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OFFICIAL SENSITIVE - COMMERCIAL ae
Department for
Business, Energy
& Industrial Strategy
Date: 27 September 2021.
From: Meet Desai-!_ GRO.
SCS clearing: Tom Cooper-—
Recipient To Note / Comment To Approve / Decide
Minister Paul Scully x
Permanent Secretary x
Special Advisers (SpAds) Xx
Post Office Limited (POL)-
Network Investment and Subsidy Payments due to POL by BEIS
Summary
1. As part of the Funding Agreement agreed to fund POL for 2021/22Network Investment and
Network Subsidy payments are due to be paid periodicallyn-year from BEIS to POL.
2. However, in the view of UKGI officials, there have not been adequate controls over PO
litigation costs and as a result,;we have not recommended BEIS approve POlLs annual
2021/22 budget. Consequently, BEIS withheld payment ofhe Network Subsidy (£12.5m)
which was due to be paid on 1 July with Minister Scully informing POL (see Annex A).
3. Officials and POL havebeen working together to improve POLs litigation cost controls and
forecasting for POL to present an improved 2021/22 budget that could be approved by PO&
Board and BEIS. However, POLs progress in this matter is still ongoing and, on 1 October, a
Network Investment payment of £64m and a further Network Subsidy payment of £12.5m are
due.
4. It is recommended that you (Permanent Secretary)write to Nick Read(POL’s CEO) to ask for
a meeting to discuss POL's legal costs and what progress POL is making in managing and
controlling them. A draft letter isin Annex B.
Recommendation
5. As POL have not presented a budget for review and approval, officials recommend that the
payments due on 1 October are delayed indefinitely until BEIS are content with POs litigation
cost controls.
6. There areno immediate consequencesto POL’s service provision bywithholding payment
because POL currently have c.£200m ofsecurity headroom under the BEIS working capital
facility. This means POLshould be able to continue operatingwhile this issue is resolved
7. POL are looking to provide an improved budget as soon as possible and have been working
hard with officials to improve litigation cost forecasting. Though POkre aiming to present an
updated budget for Board and shareholder review in the coming weeksas outlined in
paragraph 4, officials recommend asking to meet Nick Read and issuing the letter.
Timing
8. By close Wednesday 29 September requested
Background
9. BEIS do not have a contractual right to withhold fundingunder the Funding Agreementon the
basis of the budget not having been approvedby the shareholder but have done so in Q3 2019
and Q2 2021 given the need tohold POL to account fora lack of spending control Officials are
proposing to withhold funding again on the same premise The legal risk of withholding the
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funding, in terms ofthe risk of legal challenge from POLon the basis of BEIS not having the
relevant right under the Funding Agreementis considered low (particularly given the proposed
course of action follows precedent and POL has not previously mounteda challenge).
However, we are seeking to ensure the next iteration of thé-unding Agreement between BEIS
and POL (to be negotiated byDecember 2021) contains an explicit right to withhold payment if
an annual budget cannot be agreed with POL.
10. Evaluation of the options to BEIS:
a. Extend payments regardless of a shareholder-approved budgetJhis would set 1
inappropriate precedent where POL in future could delay providing an annual budget
for shareholder review. This would mean BEIS do not have sight or are belatedly
sighted on how POLare spending taxpayer money. This is NOT recommended.
b. Extend a partial payment regardless of a shareholder-approved budgetWhile
POL will require funding as agreed in the Funding Agreement, currently, PO& need
for funding is not immediate A delay in funding may mean POL delay investments for a
short period of time and a partial payment may encourage some investment while
making a point that a budget still needs to be approved for full fundinglhis is NOT
recommended. This is because officials believe a shareholder-approved budgetshould
be a required milestone before spending funds and partial funding before approval
would set an inappropriate precedent
c. Do not make payment untilIPOL present a shareholder-approved budget. While
POL have security headroom of c.£200m for the BEIS working capital facility, this
would allow POL to borrow funds as requiredn order to continue service provision.
Therefore, for the foreseeable future, there will be no disruption to PO& service
provision. As POL are aiming to present an updated budget for approval in the coming
weeks, a delay to the paymens would ensure POL adhere to having the budget
approved by BEIS before receipt of funding This option is recommended.
11. Do you agree with the recommended option and, consequently, the letter of notice in
Annex B to be issued to POL before 1 October?
Annexes
Annex A: Minister Scullys letter to POLon 8 June 2021
Annex B: Proposed letter of notice to POL
Clearance checklist
Team Outcome of conversation
Finance Cleared by Nigel Richards (BEIS)
Communications Not applicable. Funding specifics
between POL and shareholder are
not public.
Legal Cleared by Eleri Wones (BEIS)/
Kyla Fidgeon (UKG)
Delivery Not applicable.
Other <
Please email your submission tosubmissionst
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Annex A: Letter from Minister Scully toPOL on 8 June 2021
Dear Nick,
POST OFFICE: BUDGET 2021/22
I am writing to you regarding Post Office’s proposed budget for 2021/22 that requires shareholder
approval from BEIS.
In our discussions, I have been pleased to hear about improved trading conditions and I look forward to
seeing the Post Office operating at full capacity of its branch network during 2021/22.
In reviewing Post Office’s 2021/22 budget, I am encouraged to see debate and challenge on Post
Office’s budget targets and urge continued ambition to grow Post Officés profitability to ensure its
future relies on a more self-sustained footing.
However, based on advice from UKGI officials, I understand that there is not adequate control
regarding the Post Office's litigation costs. Clearly, the Post Offices litigation proceedings are a very
important matter given its history, scale and doing the right thing for postmasters.
The operation of strong controls in this area is critical to the Post Officés financial future and until I
am content that there is a robust forecast in place, I am not able to approve the budget. Consequently,
under the 2021/22 Funding Agreement, I am not able torelease payment of the Network Subsidy until
there is a shareholder approved budget
I trust you understand my concerns andI look forward to considering Post Office's budget which has
an improved grounding for forecasted litigation costs I thank you for your continued cooperation and
collaborative efforts with officials.
Yours sincerely,
PAUL SCULLY MP
Minister for Small Business, Consumers & Labour Market, Minister for London
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Annex B: Proposed letter of notice to POL
Nick Read
Chief Executive Officer
Post Office Ltd
20 Finsbury Dials
Finsbury Street
London
EC2Y 9AQ
Dear Nick,
POST OFFICE: BUDGET 2021/22
I am writing to you regarding Post Office’s 2021/22 budget which has yet to receive shareholder
approval from BEIS.
I am aware that Network Investment and Network Subsidy payments of £64m and £12.5m are due to
be paid to POL on 1 October. However, on account of the management and controls of POL’s
litigation costs not being adequate, I am unable to release the payments due until POL can demonstrate
satisfactory control Payments would be made by BEIS following a shareholder approved budget.
As you know, BEIS is fully supportive of the need to settle POLs historic liabilities as quickly and
efficiently as possible. BEIS has already provided funding ofup to £285m for settlements under the
Historic Shortfall Scheme. In addition, my officials are also seeking funding of up to a further
c.£780m for settling claims resulting from overturned criminal convictions. These amounts are in
addition to BEIS’ substantial funding of POL’s business as usual activities.
In our discussion on 2 July, we discussed my departments continuing concerns about the management
and control of Post Office's litigation costs. I understand that litigation costs (excluding settlements)
which are accounted under the Historical Matters Business Unit is forecast to cost c.62m for 2021/22
and c.£63m in total between 2022/23 to 2024/25. This follows expenditure of £52m in 2020/21. Whilst
I understand progress is being made in getting these costs under control, I remain very concerned and
would be grateful if we could meet so I may understand thecurrent status of litigation cost control and
the wider plan for budget approval.I would like to understand how you, as Accounting Officer for
POL, are taking steps to establish that the legal costs being incurred will representValue for Money for
POL and the taxpayer.
I trust you understand my concerns andlook forward to meeting. In the meantime, thank you for your
continued cooperation withBEIS and UKGI officials.
Yours sincerely,
Sarah Munby
Permanent Secretary for the
Department for Business, Energy and Industrial Strategy (BEIS)