other address in England or Wales or fax
number notified by it to the other Parties and marked for the attention of the person or
department therein specified.
18.2 The address and addressee of each Party at the date of this Agreement are:
Name of Party I Addressee Address Fax Number
Secretary of I Legal Director for I 1 Victoria Street,
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Name of Party I Addressee Address Fax Number
State Postal Services London SW1H OET
Holdings Company Secretary 100 Victoria
Embankment, London
EC4Y 0HQ
Mails Company Secretary 100 Victoria
Embankment, London
EC4Y 0HQ
POL Company Secretary I 148 Old Street, c
I London EC1V 9HQ
18.3. A notice shall be deemed to be received on the date and time specified below (save
that where such notice would otherwise be deemed to be received after 17:00 London time on
a particular day, it shall be deemed to have been received at 9:00 London time on the next
Business Day):
(a) in the case of a notice served in person, upon delivery at the address of the addressee;
(b) in the case of a posted letter, on the second Business Day after posting;
(c) in the case of a fax, when received in legible form; and
(d) in the case of any other electronic method of communication agreed by the Parties,
when actually received in readable form.
18.4 Each Party undertakes to notify all of the other Parties by notice served in accordance
with this clause if the address specified for that Party herein is no longer an appropriate
address for the service of notice or if it is desired to substitute any individual addressee of that
Party named in clause 18.2.
18.5 In proving service of any notice under or in connection with this Agreement it will be
sufficient to prove:
(a) in the case of a letter, that such letter was properly stamped or franked, addressed and
placed in the post or in the case of personal delivery, was left at the correct address;
and
(b) in the case of a fax transmission, that fax was duly transmitted to the fax number, as
appropriate, of the addressee referred to in clause 18.2.
19. ENTIRE AGREEMENT
19.1 This Agreement and any documents referred to in it or annexed to it constitute the
whole and only agreement among the Parties or any of them relating to its subject matter and,
for the avoidance of doubt, supersedes any other prior arrangement, understanding or
agreement between the Parties or any of them relating to the subject matter of this Agreement.
19.2 Each Party acknowledges that in entering into this Agreement, it is not relying on any
pre-contractual statement which is not set out in this Agreement.
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19.3. Except in the case of fraud, no Party shall have any right of action against any other
Party arising out of or in connection with any pre-contractual statement except to the extent
that it is expressly provided for in this Agreement.
19.4 For the purposes of this clause 19, pre-contractual statement means any draft,
agreement, undertaking, representation, warranty, promise, assurance, forecast, estimate or
arrangement of any nature whatsoever, whether or not in writing, relating to the subject matter
of this Agreement made or given by any person at any time prior to the date of this
Agreement.
20. GENERAL
Secretary of State
20.1 Nothing in this Agreement fetters the powers conferred on the Secretary of State by
the Act.
Costs
20.2 Save as expressly provided for elsewhere in this Agreement, each of the Parties shall
at its own expense do all such things as shall be necessary to give full effect to the obligations
imposed on it under this Agreement.
Third parties
20.3 For the purposes of the Contracts (Rights of Third Parties) Act 1999, no person other
than a Party shall have any rights in respect of this Agreement.
Counterparts
20.4 This Agreement may be executed in any number of counterparts and by the Parties on
separate counterparts, each of which when so executed and delivered shall be an original, but
all the counterparts shall together constitute one and the same instrument.
Partial invalidity
20.5 If any term or provision in this Agreement is held to be illegal or unenforceable in
whole or in part under any enactment or rule of law, such term or provision or part shall to
that extent be deemed not to form part of this Agreement but the enforceability of the
remainder of this Agreement shall not be affected.
Rights, variations and waivers
20.6 ~The rights and remedies of the Parties shall not be affected by any failure to exercise
or delay in exercising any right or remedy or by the giving of any indulgence by any other
Party or by anything whatsoever except a specific waiver or release in writing and any such
waiver or release shall not prejudice or affect any other rights or remedies of the Parties. No
single or partial exercise of any right or remedy prevents any further or other exercise thereof
or the exercise of any other right or remedy.
20.7 No variation of this Agreement shall be of any effect unless it is agreed in writing by
or on behalf of each Party.
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20.8 Any waiver of any right, power or remedy under this Agreement must be in writing
and may be given subject to any conditions thought fit by the grantor. The person seeking the
waiver shall disclose to the grantor all material facts then in that person’s knowledge relevant
to the subject matter of the waiver. Unless otherwise expressly stated, any waiver shall be
effective only in the instance and only for the purpose for which it is given.
Remedies
20.9 Without prejudice to any other rights or remedies that any Party may have, each Party
acknowledges and agrees that damages alone would not be an adequate remedy for any
breach by a Party of the provisions of this Agreement, and that the remedies of injunction and
specific performance as well as any other equitable relief for any threatened or actual breach
of the provisions of this Agreement by a Party may be more appropriate remedies and that no
proof of special damages shall be necessary for the enforcement of this Agreement.
Governing law and jurisdiction
20.10 This Agreement and any non-contractual obligations arising out of or in relation to
this Agreement shall be governed by and construed in accordance with English law.
20.11 Each Party hereby submits to the exclusive jurisdiction of the courts of England.
EXECUTED by the Parties on the date first written above.
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SIGNED by OLIVER GRIFFITHS
for and on behalf of
THE SECRETARY OF STATE FOR BUSINESS, INNOVATION & SKILLS
Signature: i
Name: Oliver Griffiths 7
Title: Deputy Director, Shareholder Executive
SIGNED by
for and on behalf of
POST OFFICE LIMITED
DAO suarry,
MEE CUSTIMER OFFICER
SIGNED by
for and on behalf of
ROYAL MAIL HOLDINGS PLC
GRO
Signature: cements
Name: Vow Mice pur
Title: Comme Grunt amt OAve gmt
onset curramner af ACen
SIGNED by
for and on behalf of
ROYAL MAIL GROUP LIMITED
GRO I
maaren
CHEF CASTOR DEFICER
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(a)
(b)
()
(b)
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Funding Agreement
EXECUTION VERSION
SCHEDULE 1
DELIVERABLES
A certified copy of a resolution of the board of POL:
approving the terms of, and the transactions contemplated by, this Agreement and
resolving that it execute and perform this Agreement;
authorising a specific person or persons to execute this Agreement on its behalf; and
authorising a specified person or persons, on its behalf, to sign and/or dispatch all
documents and notices to be signed and/or dispatched by it under or in connection
with this Agreement.
Certified copies of resolutions of the boards of Mails and Holdings:
approving the terms of, and the transactions contemplated by, this Agreement and
resolving that it execute and perform this Agreement;
authorising a specific person or persons to execute this Agreement on its behalf; and
authorising a specified person or persons, on its behalf, to sign and/or dispatch all
documents and notices to be signed and/or dispatched by it under or in connection
with this Agreement.
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SCHEDULE 2
Part A
Fundamental Change
A Fundamental Change will have occurred if:
1,
an order has been made or resolution has been passed for the winding-up of, or a
provisional liquidator to be appointed in respect of, POL;
an administrator has been appointed in respect of POL;
a receiver (which expression shall include an administrative receiver) has been
appointed in respect of POL;
POL has stopped paying its debts as they fall due;
a moratorium is declared in respect of the indebtedness of POL or POL enters into a
moratorium or a composition, assignment or similar arrangement with its creditors
generally;
a scheme of arrangement is approved, or proposed by POL, under Part 26 of the
Companies Act 2006 with a view to rescheduling or restructuring POL’s
indebtedness;
a voluntary arrangement has been proposed by POL under section 1 of the Insolvency
Act 1986 in respect of POL; or
an event analogous to the foregoing has occurred in relation to POL in any
jurisdiction outside England.
Part B
Potential Fundamental Change
A Potential Fundamental Change exists at any time if at that time a Fundamental Change shall
not have occurred but:
1.
a petition has been presented or a meeting has been convened for the purpose of
winding-up POL or appointing a provisional liquidator in respect of POL and such
petition has not been discharged or such meeting has not been held; or
POL is currently taking steps with a view to appointing an administrator or agreeing a
moratorium, composition, assignment or similar arrangement with its creditors
generally.
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SCHEDULE 3
CALCULATION OF SGEI PAYMENT
The amount of the SGEI Payment shall (subject to clause 5.7 (Government Funding for
Services of General Economic Interest)) be equal to all the direct and indirect costs associated
with the provision by POL of services of general economic interest (SGEJ) including:
1,
2.
we
4.
5.
all variable costs incurred in providing the SGEI; plus
all fixed costs incurred in providing the SGEI; plus
such proportion of fixed costs common to both the SGEI and other activities of POL
as is appropriate to be allocated to the SGEI (based on generally accepted cost
accounting principles); plus
a reasonable profit in providing the SGEL, less
the revenues received by POL from the SGEL.
For the purposes of paragraph 3 of this definition the fixed costs common to both the SGEI
and other activities of POL shall include, without limitation, contributions to pension funds,
interest costs, group central cost allocations, capital expenditure, contributions to the cost of
any employee incentivisation arrangements and the costs of rationalising the network to
maintain a network with optimal coverage for delivery of SGEI at minimum cost within the
funding envelope, in each case whether such costs are recurring or exceptional.
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APPENDIX A
POL ENTRUSTMENT LETTER
Post Office Limited
148 Old Street
London
EC1V 9HQ
For the attention of: Paula Vennells
{ ] October 2010
Dear Sirs,
ENTRUSTMENT OF POST OFFICE LIMITED WITH THE DELIVERY OF
CERTAIN PUBLIC SERVICES
Commencement
This letter has effect from the later of: (i) the date on which the European Commission
confirms that the schedule of services of general economic interest as set out in Annex
A to this letter are compatible with the requirements on State aid of the Treaty on the
functioning of the European Union; and (ii) 1 April 2012 (the "Effective Date").
Existing entrustment letter
Notwithstanding the signing of this letter, in respect of the period prior to the
Effective Date, the provisions of the letter from the Secretary of State to Post Office
Limited entitled "Entrustment of Post Office Limited with the delivery of certain
public services" and dated 24 March 2010 (the "Existing Entrustment Letter") shall
continue in full force and effect and the provisions of this letter shall be without
prejudice to any rights, remedies, obligations or liabilities of any party accrued under
the Existing Entrustment Letter.
The Existing Entrustment Letter shall be terminated on the Effective Date.
Entrustment
This letter contains an overarching ministerial instruction entrusting Post Office
Limited with the provision and delivery of certain public services of general economic
interest. This instruction is legally binding on Post Office Limited and Post Office
Limited has signed this letter in agreement and acknowledgement of this.
Post Office Limited is required to provide a network of post office branches to make
available the services of general economic interest detailed in Annex A ("SGEI").
Post Office Limited is entrusted with the delivery of these SGEI using its network in
accordance with the contractual terms which apply to each service.
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Specifically, the SGEI are provided under commercial contracts entered into by Post
Office Limited and the Government department or body purchasing the service. In the
case of universal postal services, the services made available at post office branches
are ones which the universal service provider (Royal Mail Group Limited) is required
to provide under the terms of its postal service licence.
The entrustment of the delivery of the SGEI set out in this letter to Post Office
Limited does not replace or change in any way contracts and other agreements under
which the terms of the provision of the individual SGEI are made. Post Office Limited
is expected to use reasonable endeavours to enter into contracts with the Government
department or body purchasing the service to provide the SGEI.
We confirm that Post Office Limited's public service obligation extends to
maintaining a network of post offices beyond its optimum commercial size and
providing services of general economic interest over that network from the start of its
financial year on or around Ist April 2012 until its financial year ending on or around
31st March 2015. Additionally, as set out in the Post Office Limited Funding
Agreement dated on or around the date of this letter (the "2010 Funding
Agreement"), Post Office Limited will, as a minimum, be required to meet the
following access requirements:
° Nationally, 99% of the UK population to be within 3 miles and 90% of the
population to be within 1 mile of their nearest post office outlet.
° 99% of the total population in deprived urban areas across the UK to be within
1 mile of their nearest post office outlet.
° 95% of the total urban population across the UK to be within I mile of their
nearest post office outlet.
e 95% of the total rural population across the UK to be within 3 miles of their
nearest post outlet.
In addition the following criterion will apply at the level of each and every individual
postcode district, establishing a minimum level of coverage at a very local level.
° 95% of the population of the postcode district to be within 6 miles of their
nearest post office outlet.
Method of Calculating Compensation
As soon as reasonably practicable following publication of its audited accounts for the
Financial Year 2014/15, Post Office Limited will be required to provide, in
accordance with the 2010 Funding Agreement, a statement (the "Cumulative SGEI
Statement"), accompanied by a supporting statement from an independent financial
adviser, to confirm that the aggregate actual amount of the SGEI Payments made by
the Government to Post Office Limited in respect of Financial Years 2012/13,
2013/14 and 2014/15 under the 2010 Funding Agreement did not exceed the direct
and indirect costs incurred by Post Office Limited in connection with the provision of
SGEI during those Financial Years, including::
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1. all variable costs incurred in providing the SGEI; plus
2. all fixed costs incurred in providing the SGEI; plus
3. such proportion of fixed costs common to both the SGEI and other activities of
POL as is appropriate to be allocated to the SGEI (based on generally accepted
cost accounting principles); plus
4, a reasonable profit in providing the SGEI; less
5. the revenues received by POL from the SGEI.
in each case in respect of the relevant Financial Years.
For the purposes of paragraph 3 above, the fixed costs common to both the SGEI and
other activities of Post Office Limited shall include, without limitation, contributions
to pension funds, interest costs, group central cost allocations, capital expenditure,
contributions to the cost of any employee incentivisation arrangements and the costs
of rationalising the network to maintain a network with optimal coverage for delivery
of SGEI at minimum cost within the funding envelope, in each case whether such
costs are recurring or exceptional.
Recovery of Overpayment
Notwithstanding clauses 5.2 of the 2010 Funding Agreement, in the event that the
aggregate actual amount of the SGEI Payments made by the Government to Post
Office Limited in respect of Financial Years 2012/13, 2013/14 and 2014/15 exceeds
the costs incurred by Post Office Limited in providing the SGEI during those
Financial Years, as calculated in accordance with the above formula, Post Office
Limited will be required to repay to the Government, within 10 Business Days of the
receipt by Government of the Cumulative SGEI Statement, an amount equal to such
excess.
Edward Davey MP
Post Office Limited acknowledges that the instructions set out in this letter are legally
binding.
Signed by )
for and on behalf of Post Office Limited )
Dated ___ October 2010
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SCHEDULE OF SERVICES OF GENERAL ECONOMIC INTEREST
PROVIDED BY POST OFFICE LTD AT POST OFFICE BRANCHES
Category of Service provided Service provided on
service behalf of
1. Processing social Cash payment of state Department for Work
benefit and tax
credit payments to
benefits including state
pension, child benefits and
and Pensions, Social
Security Agency -
the public. tax credits and encashment of I Northern Ireland, Her
benefit cheques. Majesty's Revenue &
Cash payment of benefits and I Customs and financial
the issuing of vouchers to institutions Home Office
eligible asylum seekers.
Cash payment of health Department of Health.
benefits and the provision of
form EHIC benefits
2. Processing of Providing passport The Identity and
national identity
and licensing
scheme applications
application forms for
customers to complete and
return to IPS Checking and
authentication of passport
applications and supporting
documentation
Providing vehicle licence
application forms for
customers to complete and
return to DVLA, and budget
cash savings schemes for
licence fees.
Receiving payment for
vehicle licences and
Photocard Licences, and
checking Photocard
application forms and
supporting documentation.
Passport Service ("IPS")
IPS
The Driver and Vehicle
Licensing Agency
("DVLA")
DVLA.
3. Universal payment
facilities for public
utility services.
Provision of facilities for
payment of electricity, gas,
telecommunications and
water bills. Payment options
include pre-payment and
other budgeting schemes (e.g.
savings stamps).
Financial Institutions
individual utility service
providers, and billing
service providers
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Category of Service provided Service provided on
service behalf of
Provision of facilities for Her Majesty's Revenue
payment of tax bills and and Customs, local
social housing rents. authorities and housing
associations.
4, Universal postal Provision of postal services I Royal Mail Group
service. which the universal service Limited.
provider (Royal Mail Group
Limited) is required to
provide under its postal
services licence
5. Universal access to I Provision of basic Financial Institutions
basic cash and
banking facilities
and Government
savings
instruments,
especially for rural
customers and
those on social
benefits.
community banking facilities
(cashing of cheques, cash
deposit, Post Office card
account and automated cash
withdrawals and deposits)
and cash transmission
facilities (postal orders), in
particular to socially
excluded customers. This
includes deposits and
withdrawals of cash by
businesses local to Post
Office branches. Access to
Saving Gateway accounts
and Government savings
instruments including
Premium Bonds, Investment
Accounts, Children's Bonds
and National Savings
certificates.
including Her Majesty's
Treasury, the
Government-owned
National Savings &
Investments, the
Department for Work
and Pensions, the Social
Security Agency -
Northern Ireland, and
Her Majesty's Revenue
& Customs.
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APPENDIX B
STRATEGIC PLAN
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Delivering a sustainable and relevant
Post Office
Government Funding and Strategic Plan
(2012/13 to 2014/15)
F post %
OFFICE
Commercial in confidence
25" October 2010
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Government Funding and Strategic Plan - Executive
Summary
GOVERNMENT FUNDING
HM Government has entrusted Post Office Ltd to maintain a network of at least 11,500 Post Offices
meeting certain access criteria and through that to provide certain SGEI services. This places a material
financial obligation on Post Office Ltd so, in order for these obligations to be met, Post Office Ltd requires
on-going Government funding. To further minimise the funding required Post Office Ltd also provides
some non-SGEI services the revenues from which contribute to the SGEI funding.
STRATEGIC PLAN
Post Office Ltd has created a strategic plan which addresses the challenges the business faces, and puts
the Post Office network and the ongoing provision of SGEI services on a more sustainable footing. This
document outlines that plan.
The Post Office network is a valuable national asset which positively contributes to communities the
length and breadth of the United Kingdom. A report for Posteomm on the social value of the Post Office
network found that its annual social value is upwards of £2.3B'. However the network as currently
constituted requires ongoing reform if the delivery of the SGEI services and the social value is not to be at
risk over time. In particular Post Office Ltd needs to address the uneconomic legacy network operating
models — and specifically the Subpostoffice model. Not only are the legacy operating models uneconomic
for Post Office Ltd, but also for many agents (due to staffing costs and the lost opportunity cost of retail
space foregone), and most importantly they do not meet the needs of customers in the 21* century. Post
Office Ltd's strategic plan aims to modernise the models to the benefit of Post Office Ltd, its shareholder,
Post Office agents, customers and UK communities
CHALLENGES.
e Customer relevance challenge: the Post Office continues to see accelerating decline in traditional
revenues, intensifying competition and substitution across all our markets. This is leading to a
diminishing sense of relevance among many of our customers for the Post Office brand, which is
further driven by the Post Office falling behind customers’ channel experience expectations.
e Operating model challenge: the customer challenge is in part driven by our network operating models
which are inflexible, expensive, high in fixed cost for Post Office Ltd and also low-yield, high cost for
Post Office Ltd’s agents.
° Financial challenge: While Post Office Ltd has returned to an operating profit level in recent years
(inclusive of Government SGEI compensation), the business has not begun to generate cash and the
outlook is one of decline and ever increasing subsidy unless the business is able to solve the
customer relevance and operating model challenges it faces and also to innovate in growing new
revenue streams.
e Shareholder challenge: Government requires Post Office Ltd to retain its current network size, reduce
its reliance on subsidy, grow revenues and ensure alignment of interest with agents.
THE PLAN
Post Office has put together a holistic plan which addresses the challenges the business faces:
2 Defend Traditional Income: by improving customer experience across all channels, by offering
tailored mails services for SMEs and by extending network coverage for relevant services
2 Innovate and grow new income streams: particularly from making the interface between Government
and citizens more efficient via identity verification and application management services.
2 Modernise channels: by extending opening hours, improving the in-store environment and reducing
queues in the network and through extending and improving the online offering. In the network Post
Office Ltd will introduce new, more flexible, operating models which better integrate the Post Office
"1 HITTP:mww.nera.com/extimage/PUB_Postcomm_Aug2009.paf
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with the host retail business and remove entitlements to fixed pay and compensation from agents’
contracts.
e Address cost base competitiveness: by buying down pay and reviewing the number of Crown Offices,
by driving efficiencies in our support operations and by removing fixed pay in the agency network.
e® Engage our people: Post Office will engage its people and agents by ensuring that focus on
customers is at the heart of the business and via reward structures that ensure alignment of interests.
OUTCOMES
e Post Office Ltd will maintain the network of ~11,500 Post Office branches, the majority of which will
offer extended opening hours and significantly improved customer experience. Post Office Ltd will
also investigate extending its bill payment network significantly through partnerships. In particular this
modernised network will better meet the future needs of Royal Mail and their customers, and in doing
so make Post Office Ltd the mails channel of choice for small businesses and consumers.
e Post Office Ltd will eradicate the loss generated in the Crown Office network through pay rebalancing
and by reviewing the number of directly managed branches.
e Post Office Ltd will transform the franchise proposition for its agents, reducing their cost base,
simplifying their operations, driving new revenue streams and investigating the introduction of
mechanisms for agents to share in the success of a transformed business.
e Post Office Ltd will offer direct channels that account for a material proportion of revenues and enable
a multi-channel experience alongside the network channels providing customers with real channel
choice
e Income will grow by ~£60m during the Spending Review Period to 2014/15 (compared to 2010/41
forecasts) despite some declines in traditional markets and if Post Office Ltd were able to complete
the remainder of its plan in 2015/16 and 2016/17, it would achieve a steady state growth of around
£200m.
e Costs will absorb inflation and the introduction of additional functionality (e.g. CRM and ID Services),
and will become further variabilised.
e Post Office Ltd will deliver a marginally positive annual cash flow exit rate at the end of 2014/15 with
an NSP payment that is in decline (£160m in 2014/15), and if Post Office Ltd were able to complete
the remainder of its plan in 2015/16 and 2016/17, then at maturity NSP would be ~£50m p.a. and
annual cash flow would be positive by ~£25m.
RISKS TO THE PLAN
There are a number of risks to the plan which are covered in section 6 of this document; the five most
critical risks are:
e Pensions settlement not being implemented,
e Failure to obtain State Aid approval,
2 Slower growth in New Government Services income,
e Retail mails revenues lower than forecast, and
e Network programme not being deliverable.
UPSIDES TO THE PLAN
There are also a number of potential upsides to the plan which are covered in section 7 of this document:
e More new Government Services income coming through,
e {nnovation proposition revenues higher than forecast over the plan period,
e Agreater than assumed contribution from Personal Financial Services, and
oe The network programme being delivered under budget.
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Post Office Strategy - Part 1, Government Funding
etwork rernain eart of commu
serving around 20 million customers
ationwide with ~11,500 branches (including
5 "
The Government is clear that there is a continuing social need for a network of Post Offices, providing SGEIs
throughout the country, which cannot be provided by networks other than the Post Office network, or through
internet or telephone-based access. In particular, the dispersed nature of the UK population means that a
commercially optimal network, which would very largely be located in densely populated urban areas, would be
insufficient to meet the needs of many communities.
the Government funds Post Office Ltd to enable the continued provision of SGEts across
larger than the optimum commercial size. In return Post Office Ltd provides a network of
The expansion of the network through the introduction
costs incurred as Basics will only operate in locations
In recognition of tl
a network which is
11,500 Post Offices and adheres to the access crit
of the Basics mode! will not increase the network SG
where it is commercially viable in absence of subsidy.
In addition to the network requirements described above, Post Office Ltd has been entrusted by Government to
provide the following SGEI services (these are set out in the Entrustment Letter and summarised below):
Processing social benefit and tax credit payments to the public;
Processing of national identity and licensing scheme applications;
3. Universal payment facilities for public utility services;
4. Universal postal service; and
5. Universal access to basic cash and banking facilities and Government savings instruments, especially
for rural customers and those on social benefits.
These services are entrusted to Post Office Lid by way of a letter auth: scl by Edward ey MP signed on
25" October 2010 and covers the funding period 12/13 to 14/15 (the “Entrustment Letter"). milar letter from
Pat McFadden to Mike Moores dated 24 March 2010 entrusis Post Office Ltcl to provide these services in
2011/12.
Government does not compensate Post Office Ltd for the full cost of lis SGEI provision and does not
compensate Post Office Ltd for non-SGEI in any way. Post Office Ltd provides non-SGEI products with the sole
purpose of reducing the funding requirement generated by the provision of the SGE! requirements. The:
products include Telephony, Personal Financial Services and Travel. In addition these non-SGEI products
generate agenis pay which would probably have to be paid in order to make the agents economically viable -
this benefit however is not taken into account within POL’s accounts.
Government envisages that it is likely it will continue to require Post Office Ltd to maintain the network and
provide the SGEI services through that network beyond the current funding period and accordingly also require
Post Office Ltd to take reasonable actions to reduce the longer term costs of the SGEIs and the vork and to
increase the amount of contribution generated from non-SGEI services. It should be noted that the actions Post
Office Ltd plans to take to reduce the longer term cost of the SGEIs and the network through which the SGEIs
ate provided ara counted as SGEI cost within the funding period.
POL's accounts are split into SGEI and non-SGEI with direct income and costs aitributed to the respective parts
of the business. Fixed costs are allocated to both paris of the business.
The amount of funding proviced by Government is restricted to the costs of SGEI over this period by EU State
Aid rules. The total amount of funding Government will provide to Post Office Ltd over the period 12/13 to 14/15
is less than the SGEL costs for the sare period and - along with an indicative fo! £ of the quantum of the
SGEI costs - is set out in the following table:
én) 5012713 R0134 I 014715
EI Cost (broken down at Annex 7) (497) (468) (410)
NSP I 20 160
Other Government Funding 200 _ 170
Total SGEI Funding (sum of lines 2 and 3) 440 330
POL contribution to SGEI cosis
(the negative of the sum of lines 4 and 5 equal line 1) 87 53 80 220
* 2011/12 NSP is not new funding and is covered in the 2011/12 Funding Agreement. The total with that Sanding would be £1,335m
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Within the funding period Post Office Ltd will deliver the strategic plan as set out in Section 2 of this document.
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Post Office Strategy - Part 2, Strategic Plan
1. The case for change
e There are a number of factors that combine to create real pressures on the Post Office business
model and the company’s ability to meet Government objectives around maintaining the network and
delivering SGEIs:
External Environm:
e Customer demands are fast shifting due to
technology, lifestyle and widened choices for number of policy objectives with regards to
fulfilling needs; they want enhanced the Post Office including: maintaining the
convenience, better opening hours, high retail network at ~11,500, avoiding any closure
standards and quick tailored service in programme, meeting the access criteria and
obtaining the services they demand from Post delivering the Services of General Economic
Offices Interest
e Markets and competition are evolving much e Stakeholders (special interest groups and
faster, becoming sharper and widening into the MPs) want a reliable network as part of a
key mails pillar, through a mixture of electronic national infrastructure, providing key services
substitution and competitors diversifying their and delivering significant ‘social value’ for the
offerings into adjacent market places, or small UK and vulnerable customer groups
retailers seeking to replicate Post Office ° Post Office Ltd has a legacy of inflexible
service provision and expensive operating models in the
e Agents face escalating costs, Post Office pay network (which work for neither Post Office
reduction and loss of footfall which coupled Ltd nor agents) which are enshrined in
with the recessionary impacts in their retail practice and in contract
businesses are leading to more of them ° Clients (including Government
becoming economically unsustainable. This is Departments) need to be able to access
now becoming acute for larger branches and ‘fast, transaction services’ (requiring high
multiple partners as well levels of network coverage, convenient
e Public opinion does not want to see further locations and opening hours) and / or
closures and wants ‘social value’ maintained. ‘secure, complex services’ (requiring efficient
The national role and social cohesion of the mass distribution channels for face to face
Post Office network remains treasured. services with highly skilled, trusted customer
facing people).
e Overall these drivers combine to create a position where the business has to spend increasing levels
of cash to sustain the network. Even additional cash payments by way of fixed agents pay will
ultimately fail as declining footfall undermines the business models of the agents themselves.
e The challenge to the Mails market is particularly acute. This market accounts for 38% of Post Office
Ltd's income, 46% of agents’ variable pay and 35 to 40% of footfall. Post Office’s market share is at
risk from a number of areas:
e Failure to meet customer and client expectations — customer loyalty is declining largely due to
queuing and to uncompetitive opening hours. This in turn potentially undermines Royal Mail's
commitment to Post Office Ltd as a channel in the medium term,
e Continued electronic substitution across the mails market — Post Office Ltd is the only Royal Mail
Group retail channel in decline currently (compared to direct channels such as On Line Postage),
e New competition — this risk has increased notably with the establishment of competitor networks
and a growing risk of operators consolidating customer mail and entering the Royal Mail pipeline
through account based products.
e The market for personal financial services is also in flux due to the banking crisis and the recession.
While an opportunity exists for Post Office Ltd to extend its personal financial services business -
building on its trust, reach and the foundations of Forward:five2eleven - other entrants such as Tesco
and Virgin are also looking to expand their role and operate in the same trusted space that the Post
Office brand could exploit. It is critical that Post Office Ltd is able to progress its proposition consistent
with market evolution.
e There is also a real opportunity for Post Office Ltd to develop new Government Services which focus
on two key public requirements: firstly, allowing Government Departments and Agencies to reduce
their costs and secondly, providing a physical access channel to direct services for digitally excluded
customers.
e A failure by Post Office Ltd to react now to the challenges and opportunities it faces will lead to
irrecoverable position where the network starts to contract due to uncontrolled closures and wi
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the business has lost many of its customers. In this scenario there is unlikely to be any further
opportunity fo subsequently arrest the decline of the network.
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2. Commercial Strategy
CUSTOMER FOCUS
e The most fundamental issue Post Office Ltd faces is one of customer relevance and accordingly the
strategy has at its heart a relentless focus on understanding and meeting developing customer
needs.
e Post Office Ltd has developed an aspirational vision to become “The People’s Post Office, always
socially and commercially relevant by providing essential services for a fair return”. This vision has in
turn led to three Customer Change principles which underpin all elements of the strategic plan:
e Increase Accessibility: Post Office Ltd will aim to offer customers a wider choice of channels, to
make more products and service available online and on a multi-channel basis, to maintain the
network at 11,500 Post Office branches, to provide more convenient locations with longer
opening hours, and to tell customers about these developments.
e Improve Branch Experience: Post Office Ltd will aim to reduce queues, to provide rapid,
convenient access, to offer the choice of automation suited to customer needs, to maintain clean
branches with high retail standards, to deliver trusted, helpful and informed customer service, and
to provide closer integration with the existing retail offering.
e Enhance products: Post Office Ltd will aim to provide simpler, more customer-friendly and more
easily accessible products, to offer customers the right range of products to meet their needs, and
to ensure products offer good value for money.
MAILS STRATEGY
e The main focus of the mails strategy is to address the issues Post Office Ltd currently has with the
customer experience issues. Much of this improvement will be delivered by the channel strategy, and
the three strategically vital areas for improvement remain:
e Reducing queue times in the Premier and Main Post Offices delivering Mails capacity,
e Extending opening hours to meet the needs of our customers, and
e Improving the in-branch experience of customers, in particular small businesses.
e In addition to the medium term improvements delivered by the network strategy Post Office Ltd will
also focus on:
Queue busting solutions for Premier and Main Post Offices,
Extending functionality and deployment our of Post & Go self service kiosks,
Creating a compelling pre-paid mails range,
Improving collection services,
Developing the mails specialist role,
Developing targeted small business propositions and account management solutions,
Developing and supporting online mails services,
Investigating opportunities as a mails aggregator
GOVERNMENT SERVICES STRATEGY
e Post Office Ltd plans to become the physical channel alternative to Government's own direct
channels for those customers who cannot interact online and for those services that require a
physical touch point.
e This aspiration will support Government objectives around universal access to services, removing
paper and complexity and enabling digitisation of administration, as well as providing material savings
opportunities.
e Post Office Ltd plans to develop and offer three main propositions to Government departments and
agencies:
e dentity and verification: to become Government's consolidated channel for authenticating and
verifying customer identity and credentials,
e Assisted digital applications: become Government's physical exception channel for the digitally
excluded, and
e Data re-use: over time, make customers’ lives easier - and enabling Government's ‘Tell Us Once’
aspirations - by storing and re-using customer consented data.
FINANCIAL SERVICES STRATEGY,
e Post Office Ltd's financial services portfolio remains broad and its strategy contains a variety gf
differing aspirations in the various sub-markets:
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° Personal Financial Services: Post Office Ltd plans to re-focus business around savings and
mortgage products while limiting exposure on insurance, to improve the online offer significantly,
to review the branch capacity and focus, and to renegotiate the relationship with the Bank of
Ireland to deliver a proposition which reflects customer needs and preferred channel choices,
e Bill Payments: Post Office Ltd plans to partner with one or more suitable network terminal
operators or point of sale providers to dramatically increase the number of locations where Post
Office bill payment is offered,
° Personal Banking: Post Office Ltd plans to increase the number of partner banks who allow their
customers to undertake cash withdrawals and deposits in Post Office branches, with an
aspiration to have all major high street banks signed up,
° Travel Services: Post Office Ltd plans to maintain their position in the market,
e Financial Inclusion: Post Office Ltd plans to develop its relationship with ABCUL and individual
credit unions with a view to helping them make their service more accessible.
TELEPHONY & INNOVATION STRATEGY
° Post Office Ltd’s Telephony strategy is to continue to provide fixed line and broadband propositions
that meet the need of the business’ core customers, presenting the proposition as a simple and
competitive alternative to BT and focusing sales activity more on direct channels.
° At the same time Post Office Ltd will:
e Look to improve the customer proposition to keep pace with the market,
° Assess the opportunity for launching a simple mobile offer, and
e Investigate the value of installing '4G' repeaters across the branch network,
° Post Office Ltd will also develop a much greater focus on innovation, setting aside funds to develop
new propositions. In addition to the ‘4G’ and mobile concepts in Telephony and the new Government
Services detailed above, Post Office Ltd will also investigate:
° Online mails services aimed at supporting growth in mails fulfilment,
° Payments solutions which will support the phasing out of cheques, and
e Further self-service solutions.
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3. Channel Strategy
OVERALL NETWORK STRATEGY
e The network strategy aims to:
e Maintain geographic accessibility, network capabilities and social value for the benefit of
customers,
e Undertake a network modernisation programme to ensure customers can access services
through channels that meet their needs and expectations,
e Offer a ~40% increase in opening hours giving greater convenience ,
e Ensure queues are reduced so that 90% of customers are served within 5 minutes,
e Bring the Crown Office network to break even through pay rebalancing and a review of the
number of Crown Offices (within the bounds of contractual obligations),
e Create branch models that are profitable for Post Office Ltd and for Agents,
e Change all agency contracts within the scope of the network programme set out within this
strategic plan to fully variabilised pay and remove the right to compensation on termination other
than for breach of contract by Post Office Ltd, and
e Manage the transition from the current network structure to one that is more fit for purpose and
cost effective in a smooth, customer oriented way which compensates agents appropriately,
minimises adverse public opinion and which takes account of local community views. As part of
this transition, Post Office Ltd will not remove any provision from a community where a service
currently exists other than for reasons beyond Post Office Ltd’s control.
The network will be modernised along the operating model lines set out below in this section. Details of
the purpose, role and product set for each operating model is included at Annex 2.
CROWN OFFICES AND PREMIER BRANCHES
e Post Office Ltd plans to buy down Crown Office pay and to review the number of Crown Offices
retained. Current plans envisage around 140 directly managed branches being retained (subject to
amending certain existing contracts) which would become Premier branches focusing on sales of
personal financial services along with a further 60 agency run premier branches. Post Office Ltd is
committed to moving the remaining Crown Office network to break even position within the funding
period, eliminating an annual cash loss of ~£50m.
MAIN POST OFFICES
° Post Office Ltd plans to modernise 4,000 larger branches, and to relocate 1,000 of these to new
partners better able to meet customer needs.
e Main Post Offices will be better integrated with the host retailers business allowing for extended
opening hours, have excellent retail standards (delivered through refurbishments and through new
partner investments), and will deliver capacity for retail mails and new Government services as well as
continuing to generate personal financial services and telephony leads for direct channels.
e New agents taking on Main Post Offices (including Premier branches) as part of this programme will be
expected to make a material investment in setting up their branches, matching the investment being
made by Post Office Ltd.
POST OFFICE ESSENTIALS, OUTREACH AND BASICS+
e Post Office plans to introduce the Post Office Essentials model across the majority of the remaining
agency network, however within the plan period up to 2014/15 it will only create 2,000 of the planned
6,000 Essentials branches that are planned to be introduced by 2016/17. Around half of the new
Essentials branches will be operated by new agents in new premises.
° Post Office Essentials branches will be fully integrated with the host retail business, freeing up retail
space and allowing for staff efficiencies as well as increased opening hours. This means that Post
Office Ltd will be able to pay Essentials agents on a variable basis only, removing fixed pay from the
network.
e In addition the product range in an Essentials branch will be simplified to remove those manual
products that make up a small minority of the customer demand but disproportionately increase the cost
and complexity of the branch model
e Post Office Ltd also plans to increase the number of Outreach by around 200 locations and to introduce
a Basics+ model in around 750 locations (which offers simple mails, bill payment and POCA cash
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withdrawals only) to ensure that all cornmunities with an existing Post Office service continue to receive
the provision they need but on a more economic basis.
BASICS MODELS
© Post Office Ltd plans to extend its network by adding around 3,000 brand new Basics models. These
will be light touch models providing simple mails and automated bill payment services at point of sale in
locations where demand allows. These will mostly be in urban and suburban locations and will be
critical for Post Office Ltd in targeting mails and bill payment convenience transactors.
e In addition to the Basics model, and as described above, Post Office Ltd will also investigate partnering
with one or more parties to extend its bill payment provision. Potential partners could include the
operators of point of sale terminal networks. Up to 20,000 additional bill payment locations could be
added through this approach.
COMPENSATION POLICY
e Post Office Ltd plan to compensate existing agents for the introduction of these changes along the
following lines:
e Compensation will only be paid to agents leaving the business or to agents who remain on
acceptance of the revised contract terms,
e New contract terms will be introduced on 1* April 2012 for all changing agents. These contracts will
embrace a number of changes including: a move to fully variable pay, the removal of any right to
future compensation and clearly defined customer experience service levels (including opening
hours and queuing performance),
e Existing Agents — i.e. those currently holding a contract for services - will be required accept the
new contract terms at the latest by December 2016 (at which point Post Office Ltd will serve notice
on any who have failed to do so),
2 Compensation will only be paid to existing agents when the new contracts are signed.
Compensation will be paid against a base factor of 18 months pay, with those agents leaving the
business receiving 18 months of full pay and those remaining receiving 18 months of fixed pay plus
18 months of variable pay for those products that are being withdrawn (in the case of Essentials),
e 18 Months has been chosen as the base factor because it closely equates to the re-sale value of a
Subpostoffice on the open market currently and this has been discussed with the NFSP executive.
° The exception to the 18 month base factor rule is that those agents who remain and who operate
Main Post Offices will receive a smaller amount of compensation, referred to as a transition
payment, which is intended to bridge the gap between fixed pay being removed and a material
amount of new Government Services income being delivered. In addition to these transition
payments, these agents will also receive a significant contribution towards the refurbishment which
becoming a Main Post Office requires.
NETWORK IMPLEMENTATION
© The network strategy will be implemented on a semi-voluntary basis using a programmatic approach,
taking best practice from previous network programmes. The detailed plan for the programme will be
built up over time and will take account of the views of the NFSP, local authorities and communities.
© Underpinning this programme of network modernisation are two core principles; firstly, that there will be
no planned closures instigated by Post Office Ltd and secondly; that the Government's stated
requirements for access will continue to be met. This does not mean that branches will not be moved to
new locations in circumstances where doing so strengthens the sustainability of the branch and/or
enhances the service offer to customers, but it does mean that communities who have a Post Office
service at the commencement of the plan will continue to do so. In cases where Post Office closes for
reasons outside Post Office Ltd’s control the company ("Unplanned Closures”) will, as now, take all
reasonable steps to replace that service so that community access to services is not lost.
Where the Code of Practice requires Post Office Ltd to consult on a change then Post Office Ltd will do
so in accordance with the Code of Practice that is current at that time for the purpose of delivering this
modernisation plan. For the purposes of this plan Post Office Ltd has assumed the following
obligations:
e Where an existing Post Office converts on site to either a Main Post Office or an Essentials branch
Post Office Ltd will advise customers of the change 4 weeks in advance, through communications
displayed in branch, and
e Where a new Post Office branch (Main Post Office, Essentials or Outreach) is to be established in a
community - but in a new location that is likely to materially affect the accessibility of that branch for
a significant proportion of customers - then Post Office Ltd will consult on relevant issues for a
period of up to 6 weeks;
°
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The above arrangements do not cover changes to the network that are outside the strategic plan and /
or Post Office Lid’s control, namely Unplanned Closures.
e The programme will be “semi-voluntary” in nature, meaning that those agents who have a valid contract
in place on 1* April 2012 will have some choice as to when they adopt the new models into their
businesses, but that this period will have an end date upon which contract and operating model
changes become mandatory.
« The full network progremme will take five years to complete (from 2042)
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3 to 2016/17), and the current
funding period does not cover the full programme. The table below sets out the broad shape of the
9) for the funding period to 2014/15.
Current Newer
(11888)
CROWNS % 2s 6 5 Fraped nosey
(873) 50 Es o8 253 Lage (Agent operated)
Premiar Beane
POE (3.9806 2015-17)
asic
P Remain POE
(49) Remain Outreach:
oumeach Newb
ai)
PO ESSENTIALS
(2,000)
‘OUTREACH
41,000)
BASK
+ (750)
BASICS (3,000)
DIRECT CHANNELS
° Post Office Lid plan to improve its direct channels further, plans include:
introducing CRM, data management and improved web functionality,
Growing personal financial services and telephony sales,
Extending the range of service offered including introducing direct only offers,
Giving customers more choice around how they interact with postoffice.co.uk,
Providing greater alignment and consistency of voice a
oe eee
ross Post Office’s contact centre channels
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4, Delivery Strategy
TECHNOLOGY
e Post Office Ltd has developed a technology strategy that supports the overall strategy, reduces the cost
of operation and satisfies the demands of the business for new products, services and operating
models. The technology strategy will be delivered through the provision of industry standard solutions
and Post Office Ltd will adopt “off the shelf components” where possible and maximise reuse and value
for money.
2° The main elements of the technology road map will be:
e Need To Do items including: pin-pad replacement, branch counter hardware refresh and Paystation
renewal,
e Cost Reducing items including: core Horizon system development (including preparation for
replacement), introduction of unified branch engineering and rationalisation of branch telecoms,
e Strategic Development items: development of a service orientated architecture service layer,
improvements to management information and business intelligence capabilities, consolidation of
desktop, engineering and hardware contracts,
e Channel strategy supporting: development of point of sale and other systems to support the new
branch operating models, development of functionality to support the direct channel strategy,
enhancements to Post & Go and roll out of more units, development of queue measurement and
management solutions,
e Commercial strategy supporting: introduction of a Customer Relationship Management system,
development of data management solutions to enable Post Office Ltd to strengthen and leverage
our customer, product and transaction information, and the development of functionality and
hardware to deliver the new Government Services propositions.
PEOPLE AND ENGAGEMENT STRATEGY
e Post Office Ltd will deploy a People Engagement plan aiming at ensuring the whole organisation
including agents is aligned behind the strategic plan. This will feature:
e Aclear focus on the customer centricity of the plan,
e The deployment of a clear set of leadership standards and behaviours,
e Areward structure focused on delivering objectives, and
° The development of any gain share mechanism or mutualisation structure required by Government.
COST REDUCTION
° Post Office Ltd will also reduce its cost base in delivering the strategic plan. The total operating cost of
the business will stay materially the same but will absorb inflation and add new channel and technology
functionality within that cost envelope. Key cost reduction drivers include:
° Delivering the changes to Crown Offices will reduce staff costs by ~£60m p.a.,
e Reducing the cost of central and supporting staff through ongoing organisational development &
management and through the introduction of more Single Person Vehicles in supply chain will
reduce staff costs by ~£20m.
© Delivering the new agents contracts will remove fixed pay by ~£110m (while agents retain much of
their income as variable pay, critically, it is then dependent on revenue levels).
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4A,
Milestones and Milestone Test Dates
Milestone
Milestone Test Date
Requirements
1
31 March 2012
Network size and scope:
e
Any shortfall caused by Unplanned Closures, which
POL can demonstrate it is taking steps to remedy,
will be deemed not to be a failure fo meet this
milestone.
‘Network contract:
As demonstrated by the then most recent report
submitted to the House of Commons library
(subject to any updates notified by POL), POL’s
network continues to number at least 11,500
Branches in accordance with clause 12(1)(a) of
the Funding Agreement.
POL’s network continues to meet the access
criteria set out in clause 12.1(b) of the Funding
Agreement.
POL has developed replacement sub-postmaster
contracts to ensure that under the new contract
no sub-postmaster has any right to receive: (i)
fixed pay; or (ii) any compensation payment for
termination of that contract (other than for breach
by POL of the contract or under applicable law).
Annual plan:
SGEI Statements
POL has presented a plan for the Financial Year
2012/13 setting out the steps it will take in
respect of the Strategic Plan (or any variation to
it, agreed by the Parties where material) during
that Financial Year (an “Implementation Plan”).
This Implementation Plan will include:
- POL's annual budget; and
- POL's network strategy, including details of the
commercial rationale for the same.
POL has presented the NSP Statement and the
Supporting Statement for the Financial Year
2010/11.
31 March 2013
Network size and scope:
°
Any shortfall caused by Unplanned Closures, which
POL can demonstrate it is taking steps to remedy,
As demonstrated by the then most recent report
submitted to the House of Commons library
(subject to any updates notified by POL), POL’s
network continues to number at least 11,500
Branches in accordance with clause 12(1)(a) of
the Funding Agreement.
POL's network continues to meet the access
criteria set out in clause 12.1(b) of the Funding
Agreement.
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Page 15 of
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will be deemed not to be a failure to meet this
milestone.
Annual plan:
e POL has presented an Implementation Plan for
the Financial Year 2013/14 setting out the steps
it will take to deliver the Strategic Plan (or any
variation to it, agreed by the Parties where
material) during that Financial Year. This
Implementation Plan will include:
- POL’s annual budget;
- POL’s network strategy, including details of the
commercial rationale for the same; and
- Areconciliation of the steps it took under its
Financial Year 2012/13 Implementation Plan
back to the Strategic Plan, including a
breakdown of changes to the network.
SGEI statements:
2 POL has presented the NSP Statement and the
Supporting Statement for the Financial Year
2011/12.
341 March 2014
Network size and scope:
e As demonstrated by the then most recent report
submitted to the House of Commons library
(subject to any updates notified by POL), POL’s
network continues to number at least 11,500
Branches in accordance with clause 12(1)(a) of
the Funding Agreement.
° POL’s network continues to meet the access
criteria set out in clause 12.1(b) of the Funding
Agreement.
Any shortfall caused by Unplanned Closures, which
POL can demonstrate it is taking steps to remedy,
will be deemed not to be a failure to meet this
milestone.
Annual plan:
e POL has presented an Implementation Plan for
the Financial Year 2014/15 setting out the steps
it will take to deliver the Strategic Plan (or any
variation to it, agreed by the Parties where
material) during that Financial Year. This
implementation Plan will include:
~ POL’s annual budget;
- POL’s network strategy, including details of the
commercial rationale for the same; and
- A reconciliation of the steps it took under its
Financial Year 2013/14 Implementation Plan
back to the Strategic Plan, including a
breakdown of changes to the network.
SGEI statements:
e° POL has presented the SGEI Statement and the
SGEI Supporting Statement for the Financial
Page 16 of
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Year 2012/13.
Page 17 of
§, Financial position
MAJOR AREAS OF SPEND
2 Ltd foret
2 In delivering this strategic plan Post O1
is it will iricur the following:
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Agents comp
buy-out (for those exiting), buy-cown (for those cor
Post Offices} and transition payments (for on-sile Main Post Office
Project costs — this i
costs and ‘egal fees
branches 2
Post Offices.
part of th
nd poi
tof
dev
Direct this is
Man ‘oot
exits and to fund compromise agreements for those staff working
which convert to agency models
Support Restructuring — this is 2
staff and Supply Chain stoff
Need fo Do Technotogy ~ this is
‘Technology developments and inct
reitesh of counter hardware (PCs, screens and periphera's)
‘Total Post Office spend
nsation — this is the {otal amount fo be paid to agents in respect of
erting on-site other than Main
conver
1 amount fo be spent cn unavoidable
je the replacement of PIN pads and the
jons)
s the amount required to detiver the network programme and
inchides staff costs, travel & subsistence, agents raining, consultation & communications
Network Development casts ~ this is the amount fo be spent on the infrastructure of
network programme and includes refurbishment costs for Main
Je positions and materials for Essentials and Basies models
Channel supporting strategy ~ this is the amount to be spenton Post 2 Go
Jopmrent and deployment and queue management & measurement systems
1 amount Post Office will contribute fo the development of its
Diree! channels and includes ihe development of a Customer Relationship
Crown Offices ~ this is the amount to be spent to buy-down pay, cover property
branches
mount to be spent an severance for support
40
20
an
30
100
40
80
800
Post Office Lid will seek external investment from new and existing partners in order io deliver some
commercial elements of the plan.
STRATEGIC PLAN FORECAST FINANCIAL STATEMENTS
» Past Office Ltd forecasts the following business pro’
delivered (the key assumptions which underpin this forece
and cashflow when the strategic plan is
st are included at Annex 3):
Profit & Loss (£1) 20104 «20172 2012S = abtaNia = 2ONaS = 2otsrIG = 2018/17
Income 907 a72 899 923 966 4,025 1,084
» Mails 339 2 331 337 336, 338, 340 MG
» Financial Services 305 303 304 292 294 280
~ Personal Financial Services 36 36 38 37 42 41
= Other FS 290 269 267 262 264 252 249
» Government & ID Services: 144 438 143 187 497 240 284
~POCA 7 69 a7 62 $3 52 4a
~ Other existing services: 74 68 ST 45 41 37 36
~ New seivices oO oO 25 50 160 150 200
« Other (inc innovation) 102, Wy 128 139 184 46a
Total Gosts (4,028) (4,022) (1,026) 4,020) (4,027) 4,028) (1,027)
» Agents Pay (4¥9) {a79) 4493) ($28) {560) (584) (S77)
+ Staff Costs (252) (252) (22a) (194) 4163) (184) (184)
+ Contral & supporting 4298) (284) 4803) (288) a} (287) (254)
« Other Costs of new income 0 o (6) (92) 22) (32) (82)
Ouicomes
+SP 150 480 210 200 460 130 80
+ Operating Profit 234 30 e 102 99 430 432
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Cashflow (£m)
Operating profit
2012 2Bi8hG = Anielie
430 4a7
Working capital 4 10
Capital Expenditure (rangible & Intangible) 63) 0}
Reserves, Provisions & Exeeptionals
Other Cash Movements
Operating Cash tow
Undisiribuled JV profit & Pension crediter ete
Free Cashflow Before Interest an
interest
Tax
Cashflow alter funding
1
STRATEGIC PLAN BALANCE SHEE
Under the strategic plan Post Office Ltd forecast the following balance sheet position”:
Balance Sheet (£m) asat Marti Mar-12 Mar-13 Marta Maris Mari6 Mart?
Assets 118 0 183 483 11 184 497
Working capitat e884) (58) 185) 1838) (1333 £2295 e827)
Pousion Creditor ay faa) ee) ony (aaa (aio)
Gtlent balances 203) (208) eo as wey (ant
Notwork Cash 680 689 ea 702 593 802 695
Cash equivatent investments 78 50 50 50 50
Net Trading Funds Bay tte $8034 gas) ei) A888) en)
Not Assets 436) eis (ce a CD (438) wij 833
Financed by:
got es (a8) (683 3) aay 148)
Capital reserves ee 530 523 532 6 318
436 aaa "486 ai
BASELINE FINANCIAL STATEMENT
e The strategic plan cashflow re} ents a significant improvement on the baseline scenario in which
no improvements are made to the network. £18 of NSP would still fail to stem the deteriorating
financial position of the business and risk Post Office Ltd's ability to maintain the network.
fe 20101 20112 204913 = 201SA §=— OAS = osIg «= 2a teliz
Income gio) BT 867 823 809 802 794
« Mais: 339 3 329 323 316 3it 307 304
« Financial Services: 326 q 906 298 282 282 2 284
~ Personal Financial Services: 32, 36 38 38 42 Az
Other FS: 270 2d4 24d 243 240
« Government & {D Sarvices: 144 423 ita 4106 104
aw 72 Bt 56 St AT
78 ral 62 58 ‘56 4
0 oO oO oO oO 9
« Other {inc innovation) 402, 400 404 102, 403 105
Total Costs (4,027) 4,043) 4.044) ,082) (4,087) 4,078) (4,089)
« Agents Pay {480} (480) (686) (a5) 4282) {464} 4a4ay
+ Staff Costs (282) R61) esr (277) {28a} 4286)
« Central & supporting (298) (301) (302) (302) (299)
» Other Costs of new income oO a {8} (12) (22)
Outcomes
<NSP 150 480 360 350 400 400
+ Operating Profit 33 18 70 72 4126 124
» Free Cashflow (33) {4a} (465) ) (61) i) 43
uumed ot to be fu
13 onwards,
> Pension deficit recovery payments are a
ied by POL aiter 2011/12 and, therefoi
income statement and cashflow from 20
do vot impact its
Page 19 of 2
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Risks
e Pensions settlement: Post Office Ltd has assumed that the Government will take on the historic pension
deficit for the whole of Royal Mail Group as of the 1* April 2012 and that Post Office Ltd’s ongoing
contributions will not materially increase; there is a risk that this assumption proves not to be the case,
in which scenario (where Post Office Ltd has to continue to fund its share of the historic deficit) there is
arisk of up to £75m funding shortfall during the plan period.
e New Government Services Income: Post Office Lid has assumed it will secure £175m of new
Government Services income during the plan period. These services will be publicly procured in line
with all relevant legislation and that may result in Post Office Ltd being unsuccessful in some tenders.
There is, therefore, a risk that this income growth is not secured, or that it is won at lower margin than
assumed. Post Office Ltd’s maximum exposure to this risk is ~£90m. Post Office Ltd will mitigate this
tisk by working with Government and in particular the Cabinet Office to move to pilot on new services
with a number of Government Departments and Agencies with a view to proving concepts and securing
contacts as soon as possible.
e Retail mails revenues: Post Office Ltd has assumed that in return for it delivering the improvements to
the customer proposition for retail mails customers, Royal Mail will agree to an intra-business
agreement (or in the event of separation, a distribution agreement) at materially the same value as the
existing IBA. There is a risk that Post Office Ltd is not able to deliver the level of revenue and
contribution from its Mails pillar assumed in the strategic plan, for instance because Post Office Ltd fails
to deliver the customer service improvements set out in the plan. This could lead to a revenue shortfall
of up £150m within the plan period. The mitigation of this risk is intrinsically linked to the delivery of the
network programme and Mails commercial strategy.
e Innovation: The cumulative income from innovation is £60m from 12/13 to 14/15 which is not yet tied to
specific business cases and if it doesn’t materialise will reduce POL’s profit by £15m. The mitigation for
this risk is that Post Office Ltd will monitor delivery of Innovation benefits and take remedial
management action if benefits are not forthcoming,
e Consultation and the code of practice: There is a risk that if the code of practice arrangements
envisaged for the programme become more onerous than currently envisaged then the costs of
implementation will rise, the timescales for delivering changes extend and the likelihood of legal
challenge heighten. The mitigation of this risk will be that Post Office Ltd will work with Government and
the appropriate consumer body to agree a practical code which gives local communities a proportionate
voice in the network changes.
e Completion of network programme: The network programme is highly ambitious, impacting ~7,500
offices during the funding period, and has three main risks. Firstly the scale of the change (effectively
twice the size of any previous change programme); Secondly the reliance on some new operating
models that have only been piloted and not tried at scale; and Thirdly the ability to find new agents who
will operate the new models. The financial impacts of these are impossible to quantify but any of these
factors could undermine the network change. Post Office Ltd's management team is experienced in
delivering programmatic network change and will track the delivery of the network programme closely
as well as incorporating the learnings from earlier programmes into the implementation plan.
o Lack of NFSP support: It is possible the NFSP membership will not support 18 months compensation
as previously it was paid at 26 months. If the NFSP are able to generate sufficient public opposition to
the change this might undermine the network change or increase the cost of it by ~50% (in excess of
£100m). Post Office Ltd has already begun mitigating this risk by consulting with the NFSP executive
over the changes and involving them in the strategic planning process,
° Public reaction: The British public have demonstrated great attachment to Post Offices and they might
regard the new operating models as a reduction in service. If this opinion generates sufficient
momentum it could, again, undermine the network change. To mitigate this risk Post Office Ltd will
carefully plan and deliver a communications plan highlighting improvements in customer experience,
accessibility and opening hours,
o State Aid approval: If State Aid approval is not obtained for all of this funding over the period (including
working capital and the separate 2011/12 funding request) then it is likely that POL would not be able to
maintain the network at its current size meaning that POL would be unable to discharge the SGEI
obligations that have been entrusted to it or to deliver this strategic plan.
2 Additional obligations on Post Office Ltd: If extra obligations over and above those in this agreement
are placed on Post Office Ltd that have a material impact on Post Office Ltd’s funding then Post Office
Ltd’s financial viability could be threatened. Post Office Ltd will mitigate this risk by continuing to work
with Government on all aspects of the strategic plan to ensure all decisions which might add additional
obligations on Post Office Ltd are made with these costs understood.
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e Underperforming economy: if the UK economy fails to recover at the pace assumed in the plan Post
Office Ltd's commercial operations may fail to deliver the level of contribution towards costs anticipated
in the strategic plan.
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7. Upsides to the Plan
e New Government Services: there is an opportunity for Post Office Ltd to deliver more new
Government Services income beyond planned levels largely by selling the propositions to more
Government Departments and Agencies than the core ones assumed in the plan and by re-using
consented customer data towards the back end of the funding period.
© Innovation: there is an opportunity for Post Office Ltd if one of the Innovation propositions under
investigation can be brought to maturity sooner than assumed and starts to materially contribute to
overheads over the plan period. In order to improve the chances of this, Post Office Lid are assessing
a wide range of potential propositions (both in number and diversity).
© Personal Financial Services: there is an opportunity for Post Office Ltd to deliver more contribution
from Personal Financial Services than assumed in the strategic plan, for example through:
© Improved commercial terms with its partners and providers,
© Higher than forecast sales volumes caused by i) improvements to the sales model and channels
or through, ii) effectiveness of Post Office marketing, or iii) market trends,
e Network Programme: there is an opportunity for Post Office Ltd to deliver the network programme
under budget through:
e Lower than assumed development and project costs,
e More agents opting to convert to new models onsite than assumed reducing the overall amount of
compensation, or
e More Unplanned Closures than assumed, removing these agents from the compensated
population.
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Completion of the programme beyond the funding period
Post Office Ltd’s full plan for the business runs through to 2016/17, with 2017/18 being the first year of
steady state operation.
There are two main elements of the longer term plan that are not completed by 2014/15 and will
continue through 2015/16 and 2016/17:
e The completion of the network programme and in particular the deployment of a further 4,000
Essentials branches, and
e The ramp up of new Government services revenues.
It is critical to the delivery of the strategic plan and to the integrity of the network that Post Office Ltd is
able to offer reasonable comfort to agents at the start of the network programme that the programme
will be completed in full. Post Office Ltd accepts that it is not possible for Government to provide
confirmation of funding beyond 2014/15 at this point.
Post Office Ltd forecasts the following NSP payments in the years immediately beyond 2014/15:
NSP Breakdown By Year (£m)
2015/16 ET 2016/17 2017/18
130 80 50*
*£50m is the forecast steady state NSP once the strategic plan is delivered.
Post Office Ltd forecasts that it will spend £105m in each of the years 2015/16 and 2016/17 on
completing the network programme. This will allow Post Office Ltd to complete the implementation of its
proposed end state network, made up of the following operating models:
Premier branches: 200
Main Post Offices (large): 1,500
Main Post Offices (medium): 1,300
Main Post Offices (small): 1,200
Post Office Essentials: 6,000
Outreach and Basics +: 1,750
e Basics: 3,000
ooo 0
Aunex 1 ~ indicative SGEI Cost Forecast
Agreement:
ing table sets out Post O1
e Lid’s indicative forecast of the
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services
Inceme
Ce
Direct
Other operating costs
Capex
21263
636
BO1N14
637
¢
Exceptionals (180)
Pension deficit cr)
Total costs 4,084) (4,068)
Net Income/{loss) 4449) 24)
Reasonable Profit 48 48
Net Incomelloss) 97} (468)
Non-SGEI services
income 248 229 234
Costs
Direct 120) (43)
Other operating costs 61) 8)
Capex 33) 2)
Exceptional (48) 5}
Pension deficit é) ®
‘Total costs (274) {288}
Net Income/{loss) {42} ey
Contribution 99 90
Total » SGEI and non-SGEI products
Income a4 866 908
Costs
Direct (387)
Other operating costs 602)
Capex (126)
Exceptionals G8)
Pension deficit 3) 6)
Total costs (4,339) 1,328) _
Wet Income{loss} - (430) 52)
Note: Income iines exclude profit share and cost lines Include network cash interest cos!
Page 24 of
Annex 2-~ Network operating models
8
‘The network strategy contains
delivering Post Office services
thelr roles:
to dif
fi
a number of new operating models,
‘ent soris of communities. The table below sets oui the models and
each of which plays a di
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vent role in
LARGE
SMALL
POST OFFICI
ESSENTIALS
~ Purpose: Mainbvanch
‘tideg Personal Financ
Senices eaies, acl
the fon ofc of
‘Government aot the foes
paint of Bue sted in
apr cles midiey
Toons aur shop windy
= boeatieneomimunity:
iy canes, high Foca
= Customers: Full nge.of
teffeent, customer.
focused environment sth
xceiont ta standards,
prcst spocatste and
igh fais autocration
cach dthating
I hitrange posits
pps
Losationtsmamenig:
ban subsrbas,
fea
Customers: ds rng
ot products and soniss
os
doated PO:
th igh a stants
Purpose: tovecos,
Yarabfocosl aossss to tha
fess ih enhanced
fustosar convenience and
‘pering house
« Location'communty:
and seh
eter urs fr urban
range of ware Pest Oftew
prolos and servis
tbat and push areas ver
the rela counter
OUTREACH T
BASICS+
Purpose: Across to Post
Ofc servzes inured
Fosations in wich other
rmedsis are impractical or
Lecstiontccmmanity:
Rurat
Customers: socatand
POST OFFICE
BASICS
Purpose: Expansion of
nate © prove
Feros bt
pay and out of hours
ocess fomeat potest
conpabtive treats
= Losstioveommuniy:
fefiabi secees oa broad
protets and sence
‘irban dauburaan,
‘extended pours aad
eeaneaionss
‘Customers: Convsaiont
cess fo Pest fhe Bie
pay and sipie male
Sservoes over the reat
Counter in wan areas,
‘Alea geod for Royal Wal
fetes husiness
+ Customers: Comsat
BILL PAYMENT
POINTS
Puspeca: Commariah
iy was paren
‘guration fo capture
‘real sharefeut of
hours acc pe-py ti
paymeet
Locatieatcanmuniy:
Uaian feubatan,
axed ours ane
‘sosnee 9 Posh
pay ssreces over
feted i altreaner of
convenience and
Supaumadal sexes
Each model has a slightly different product and service portfolio designed to meet differing customer and
community needs ~ these are described in the table below:
IAIN POST OFFICE:
MEDIUM SHALL
PRENIER LARGE
ESSENTIALS.
‘OUTREACH
BASICS I
1600 I 4
200 300 I 4,200 4,000 750 I
Key PRODUCTS I
“Reped rn rs 7 rv v
= hiais above Gig ana PEWaeles YY ’ ¢ 4 %
Phase Y oY YY x 7 x =
Local Coteet doi toe even Y ssa, be proven *
eb Y Selected onsite POes ® »
ne Y “est. tobn pen x x
% 4 y -
"apa v ¢ v a 4
E> poe a (oF) YoY oy a 7 x
GPS rors tabrenan sain) teat gnataion = * x
[eg = Postal oars Yogs v y / »
7 bureau Pre-onte YoY vg “ “ z
i: ~ Euro otureDotaroreygamy, % Monaygram tered by core ®
Fe = Fut bacau on comand YY , esters by ee ®
Foo nea YoY Y 7 x
I x Becatteavmerss Poca «Gi f Yoo v y A a
FL Cariax 4 oY ‘s tromere by core ;
F110 sPacsports /Driversticansa V(+HA8I GAB & (Soma v e Y x
Ae
° The 3,950 logacy model Subpostofices which Post Office Lid plan to convert to Essentials jn 2015/16 and 2016/17 would
mostly have ihe same product mix as small Main Post Offices
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Annex 3 — Key Planning Assumptions
Funding
e State aid clearance sought and obtained for all required elements of plan
° Government provides funding in accordance with the Funding Agreement
e Funding will not be subject to tax
e No net VAT impact from separation
Financials
No pension deficit recovery payments are assumed from 2012/13 onwards
e Inflation is included at 3.5% pa for staff costs and 2.5% for other costs. Interest rates rise, to 3.8% in
2012/13 and 4.3% subsequently
e The UK economy will not change materially throughout the plan period with modest GDP growth
e Network Subsidy Payment will be received as revenue
Commercial strategy
e The Mails IBA contract at materially the same value
e Mails simplification agreed with Royal Mail to enable pre-paid parcel solutions
e There is no strike action within Royal Mail
e Postcomm approval for increase in mails prices is forthcoming in line with Royal Mail October 2010
application to Postcomm
ABCUL/credit union costs and income excluded from plan
There will be no net financial impact from renegotiation of the current joint venture deal with Bank of Ireland
affecting Personal Financial Services over the current plan period
No major changes affecting Post Office Ltd's travel services (in particular travel money and travel insurance)
Post Office Ltd sign-up two of the remaining big three banks to its cash withdrawal services
There is no net financial impact from signing up a partner in Bill Payment over the plan period
New Government Services initiatives will provide Post Office Ltd with ~£175m income over the plan period
with a 25% contribution to fixed overheads
POCA revenue will decline in line with the forecast provided in the POCA contract
e Innovation income will be £60m over the plan period with a 25% contribution to fixed overheads
oece0e oe
°
Network and Delivery strategy
e Government will continue to mandate a network of at least 11,500 branches which meet the access criteria
and that there will be no mandated programme of Post Office closures
e° New model propositions will be sufficiently attractive to prospective agents to enable Post Office Ltd to
recruit the number of agents assumed in the plan; and new Main Post Office agents will match funding for
their branch refurbishments,
e Project cost assumptions are based on previous management experience of change programmes.
e The programme will be “semi-voluntary” in nature, meaning that those agents who have a valid contract in
place on 1° April 2012 will have some choice as to when they adopt the new models into their businesses,
but that this period will have an end date upon which contract and operating model changes become
mandatory (no later than the end of December 2016)
° The National Federation of Subpostmasters supports the compensation policy, in particular the base factor
being at 18 months pay
° The changes in the Crown Office network, particularly the staff pay buy-down and franchising are achieved
without industrial action
o The level of Unplanned Closures is 150 per annum
° The proportion of off-site conversions is 25% for Main Post Offices and 50% for Post Office Essentials
e The full network programme is communicated to agents at the outset of the programme, and funding will be
available for the last two years of the programme (15/16 and 16/17) which fall beyond the period of this
funding agreement
e There is no judicial review or other legal challenge to the programme that delays or halts implementation
e There is no change in relevant Government policy
e The Code of Practice is no more onerous than currently and there will be no consultation for on-site
conversions
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e The cost of services provided to Post Office Ltd by Royal Mail remain materially the same and there will be
ho material financial impact on Post Office Ltd as a result of the separation
e The cost of any agent gainshare mechanism is excluded