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To: Secretary of State and Jenny Willott
Purpose: You are both meeting the Chairman and Chief Executive of Post Office Ltd
(POL) for them to update you on progress to deliver the strategic plan that was agreed
last year, and to raise any other current issues.
Attendees: Alice Perkins (Chairman, Post Office Ltd); Paula Vennells (Chief Executive,
Post Office Ltd); Richard Callard (Shareholder Executive)
Timing: Scheduled for Wednesday 5 March, between 13:15 and 14:00 in your BIS office.
Background and progress made:
1. Since 2010, HMG has committed nearly £2bn to support POL in maintaining and
modernising the post office network. £1.34bn was announced in 2010, and covers the
period to 2015. Following last year’s agreement with POL’s strategic plan, HMG is
providing a further £640m funding for the period April 2015 to March 2018 to enable a
network of at least 11,500 branches to be maintained.
Network Transformation
2. These commitments are allocated to fund: (i) the transformation and modernisation of
the post office network (e.g. through the Network Transformation (NT) programme
and investment in IT and commercial infrastructures); and (ii) continuity of service
provision across the network while the transformation and modernisation initiatives
are delivered.
3. £20m of the most recent £640m commitment will be allocated to setting up an
investment fund for Community post offices — this makes Government support
available to these branches for the first time and is important for a population of post
offices that are typically the last shop in their area.
4. The £640m funding enabled POL to introduce changes to NT which address
weaknesses identified during the first 12 months of the strategy’s implementation.
Since November 2013 POL has written to all subpostmasters, explaining what the
changes mean to them and the options they now have available, and to date
subpostmasters have also completed a retail survey that has pooled a significant
amount of management information (e.g. on opening hours and retail sales) that will
help POL to plan the implementation of NT more effectively. Importantly these
changes were developed with and have the support of the National Federation of
Subpostmasters (NFSP) — this was not the case with the “old” version of NT.
5. NT is central to POL’s strategic ambitions. It reduces and makes more flexible POL’s
high fixed cost base, making the company more financially sustainable. It improves
branch environments and extends opening hours, helping post offices to retain and
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win customers and clients. Critically it also makes the post office network as a whole
more sustainable and stable (e.g. because individual branches themselves are more
viable) which reduces the need for taxpayer subsidy. Together the benefits of NT help
to create a business that could, subject to stakeholder support, be mutualised.
6. As of 28 February, POL had secured contracts to convert 2,906 branches (35% of the
convertible network) to the new NT operating models, and 1,754 branches have
converted (21% of the convertible network).
Relationship with the NFSP
7. POL’s relationship with the NFSP (which represents the vast majority of
subpostmasters) has improved significantly over the last year. This is in part due to
your request that POL works with the NFSP on the proposed changes to NT, but also
due to closer engagement between POL and the NFSP on other business-as-usual
matters. This brings considerable benefits, including helping POL to implement
changes to NT and in relation to more productive day-to-day interactions.
8. As a result of NT the NFSP is currently facing up to the challenge presented by a
network with fewer standalone subpostmasters and therefore a smaller membership
and less influence (e.g. NT will see more post offices operated by existing retailers
who are less likely to sign up to membership). POL recognises this however it also
accepts that there is a long term role for a body that represents people that deliver
post office services. It is therefore working with the NFSP to see if the NFSP has a
role to play in this future and how a relationship between two closely aligned
organisations might work (e.g. with the NFSP as a trade association).
Mutualisation
9. POL has made steady progress towards mutualisation over the past 18 months since
BIS published its response to the public consultation on POL’s mutualisation. This has
included convening a Stakeholder Forum to develop a “public purpose” of the post
office — this is a “purpose” around which a mutual can be built and is a key milestone
on the road to mutualisation.
10.POL is planning to publish this “public purpose” soon, alongside a list of other
milestones that mark a path to mutualisation. This approach was agreed between
POL and Jo Swinson in November when the new funding was announced and this is
an important opportunity for POL to signal what has been achieved to date and the
steps it will be taking in the future.
.It has been envisaged that this would be published in March / April and your strong
encouragement for POL to continue to work to this timescale is important. This is an
important signal to stakeholders — many of whom have questioned POL’s commitment
that POL will continue to make progress towards mutualisation. In addition, this timing
would be aligned to Jo Swinson’s statement in the House of Commons on 27%
November which stated:
1
“Creating a financially sustainable network will be key to delivering a Post Office that
can be mutualised. Significant progress has been made by the Post Office and its
Stakeholders already, and that will be boosted by the Government's funding
commitments today. The Post Office will shortly publish further details of the steps it is
taking to build a mutual future.”
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Issues POL may raise:
12.In addition to updating you on their recent progress, Alice and Paula may choose to
raise the following topics, which are all subject to continuous and ongoing
engagement between the ShEx team and POL.
Revenue from Government services
13.You and Jenny continue to act as champions for POL across Whitehall, but Paula
may flag a risk to delivery of POL’s strategic plan if certain existing Government
contracts are renewed on weakened terms (e.g. POCA with DWP) or if opportunities
that have been identified are delayed (e.g. ID assurance and assisted digital with
Cabinet Office). You can assure POL that you continue to support their ambitions to
be the front office of government, but that they must continue to show they represent
value for money for the taxpayer by engaging commercially with Departments.
Revenue from mails
14.Mails revenues will be lower in 2013/14 compared to 2012/13, and POL may seek to
provide an explanation by suggesting that the fall is a result of poor pricing policy by
Royal Mail. It would be helpful for you instead to draw attention to the need for POL
to prepare fully for the mid-term review of POL’s contract with Royal Mail, which will
take place in 2016/17 — e.g. by being innovative and customer oriented and by making
sure POL delivers the transformation of the post office network. It is possible that
Royal Mail might seek to renegotiate some contractual terms in 2016/17, which could
have a material impact on POL’s financial performance.
The integrity of POL’s ‘Horizon’ accounting software
15.All in-branch transactions performed by subpostmasters and POL staff are recorded
by POL’s accounting software, known as ‘Horizon’. Shortly after joining POL and in
response to low-level but persistent grumblings by a small number of former
subpostmasters, Alice commissioned a review of the integrity of the Horizon system.
An independent report, published in July 2013 found there were “no systemic” issues
with the software, but made recommendations about POL’s processes for handling
financial irregularities in subpostmaster accounts.
16. Following the report, POL has worked with a group representing the former
subpostmasters and the report’s author (a small firm of forensic accountants called
Second Sight) to establish a working group under an independent Chair that has set
up a mediation process for former subpostmasters who feel wronged by the Horizon
system. The working group has received 147 submissions, but has not yet agreed its
terms of reference. POL may choose to raise this with you; however you should avoid
being drawn on the matter at this stage as HMG involvement risks the independence
of the working group, and involves Ministers in an operational matter. Further specific
advice will be submitted to you shortly.
Business transformation
17.As part of its strategic plan POL will be undertaking a review of its business model to
ensure that it has the right structure to deliver its strategy effectively. Given the
marked change in POL’s business and its network over the last 25 years this is likely
to lead to a number of recommendations suggesting a restructuring of a variety of
business processes (e.g. supply chain, finance function, IT delivery, network
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management) — together these will not only help to reduce costs but they will also
make sure that POL is structured for a growing future. It is important that POL takes
the right decisions following this review, and to meet its targets some of these
decisions are likely to be difficult to make (e.g. challenging long established business
practices). All options are currently being considered and you should encourage Alice
and Paula to wait for the review to end, and then to consider the commercial, strategic
and political costs and benefits of each option. It would also be recommended for
them to engage with the ShEx team to ensure plans are deliverable and assessable.
Copied to: Perm Sec MPST; Spad MPST; ShEx Post Office team; Anthony Odgers
OFFICAL — COMMERCIALLY SENSITIVE
Speaking Notes / Questions to ask:
e Securing £640m funding for the period 2015 to 2018 was a
major achievement. This is a sign of this Government's
commitment to the Post Office
Funding ae . .
In turn, it is absolutely vital for the Post Office to deliver on the
agreed strategic plan, including delivering Network
Transformation to time and budget.
e I was very pleased to see the NFSP supporting the reforms of
the Network Transformation programme. I hope that this
heralds a new and productive period in your important
Network relationship with the NFSP and subpostmasters.
rans-
formation e Recent progress under the Network Transformation programme
has been encouraging; can you assure me that lessons are
being learned that will ensure the rate of branch openings will
be improved?
Mutualisation
e This is an area that is very important to me and my Ministerial
colleagues. Jo Swinson announced last year that you would
publish an update on mutualisation shortly. I am looking
forward to this in the coming weeks.
« What do you see as the key steps towards mutualisation over
the next twelve months, and in the longer term?
I continue to lend my support to the Post Office’s ambitions to
become a Front Office for Government. However, in the context
[If raised] of continued budgetary restraint, it is incumbent on the Post
Government Office to demonstrate that it is delivering value-for-money for
Services the taxpayer.
Revenues e Jenny and I continue to act as the Post Office’s “cheerleaders”
across wider Government, but it is crucial that the Post Office
starts thinking of the Government as a customer.
* The Post Office is an independent business that has a
commercial agreement with the Royal Mail. The Government
[If raised] cannot be involved in commercial matters, and it is your
Mails responsibility to negotiate effectively and in your company’s
revenues best interests.
As a regular shareholder, the Government has no special
influence over the Royal Mail.
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If raised e I understand that you have established a Working Group with
Horizon an independent Chairman. I am conscious that this working
accounting group must be seen to be independent, and cannot comment at
software this stage.
e I understand the importance of transforming and modernising
[If raised] the business. I would urge you to consider the range of skills
Business required to deliver the necessary changes.
Trans- e And to work closely with my officials to ensure that all options
formation
are appropriately assessed, and are deliverable from a
commercial, strategic, and political perspective.
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