FIRST ANNUAL REPORT TO PARLIAMENT ON THE PROGRESS OF THE
REFORMS SET OUT IN THE WHITE PAPER ON POST OFFICE REFORM
Introduction
On 8 July 1999, the Government published its White Paper “Post Office
Reform: A World Class Service for the 21* Century”. The White Paper
detailed the way in which the Government would set the agenda for a modern
UK Post Office operating in global markets and providing high quality services
to every user in the country. It also described the way in which the
Government would ensure that the postal services of the UK developed in
such a way that all business and individuals could be confident of having the
communications services needed in the 21* century.
The Government gave an undertaking to report annually to Parliament on the
progress of the reforms set out in the White Paper, and particularly on the
functioning of the new arm’s length relationship between the Government (as
shareholder) and the Post Office Board. This is the first such report.
The Government started implementing appropriate elements of the reform
package as quickly as possible following publication of the White Paper,
through a mix of administrative action and secondary legislation. The
following measures were put in place following the White Paper:
e Establishment of an arm’s length relationship between the Government
and the Post Office, including the preparation by the Post Office of a
rolling annual 5 year Strategic Plan which has been approved by the
Secretary of State. This gives the Board greater freedom to run the
business.
e Allowing the Post Office to retain more of its post-tax profits (560% in 1999
and 60% thereafter, compared to around 10-20% previously) for
investment in its existing business.
e The Post Office has the freedom to borrow from the National Loans Fund
for growth investments:
- up to £75m per year without Government approval; and
- for larger growth investments above £75m, there will be a fast track
approval system.
e The Universal Service Obligation (setting out the minimum criteria for
deliveries and collection by the Post Office) was set out in law for the first
time in the UK when the Government implemented the European Postal
Services Directive in September 1999.
‘ Command Paper 4340, The Stationery Office, July 1999 (ISBN 0-10-143402-2)
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The Government has now completed the framework of the reform package
with the passage through Parliament of the Postal Services Bill which
received Royal Assent on 28 July 2000.
The Reform Package
The objectives set out in the White Paper were intended to achieve the
Government's twin goals of:
¢ enhanced postal services which satisfy developing business and individual
customer needs at affordable prices, and
© a Post Office which is able to succeed in an increasingly demanding
national and international market place.
The reform package would allow the Post Office’s customers to be given
greater choice in postal services by allowing more competition, strengthening
the Post Office Users’ National Council (POUNC) to ensure that customers’
interest are taken fully into account, and establishing a Regulator to ensure
fair competition in the UK postal market. And the Post Office would be able to
invest more in its future in order to help it become a thriving business, able to
adapt to changing markets, providing high quality services and efficiently
serving the needs of its customers.
Improving postal services for business and domestic customers
through greater choice, better quality and falling prices
The Government's aim is to improve postal services for business and
domestic customers through greater choice, better quality and falling prices.
Experience with the utilities has shown that, in the right framework, greater
competition can lead to improved services and falling real prices for domestic
and business customers. As well as extending competition in the postal
market, there should be robust regulation to ensure fair competition and to
provide a surrogate for market pressures where competition continues to be
limited in order to protect the universal postal service. An independent postal
Regulator (to be known as the Postal Services Commission) has been
established to achieve this objective.
The Regulatory Framework
The Postal Services Regulations 1999” made both the Secretary of State and
the Postal Services Commission the national regulatory authorities for postal
matters under the Postal Services Directive. The Commission took up its
duties on 1 April 2000, initially with just the Chairman and Chief Executive as
members. Five other members of the Commission took up office on 1 June
2 $.1. 1999/2107
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2000 completing its membership and putting in place the collegiate regulator
envisaged in the White Paper. Their role is to advise the Secretary of State in
carrying out his functions under existing Post Office legislation. They are
supported by an office of some twenty staff.
The Postal Services Act abolishes the existing Commission and replaces it
with a statutory body of the same name. Existing Commissioners and staff
are expected to transfer to the new body. The first duty of the new
Commission is to ensure the continued provision of the universal postal
service. Subject to that it must also further the interests of users of postal
services, wherever appropriate by promoting effective competition between
postal operators.
The creation of the new regulator is complemented by the creation of a new
Consumer Council for Postal Services (which will replace the existing Post
Office Users’ National Council) to represent the interest of consumers,
working with the Commission, but from a position of independence, to raise
the quality of postal services in the UK.
Establishing Greater Competition
The Postal Services Act provides a framework for greater competition in the
postal market. Firstly it replaces the Post Office’s monopoly with a reserved
area in which any person who wishes to operate will require a licence to do
so, including the new Post Office company. Subject to ensuring the
continuation of the universal postal service at a uniform tariff, the Commission
may promote competition within this reserved area by issuing licences to
more than one postal operator. The Act sets the reserved area at letters
costing less that £1 and weighing less than 350 grams.
In addition, the Commission is considering the scope for reducing the
reserved area, promoting greater competition through liberalisation of the
market.
The Postal Services Directive (97/67/EC) requires that a reserved area
should be no larger than is required to fund the universal postal service. It is
anticipated that the Commission will report during 2001 to the Secretary of
State on the scope for reducing the reserved area. The Commission must, of
course, ensure that any recommendation to reduce the reserved area is
consistent with its duty to ensure the continuation of the universal service. If
such a proposal is made, an order must be approved by a resolution of each
House of Parliament before the reserved area can be changed. The
Commission is also due to report in 2001 on its proposals for a price control
mechanism to be incorporated in the licence regime.
Maintaining a universal service of postal delivery throughout the UK and
the uniform tariff.
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The Government is committed to the continuation of the universal service of
postal delivery throughout the UK, and to a uniform tariff. Under the universal
service, all customers, wherever they live or work in the UK, can currently
send and receive letters, registered post and postal packets up to 20
kilograms at a uniform tariff, regardless of distance. In order to safeguard this
vital service in the future, whatever other services the Post Office company
(and any other designated universal service provider) wishes to provide and
whatever its ambitions to expand, the Regulator will need to be assured that
its universal service obligations can be met in full. The Government will also
be looking for the Post Office company to maintain and improve its quality of
service which will in future be laid down by the Regulator.
The universal service obligation was first enacted in UK legislation by the
Postal Services Regulations 1999. The Postal Services Act re-enacts those
universal service provisions (in section 4). One or more postal operators will
be required by their licence to operate within the new reserved area, to
provide a universal postal service or part of such a service. Quality of service
targets and other requirements on universal service providers are expected to
be the subject of licence conditions. Breach of licence conditions will be
subject to enforcement action by the Commission, and where necessary
fines. It is anticipated that the new licence regime will commence in Spring
2001.
Establishing clear and accountable relationships between the
Government, the Post Office, the Regulator and POUNC.
The boundaries between the responsibilities of the Government and the Post
Office have become blurred over the course of time with the Government
previously acting as both owner and regulator with no clarity as to how it
balanced its interests. Under the reform programme, clear boundaries and a
genuine arm’s length relationship are being established between the
Government (as owner/shareholder) and the Post Office Board (as
commercial/postal operator). For the Post Office, this will mean clarity about
which decisions and objectives fall to the Board, rather than to the
Government, and for which the Board should take responsibility. For the
Government, this means greater transparency and accountability. The
intention is that the Government will agree the strategic direction of the Post
Office; the Board will be responsible for proposing and executing that
strategy. The Postal Regulator will undertake economic regulation and
promote competition. The new Consumer Council for Postal Services
(currently the Post Office Users’ National Council) will promote and advocate
the views of consumers.
Establishing clear boundaries and a genuine arm’s length relationship
between Government and the Post Office and approving the Post
Office’s strategic objectives
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The Post Office’s annual five-year Strategic Plan is central to the
establishment of the new arm’s length relationship between Government and
the Post Office. The Plan should set out the high level strategic approach by
which the Board will secure the commercial success of the Post Office.
Endorsement of the Plan by the Secretary of State will define the strategic
envelope within which the Post Office is free to manage commercially, and
will set the framework within which the Government will approve borrowing in
excess of £75 million for major commercial investments, including
acquisitions.
The Post Office’s first Strategic Plan covering 1999-2004 was approved by
the Government in November 1999. Both 1999 and 2000 are seen as
transitional years in the move towards establishing the arm’s length
relationship and detailed discussions with the Post Office were necessary for
the first Strategic Plan in order to develop an understanding of the general
direction in which the Board was seeking to move forward. The Post Office
are pursuing and developing their strategy of becoming a complete
distribution company with global reach and this is reflected in the Strategic
Plan for 2000-05 [which was approved by the Government on xy August].
Further detailed discussions have taken place to further the Government's
understanding of the Post Office’s developing strategy. In advance of the
approval of the Strategic Plan for 1999-2004, the Post Office gave a
presentation on the Strategic Plan to the Minister for Competitiveness and
Officials from both DTI and Treasury. This allowed an opportunity for
questions from the Government side to be discussed prior to final
consideration of the Plan. A similar presentation was made by The Post
Office's Chief Executive to the Minister for Competitiveness prior to the recent
approval of the Plan for 2000-05.
The key features of the Strategic Plan are commercially confidential and as
such will not be published. However it is used as the basis for Government
setting the Post Office’s financial targets which are discussed in more detail
below.
Some discussion has taken place with the Post Office about the frequency
and form of shareholder meetings with the company to discuss progress
against the Strategic Plan. To date one such meeting has taken place with
senior officials from the DTI and the Treasury meeting the Chief Executive of
the Post Office. It is expected that such meetings are likely to happen
quarterly with preparatory discussions about the issues to be raised taking
place between DTI, Treasury and Post Office officials.
In order to make the arm’s length relationship between the Government and
the Post Office fully transparent, the Government is currently discussing with
the Post Office how best to enshrine the rights it intends to reserve to itself,
as set out in the White Paper, within the Post Office company’s Articles of
Association when this is established. The Memorandum & Articles of
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Association of the Post Office company will be publicly available in due
course at Companies House.
Although the past year has seen the establishment of the arm’s length
relationship between the Government and the Post Office in respect of the
new strategic approach towards the business of the Post Office, regular
dialogue between both parties has continued during the year in respect of a
number of issues. The Department of Trade and Industry remains the
sponsoring department in Whitehall for the Post Office which entails regular
contact about a range of issues. Whilst the Post Office remains a statutory
corporation, the Department also retains responsibility for a number of
matters under the current legislation governing the Post Office, such as the
appointment of the Post Office’s directors and auditors. As a public sector
body, the Post Office remains subject to the Government's planning and
control regime for public expenditure which requires dialogue with both the
DTI and HM Treasury. The extent of the arm’s length relationship will
develop further once the Post Office becomes a plc and the Department
moves into its role of shareholder of a wholly owned public limited company.
Government progress in setting strategic social objectives
The Government remains responsible, in the national interest, for setting the
legal and regulatory framework for postal services in the UK and for the social
and environmental obligations under which the Post Office, or any future
licence holder, must operate.
The Government published draft Social and Environmental Guidelines at the
time of introduction of the Postal Services Bill to Parliament on 11 February
2000. Further consultation will take place once the relevant sections of the
Postal Services Act are commenced (probably in the Autumn).
Government progress in giving the Regulator and POUNC duties,
powers and resources to promote consumer interests
Consumer interests are at the heart of the reform package and run
throughout the Postal Services Act which creates a strong, independent
regulator, the Postal Services Commission, and a new national consumer
council, the Consumer Council for Postal Services. The Commission's core
duties are focussed clearly on the interests of consumers.
The Council’s sole purpose is to represent and further the interests of users of
postal services. It is given a central role alongside the Commission in the
new regulatory framework where it can be a more effective champion of
consumers interests and investigator of complaints. The powers of the
Commission and the Council are in line with those of other similar bodies in
the utilities and elsewhere.
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The Act gives the Council a function to provide advice and information and to
represent the views of users of relevant postal services and make proposals
to the Secretary of State and other specified bodies. The Act also allows the
Council to make available to users such information as it considers expedient
to give to users.
The Act also gives the Council a function to deal with complaints about
relevant postal services that have not been dealt with by the operator
concerned. Where it considers that a licence condition may have been
breached it may refer the matters to the Commission. The Act also allows the
Council to investigate any matter which it considers to be a matter relating to
the interests of users of relevant postal services.
The Act requires the Commission and the Council created by the Bill to make
reports annually to the Secretary of State on their activities as soon as
possible after the end of each financial year. The Secretary of State is
required to lay such reports before each House of Parliament and to publish
the report in such manner as he considers appropriate.
Equipping the Post Office to meet the challenges of the changing postal
market
The Government's intention is that the Post Office will be driven by market
and regulatory disciplines which it will need to respond to by improving
efficiency and seeking out commercial opportunities. But to make this work,
the relationship between the Government and the Post Office had to change
(as already discussed) and the previous financial regime had to be reformed.
Progress on implementing the new financial regime between
Government and the Post Office, including the restructuring of the
balance sheet and allowing the Post Office greater pay flexibility
The Government has already implemented by administrative action the new
financial regime set out in the White Paper. Its key features are:
e the Government will set a profit target for the whole of the Post Office
business on the basis of the agreed Strategic Plan;
e allowing the Post Office to retain more of its earnings for investment. The
Post Office will be expected to invest an equivalent of a commercial
dividend each year. This was set at 50% of the Post Office’s expected
post-tax profits in 1999/2000 and from 2000/01 reduces to 40% of post-tax
profits each year. This will in effect mean more than halving the rate at
which profits are removed from the business. The retained earnings will
be expected to finance capital expenditure required to maintain and
enhance its existing business;
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e allowing the Post Office to borrow for growth investments including
acquisitions and joint ventures, and subject to an approval process for
larger investments;
e by 1 April 2002, the Post Office’s balance sheet will be restructured.
Financial targets for 1999/2000
The Government announced the financial targets for the Post Office for
1999/2000 last November at the same time as announcing approval of the
first Strategic Plan. On the basis of the Plan, a post-tax profit target of £350
million was set for the 1999/2000 financial year. This figure excluded any
exceptional provisions made for the Horizon automation project. The
equivalent of a “commercial dividend” to Government was set at 50% of the
post-tax profits for 1999/2000, ie at £175 million. In the unlikely event of the
Post Office falling short of the profit target, a “dividend floor” was also set of
£140 million. The Post Office is not able to pay dividends until it becomes a
plc, but in the meantime it is setting aside the relevant amount in its reserves.
The results of the Post Office for 1999/2000 were published on 19 June and
showed a post-tax loss of £264 million for the group. The post-tax profit
target of £350 million was not therefore achieved. However, excluding
exceptional items - the write down of £571 million for the Horizon capital
costs, write down of £50 million in respect of Parcelforce’s legacy assets
(following the commissioning of the Coventry hubs) and restructuring costs of
£35 million — the outturn was £302 million. The Post Office has set aside
£151 million for the payment of a future dividend, in accordance with the new
financial regime. The Post Office will not pay dividends until it becomes a
ple.
The write down of the full £571 million for the Horizon project's capital costs
and the £50 million costs in respect of Parcelforce’s Coventry hub was a
prudent accounting measure in compliance with the latest Financial Reporting
Standards, but it has given rise to a “paper” loss in the Post Office’s group
accounts. The profit target set for the group last November related to the
expected trading results for the year and reflected its underlying profitability
which the latest accounts confirm. It is normal commercial practice for
businesses with sound underlying profitability to maintain payment of
dividends whilst making provision for exceptional items.
Financial targets for 2000/01
In May 2000 the Government set the Post Office a return on capital employed
target of 13% for 2000/01 which translates into an operational pre-tax profit
target of £392 million. This target excluded the network of post offices, where
the PIU report was awaited, and the non-operational interest arising from past
surpluses held on the Post Office’s balance sheet. The target will be
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subsumed within the overall post-tax profit target for the Post Office as a
whole, as described in the White Paper.
As already announced, the dividend that the Government effectively take out
of the Post Office is set at 40% of the post-tax profits of the business as a
whole from 2000/01 onwards. This is subject to a dividend floor payment
which for 2000/01 will be raised from 80% to 90% of the dividend that would
be paid if the Post Office meets its overall profit target.
In order to help the Post Office to plan for the medium term, the Government
has also set an indicative financial target for 2002/03 of 13% return on capital
employed (ROCE) in the Post Office’s operational business, excluding the
network of post offices and any non-operational interest arising from past
surpluses. Return on capital employed is defined as profit before interest
payable and tax, but after operating interest receivable, divided by operating
capital employed.
The Post Office’s financial target and dividend floor for 2000/01, and the
indicative financial target for 2002/03, have been set in the light of external
benchmarking, the likely regulatory environment, market expectations, the
Post Office’s approved Strategic Plan for 1999-2004, and other projections
from the Post Office.
Borrowing for growth investments during 1999/2000
Under the new financial regime set out in the White Paper, the Post Office
may borrow for growth investments where these cannot be funded from
retained earnings, and subject to an approval process for larger investments.
The Post Office may borrow up to an annual limit of £75 million for individual
growth investments, but specific Government approval is required for
borrowing for major strategic investments over £75million. Investments might
include acquisitions, joint ventures and strategic alliances in new markets,
both in the UK and overseas. Each proposal for a large acquisition by the
Post Office will be considered by the Government on its own merits and on its
strategic importance to the Post Office business as a whole. The
Government will approve Post Office borrowing for large investments which
are consistent with the Strategic Plan, commercially robust and pose no
undue risk to the taxpayer.
Since granting the Post Office greater commercial freedom to borrow for
growth investments at commercial rates, it has now invested over £600
million in strategic acquisitions. It has made a series of acquisitions in the
European parcel sector, including Austria, Denmark, France, Germany,
Hungary, Ireland, Netherlands and Slovenia. It has also purchased express
companies in Germany, France and the United States. Recently it increased
its involvement in the Swedish letters market by increasing its shareholding in
Sweden's CityMail and in March 2000 it announced a joint venture agreement
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with TNT Post and Singapore Post to create the world’s biggest international
mailing partnership.
During 1999/2000 the Post Office made the following acquisitions:
Der Kurier group April 1999 £10m
Delacher etc April 1999 £10m
Williames group December 1999 £10m
Citipost group January 2000 £25m
Crie group January 2000 £6m
Pakke Trans group March 2000 £20m
Nederlanse Paket Dienst March 2000 £68m
Borrowing for growth investments will be at commercial rates from the
National Loans Fund (NLF). Whilst the mechanics of NLF borrowing are
being put in place, the Post Office has been allowed to draw down the
necessary funds from its reserves. Appropriate readjustments will be made in
due course, including the replacement of any reserves used in lieu of
borrowing.
A table summarising the key financial information covered in this section can
be found at Annex A.
Restructuring the Post Office’s balance sheet
In order to place the Post Office on a more commercial footing, and one
where it can be better benchmarked against its competitors, the balance
sheet will be restructured by 1 April 2002. At present the Post Office holds on
its balance sheet government gilts and deposits with the National Loans Fund
(NLF) which in effect are accumulated dividends which could not be paid over
to the Exchequer since the relevant legislation did not enable the Post Office
to do so. The Post Office will cease to hold, and to have access to the
interest from, the present level of these accumulated reserves.
Preliminary discussions have taken place with our professional advisers
about the issues involved with the restructuring and we have agreed a
preliminary workplan. But no decisions have been taken at this early stage as
we intend to consider all the issues thoroughly and to hold discussions with
the Post Office before reaching any final decisions. We will also need to
consider how the development of the Post Office’s business between now
and the deadline for restructuring of 1 April 2002 might affect the final
decisions about the shape of the balance sheet. But it remains our objective
to give the Post Office both the incentive to perform and the financial scope to
enhance its business.
Greater pay flexibility
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The Government has discussed and agreed a pay framework with the Post
Office following the contribution of discussion papers on pay reform from both
the CWU and the CMA. The objective was to agree a general framework of
parameters for overall pay settlements within which the Post Office have the
flexibility to negotiate the detail of annual pay agreements. The framework
seeks to achieve the policy set out in the White Paper of increasing the links
between pay, productivity and performance, whilst moving away from the old
requirement for the Post Office to put forward each settlement for the
approval of Government.
Postal Services Act
The Postal Services Bill was published on 28 January and received Royal
Assent on 28 July.
The aim of the Postal Services Act 2000° is to complete the package of
reforms set out in the White Paper on Post Office Reform published in July
1999.
The Post Office was established as a statutory corporation under the Post
Office Act 1969. That Act and the British Telecommunications Act 1981 set
out the responsibilities of Government towards postal services and give the
Post Office its current powers and duties. Since the 1969 Act became law the
postal services market has developed significantly and the Postal Services
Act redefines the roles of the Government and the Post Office to reflect those
changes. The Act will enable the Post Office to be transformed into a public
limited company formed and registered under the Companies Act 1985 and
subject to normal company law. Once the Post Office company becomes
operational, the scope of its permitted range of activities will be defined by its
Memorandum of Association which can be changed in accordance with the
provisions of the Companies Act 1985 allowing the company the flexibility to
develop its business in order to keep well abreast of market changes. All the
shares in the new company will be owned by the Crown. There can be no
disposal of shares without further primary legislation, except in the case of a
share sale or swap between the Post Office company and a partner to
cement a commercial alliance, which will require approval from both Houses
of Parliament. Similar restrictions apply to the disposal of shares in any
subsidiary company directly engaged in providing the universal postal service.
At present, an area of the postal services market is reserved largely as a
monopoly for the Post Office. This is called the reserved (or licensed) area.
Decisions relating to the Post Office monopoly are currently undertaken by
the Secretary of State for Trade and Industry under provisions in the British
Telecommunications Act 1981. The Postal Services Regulations 1999, tabled
on 26 July 1999, designated the Postal Services Commission as the new
independent regulator for postal services. Provisions in the Postal Services
3 Postal Services Act 2000, The Stationery Office (ISBN 0-10-542600-8)
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Act will replace this advisory body with a new fully independent regulatory
body, along the lines of those in the privatised utility industries, by giving the
Commission powers to issue licences, to regulated prices, to enforce the
monopoly, to introduce greater competition and to maintain a universal
service at a uniform tariff.
The Post Office currently has the exclusive privilege of delivering mail costing
less that £1 within the UK, subject to only a handful of exceptions provided
through niche and class licences. The Act will require anyone operating in
the reserved area, including the Post Office company, to be licensed by the
Postal Services Commission. The Commission will be responsible for
recommending the level of the reserved area in future and judging how far to
open up the market to further competition from licensed competition within the
reserved area. It will also be given powers of investigation and enforcement,
including the power to impose monetary penalties for breach of licence
conditions.
The Act provides for a new system of licensing and regulation for postal
services operators/providers operating in the market currently reserved
largely as a monopoly for the Post Office. It gives the independent regulator,
the new Postal Services Commission, new duties and powers to protect the
interests of users of postal services. In particular, it enshrines the universal
service obligation in primary legislation and makes it the duty of the
Commission to ensure the delivery of this universal service at a uniform tariff.
Subject to this duty, the Commission is required to further the interests of
users, wherever appropriate by the promotion of greater competition in postal
markets. The Commission will also have responsibility for setting quality
standards and regulating prices.
Consumers are given greater protection through replacing the Post Office
Users’ National Council with the Consumer Council for Postal Services
(CCPS). The creation of this body brings consumer representation in the
postal services market into line with the provision for other utilities. The
CCPS will have a central role in the new regulatory framework, monitoring
service standards that users can expect and acting as a focus for consumer
issues and complaints. Its powers are strengthened and it is given wider
access to relevant information from the Post Office company and other
licence holders.
The Postal Services Act also seeks to consolidate the postal services
provisions in the main pieces of legislation which currently govern the Post
Office - the Post Office Acts 1953 and 1969 and the British
Telecommunications Act 1981 — by repealing or redrafting relevant sections in
order to provide a more simple and modern legal framework in which the Post
Office company and other licensed persons can operate.
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It is anticipated that the new licensing regime under the Act will commence in
Spring 2001 and the transformation of the Post Office into a public limited
company will take place at the same time.
The network of post offices
The Government remains firmly committed to a viable network of post offices
across the country. The sub-post office plays a valuable role in local
communities, particularly for the less mobile, but the Post Office cannot
sustain a network if it is not sufficiently well used, and nor can the
Government. The future of the Post Office counters’ network lies above all in
its continued attractiveness to clients and customers as a channel for
accessing products and services and to sub-postmasters as a business
proposition. The network has to offer products people want and automation
is vital to this since it will provide the opportunity to offer a wide range of
products as more traditional business falls away.
Given its important social role, issues around the network will form an
important element of the Social and Environmental Guidelines (see page 6).
The Performance and Innovation Unit of the Cabinet Office has now
published its report on “Modernising the Post Office Network”. The
Government is committed to implementing its recommendations.
Horizon project
In July 1999, following a review of the Horizon post office automation project,
the Government, the Post Office and ICL reached agreement on the
continuation of the project, but in a simplified form without the original Benefit
Payment Card. By Spring 2001 some 40,000 counter positions at more than
18,000 post offices will be equipped with a modern, on-line computer system
to enable the Post Office to modernise and improve services to existing
customers, and to win new business. The project is proceeding as planned
with over [10,000] post offices automated to date.
The Government fully recognises the valuable role played by post offices in
the communities which they serve, and in particular the importance of small
rural post offices which can act as a focal point for village life, providing
access to cash, postal services and other day to day items. In view of this,
the Government decided to make a substantial contribution (£480m) towards
the capital costs of the revised Horizon counters automation project. This
represents a major investment, and commitment to, the future of the post
office network, including small rural post offices.
Reconfiguration of the Horizon project to simplify its scope was necessary in
view of the significant delays being experienced in the project which was
running three years late. The fact that increasing numbers of benefit
recipients are choosing payment by automated credit transfer (ACT) had also
substantially reduced the role that the Benefit Payment card could be
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expected to play. The current approach has enabled the Post Office to
concentrate on automating the post office network by Spring 2001. All benefit
recipients who wish to do so will be able to continue to access their benefits in
cash at post offices after the move to ACT, and other bank customers will
benefit from the wider availability of banking facilities.
The Post Office’s write off of the full £571m capital costs in its 1999-2000
accounts was a prudent accounting measure in compliance with the latest
Financial Reporting Standards, but it has given rise to a “paper” loss in the
accounts. However underlying profitability of the group remains sound.
Setting criteria for access to post office counters’ services
While it is essential that the Post Office places the network on the strongest
possible commercial footing, it is also essential that everyone in Britain
continues to enjoy convenient access to a post office.
The Performance and Innovation Unit (PIU) of the Cabinet Office has now
published its report on “Modernising the Post Office Network”. One of the
Government's objectives for the network contained in the report is convenient
access for all to post offices. The post office network should offer people in
all parts of the country convenient access to the services available in post
offices.
The White Paper on Post Office Reform published last year suggested that
the Government might set numerical access criteria, expressed in terms of a
percentage of the population within a certain distance of their nearest post
office. The PIU team analysed carefully whether such access criteria would
help to deliver the Government's aims in relation to the rural network where
post offices play a particularly crucial role in sustaining rural communities.
However they concluded that numerical access criteria could well undermine
the Government's policy rather than strengthen it. For example, 99% of
people in rural areas currently live within three miles of a post office. Setting
access criteria which sought to maintain this level of provision would allow the
Post Office to close down two-thirds of rural post offices.
The Government has accepted the recommendation of the PIU report that it
should place a formal requirement on the Post Office to maintain the rural
network and prevent any avoidable closures of rural post offices. This
commitment on access will apply until 2006 and will then be reviewed so that
the changing needs, circumstances and priorities of local communities can be
taken into account. The six-year commitment should provide significant
reassurance for sub-postmasters and their customers and allow time for the
Post Office to maximise the potential of the network.
The Government has also accepted that the Postal Services Commission,
informed by the new Consumer Council for Postal Services, should report
annually to the Secretary of State on the shape of the rural network and any
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developments which affect it. In particular, the report should assess whether
the range of services across the network remain relevant and meets the
needs of rural communities and any relevant regional disparities.
For urban areas, the Government has accepted the recommendation that the
Post Office should embark on a programme of modernisation of the urban
network in partnership with sub-postmasters and other stakeholders. The
PIU report concluded that such a programme would place the urban network
on a sound footing for the future, whilst ensuring continued convenient
access for all in urban areas to post offices.
As for the rural network, the Postal Services Commission, informed by the
Consumer Council for Postal Services, will report annually to the Secretary of
State on the urban network, and in particular, will report on post office
provision and access in deprived areas.
The Postal Services Commission, informed by the Consumer Council for
Postal Services, will also work with key post office network stakeholders,
including the National Federation of Sub-postmasters, over the next five years
to develop a shared understanding of the role that post offices should play in
the longer term. The PSC will advise the Government on the main options for
the policy framework after 2006 on convenient access for all to post offices.
The Performance and Innovation Unit Report
In October 1999, the Prime Minister asked the Performance and Innovation
Unit in the Cabinet Office to draw up a strategy for the future of the post office
network. This was a response to the acknowledged challenges the Post
Office faces and the need for its traditional work to respond the changing
requirements of customers, to changes in society and to the opportunities
arising from new technology.
The PIU Report on the future of the post office network was published in
June 2000 and set out 24 proposals and measures to modernise the network,
to protect the rural network in particular and to maintain convenient access
and improve the quality of urban post offices.
In accepting all of the Report's 24 conclusions and recommendations, the
Government has clearly demonstrated its continuing commitment to
maintaining a nationwide network of post offices.
Among the key elements in this are:
e a formal requirement will placed by the Government on the Post Office to
maintain the rural network and to prevent any avoidable closures of rural
**Counter Revolution — Modernising the Post Office Network” published by the Performance
and Innovation Unit of the Cabinet Office on 28 June 2000 (Ref: CABI 00-5902/0006/D96)
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offices for a period of 6 years in the first instance. This will help to protect
nearly 10,000 post offices in all communities of less than 10,000
inhabitants;
e in urban areas, the Post Office should embark on a programme of
modernisation of the network to improve the quality of post offices and the
Government will aim to provide a mechanism to ensure people in urban
deprived areas continue to enjoy convenient access;
e subject to evaluation of detailed business cases, financial support will be
available for a range of measures. As the first stage of modernising the
post office network, ring-fenced funding for new investment of £270 million
over the next 3 years to start the implementation of the PIU
recommendations was announced in the Spending Review in July.
The Government has said that it is prepared to consider adding to this
investment over the next few years through support for the development of
the Universal Bank and the extension of the Government General Practitioner
and Internet Learning and Access Points, following satisfactory evaluation of
the pilot trials and development of business plans. The case for new financial
support will be considered once viable proposals have been drawn up and
approved.
These measures will help to develop the particular new business
opportunities identified by PIU: Universal Bank; facilitation of e-commerce
services; access to Government General Practitioner (GGP) and Internet
learning and access services (ILAP). But the Post Office too will be seeking
to develop other new commercial opportunities.
These new and improved services will utilise and build on the Horizon
automation platform being installed in every post office.
Funding for PIU recommendations
Ring-fenced funding has been set aside in the Spending Review for new
investment of £270 million over the next three years to start the
implementation of the PIU report recommendations. Subject to validation by
robust business cases which the Post Office is working on as matter of
urgency, financial assistance is envisaged:
i) to modernise and maintain the rural network, preventing
avoidable closures of offices;
ii) to support some modernisation of the urban network;
iii) to improve support to local post offices in deprived urban
areas;
iv) to support the establishment and operations of the
Universal Bank and
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v) to support pilot trials for the development of Government
General Practitioner and Internet access and learning
point facilities.
Timescales for taking forward PIU proposals
The proposals will be taken forward in conjunction with the Post Office and
other parties as a matter of priority in line with the timescales set in the PIU
Report. These timescales are:
Requirement on PO to maintain the rural network and avoid preventable
closures — Autumn 2000.
Completion of work to establish size and operational details of fund to
sustain and improve post offices and associated retail facilities in deprived
urban areas — Autumn 2000.
Revision of code of practice for closure and relocation of post offices in
deprived urban areas —Autumn 2000.
Completion of business case and pilot trial specifications for GGP and
ILAP by early September 2000. Pilot trials in place during 2001.
Completion of the development by the Post Office and the banks of the
Universal Bank concept and assessment of the appropriate level of public
sector contribution which may be required — by 31 December 2000.
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Annex A
SUMMARY OF KEY FINANCIAL INFORMATION
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Financial Targets Outturn
1999/2000
Group post-tax profit target £350m £302m'
Dividend target - 50% of post-tax profits £175m £151m
Dividend floor - 80% of dividend target £140m
2000/01
Operational pre-tax profit target £392m?
Dividend target 40%?
Dividend floor 90%‘
Borrowing for growth investments in 1999/2000°
£
Der Kurier group April 1999 10m
Delacher etc April 1999 10m
Williames group December 1999 10m
Citipost group January 2000 25m
Crie group January 2000 6m
Pakke Trans group March 2000 20m
Nederlanse Paket Dienst I March 2000 68m
Total cost_£149m°
Outturn External Financing Requirement (EFR)’ for 1999/2000
Gilts purchased [awaiting figures from the Post Office]
New NLF deposits [awaiting figures from the Post Office]
(New borrowings) [awaiting figures from the Post Office]
Outturn EFR 1999/2000 [ ]
’ excluding exceptional items for the Horizon and Parcelforce write downs and restructuring
costs.
? excludes the network of post offices and the non-operational interest arising from past
surpluses held on the Post Office's balance sheet. The target will be subsumed within the
overall post-tax profit target for the Post Office as a whole, as described in the White Paper.
% as announced in the White Paper, the dividend payment to Government is set at 40% of
post-tax profits of the business as a whole from 2000/01 onwards.
4 the dividend floor payment for 2000/01 will be raised from the level of 80% set for 1999/2000
to 90% of the dividend that would be paid if the Post Office meets its overall profit target.
5 in respect of acquisitions agreed by the Post Office during 1999/2000.
® the mechanics of borrowing from the National Loans Fund are currently being put in place
and appropriate readjustments will be made in due course, including the replacement of any
reserves used in lieu of borrowing.
7 EFR equals the sum of the gilts purchased plus new NLF deposits, less new borrowings.
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