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Date: 23 October 2019
Director General: Sarah Munby
Lead Officiak Pranita Bh:
Lead Official Telephon
Recipient To Note / Comment To Approve / Decide
Kelly TolhurstMP (Minister) x
Permanent Secretary X
Special Advisers xX
Secretary of State X
OFFICIAL SENSITIVE
UPDATE ON THE GOVERNMENT'S DRAFT LONG-TERM VISION FOR POST
OFFICE LIMITED
Summary
1) Before summer recess you agreed that the Post Office Policy teamtake forward
work to design a long-term vision for the Post Office up to 2030. We have
undertaken a rapid policy analysis to identify the key strategic questions and
drivers that could support Governments future aspiration for the Post Offie and
developed an initial set of options Your steer will helpinform:
(a) In the immediate term, the joint Spending Review (SR) work with UKGI ona
post 2021 subsidy; and
(b) The next stages of ourlong-term vision work, which we will co-design with Post
Office Limited (POL). This focuses on questions relating to the future role of the
social purpose (and rationale for an on-going subsidy) future size, accessibility
and sustainability of the network and the future government service offer via the
Post Office as well as ensuring that POL’s broader service offer is fit for the
future.
Timing
2) Routine — it would be helpful to have a steer by 30 October to help inform next
steps on (a) the SR business case for the post 2021 sulsidy; and (b) our ongoing
engagement with Nick Read(POL CEO) and POL colleagues. We would like to be
able to discuss this with them at the BEIS/UKGI/POL shareholder meeting on 13
November.
Recommendations
3) That you agree that BEIS (and UKGI) should work with POL over the next few
months to gather data on uncommercial branches to potentially inform the
development of policy options on a post 2021 sulsidy with conditions We would
like to provide you with fuller advicein January 2020; and
4) That you agree to us working with POL on the specified range of key strategic
questions, which we will discuss with POL over the next month.
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Background
Approach to long-term vision programme of work
5) At our meeting with you on 15 July, we agreed that the scopeof the long-term
vision work would look aheadto 2030, with an immediate focus onwhat we would
like to achieve by the end of the next SR Period. We discussed five priority areas
with you:
e approach to funding, commercial sustainability and business model;
e ensuring sustainability of the network and positive workforce relations;
e re-defining and delivering on POL's social purpose agenda and its role in
communities;
e alignment of POL’s activities with Governments wider objectives; and
e championing POL's role in the delivery of government and other services.
6) By drawing on a wide range of available evidenceincluding discussions withUKGI,
BEIS finance and analysts, OGDs (mainly MHCLG and DCMS) and Citizens
Advice’, we have undertaken a rapid policy analysis to identify the emerging
opportunities and barriers linked to each priority area to develop a set of strategic
problem questions.
7) We have had early engagement with POLon the Long-term Vision, as you heard
during your intro chat with Nick Read last week We have agreed with him that our
work needs to be informed by the project he has started with McKinsey on
‘Purpose, Strategy and Growth’. This is due to report early findings onpurpose and
strategy for POL by the end of the year, with iterations for a final product in
February. We will undertake a series of engagement pieces with POLas we
develop the long-term thinking.
8) We have divided the advice in this submissioninto two main parts:the immediate
focus on the next five yeas to reflect the next SR/Subsidy period;and an update
on the longerterm vision work. Although the next subsidy question requires
immediate consideration, we have set out our advice on this in terms of policy
considerations that will impact the longerterm vision, particularly on the role and
value of the social purpose.
9) The Government subsidy to POL is made on a quarterly basis and is contingent on
it meeting a range of access criteria set out in AnnexA. UKGI review POL’s
performance against these obligations ahead of each payment. In paying the
subsidy we have taken account of not only POL’s commercial sustainability and
increasing profits but also state aid rules.In considering the advice on the next
subsidy it is also worth noting that whilst POL is on a profit trajectory (potentially
over £100m in 2020/21) on-going litigation will also present costs Therefore, the
settlement payout could also impact POL’s ability to remain on a glide path to
» BIS, Building a Mutual Post Office 2012; Post Office Limited analysis; RSA, Making the Connection: Post
Office’s as Community Enterprise Hubs 2014 ; Select Committee Inquiry 2019- Written and Oral evidence, BEIS.
& London Economics, The Social Value of the Post Office Network, 2016
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become ‘subsidy-free’. UKGI will provide an update separately on the litigation
settlement strategy in due course.
Advice
The next Post Office subsidy: rationale for continung post 2021
10)Having allocated £2bn to fund the Post Office’s modernisation and transformation
programme (2010-18), in December 2017 the Government agreed a new funding
package of £370m for the Post Office to run until March 2021, of which £160m
was the subsidy.
11)Governments aspiration, made clear when the last Funding Agreement was
agreed, has been for POL to become financially self-sustainable post-2021. Over
the years, the subsidy has been steadily reduced from £210m in 2012 to £50m in
2019/20 as POL decreases operating costs and begins to create an operating
profit. This is shown by its first trading profit in 2016/17 which has grown to £60m
for 2018/19 and is expected to exceed £100m by 2020/21. While there has been a
decline in government services such as Post Office Card Accounts (POCA) which
are due to cease in November 2021 (revenues have fallen from £75m in 2015/16
to a budgeted £20m for 2019/20), the implementation of the new Banking
Framework in January 2020 will bring up to £100m in additional revenues that will
more than offset this. Therefore, in line with our previous reasoning we think the
starting point for determining a post-2021 subsidy ought to be zero.
12)Further, the Consolidated Budget Guidance? (CBG) normally requires that
Departments pay full costs for a subsidy, however BEIS has an exemption from
doing so with regardsto POL. This is because paying the full cost would be unlikely
to deliver significant additional VfM, given Governments aspiration for POL to
become financially selfsustainable. The CBG also normally requires a dividend to
be linked to a subsidy payment for transparency reasons. In 2017, whilst the
derogation from a dividend paymentwas applied by HMT, they did indicate a need
to review this as a part of future funding agreements.
13)However, whilst this approach helped secure HMT approval to the previous funding
package, it would require POL to sustain the c. 4,500 uncommercial network (cost
estimated c.£67m in 2018/19) from within its own capabilities 3,200 of these are
the ‘last shop in the village and in rural locations and would otherwiseclose if they
were on a standard commercial variable model. The zero-subsidy option would
risk undoing the benefits achieved from the network transformation and the
pressure you have applied onincreasing agent pay.
14)We would also lose the direction of travel Government is seeking. While being
consistent with BEIS & HMTs previous expectations, discontinuing the subsidy is
likely to give rise to numerous campaigns from postmasters, unions and other
stakeholders. This is because, as the 2017 Conservative Party Manifesto
committed Government to protect the Post Officés presence, especially in rural
areas and increase banking services POL is required to maintain at least 11,500
? Consolidated Budgeting Guidance 11.41 and 11.38
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post offices that meet strict access criteria However, due to the increased political
scrutiny and campaigns surrounding postmaster pay (Select Committee Inquiry
and Daily Mail campaign) and the ongoing litigation there are many presentational
risks to discontinuing a subsidy without an alternative measure in place or proper
consultation. The upcoming SR therefore requires BEIS and UKGI to develop an
appropriate VfM structure for any future HMG funding.
Commercial sustainability vs payment of subsidy
15)The cost of maintaining the uncommercial network is growing year-on-year due to
the reduction in the demand for traditional POL services such as mails, bill
payments and government services such as benefits and pensions. This therefore
raises questions about the purpose and size of a post 2021 subidy, as the
operation of uncommercial branches will continue to present a real cost to POL.
Also, even though POL is on a profit trajectory, POL may not yet be on the
glidepath to be able to pay a dividend during the next SR period.
16)In terms of wider funding, we do not propose furtherinvestment funding as POL
should bein a position to self-fund BAU investments.
17)Whilst we recognise that discontinuing a subsidy is the starting point we propose
working with POL to collect better data on specific areas to help inform any future
HMG funding. The Funding Agreement allows us to request any data linked to
POL’s strategic plan. We would like to also use this as anopportunity to discuss
top-level aspirations. For example, based on our initial data gathering work with
POL, we could develop more detailed policy options on a subsidy withconditions to
encourage data reporting, develop a strongerVfM rationale for any future HMG
funding and improve transparency (and accountability for the social purpose) It
would also inform longer term thinking on the:
(a) role and value of a social purpose: whilst the cost of the uncommercial
branches was estimated at c.£67m in 2018/19, in a 2016 report’, the social
value of the Post Office was estimated to be between £4.3bn and £9.7bn
(based on households and SMEs’ willingness to pay for the service). POL data
on the uncommercial branches would therefore not only help us better
understand the associated costs (and benefits) for this part of the network but
also help shape our approach to understand the broader ‘social value’ - what
works, for whom, and where.
Further, whilst there is a definition of the social purpose in the current
Framework Document (see Annex B), given this was last agreed in 2013
between BEIS, unions and POL, we think the SR presents an opportunity to
build an evidence-based approach to reviewing the overall definition and
measurement approach to the social purpose (see paragraph 25) This is to
ensure a stronger VfM rationale so that services are directed to those who need
them most and
° BEIS & London Economics, The Social Value of the Post Office Network, 2016.
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(b) definition of a branch particularly to understand what the minimum service offer
ought to be e.g. selfservice kiosk for some and face to face provision for others
Recommendation 1: to work with POL over the next few months to gather data
on the uncommercial network to inform thedevelopment of policy options on a
post 2021 subsidy with conditions
18)The advantages of attaching further conditions to help achieve the above aims
through better data collectiort are three-fold:
(a) Firstly, better data would help UKGI and BEIS providestronger VfM assurance
to the Permanent Secretary as well as enabling you to proactively handle any
criticisms directed at Governments role in delivering social purpose (and any
trade-offs linked to the commercial sustainability of POL).
(b) Secondly, a more detailed understanding of the use of the subsidy across the
network will inform an evidencebased approach for re-defining and measuring
the social purpose and reviewing the network criteria We will also as a result of
this exercise be in a better position to identify and balance tradeoffs associated
with the commercial sustainability of POL.
(c) Thirdly, better data would enable us to develop a better cost and benefit analysis
and counter factual for future SRs to secure HMT approval.
19)POL may object to further Shareholder control and associated costs linked to data
gathering. Further, an ongoing subsidy may not be supported by HMT given their
steer for POL to be subsidy-free by 2021. However, we believe that POL should
already have this data so it should not present an undue burden. We would look
to work with POL to make this ask reasonable and practicable
20)Alternative options to the recommendation would be to (i) continue subsidy using
the current reporting approach or (ii) as outlined in paragraphs 11-— 14, remove
Government subsidy and require POLto sustain the uncommercial networkfrom
within its own capabilities. As stated above, while being consistent with BEIS &
HMT’s previous expectations, discontinuing subsidy is likely to give rise to
numerous campaigns from postmasters, unions and other stakeholders.
The Next 10 years— key strategic questions
21)We have identified four strategic questions that need further exploration to inform
the longer-term strategic direction of the Post Office. Annex C has further
information. We are keen to seek your steer before we engage POL and start
further work with analysts:
* Conditions related to data collection could include a focus on areas likeas (i) the cost/benefit of the
current network size (ii) a breakdown of the cost of POL uncommercial network (iii) a demand/supply
analysis of POL services; and (iv) the development of a no subsidy counterfactual to better understand
the trade-offs between POL commercial objectives- to be profitable and less reliant on the Exchequer
and the Company social purpose.
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(a) What is Governments aspiration for the Post Office in 2030 and what will the
rationale for a future subsidy be? This addresses the approach to funding and
commercial sustainability.
(b) What is Governments aspiration for the future size of the Post Office network
and access criteria, taking account of both changing market trends and
workforce needs? This addresses the sustainability of the network and positive
workforce relationsand future business model.
(c) What is Governments aspiration for POL’s Social Purpose, taking account of
the need to deliver services to those who need these the most?7This addresses
the defining and delivery on POL’s social purpose agenda and its role in
communities and alignment of POL’s activities with Governments wider
objectives.
(d) What should a future Government services offer via the Post Office look like
taking account of the government wide shift towards digitisationT his addresses
the championing of POL’s role in the delivery of government and other services.
Calling the Post Office “the front door to Government services may not be
tenable in the future due to the shift toonline services.
Do you agree that these are the right strategic questions?
Recommendation 2: work with POL on a joint programme of work to explore key
strategic questions, with the aim of providing fuller advice to you in January
2020.
(a) What is Governments aspiration for the Post Office in 2030 and what will the
rationale for a future subsidy be?
22)As outlined above, the question of the subsidy payment cannot be looked at in
isolation. The considerations as to whether and to what level, to publicly fund the
Post Office to deliver the public benefit need to be based on evidence as value for
money principles. These considerations are also inextricably linked to policy
questions including the Governments goals for the Post Office network — in terms
of network size, minimum service offer (given changing market trends and
consumer behaviours) and the balance between social purpose and commercial
sustainability. Working with POL to answer these questions through data gatheting
(and potentially other means e.g. call for evidence reviewor public consultation)
will help determine Governments aspiration for the Post Office Network,
commercial sustainability and the nature and level of Governments future
oversight, funding and POL's accountability.
(b) What is Governments aspiration for the future size of the Post Office network
and access criteria, taking account of both changing market trends and
workforce needs?
23) The Governments access criteria were originally designed to ensure fair access to
post office services across the UK; however, with the changing market conditions,
6
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declining footfall and multiple operational issues (branch closures; increase in
outreaches) raises a fundamental question about whether the current framework
will equip POL to navigate these challenges over the next 5 — 10 years as
consumer and retail patterns continue to change Working with POL, NFSP and
other stakeholders such as Citizens Advice we will explore options on the future
design of the network and access criteria, drawing onfuture trends analysis (e.g.
retail and financial services sector) and international comparators.
24) Changes to the business model (linked to the New Transbrmation Programme)
have exposed issues for postmasters relating to low morale and skills deficiency.
These issues have contributed towards an increase in postmaster resignations and
tension between Post Office Limited and postmasters. While agent pay is a clear
concern, NFSP, Citizens Advice and others have suggested the need for an
improved wider support package provided to postmasters We will work with POL
to explore what makes an attractive support package for postmasters (e.granging
from peer support networks to accreditations and apprenticeships) as well as
longer term options to identify ways to create a stronger and more inclusive
workforce e.g. mutualisation (as suggested in the Governments 2010 report
‘Securing the Post Office Netwak in the Digital Agé).
(c) What is Governments aspiration for POL’s Social Purpose taking account of
the need to deliver services to those who need these the most?
25)Whilst the social purpose is currently defined (focused on meeting access citeria
and delivering services of a social nature)it does not meet Ministers’ or the publics
aspirations. It includes access across the UK and provision of services that support
some of the most vulnerable in society However, it is unclear and does not take
account of the social value provided by many postmastersor the value that the
public perceives the Post Office to povide to local communities.
26)As outlined above, we do not know whether uncommercial branches are providing
a social value/benefit that could be considered to‘offset’ the opportunity costs
linked to the running of 4500 branches. Therefore, by collecting data as a condition
to the post 2021 subsidy, we willhave a better grasp on the cost/benefit of the
uncommercial branches (which includes the value from the ‘customer and
‘community perspectives). This may be combined with broader evidence gatheing
on innovative local practice, which will give us a better picture of vulnerable
customers’ needs, how this varies across locations, and the ‘social value’
community branches and postmasters provide The data analysis and customer
insight will firstly help inform the definition and measurement approach of the Post
Office’s social purpose. Secondly it will enable us to explore alternative ‘future’
approaches to providing‘social purpose services in rural and urban deprived areas
and pose a credible counterfactual to the status quo.
27)Alongside working with POL to collect more data ahead of SRwe propose working
with OGDs and POL to develop options for a future social purpose following your
5 BIS, Building a Mutual Post Office 2012; Post Office Limited analysis; RSA, Making the Connection: Post
Office’s as Community Enterprise Hubs 2014 ; Select Committee Inquiry 2019 - Citizens Advice written
evidence, Post Office Policy team branch visits 2019, et al.
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letter to them in the summer So far, we have led discussions with MHCLG and
DCMS and identified various opportunities to join up to ensure the social purpose is
‘customer focused and reflects local needs. We are also planning to meet with
Defra and HMT (particularly to explore the futureaspirations for the access to cash
agenda) and will update you on our progress on joining up with these strategies in
January 2020 (See Annex D). This work will be linked to the development of
minimum service provision criteriawhich could range froma minimum service offer
for vulnerable customers who require face to faceprovision, to a local services
offer by innovative community branches (which could be supported by HMG
innovation funding through local partnerships and creative use of community
assets) to exploring a broader range of services of a socialaction nature.
(d) What should a future Government services offer via the Post Office look like
taking account of the government wide shift towards digitisation?
28)We want to work with POL and OGDs to identify the key risks and opportunities
linked to the delivery of future government services For example, learning from
DWP’s channel shift approach on Universal Creditto develop a minimum value
product for Universal Credit may be instructive. This may involve further
engagement with DfT, MoD, DfE and others. We would like to explore whether we
have the right incentives in place for POLto develop both cost effective and
customer-focused options such as co-location of government services (e.g.
libraries) as well as digital options.
Media Handling
None.
Contributors
Jane Corera, Alicja Hermann (BEIS Legal), Richard Beckett, Nigel Richards (BEIS
Finance), Alex Cole, Tom Aldred, Tom Cooper (UKGI), Michael Morondiya (BEIS
analyst), Cecilia Vandana, Shanice Swales, Will Wilson, Carl Creswell (Post Office
Policy Team).