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popes)
posgi7t to 86 POST OFFICE BOARD
Minutes of the meeting held at Charingworth Manor, Gloucestershire.
on 20 July 1999
pr Neville Bain Chairman
Jobn Roberts Chief Executive
Richard Close Managing Director Finance
Jerry Cope Managing Director Strategy & Personnel
mike Kinski Non-Executive Member
Dr John Lloyd Non-Executive Member
Rosemary Thorne Non-Executive Member
Richard Adams Secretary
Scott Chiides Notes
Richard Dykes, Managing Director Royal tail
Stuart Sweetman, Managing Director Pos! Office Counters Limited
Kevin Williams, Managing Director Parcelforce Worldwide
Others attending: Barrie Stephens, Director Royal Mail Delivery Review,
for POS9/77
David Miller, Horizon Programme Director, for PO99/78
&739
APOLOGIES POS9/71
Miles Templeman was unable to attend.
MINUTES OF PO99/72
PREVIOUS MEETING
The Board approved the minutes and separate record
of proceedings of its meetings of 7/8 June 1999.
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CHAIRMAN’S PO9S/74
BUSINESS
(i) The Chairman had wanted to discuss two key issues
* White Paper, and
* Horizon
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CHIEF EXECUTIVE'S
REPORT POB(99)45
0)
Office had made two appearances before the Trade &
Industry Select Committee on Horizon and on the White
Paper. Both had gone well, the Committee appearing to
be supportive of The Post Office position. The
unprecedented appearance of three cabinet Ministers
(DTI, Treasury and Social Security) at the hearing on
Horizon had been uneventful with each Minister
presenting a consistent position
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ACCOUNTING,
UNDING & TAX
IMPLICATIONS OF
THE 24 MAY 1999
HORIZON
AGREEMENT
poB(99)48
i)
(ii)
(iii)
(iv)
(vy)
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Possi7e
The Board paper only reflected the impact on POCL.
Under the Horizon contract POCL. would have to make
payments to ICL for services and assets. Ernst & Young
had advised The Post Office that the contract could be
regarded as a Hire Purchase agreement and as such the
Horizon system would be recognised as an asset on
POCL's balance sheet. The asset would be purchased for
£550m, It was possible that the full value of the asset
could be allowed for capital allowance purposes, which
would provide a tax benefit of up to £165m over the life of
the contract. Additionally, future cash flow projections
suggested that the contract would not sustain an
expected rate of return and that therefore the £550m
should be written off at the half year.
Under the terms of the agreement, POCL could make use
of £480m of gilt investments to fund payments to ICL.
However, without Government intervention, this would
have to go through the balance sheet and would not be
recognised as income in the profit and loss account. The
£480m might also be viewed as a Government grant and
as such taxed and the write-off significantly reduced
although this would improve the adverse impact on the
profit and loss account.
Careful management of the accounting, tax and funding
position could affect The Post Office’s ongoing profit and
loss position by as much as £100m p.a,
With regard to accounting, the use of the £480m of
current investments could be treated in four different
scenarios although one of these, scenario 3 had,
following discussions with Government, been discarded.
Under scenario 1 the transaction remained as set out in
the 24 May Heads of Agreement and would be accounted
for under conventional UK GAAP, The Corporation
funding of POCL is treated as an investment and impaired
to the extent the POCL asset is impaired. The Post
's advisors, Ernst & Young and Slaughter & May,
Scenario 1 was the preferred option.
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(vi) In scenario 2(a) Government appropriates surplus EFL
reserves by way of a quasi-dividend from the Corporation
and maxes a Government grant to POCL for investment
in an automated infrastructure. Under UK GAAP the
Corporation's reserves are reduced and POCL recognises
the net cost of acquiring the asset from ICL Pathway. This
cost is depreciated over the contract term. It was unclear
whether Government had power to take a quasi-dividend
(vii) Scenario 2(b) mirrored the arrangement for 2(a) but
Government did not take a dividend but rather awaited
the restructuring of The Post Office's balance sheet prior
to a change of status. It was highly likely that under
scenarios 2(a) and (b) the £480m funding payment would
be taxable and that this could be as high as £150m
{t was noted that
(vill) DTI and Treasury officials were aware of the factual basis
behind the accounting, funding and tax implications but
not of The Post Office's preferred way forward.
(ix) Reporting the impact of Horizon within the half year
accounts and taking this ‘hit’ over the short term as
opposed to a five year period was considered the best
way forward for The Post Office, although politically it
might be unpopular. The timing of any declaration was
within The Post Office’s control and would not be made
whilst negotiations continued with the Benefits Agency.
Agreed that
(x) Based on advice from Ernst & Young, POCL could impair
the Horizon asset by as much as £550m at the half year.
(xi) POCL should attempt to improve the chances and
amount of capital allowances.
(xii) Unless Government guaranteed that the grant to POCL
was £480m (net of tax), and was free from any additional
conditions on network size, The Post Office’s preferred
way of treating the £480m funding was under scenario 1.
IMPLICATION ON THE POS9/79
POST OFFICE OF
THE 24 MAY 1999
HORIZON
AGREEMENT
POB(99)47
(i) The Board had considered the Horizon contract in detail
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Gi)
(iil)
(ivy
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at its ‘Awayday’ discussion on 19 July. in particular the
discussion had identified four work streams to be
progressed:
v Influencing the timing of ACT
* Getting the most out of Horizon
+ Reviewing channel strategy across The Post
Office
+ Defining options for the counters network,
including subsidy issues
An action plan to progress these issues with milestone
reporting to the Executive Board would be undertaken.
The Board had to decide by 31 July 1999 whether it
wanted to terminate or sign the revised contract with ICL
for the automation of post offices. Key elements of the
new contract were:
* Electronic Point of Sale functionality, automated
payments, local feeder systems and Order
Book Control Systems (OBCS),
¢ additional functionality, such as Network
Banking and Government Gateway to be added
at an extra cost of £120m;
* system rollout by March 2001;
+ the contract to terminate on 31 March 2005.
in addition the following payments would have to be
made:
« Capital of £480m to be paid, less a 25%
retention, over the next two years (retention to
be paid over subsequent four years);
* a payment of £68m to be made on acceptance;
» following rollout, operating payments of £95m a
year to be made;
* operating costs of 61% fixed, 32% variable with
number of outlets and 7% variable with volume;
* unrecovered VAT costs borne by POCL; and
Termination for convenience would result in payments in
the order of £450m, but if the system failed acceptance,
no payments would be made.
POCL was currently negotiating a deal with BA to cover
the existing manual benefit payment and new OBCS. BA
was not prepared to move its position from that agreed
with its Secretary of State which would reduce POCL’s
original income projections by £400m.
Ministers were meeting on 21 July to discuss Horizon and
it would be important to ensure that The Post Office's
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(y)
i)
(vii)
(viii)
(i)
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Minister, fan McCartney was fully aware of the Board's
concerns. This would best be communicated through a
letter from the Chief Executive.
» System roll-out was scheduled for 23 August
1999 with acceptance needed by 18 August.
There were three categories of acceptance
each with a threshold which would determine
whether or not rollout could proceed: high,
medium and low.
One incident within the high category, or more than 20
incidents within the medium category, would result in the
system not being accepted. Currently there were 270
incidents of which 1 was high and 29 were medium. Of
greatest concern was the inadequate training of
employees although a new package had been produced
and work on the other incidents was underway. At this
stage it was expected that there would be no reason for
not accepting the system by 18 August.
it was noted that
Excluding the concems over training, David Miller
considered the system robust and fit for service.
A number of sub-postmasters were experiencing
difficulties operating the system and in particular with
balancing. To help overcome this and in addition to the
new training package, additional resource (300
managers) had been allocated to ‘hand hold’ staff as
offices came on line. This was a considerable but
necessary investment to ensure the human/technology
interface worked correctly. it was likely that a small
number of sub-postmasters would continue to experience
difficulties.
ICL’s ability to develop the system over time was an
important issue and the Board was reassured that they
had demonstrated an ability to do this in other projects.
@.g. the An Post package.
Given that ICL’s own future was uncertain POCL hed
arranged for Fujitsu to provide a written guarantee on
future support.
Roll-out to offices would be suspended for a 4-6 week
period over Christmas 1999 at which point a review of the
process would be conducted.
The contract provided for 39,750 counter positions to be
autornated with up to a 35% price variation on annual
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operating costs,
(xii) Members were concerned that a number of technical
issues remained unresolved and that the BA contract
Position was still unclear. These were two critical issues
and needed to be progressed further before the Board
would be content for the contract with ICL to be signed.
An update on the negotiating position with BA would be
provided to Members who were content that the final
decision on whether or not te sign the contract be
remitted to the Chairman and Chief Executive,
Agreed that
(xiii) The decision to sign the revised contract with (CL would
be remitted to the Chairman and Chief Executive.
(xiv) __ Interim funding of £11.03m could continue until the formal
MaPEC meeting in September.
(xv) Work should continue on the work streams set out in
Paragraph (i) above,
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BOARD PO99/84
EFFECTIVENESS
@ The Chairman had previously circulated to all Members a
questionnaire covering the performance and
effectiveness of the Board as it currently operated. These
responses had been collated and a summary of results
circulated.
(ii) With regard to ‘Key areas of Governance ‘ there had been
some uncertainty over the establishment of appropriate
values. These had now been addressed and all Members
were aware of what these were. A concern over matters
reserved to the Board had been based on Government's
handling of Horizon and the role of the Board in
developing a commercial way forward. This ‘hands on’
approach by Government was typical of their handling of
Nationalised Industries and would not easily be changed.
With regard to actual matters reserved to the Board,
something on strategic acquisitions was thought
appropriate. It would be useful to seek advice from Ernst
& Young on how these reserved matters compared with
other companies.
(iii) On administration of the Board, there had been a general
concern over the information provided to Members. This
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had been addressed and improvements made through
the new format of the annex to the Chief Executive’s
Report.
{iv} Succession planning issues would be covered at the
Board in either December 1999 or January 2000.
™ Meetings would be aligned to the financial reporting
schedule.
(vi) Non-Executives were now content that major issues were
addressed by way of the Awayday sessions.
it was noted that
(vii) The provision of information to Non-Executives in
advance of major announcements/decisions could be
improved and action to address this would be taken.
(viii) Meeting managers from across the organisation was
extremely beneficial and the establishment of new
Business Unit Managing Directors would increase the
opportunity for the Board to meet these people as issues
related to their area of work were tabled for discussion.
Non-Executive Members were also happy to take part in
internal conferences/seminars etc.
(ix) The future format for reporting on employee issues would
be reviewed.
Actions To seek advice from Ernst & Young on how matters
The Secretary reserved to the Board compared with other companies.
The Secretary Meetings would be aligned to the financial reporting
schedule.
John Roberts The provision of information to Non-Executives in
The Secretary advance of major announcements/decisions could be
improved and action to address this wouid be taken.
Jerry Cope The future format for reporting on employee issues would
be reviewed.
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THE SECRETARY Posg/85
@ The Board noted that Richard Adams would be retiring in
October and agreed that Jonathan Evans should be
appointed by resolution at the September meeting.
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paTE OF NEXT Posg/es
MEETING
The next meeting was scheduled for 14 September 1999,
at 148 Old Street
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