BEIS0001132
BEISO001132
OFFICIAL SENSITIVE ue
Department for
Business, Energy
& Industrial Strategy
Date: 15 January 2020
Director General: Sarah Munby
Lead Official: Pranit
Official Telephone:: GRO __
Recipient To Note / Comment To Approve / Decide
Kelly Tolhurst MP (Minister) x
Permanent Secretary X
Special Advisers xX
Secretary of State X
OFFICIAL SENSITIVE
UPDATE ON THE GOVERNMENTS SPENDING REVIEW FOR POST 2021
SUBSIDY AND DRAFT LONG-TERM VISION FOR POST OFFICE LIMITED
Summary
1) This submission provides a further update on ourlong-term vision project on the
Post Office, with the immediate priority on developing a robustpost 2021 Spending
Review (SR) case. The purpose is to update you ahead of your meeting with Nick
Read on 22 January (briefing submitted separately).Your steers will help inform:
(a) our immediate steps working with UKGI to obtain and scrutinise the best
available evidence to support POLs expected subsidy request for up to £50m
p.a
(b) our proposed refreshed definition of the Post Officés ‘social purpose and an
engagement plan to test this with a broader set of stakeholdersand
(c) the medium-term approach to reviewing the network size and access criteria
Timing
2) Routine in advance of meeting with Nick Read on22 January.
Recommendations
3) That you:
(i) confirm that you are content for BEIS (and UKGI) to work with POL to develop a
SR bid for up to £50m p.a. We would like to provide you with fuller advice in late
February 2020, together with an assessment of the strength of the business case
(ii) agree to us developing and testing our approach to define a clearer, relevant and
impactful social purpose with key government and external stakeholdersand
(iii) agree to us developing a SR bid based on the current network size and access
criteria and explore the case for changing these in the medium term
We can also discuss these points with you at our meeting on 27 January.
BEIS0001132
BEISO001132
don
OFFICIAL SENSITIVE an
Department for
Business, Energy
& Industrial Strategy
Background
POL’'s 5 Year Plan (5YP
4)
Nick Read has commissioned McKinsey to work on POL's Five-year Plan 6YP)
and ‘Purpose, Strategy and GrowtH (PSG); two strategic pieces aimed at setting a
new vision for the company and make strategic investment choices'‘big bets’). The
BEIS policy team and UKGI expect to see the draft SYP following the January
Board meeting (and a further iteration in February) with the aim of feeding into it
ahead of it being agreed at the Board meeting on 24 March. It will then be
submitted to you for approval.
SR preparation and case for a post 2021 subsidy
5)
6)
7)
8)
9)
POL recently provided data on their uncommercial network (as an initial response
to our SR commission— see Annexes A and B). BEIS analysts are currently
reviewing this data and UKGI plan toprocure external assurance support during
February-March (paid for by POL)to scrutinise this and the 5YP.
Although POL have said in writing that they will not ask for any further investment
funding, through a recent discussion with POLs Finance Director, we understand
POL intend to seek the continuation of network subsidy at or slightly below the
current level of £50m p.a As discussions continuewith POL and we obtain more
information, which will give a better understanding for us to test POL’s proposed
level of subsidy . Given that the Government expectation when the 2018-21
funding was agreed was for POL to become commercially self-sustaining by the
next SR, we recognise the need to provide HMT with a robust SR case that
explains why a zero-subsidy option would pose a significant risk to the operation of
the uncommercial network.
In addition to the subsidy,currently POL have a one day £50m Working Capital
Facility (WCF). POL will also request a renewed £950m WCFbut may need some
of the security definitions relaxed to avoid needing to increase the figure.
POL have also indicated that they plan to request a loan facilityto borrow for
material investments, but it is unlikely that HMT will agree to this due to the
uncertainty about the timing, size and nature of what their spending would be for.
We will explore this further, as we receive more information from POL.
POL do not consider it feasible to be able to make dividend payments to the
Shareholder as a part of the next SR settlement,due to the need to finance
significant ongoing investment.However, as BEIS maintain the right to take
dividends, this will need to be monitored We will test this further as a part of our
SR bid preparation.
10) Obtaining the relevant State Aid approval, getting the final Funding Agreement
updated and sign-off the updated WCF require careful sequencing, given the
interdependencies andthe possibility the SRmay be pushed back to the Autumn.
2
BEIS0001132
BEISO001132
OFFICIAL SENSITIVE ae
Department for
Business, Energy
& Industrial Strategy
For example, POL's 2019/20 accounts need to be validated by auditors by
December 2020 (in compliance withaccounting obligations under the Companies
Act). To be able to do this, the auditors will need to be comfortable at that point that
POL is a going concern and so a new WCF will need to be in place to cover the
period post-March 2021.Further, pre-notification discussions with the EU
Commission will need to commence by May 2020 to secure necessary
compliances e.g. SGEI Framework and State Aid regulations. It is therefore
necessary for Government to have an agreed position- at least in principle— on
the continuation of subsidy post 2021 before approaching the European
Commission in May.
Further Update on the Long-Term Vision project
11)In our advice of 23 October 2019, we set out the key strategic questions on the
Governments future aspiration for the Post Office in 2030 (and rationale fora
future subsidy). These included the network size and access criteria (taking
account of changing market trends), social purpose and future government
services offer, given the shift to digitsation and relevance of cross-government
strategies. You have agreed that these are the right questions. During purdah, we
have:
e kept abreast of the direction of POLs PSG work lead by McKinsey and held a
discussion with POL’s Finance Director on their emerging SR bid
e worked with OGDs (particularly MHCLG, DCMS and DWP to develop clearer
thinking on the future role of the social purpose and future government services
offer via POL. We have also lead discussions with the Financial Conduct
Authority and Payment Services Regulator on their aspirations to increase
regulation to secure access to cash in future yearsand
e reviewed the available evidence on the strengths and weaknesses of the current
network and access criteria and potential opportunities to make future changes.
Although there are lessons to be learnt from a variety of international
comparators, in many cases this is complicated due to the individuality of the
separation of Royal Mail and POL.
12)On this basis, we think the key objectives for the longterm vision in 2020 are
twofold: (a) to define a clear, relevant and impactful social purpose and (b)
ensure that Governments network and access criteria help strike the right
balance between supporting POL’s commercial growth and meeting the
accessibility requirements of citizens, particularly the most vulnerable. To achieve
these objectives we will need to work with POL and cross-government
stakeholders to develop a clear plan and tangible outcomes and test these with key
stakeholders e.g. Citizens Advice, Plunket Foundation and NFSP.
Advice
SR case for continued post 2021 subsidy
BEIS0001132
BEISO001132
OFFICIAL SENSITIVE eg
Department for
Business, Energy
& Industrial Strategy
13)Based on initial discussions with POL, they are likely to request funding for the next
SR period at or slightly below£50m p.a. (current amount). This is disappointing but
not unexpected given POL’s initial analysis that shows that50% of POL’s network
revenues are driven by just 14% of branches.Excluding the Directly Managed
Branches (DMB) network, loss-making branches (those in unprofitable locations)
account for around 45% of POLs network and c£73m loss (2018/19). On this
basis we can see a case for a level of continued subsidy, particularly to ensure
access for a range of SGEls, including government services for the most
vulnerable in society e.g. digitally excluded and SMEs in rural locations. Citizens
Advice, ACS and the recent Select Committee report on the Future of the Post
Office Network have also highlighted the importance of the Post Offic role in
ensuring access for these groups, particularly those on low-income and older
customers. However, we have not yet received all the data that will allow us the
opportunity to scrutinise the case for POL’s desired subsidy level. We may want to
consider requesting from HMT a subsidy on a declining trajectory over the funding
period (and potentially a dividend). Are you happy for us to start to work up a
bid with POL?
14)In any event, as it will be essential that Government collects better data on how the
subsidy is spent and to monitor the on-going demand for SGEI services offered
through POL’s network. We are therefore considering additional conditions to a
possible subsidy for the next Funding Perio. For example placing a requirement of
POL to provide us better, more regular and granular data on the uncommercial
network and for an SGEI audit to be carried outannually. assessment to help
provide the Accounting Officer with more robustVfM assurance./. We would like to
provide you with fuller advice on this in late Februar.
15)Further, whilst to date there has been a political imperative of maintaining the
current network size and access criteria, POLs PSG work has taken account of
changing consumer trends and indicated POlts interest in exploring a refreshed
minimum product offering, given the changing demand for services! POL think this
could open the door for more diverse branch formats! enabling a change in the
network size and potentially also a minimum service offer e.g.. change in SGEls for
those citizens who prioritise‘convenience and increased roll-out of automation via
self service kiosks.
16)BEIS policy and UKGI agree that these opportunities are worth exploring further
with POL; however, for presentational and potentially public law reasons it will be
difficult to make any changes to any one or combination of the network size,
access criteria and SGEls ahead of the next SR.This is because these changes
would require a formal consultation, so that the public and key stakeholders,
particularly those affected, have a fair opportunity to be consultec Given the extent
of those affected it is likely it would need to be a longer (e.1. 12 weeks) rather than
shorter consultation., Consultation have to be carried out in a fair manner to
minimise the risk of a Judicial Review. Therefore, we believe it is unlikely to be
feasible to formally consult on changes ahead of the SF. However, we would like
to explore the prospect of a consultation, particularlyin light of POL’s 5YP with the
aim of a potential launch post SR/late 2020.Are you happy therefore for us to
4
BEIS0001132
BEISO001132
deh
Department for
Business, Energy
& Industrial Strategy
assume for our SR bid that we should be looking to retain the current
network criteria?
OFFICIAL SENSITIVE
Next Steps on the LongTerm Vision work
Social Purpose -delivering a clear, relevant and impactful future social purpose
17)The social purpose is currently defined by the Post Officés access criteria (see
Annex C), ensuring members of the public live within reasonable distancdrom a
branch, and the delivery of Services of General Economic Interest (SGEls)’.
Government provides a subsidy to support POL in fulfilling these requirements,
even where it is uncommercial to do so. Cumulative evidence demonstrates that
branches and postmasters add additional social value to their local communities,
however the current definition does not capture this nor the significance of these
services for the most vulnerable in society. Therefore we need to take a three
pronged approach to developing and delivering a clear, relevant and impactful
social purpose for POL:
(a) we need to drive initiatives thatdeliver social and economic value to all
citizens, SMEs and local economies. This is critical for the access to cash
agenda which is central to both POLs social purpose and its commercial
growth. POL have identified the potential for growth of their banking and
financial services due to the rise in bank branch closures and changing
consumer trends in the use of cash. Evidencé suggests that, although the
number of cash transactions has been declining, 17% of the UK population
would be unable to cope in a cashless society, which places POL in a unique
position. Therefore, it is vital that we work with HMT to ensure that
Government sets a clear vision for access to cash and POL’s role in
maintaining a physical cash infrastructure and supporting the financial
inclusion agenda e.g. via POL's existing self-service ATMs and SSKs;
(b) we need to re-frame the role of the Post Office in providing declining
government services (40% revenue decline over 5 years) to being the
backstop for key services for the most vulnerable e.g. digitally excluded
(ONS suggest this is around 10% of GB). We have had early discussions
with DCMS libraries and DWP to explore their appetite for co-locating their
key services with Post Offices but will also need to test this further with POL
to identify suitable branch types and location; and therefore
(c) we need to develop an evidence-based definition (with KPIs) that reflects
the requirements of the most vulnerable, fosters local innovation amongst
postmasters for their communities, supports community cohesion and
supports POL drive the delivery of key cross-government strategies e.g. net
zero, loneliness etc
* SGEls are listed in the 2018 Entrustment Letter under five categories— processing benefit and tax payments,
processing identity and licencing applications, payment of public utilities, postal services, and banking services
? BEIS & London Economics, The Social Value of the Post Office Network, 2016; Select Committee Inquiry 2019
- Written and Oral evidence.
> Access to Cash Review, Final Report, 2019
BEIS0001132
BEISO001132
OFFICIAL SENSITIVE de
Department for
Business, Energy
& Industrial Strategy
18) Following discussions with key OGD stakeholders to develop a definition, we
propose testing and iterating this through informal consultation channels e.g.
developing a script for you to use with relevant stakeholders such as NFSP. In the
medium-term data collected on the uncommercial network via the subsidy
conditions could be used to refine the definition and develop clearer KPI to ensure
the social purpose is impactful.Do you agree that the future social purpose for
the Post Office should be based around () support for the vulnerable, (ii)
community cohesion and (iii) access to cash & financial service&
Size of the Network and Access Criteria
19) Whilst the network size and access criteria were set in 2012 and reviewed in a
2016 consultation, a combination of factors suggests that the current framework is
unsustainable in the longer term and will require a review. However, for the
reasons set out in paragraphs 16 and 17, it will not be feasible to run a formal
consultation as timings will cut across the SR (whether it is in June or Autumn).
Given the sensitivities linked to any change in network size, access criteria and/or
SGEls we propose to in the short term work with POL to develop a careful handling
plan that helps lay the groundwork for a launching a consultation in the medium
term i.e. late 2020 or early 2021. Are you happy for us to look further at
whether there is a case for reviewing the network size and criteria in the
medium term?
20)In the short— medium term we also need to review key issues linked tooutreachs
which may help inform our longer term approach. There has beena significant
rise in outreaches which are all loss-making branches and have more than
doubled (900 to 1600) in the last ten years, resulting in £5.7m loss in trading profit
(Jan 2020). Whilst these plug a gap in smaller and remote communities (following
closures), the outreaches solution currently allows POL to meet their access
criteria requirements rather than citizefs needs. It is a limited-hours provision that
is not sustainable and also creates burdens for postmasters! Therefore, in the
short term there is a pressing need for POL to explore alternatives to outreaches,
such as community hubs, and assess whether a different approach ahead of the
next SR (within the current requirements) could be more effectiveAre you happy
for us to set POL the challenge to explore alternative solutions to outreaches
ahead of the next SR?
Media Handling
None.
Contributors
Nigel Richards (BEIS Finance), Alex Cole, Tom Aldred, Tom Cooper (UKGI), Fiona
Hodgkinson Millie Milson, Michael Morondiya (BEIS analyst), Eleanor Brooks, Beth
White, Cecilia Vandini, Shanice Swales, Will Wilson, Carl Creswell (Post Office
Policy Team).
Annex A- BEIS and UKGI Joint SR Commission for POL
Preparations for the 2020 Spending Review- Post Office
BEIS0001132
BEISO001132
OFFICIAL SENSITIVE eg
Department for
Business, Energy
& Industrial Strategy
At this first stage, we are looking at evidence and information from the Post Office to
support officials in considering policy options ahead of formally entering the Spending
Review process. The aims of this exercise are to:
e gather evidence to enable us to estimate the value of the social purpose and
the extent to which subsidy covers for the delivery of SGEls throughout the
uncommercial network; and
e develop thinking on the various SR scenarios for a post 2021 subsidy.
The Post Office is required to deliver a social purpose to customers across the
network. This includes the universal delivery of SGEls, physical access across the UK
particularly for the most vulnerable customers and those in remote locations and the
broader social value provided by postmasters to local communities. Therefore, a
subsidy is paid in return for delivering a key element of the social purpose— to
maintain a presence in locations that are uncommercial and delivering SGEI services.
At this stage, we propose that we use the planning assumption that there is no change
to the social purpose or accessibility criteria
1. Preliminary Factual Questions @eadline Early January)
To help us better understand the cost basis of delivering the social purpose that
Government requests of POL we have outlined a set of factual questions:
1.1. How many branches are uncommercial? What is the branch-type
breakdown of these: outreaches, community, multiples, mainslocals. Regional
breakdown. Urban v rural. Deprived v non-deprived?
1.2. How does POL categorise lossmaking branches and how many of these
are in the network? Is the number growing, diminishing or staying broadly the
same yoy?
3. What are the costs of sustaining these? How are these costs made up?
A. Have POL made any assumptions regarding the number of branches
that will no longer be lossmaking in the short-term due to recent measures
including a) agent pay review and b) area managers?
1.5. Are there losses made by branches that you think are avoidable? If so,
what further efficiencies can be generated in the loss-making network, where
and how? Can POL make any of these branches more profitable?
1.6. How do you forecast the rise in NMW and potentially in business rates
will affect branches (including lossmaking ones)? Are there any other external
factors that are relevant?
1.7. London Economics/YouGov estimated the value of the Post Office network of
between £4.3bn and £9.7bn peramnum. Have POL done any other estimates of this?
If so, can you quantify the benefits of the POL network on communities?
1
1
1.8. Which services are the most relevant for customers of uncommercial
branches? How many customers regularly use these services?
1.9. Is the supply of services in uncommercial branches meeting or
exceeding customer demand? Can you provide a breakdown of thepread of
customer use/demand for services by region?
BEIS0001132
BEISO001132
OFFICIAL SENSITIVE de
Department for
Business, Energy
& Industrial Strategy
1.10. What else is the subsidy spent on? Can you provide a breakdown for the
current funding period? How does this compare to previous years i.e. 2012
2016/17?
2. Post 2021 Subsidy— Key Questions
To help us plan ahead of the formal SR process, we have set out three key questions
for you which will help model possible scenarios linked to a post 2021 subsidy.
Our assumption is that the network will need to be maintained in each of these
scenarios. You will recall when the last transformation fund/ subsidy was awarded,
there was an expectation that this would facilitate POL becoming commercially
sustainable, and therefore we do need to consider the zero-subsidy argument and
consider using this in the business case argument.
i. Zero case: What would the impact be on POL if there were a requirement
to deliver on social purpose without an ongoing subsidy?
a) Could you provide scenario(s) on how this could be made to work without
changes to the access criteria, highlighting the economic, social and
commercial trade-offs?
b) In addition to the base case, what alternative access criteria would you
propose, and what would be the economic, social and commercial trade-
offs?
ii. £xx case: What would POL request in subsidy to deliver on the social
purpose?
a) Based on POL plans, what subsidy would POL be seeking to request to
deliver services in the current framework?
b) What are the opportunities that this would deliver that would not be achieved
under different support models?
c) In addition to the base case, what alternative access criteria would you
propose, and what would be the economic, social and commercial trade-
offs?
iii. £x case: What would the impact be of 50% of the figure that POL is
seeking?
a) How would this vary POLs plans as set out in response to Q.2?
b) Could you provide scenarios on how this could be made to work,
highlighting the economic, social and commercial trade-offs?
c) In addition to the base case, what alternative access criteria would you
propose, and what would be the economic, social and commercial trade-
offs?
Annex C - Definition of the Social Purpose (Framework Document)
BEIS0001132
BEISO001132
OFFICIAL SENSITIVE ue
Department for
Business, Energy
& Industrial Strategy
The below is an excerpt from the Framework Document, which is in the process of
being finalised with POL.
“Governance and accountability
2 Overall aims
2.1 POL’s public ownership is founded on its social purpose, as set out in Appendix 3,
and as amended by the Shareholder from time to time.
2.2 To deliver its social purpose, the Secretary of State has stipulated that the principal
objectives of POL are the following:
(i) to maintain, during the term of the Funding Agreement, a network of post
offices beyond its optimal commercial size as detailed in the Entrustment Letter.
A specific minimum branch threshold of 11,500 is specified by the Secretary of
State in the Funding Agreement;
(ii) in so doing, meet the minimum access requirements specified for this network
of post offices as detailed in the Entrustment Letter; and
(iii) provide this network of post offices to make available the services of general
economic interest (SGE!) detailed in Annex A of the Entrustment Letter.
2.3 The Shareholder may also issue a periodic Chair Letter (the'Chair Letter’), which,
while not legally binding, will typically:
(i) provide clarity over the Shareholdeis shorter-term aspirations for POL; and
(ii) ask POL to ensure strategic alignment with wider BEIS or Government policy
objectives, where POL's business is relevant to such policy, such as financial
inclusion or the rural economy.
2.4 In delivering its objectives, the Shareholder expects POL to operate under sound
commercial and financial principles, and in accordance with all applicable laws,
seeking to deploy its capital, brand and products as a responsible commercial operator
and manage risk to deliver positive financial returns, notwithstanding the network
requirements in paragraph 2.2 above’
APPENDIX 3 TO SHAREHOLDER RELATIONSHIP FRAMEWORK DOCUMENT
POL Social Purpose
POL’s current agreed Social Purpose is as follows:
“The Post Office is unique: a commercial business set apart by its public purpose. We
believe in the importance of connecting communities and enhancing the powerful role
they play in all our lives. We will stay true to this commitment by meeting customer
needs through our unrivalled local presence across the UK.
This statement is underpinned by a set of principles and pledges.
BEIS0001132
BEIS0001132
OFFICIAL SENSITIVE ue
Department for
Business, Energy
& Industrial Strategy
To deliver our purposePOL run our organisation by following four principles:
« Keep customers at the heart of everything we do
« Build relationships based on trust
« Treat everybody with fairness and honesty
« Make a positive social and economic contribution to all the communities in which
we work
As an organisation POL pledge to:
« Maintain ethical attitudes in our behaviours
« Invest in the organisation to secure the business for the future
+ Listen with care to the views of customers, colleagues and others with an
interest in the Post Office, and support their developmerit
10