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UK Government Business, Energy
tnvestments OFFICIAL-SENSITIVE: COMMERCIAL & Industral Strategy
Date: 21 July 2020
Director General: Charles Donald (UKGI)
Lead Officiat Alex Cole (UKGI), Eleanor Brooks /Beth White (BEIS)
Lead Official Telephon
Recipient To Note / Comment To Approve / Decide
Permanent Secretary x
Minister Scully x
Post Office Limited (POL): Quarterly update
Summary
1. This quarterly update is for your information. Officials will meet POL for the formal Quarterly
Shareholder Meeting on Monday 27 July.
Timing
2. Routine.
Overview
3. POL’s operations are beginning to move towards a new normafollowing the significant impact of
Covid-19, as the numbers of branches closed or operating reduced hours hae stabilised. POL’s
financial performance has beaten the budgetagreed in May as the recovery has begun earlier
than forecast, although POL is still projecting £9m trading profit for the year (vs. E90nforecast
pre-Covid-19).
4. On litigation, the Historical Shortfalls Scheme has been launched and hs had 745 applicants so
far. The CCRC has referred 47 of the 61 criminal cases to the Court of Appeal. The Independent
Review's terms of reference have been announcedand Chair selection is underway. The BEIS
Select Committee's interest remains although it has not yet invited Minister Scully/BEIS/UKGI
officials to give evidence on the Horizon case. The All-Party Parliamentary Group (APPG) on
Post Offices have also asked NickRead and Minister Scully to attend, probably in September.
5. POL has kicked off its preparations for the Spending ReviewSR) and will be putting a new 4-
year plan to the Board in the coming weeks (forming the basis of its SR reques. An opening
proposal of a £350m equity injectionplus a separate postmaster compensation schemeto deal
with any overturned convictions has been provided by POL These will underlie POL’s formal
proposal, which officials will challenge during August ahead of submitting a full business case in
September.
Background
6. As Permanent Secretary and thergore POL’s Principal Accounting Officer, you are accountable
to Parliament and for ensuring that arrangements are in place for effective shareholder oversight
of POL. You are responsible foradvising the responsible Minister on POL’s objectives in light of
BEIS's wider strategic aims and priorities an appropriate allocation of BEISs budget for POL in
light of BEIS’s overall expenditure prioritiesand how well POL is achieving its strategic objectives
and if it is delivering value for money.To support this, the BEIS/UKGI Post Office teams provide
quarterly updateson POL and hold quarterly shareholder meetingswhich Minister Scully usually
attends, although he will be unable to attendthe next meeting on 27 July).
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Covid-19
7. POL’s leadership, teams and postmasters have performed well during Covid-19, delivering
continued post office services throughout the lockdown period. POL was very proactive in its
handling of issues during the Qvid-19 lockdown, particularly regarding'self-help’ for postmaster
remuneration and communicated well with BEIS on all Covid-19-related issues. Minister Scully
also sent a letter to postmasters and postal workers to thank them for their efforts.
During the lockdown POL reported that they were not able to meet the minimum 11,500 branch
requirement or the network access criteria because of closures due to Covid-19. BEIS Ministers
therefore agreed to waive these requirements for 3 months, to allow the continued payment of
the next quarterly installment of the network subsidy to POLas payment is normally dependent
on compliance. A further three-month waiver was agreed on 25 June but onlyto relax the 11,500
minimum branch number to 10,500 as POL still have 839 branches closed (down from ~1000
during lockdown). Officials have made clear to POL that they need to continue to make efforts to
reopen branches where practical] keep BEIS informed of progress and minimise the impact of
branch closures, especially in under-served areas.POL also required waivers related to the
Working Capital Facility(see next para).
. Financial support update. Covid-19 reduced the revenue and cash generated by POL which, in
turn, reduced POL’s security on the BEIS Working Capital Facility (WCF). POLs forecasts
expected a breach of the security headroom for several months andso, on 30 April, aone-month
waiver (later extended by one month)of this event of default was granted by HMG while officials
worked with POL to secure a longer-term solution. In the event POL did not ultimately breach
and with evidence of a recovery happening earlier than originally forecast, the waiver expired at
the end of June and was not renewed. POL do not anticipate headroom breachesfor the rest of
2020/21 (unless there is asecond lockdown or slower recovery; officials will closely monitor this.
Legal [Subject to Legal Privilege]
10
11.
.‘Sparrow litigation. Media and parliamentary pressure has continued over the past quarter,
including numerous PQs and a BBC Panorama special on 8 June accompanied by a BBC R4
mini-series that ran from 25 May — 5 June. Officials are also aware of a complaint to the
Parliamentary Ombudsman alleging maladministrationby BIS/BEIS which is in progress (a
crowdfunding target was reached on 14 July by the distice For Subpostmasters Alliance (JFSA)
to prepare the paperwork).On 10 June, Minister Scully announced via an Urgent Question the
draft Terms of Reference for the Independent Review These received a mixed reception BEIS
has continued to work toidentify a suitable Chair The new Chair of the BEIS Select Committee
restarted their inquiryinto Horizon that was delayed due to Covid-19and wrote to the current and
former POL CEOs, Fujitsu andBEIS requesting written evidence, all of whom repliedby the end
of June and we expect an oral session to be scheduled in due course.On 1 May, POL launched
the Historical Shortfalls Scheme which has been receiving a steady seam of applicants (745 by
9 July). The application window closes on 15 Augustand POL has committed to coming to BEIS
for spending approvalonce they have finishedquantifying the claims.
By 3 June, the Criminal Cases Review Commission (CCRC)decided to refer 47 cases from
POL’s applicants to the Court of Appeal It is still considering a further 7 cases.On 8 July, the
Court of Appeal approved POL's request for an extension to respond to these referrals by 4
October. On 28 April, the POL Chair wrote to BEIS confirming POL were reviewing c.900
historical prosecutions in which evidence from Horizon was used to secure the convictionThis
was provided alongside a worst-case estimateof the financial exposure to POL should clai
materialise. Legal Privilege
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POL is considering how the business could be
structure internal governance arrangementsto make sure this work is properly resourced and to
free up management time (a proposal is going to the 28 July Board) and we are working up a
proposal for a compensation scheme for postmasters who get their conviction overturneds part
of the bid into the upcoming Spending Review. For this workUKGI have been engaging with
colleagues across governmenton similar compensation schemes to help guide POL's thinking
and apply lessons learned.
' Legal Privilege I
4 Year Plan (4YP) and Spending Review (SR)
13. Strategic work and 4YP. Ahead of its July Board away day, POL has been working on a strategic
review of its network and its main business units. This will look athow it will respond in the
medium-term to the impact of Covid-19, with separate strands of work on reviewing the network
size and shape (Project Neo, see para 20), the services provided in branches, the approach to
cash, insurance, identity and the relationship with postmasters. This will be brought together into
a coherent 4YP to be assured by KPMG that will be the foundation of POL’s SR bid. We will
update you with the key outcomes of the strategic review and how the 4YP is shaping up once
POL has presented its plan.
14.SR. Informed by the 4YP, POL will develop its SR bid. There had been a presumption within
HMG that POL would be financially self-sustainable in the coming years buprogress has been
slower than hoped for in reducing the cost base (mainly due to litigation costs reducing the ability
to invest elsewhere) The impact of Covid-19 on POL makes this even more difficult. An early
proposal from POL at the start of July asks for £350m of equity funding for the SR period(to
cover both investment funding and network subsidy) as well as the rolling over of its WCFs.
Officials have requested more evidenceof the need for this funding through detailed profitability
and cash flow forecasts, as well as options on the size, nature and timing of theproposed
funding and a path to future self-sustainability We expect to see a draft of this for POL’s July
Board. Officials will then challenge this during August before submitting abusiness case in early
geography ‘of the uncommercial network [imrevevant year, largely in rural areas in the North and
Scotland) funded by the current subsidy. POL’s WCF expires in March 2021 and an extension
needs to be agreed by the end of 2020 so that POLs 19/20 accounts can be signed as a going
concern. We will update you alongside the 4YP once we have more information on this A
separate business case for the litigation compensation scheme will be submittedas discussed in
para 11.
Key business issues
15. Telecoms Sale — Market Sensitive Information POL undertook a strategic review of its Telecoms
business in 2019 that led to the decision to sell the business if the right price can be obtained.
Although it drives c.£150m of revenue and c.£25-30m of trading profit per year, it requires
significant investment to be competitivein the future. A new contract to secure the back-office
supply via TalkTalk (to replace Fujitsu) was completed on 20 Julyand allows POL to undertake
and complete a sale process by 31 March 2021 POL intend to formally launch the sale in
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August, after it was put on hold in March as Covid-19 soured market appetite POL and its
advisors are preparing analysis of a reserve price and compliance with MPM and a submission
for noting this will be with you ahead of the sale process launching.
16. Royal Mail (RM) and Mail Strategy - Market Sensitive Information POL’s 10-year contract with
RM is the source of around a third {1 of POLs revenues and has been in place since the
separation in 2012. POL and RM have been negotiating a new 10-year contractwhich has been
delayed due to Covid-19 and a change in RM leadership, buthave agreed on the heads of
terms. POL and RM are expecting to finalise the contract in August while the signing of this
contract does not require shareholder approval we will write a for information submission of the
key terms once they are finalised.
Government Policy
17.Verify. Verify is the Government programme providing virtual identity services Numbers of
providers have reduced over time as Cabinet Office have reduced paymentevels. There are
only two remaining digital identity providers: Digidentity as a sole provider and POL with
Digidentity providing the technical capability GOV.UK Verify volumes have surged as a result of
Covid-19 redundancies generating more Universal Credit applications, and the numbers are
likely to continue growing as the crisis deepens. DWP are encouraging customers to use online
routes. This situation has placed immense operational and financial pressure orboth POL and
Digidentity. Recog situation, Cabinet Office (CO) have offered to increase pricing for 12-
months (from; IRRELEVANT ‘per identity payment) to cover the direct costs of identity account
creation. Digidentity have accepted this deal and committed to maintain service continuity to CO
for the year ahead, this means that in the shortterm POL agreed to provide Verifyfor the next 12
months at a small net loss. POL have also encouraged DWP toaccept a lower standard of
checks for those customers who can’t achieve the higher standard of identity verification and to
making use of POL branch network for those customers who can’t get through the online
process.
18. Post Office Card Account (POca). DWP are in the process of phasing out POcawith the aim of
moving existing POca customers onto alternativeoptions (basic bank accounts or payment
vouchers). They implemented a so-called POca Hard Stop, meaning tlat Post Office have
stopped accepting any new POca applicants since May 2020 Due to Covid-19 DWP has had to
suspend conversion lettersto POca customers to encourage them to migrate away from POca
and onto mainstream banking products inMarch. Instead DWP and POL had to refocus their
efforts during the pandemictowards supporting shielding customersand allowing them to access
their benefits, pensions and cash. POL was really proactive in this space and did an enormous
amount of work with DWP to set upthe fast PACE and Payout Now, two cash delivery services
designed for self-isolating or shielding customers that require cash.
19.POca conversion letters and all conversion type activity will restart in August As a result, it
seems unlikely that DWP will exit the POca contract by November 2021 as was planned and
they are in conversations with POL around extending thePOca contract for one or two more
years. Formal contractual negotiations between DWP and POLwill be held in September with a
view to agreeing an extension by November 2020.
20. Project NEO and Directly Managed Branctes (DMB)'. When Nick Read joined POL as CEO in
late 2019, he initiated a review of the business to inform his vision for the company. Project Neo
' DMBs are branches operating in profitable locations, with unprofitable models as their share of overheads outweighs any marginal
contribution. DMBs arethe worst-performing branches in the networkgenerating overall losses of £46.6m.
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builds on this by focussing on the future of the business and the network, taking into
consideration the likely long-term impact of Covid-19, established and emerging trends in
customer demand and the rapidly changing competitive landscape POL faces across many of its
markets. Given the critical importance of the network, this work will form an important part of
POL’s future strategy and underpin their SR bid
21.Project Neo is expected to conclude before the end of the year. Its recommendations will be
reviewed by POL’s Board and discussed with Government as POL's Shareholder. It is expected
that Project Neo will recommend network changes and increasing flexibility in the branch
network. In addition, the franchising and potential closure of DMBs are also expected to feature
in POL’s plans. This will be an incredibly sensitive issue. Franclising of post offices is a long-
standing programme that the government has supported because of the benefits it can bring to
POL, but it is unpopular with the unions (CWU in particular) and with some in Parliament
Closures would provoke a much stronger negative reaction as there have been no formal
closures programme since 2009. CWU is already lobbying on this issue and Marion Fellows,
Chair of the APPG on Post Offices has written to Minister Scullyto ask about DMB franchising
and closure plans. We have asked POL to write to us outlining their plans for the DMB network
by September before taking any final decisionsand advise them to present their proposals within
the context of their overall vision for theshape of the future network
Financial and Operational performance -
22. Trading update. POL achieved a trading loss of j="; in the first two months of the 2020/21
financial year. This performance was ahead of budget by nessun! and was due to trading showing
signs of an earlier recovery than expected.POL, however, remains cautious of future trading
conditions due to the possibility of a lockdown if there is another Covid-190utbreak. Mails and
Banking Services were above budget with weaknesses experienced in Bill Payments and
Insurance. Annex A has more detail.
23. Investment spending. POL finalised its investment spendingplans for 2020/21 at the Board in
June. These were assessed for appropriateness by KPMG and this review showed that POL had
reduced discretionary spending by as much as it could without harming the business in the long-
term. POL are forecasting to spend: , all of which will be self-financed. The largest spend
item is of Group Litigation costs which includes legal fees, the costs of the Historical
Shortfall Scheme but not any compensation associated with any convictions that might be
overturned. Total in-year benefits from investment spend are now expected to be jin with
the largest benefit drivers beingstaff redundancies andthe DMB franchising programme.
24. Network performance and sustainability As of 14 July, 839 branches were closed due to Covid-
19 (621 for 3 days or more) with 5,628 branches operating reduced hours. POL has been able
to meet its network access commitmentsbut due to branch closures network numbers are below
11,500 at 10,937. More detail is provided in Annex B.See paragraph 8 above for more detail on
the network waiver currently in place.
25.Network programmes (franchising and new branch openings) are currently under review post
Covid-19 and Nick Read has commissioned a review of POLs network to ensure alignment with
POL’s future strategy. the outputs from this review are becoming increasingly important, given
the changing retail landscape, the current customer demand patterns, the likely fallout of Covid-
19 and the funding available in the Spending Review.
Governance
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26.19/20 and 20/21 STIP and LTIP. On 15 June Minister Scully metwith POL’s Chair and Head of
the Remuneration Committee (RemCo) to discuss POs remuneration proposals. Following
further legal advice, POL are now proposing Short-Term Incentive Plan (STIP)bonus reductions
of 50% for the Exec Directors, a 20% reduction for the General Executive(GE)/Senior Leaders
and no reductions for Senior Managers and lower grades.They propose to pay the Long-Term
Incentive Plan (LTIP) in full for eligible grades— in practice only 5 of the current GE are eligible
for this as most payments are for those who have left the business and are contractuay entitled
to them. POL management believe the 50% / 20% STIP reduction is reasonable in the
circumstances, demonstrates the desire by the senior leaders to support the organisation
through the impact of Covid-19and is a prudent way to manage risk across the organisation We
had envisaged seeking approval from Minister Scully before recess, however, on 10 July UKGI
was provided with the draft proposaland it is clear further work is needed to ensure POL’s
proposal is properly articulated and justified It also will not be formally signed off until the 28 July
Board meeting so it is now very likely that this will go to Ministers over recess For FY20/21, POL
are yet to finalise performance targets and are waiting until the Covid-19 situation stabilises and
the financial outlook becomes clearer.UKGI are drafting a submission for your considerationthat
will be ready shortlybefore it goes to Ministers
27.Postmaster NEDs. On 30 June, POL wrote to BEIS outlining their desire to create 1-2 NED
positions on the Board for postmasters and providing an update on their wider postmaster
engagement plans (incl. on a consultation with the postmaster community on a new engagement
model). We support this initiative as a positive step to demonstrateto postmasters a change of
approach by POL. Minister Scullystrongly supports the initiative and we are awaiting BEIS SoS
sign off (since all board appointments require his approval) before allowing POL to announce
their plans to the postmaster community.We have drafted a letter to go from Minister Scully once
final approval is given that emphasises the need forPOL to work with Ministers and officials at
every stage of the recruitment campaign to ensure the right candidates are found for the roles.
There is also a question as to whether it might be best to have an employee NEDand a
postmaster NED; we have putthis to POL for their consideration.
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Annex A: Financial performance
Financial performancefor 2020/21 (Year to Date - until end-May):
Retail ; :
Financial Services & ! i
Peecons Sen IRRELEVANT
Identity : i
Supply Chain/Other Lo co i
[Total Revenue 10%
Cost of Sales 2%
Agents Pay -6%
Staff Costs -2%
INon-Staff Costs 3%
IFRES - -145%I
Other Income 50% -40%I
Trading Profit/(Loss) (9.1) (46.7) 46% -205%I
2020/21 Budget
POL’s budget for 2020/21 was approved by the Board in June. POL forecast to generatea revenue
of £867m and a £9m trading profit. POL’s budget assumes no secondnational or regionallockdown
as result of Covid-19
Revenue
Revenue is higher than budget by 10% due to an earlier than forecast improvement in trading
conditions as the country emerges from the Covid-19 lockdown Retail revenue is up 15% versus
budget as there were improved trading volumes across all Mails products, particularly in Labels,
International, Returns and Special Delivery while improved withdrawals and deposit volumesmean
that banking was also above budget There was weak perfomance in Bill Payments due to a fall in
resellers income that All Pay, POL’s payment partner, is investigating. FS&T was ahead of budget
by 2% due to higher than expected volumesfrom MoneyGram. Although Insurance is in line with
budget (year to date), it was behind budget in May and POL are working on re-instating travel
insurance which has been off the market due to Covid-19
Costs
Overall, costs were higher than budgeted and this was primarily driven by variable agent pay, which
is higher than budget in line with the increased revenue. The agent pay top-ups_to support
postmasters during Covid-19 were included in the budget. However, there was a i
generated by FRES (the Foreign Exchange joint venture) due to the fall in demand for foreign
currency as a result of Covid-19
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Annex B: Network Access Criteria and Branch Numbers
Access Criteria
Total Deprived
Number of Population Tela Urban Urban Bure!
Criteria i Population y Population Population
branches within 3 . ‘ Population % ,
; within 1 mile I or. .. Within 1 mile within 3 miles
miles within 1 mile
Target 11,500 99% 90% 99% 95% 95%
31/05/2020 I 10,937 99.5% 91.7% 99.3% 95.3% 96.8%
POL is currently meeting its geographical access criteria however, network numbers are under 11,500 but
well above the minimum network number waiver of 10,500 branches
Branch numbers at the end ofMay 2020
Number 3,354 116 2,165 1,270 10,937