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MEMORANDUM FOR: Group Executive
FROM:
Mark Davies,
Communications and Corporate Affairs Director
SUBJECT: Influencing the new Government
DATE:
16 April 2015
Recommendation
1.
The Group Executive is invited to approve the approach for using the post-election
period to engage with a new Government with a view to ensuring a favourable policy
environment for current strategy implementation and to start framing the way in which
our relationship with Government might evolve over the next 5 years.
Executive Summary
2. Following the general election a new Government will be formed. This is a critical
period in the life of a new parliament, where ministers are both at their most powerful
and seeking to develop and shape new policy positions. This therefore presents the
Post Office with a window of opportunity within which to set out our position and to
influence ministers.
Our objective will be to use the opportunity of building links with the new government
to ensure our minister is fully sighted on the opportunities and challenges in relation
to our business. We should also see the post-election period as an opportunity to
actively shape the agenda with Government. This will necessitate a clear exposition
of some of the difficult issues ahead, as well as setting out the opportunities the new
Minister's portfolio presents.
This paper sets out in further detail:
The context for post-election engagement — particularly the position as to the
potential constitution of a new Government and the time it will take to be formed
Considerations for setting out our position with a new Government — covering the
issues that need to be raised
Opportunities to present to Government — the propositions that help underpin Post
Office future strategy which are attractive to a future Government policy
The suggested narrative to be used — building on our existing strategy - and
approach to taken, and the risks that need to be assessed through this period.
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Financial Metrics
3.
Engagement and influencing a new Government will be undertaken by existing
resource within the Business and no additional finances are required. The approach
being taken is designed to assist the achievement of current financial strategy and
plans, and to create the most positive environment for future plans.
Previous Approvals
4.
The approach presented in this paper is consistent with the work of the cross-
business Government Relations Steering Group attended by representatives from
People and Engagement, CEO office, Commercial and Strategy teams.
Proposal
5.
Background — the General Election
We are on the cusp of the most uncertain election for a generation with no one
confidently predicting the governmental outcome.
An uncertain, volatile and potentially prolonged policy-shaping environment may
ensue.
Current polling suggests that a two-party coalition will not be sufficient to achieve a
majority. Therefore a formal coalition could comprise three parties.
Any coalition agreement could be more detailed and lengthier than in 2010.
Assuming that any coalition partners are aiming to deliver another five year
government — and the Fixed Term Parliament Act will make another election before
2020 unlikely — parties (particularly the Lib Dems if they are at the table) may be
conscious of the pitfalls of running out of policy half way through.
Therefore it could be several weeks for coalition partners to reach an agreement,
delaying the formation of a new Government and the appointment of ministers.
Alternatively, the next administration could be a minority Government, with a supply
and confidence agreement, rather than a formal coalition.
Such a minority Government with less formal ‘issue based’ support from other parties
could lead to a less structured and more flexible forward agenda. Again this could
result in a relatively prolonged period of policy uncertainty.
A single party succeeding in achieving an overall majority seems unlikely: where
pollsters and other commentators see this as a possibility they point toa
Conservative majority being the most likely outcome.
Background — Manifestos and Policy
We expect the main parties to publish their manifestos the week commencing 13"
April. The manifestos will represent an opening gambit for any coalition negotiations.
Our positioning to date with the policy teams from the main parties has sought to
reinforce a general consensus of support for current Post Office strategy. We have
attempted through our lobbying to strike a balance between engaging with
policymakers to ensure any manifesto commitments align with our strategy, while at
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the same time not fuelling interest in a way that would result in anything unhelpful.
Our specific asks to date are summarised at Appendix 1. While we cannot directly
influence manifesto content, we can seek to shape it by raising issues and
challenges, and have engaged with key figures in the three main parties
There are a number of relevant policy areas that may feature. These include:
ownership/mutualisation [and potentially governance related to executive pay]
the Post Office agreement with the Royal Mail (a Labour priority driven by CWU
agenda)
the move to digital government
financial services and financial inclusion
Further detail of what we might expect with parties’ stated policy positions is at
Appendix 2.
. Context - Government Spending Review and potential funding negotiations -
process and timescale
The priority for a new administration will be to continue to reduce the deficit (while
protecting key departments such as Health).
There are a number of possible permutations for the next spending review (SR),
both in terms of its timing and the period it covers. By Autumn 2015 the new
government will need to set spending plans at the departmental level for the year
2016/17, given that Whitehall departments currently only have their budgets set up
to the end of 2015/16.
However, SRs in the UK typically cover longer time periods so it remains to be seen
whether the new Government is in a strong enough position (both politically and
economically) to conduct a longer-term review.
Given that we have agreed our funding with BIS (and the European Commission) up
to end 2017/18, there are two broad scenarios in which we could be pulled into the
next SR process:
a) the new government conducts an SR which extends beyond 2017/18, in
which case we would need to be ready to engage with Shex on updated
projections and options (and the underpinning evidence) to support their
negotiations with BIS Finance and HMT; and/or
b) there is pressure to reopen our existing funding agreement in 2016/17 or
2017/18. While the likelihood of a concerted effort to reduce this funding is
considered to be relatively low, pressure could come to bear on BIS from
Treasury officials. We are working with the Shex team to ensure they have
the arguments and evidence to explain the substantial legal, financial and
operational issues it would create.
In both scenarios it is critical that we set out a strong account of our commercial
performance and future plans to provide reassurance that we are doing everything
within our control to reduce the requirement for subsidy. Appendix 5 provides an
outline draft of the narrative intended to meet these objectives.
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8. Using the window after the election
There will be a period immediately after a new Government is formed where
ministers’ ability to instigate a change of direction or drive the formation of new policy
is at its peak. Even if there is a protracted period of inter-party discussions around
Government and policy formation, this essential dynamic remains — once senior
politicians commit to a path, the room for manoeuvre for change is limited.
We will brief Ministers in this early window of opportunity with a view to:
* protecting the current funding envelope while providing reassurance that we
are managing this spending carefully and using it to deliver clear progress
towards commercial sustainability (and thus lower subsidy in the future)
e preparing ministers to make the case to take tough decisions in future.
* playing to ministers’ agenda by demonstrating the ways in which Post Office
can help government deliver its objectives.
9. Key Considerations within post-election influencing
We should set out issues and potential difficulties early on, thereby reducing
surprises, and any resulting political challenge further down the line. Providing
ministers with an early and comprehensive picture of the commercial and stakeholder
context in which we operate will be key. We should assume limited prior knowledge.
Key considerations within the influencing approach will be:
e Market conditions and commercial performance — highlighting the tough and
fast changing market conditions in which we operate
« Future relationship with government — building confidence in our progress
towards commercial sustainability; emphasising the importance of maintaining
the current funding as a mechanism to enable future subsidy reduction; the
potential attractions of developing the POL-Govt relationship onto a more
structured, contractual like arrangement
e Network Issues (Cliff and Extension) — NT moves into a phase that could
create more stakeholder ‘noise’ after the election. It will be crucial to explain
context and the adverse implications for Government of any change of
direction in response to such short term noise.
e Mails/RMG relationship — importance that we have flexibility in a fast moving
market to meet our commercial needs
Other key issues on which we will focus (or could be drawn into) include
mutualisation, Sparrow, the NFSP agenda (linked to the cliff and extension) and
the union agenda (most relevant should Labour come to power).
Further detail on these considerations is at Appendix 3.
10. Key opportunities in the post-election influencing process
We will also use the post-election period to emphasise opportunities that promote
Post Office strategy through helping Government realise policy goals. Key areas
discussed by the Government Relations Steering Group include our role
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providing a national infrastructure, as the default provider of over the counter
services, as enablers of the ‘digital by default’ strategy, financial services and
partner banking and support for SMEs.
Further detail on these opportunities is at Appendix 4
11. POL narrative within influencing discussions
A draft narrative, drawn up through the Public Affairs, Policy and Strategy teams (and
work in progress requiring additional detail), is provided at Appendix 5. This is
primarily focused on the key requirement to protect our existing funding agreement to
end 2017/18.
The mechanics of influencing involve contacts with BIS officials, the new Minister,
other key Government contacts (Cabinet Office, Treasury) and with key MPs on a
cross party basis — and will use the range of techniques (briefings, visits, meetings).
Further details on the approach are given at Appendix 6.
Risks
12. There are a series of potential risks inherent in the post-election environment which
will have to be assessed in handling influencing of Government within this period.
Notably:
« The post-election period of Government formation is lengthy and uncertain carrying
the risk of paralysis of Government policy formation. Whilst the ‘business as usual’ of
current Post Office strategy implementation would continue in such an environment,
opportunity to influence future direction may be constrained.
e Other stakeholders may pursue an aggressive counter-narrative depending on
circumstances (e.g. NFSP, Unions, Paypoint). Whilst this will not deflect the
influencing approach outlined above, it will require more communication focus and
increases the requirement for more extensive public and media positioning.
* Network Transformation will be entering a potentially more controversial phase with
the Cliff as more reluctant postmasters are drawn into the Programme. The handling
of NT in these circumstances will need to be carefully co-ordinated with the
Government influencing strategy to avoid negative impacts.
Whilst these are real risks, the handling of them within the overall influencing strategy is
not considered to be outwith the company’s current risk appetite profile.
Conclusion
13. The post-election period is likely to produce an unprecedented political/stakeholder
environment — but it is one which Post Office Ltd must use to promote its corporate
position and to create an environment to facilitate current strategy implementation
and future strategy formulation. The analysis and approach outlined in this paper,
implemented flexibly in the context of ongoing monitoring of the political and
governmental environment, represents a structured route to achieving the best
outcomes for the company.
Mark Davies —- Communication and Corporate Affairs Director
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Appendices
Appendix 1 - Our ‘asks’ to date in pre-election party political influencing
Appendix 2 - Manifestos: Potential areas of policy interest
Appendix 3 - Detail on the key considerations within the post-election influencing
approach
Appendix 4 - Opportunities in post-election influencing
Appendix 5 - Outline narrative for use with new Government
Appendix 6 - Mechanics of Influencing in the post-election environment
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Appendix 1
Our ‘asks’ to date in pre-election party political influencing
1.
Provide the freedom and flexibility for the Post Office to compete in a fast-changing
marketplace, and to pursue its commercial strategy to 2020
Commit to the current Government's funding for the Post Office to 2018.
Leverage the branch network: use the Post Office as a Digital Front Office for
Government
Support POL mission to become a challenger brand in financial services through its
partnership with the Bank of Ireland, and to provide partner banking services
No binding commitment to a particular ownership model
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Appendix 2
Manifestos: Potential areas of policy interest (2015 Manifestos due mid-April)
Conservatives
The Post Office is unlikely to feature in the Conservative manifesto and we have not argued
against this state of affairs.
On mutualisation, the Conservatives are likely to offer warm words in support of a range of
ownership models “occupying the space between the public and private sectors” - an
agenda close to Francis Maude’s heart. However, the Post Office is not on Conservatives’
radar in this regard.
A Conservative government is more likely to stick to the current government's spending
commitments. However all policy areas outside the protected departments of health,
education and international development are vulnerable to further cuts.
Lib Dems
We understand that the current draft of the Lib Dem manifesto contains few (if any)
references to the Post Office, apart from a list of achievements in Government. A general
commitment to mutual ownership models may well remain a key pillar of Lib Dem policy. So
it is not inconceivable that the final version of their manifesto reaffirms a commitment to take
forward ‘examination of the mutualisation of the Post Office.”
If Liberal Democrats form part of the next Government, they are likely to fight to ensure that
the current government's spending commitments are adhered to.
Labour
Labour has intimated they need to give something to the CWU that stops short of a
commitment to re-nationalise the Royal Mail. So far they have focused on the future of the
USO in the face of competition and support RMG’s request to Ofcom to bring forward a
market review. It is also possible that Labour will pledge to secure the future of the link
between the Post Office and the Royal Mail. Although in private they admit they don’t know
how they would enforce this. Mutualisation is not a priority.
On spending, Labour policy teams have been told they will have to justify every pound of
every spending commitment. This includes the shadow BIS team who will have to make the
case with their Treasury colleagues for keeping to the current Government's spending
commitment for the Post Office to 2018. A 40% cut to the BIS budget under a Labour
Government has been mooted.
We have made the case with lan Murray (Jo Swinson’s shadow) that current spending is
helping put the Post Office on a path to commercial sustainability, paving the way to a
reduction in subsidy.
Last year Chuka Umunna MP (Vince Cable’s shadow) raised with us the idea of a Post
Bank. We reminded him of our relationship with the Bank of Ireland, and that this is the best
way for the Post Office to become a challenger brand in FS, without the huge capitalization
requirements setting up a Post Bank would entail.
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Appendix 3 — Detail on the key considerations within the post-election influencing
approach
These considerations are ranked in order of importance in an assessment by the
Government Relations Steering Group. They cover those issues on which we will need to
influence Government proactively to support our position, and those which we will wish to
seek to shape Government policy into supportive positions [e.g. Sparrow].
3.1.1 Market conditions and commercial performance
We will need to highlight the tough and fast-changing market conditions in which we operate.
We should assume no prior knowledge of either the increased competition in the mails,
home shopping returns and bill payments markets, nor the impact that this has on our
business.
We should also highlight the negative impact on revenue from the drive to move more
government services online.
3.1.2 Future relationship with government
Beyond the end of 2017/18 there may be attractions to moving the relationship with
Government onto a more commercially-focused basis, including potentially exploring the
scope for a longer-term funding contract which would effectively take us out of the whims of
the departmental spending review process. However, given the uncertainty around our long-
term market and financial projections, there are dangers with this approach, particularly at
the current point in time. We will be assessing these options with the GE in more detail as
part of the work leading to the June Board, with a view to reaching an agreed hierarchy of
preferences.
In the meantime our early engagement with ministers should focus on: a) building
confidence in our progress towards commercial sustainability; b) highlighting the importance
of maintaining the existing funding to end 2017/18, explaining that there are no credible
options to reduce the subsidy more rapidly; and c) setting out in high level terms the
potential attractions for both sides of moving to a more contractual relationship in the future.
In parallel we will engage Shex officials on the emerging options during May on a ‘without
prejudice’ basis, to test and socialise our thinking before any more formal engagement.
3.1.3 Network Issues (Cliff and Extension)
There is likely to be increased local “noise” as we enter the remaining stages of the Network
Transformation programme. We will continue to mitigate this noise as far as possible.
However this could result in pressure on ministers to intervene and we should not regard the
election in isolation from current discussions with the NFSP.
We should stress the importance of sticking to our plans, and seek Government support for
this. The implications of a change in direction (on future funding and in terms of Government
detailed involvement) should be made clear.
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At the same time, we should seek to dissuade a new minister from a renewed focus on
network extension from a political viewpoint— our priority has to be investing in the existing
network and pursuing extension for commercial purposes
3.1.4 Mails/RMG relationship
In a fast-moving market, flexibility will be key to commercial success and, subject to the
conclusions of the mails strategy review underway, we should move to dissuade any future
(Labour) administration from attempting to bind us more closely to the Royal Mail, or for a
longer period.
3.1.5. Mutualisation
While it won't be a high priority, it is likely that mutualisation of the Post Office will remain on
the policy agenda.
We should continue to stress that commercial sustainability comes first, while providing
examples of ways in which we are working more mutually (new IR framework, Post Office
Advisory Council, Business User Forums, engagement activity). We want to avoid any knee-
jerk political commitments, or extended dialogue over ownership structures on the grounds
that they simply divert attention and resource from the task in hand — commercial and
financial sustainability.
3.1.6 Sparrow
There is likely to be continued, though limited, interest in Sparrow. The recent Select
Committee Inquiry concluded with a letter to the Secretary of State, and the response was
as helpful as we could have hoped for, drawing a line under that particular angle of interest.
Any continued interest will be driven by a small group of MPs with constituents in the
Scheme. The leaking of Second Sight’s Part Two report could act as a catalyst for
continued media and political interest.
So while we have had some success in removing Sparrow from spotlight, there is no
guarantee that a new minister won't seek to win some early political points by re-visiting the
issue and he or she will undoubtedly come under pressure to do so. We should warn about
the risks of this course of action.
3.1.7 NFSP agenda
The NFSP will be seeking to influence a new government as early as possible so we should
be aware how their agendas will play to ours. Their influence is likely to be greater with
Labour ministers.
The NFSP will argue for continued subsidy post 2018, for community branches at the very
least. They will highlight the risk of closures if this is not forthcoming or if agents pay does
not increase. It is likely to highlight competitive pressures faced by sub-postmasters and can
be expected to voice continued opposition to Network Extension.
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They may highlight the partner banking work undertaken by the current Government and the
BBA, using this to make the case for the banks pay more for partner banking services, and
for sub-postmasters to retain a greater share.
The NFSP will make it clear that, as far as they are concerned, the last Government failed to
meet its objective to make the Post Office network the “front office” for its services, pursuing
its agenda of placing services online instead. In the case of contracts the Post Office did
win, the NFSP are critical of the fact that many of these services were only available in a
limited number of branches, and are low-volume, one-off or in one or two local authority
areas. They will make clear the detrimental impact this has had on sub-postmaster income.
They will argue that sub-postmasters urgently need new revenue sources, without which “we
leave POL unable to operate as an independent business; and the UK with a hefty bill for the
smartest, emptiest post office network in Europe” (NFSP Annual Review 2014).
The NFSP position in a post-election environment will be strongly related to the
outcome position from the Grant agreement discussions. The NFSO has its annual
conference on 11 May and is likely to use this platform to commence its own attempt to
influence a new administration. Our aim is that it has positions aligned to our strategy, but
we will prepare contingency lines should we face a more negative position.
3.1.8 Union agenda
The unions will also seek to influence a new government and will be campaigning for Labour
(and preparing to put significant pressure on a Labour administration). On the broader
strategic issues affecting the Post Office, the CWU and Unite share similar public policy
priorities. Both unions are more interested in the future of the Royal Mail than the Post
Office.
However, we can expect the CWU to push for: a continuing government subsidy to the Post
Office as a ‘public service’, more government services contracts to be channelled through
the Crown network; and a commitment to retaining the present Crown network (i.e. no
further franchising).
Unite takes a similar position, although it is less strident on the public subsidy and, privately,
more realistic on the long-term viability of the Crown network given increasing digitisation
across government as well as the retail and postal sectors.
Neither Unite nor the CWU have any influence or links with the Conservatives or Liberal
Democrats. The same is true, in Scotland, for the SNP. Unite is, however, the largest single
donor to the Labour party and will expect to see its agenda implemented in large part if
Labour forms the next administration. The CWU is not as close to the Labour Party and may
become even less so if the current internal election for a CWU General Secretary results, as
expected, in a new leader.
We will have delivered the first phase of our new IR approach by the time a new government
is formed. We know that the Conservatives will enthusiastically back this, as well as further
moves to re-frame our union relationship: Labour less so but the party will also be reluctant
to be seen to be overtly supporting union agendas.
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Appendix 4 - Opportunities in post-election influencing
We should also set out some of the opportunities provided by the Post Office, both as
political wins that the minister can claim (saving Premium Bonds in Post Offices) as well as
ways in which the Post Office can help the Government deliver its wider agenda (e.g.
enabling digital government). The following are opportunities perceived by the Government
Relations Steering Group as those which meet Post Office objectives and could have
political and policy attraction to a new Government.
4.1 A national infrastructure
The post-election environment provides the opportunity to remind politicians and parties of
the value that a commercially successful and financially sound Post Office has as a key part
of national infrastructure which can enable desirable policy outcomes (economic growth
through SME’s, efficient links between Government and citizens, financial and banking
reform, welfare reform, local retailing).
4.2 Post Office is the default provider of over the counter services.
Post Office has successfully provided in-branch services to government (Defra, DVLA, DWP
and the Home Office) for several years via DVLA’s Front Office Counter (FOCS)
frameworks.
Cabinet Office and BIS has previously promoted the FOCS framework to government
departments as the default contract for counter services, and we would like this to continue
and be strengthened in a policy sense.
4.3 Post Office as a Digital ‘Safety Net’
The Post Office can enable the Government to go Digital by Default by:
« Providing ‘step-out services’ to verify evidence, take photographs and other
biometrics allowing individuals to transact with Government digitally.
¢ Provide in-branch services for those who are unwilling or unable to transact digitally.
These could be self-service or face-to-face. For those unwilling the service could be
chargeable, for those unable it could be paid for by government. Either way,
government would still receive digital applications, allowing it to realise the savings
that accrue from moving to digital.
Post Office can enable government to move to universally digital services, by providing a
safety net for those who would otherwise be excluded from accessing digital government
services.
The FOCS framework could be used as a procurement vehicle for these services, and Post
Office would like the FOCS framework to be the default option for these services for
Departments.
4.4 Post Office can become the default Verify Identity Provider, particularly for
‘Difficult to Verify (DTV)’ customers.
The Post Office is well placed to become the default provider for Verify.
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« The reach of and trust in the Post Office brand means that Post Office is uniquely
placed to manage the public's electronic identity.
e Post Office is alone amongst Verify suppliers in being able to reach out to those
individuals who may not have enough of an electronic ‘footprint’ (‘DTV customers) to
be able to get and maintain an electronic identity by assuring identity’s in branch.
We should ask Government to:
e Promote Post Office as the default partner for handling thin-file customers, either
through the Verify framework or FOCS.
« Work with us to ensure that we are closely associated with the use of identities
across Government. .
4.5 Providing Multi-Channel Services
Government should recognise that Post Office is a digital organisation, able to provide fully
digital services in addition to those provided in-branch. This allows us to offer complete
multi-channel services, in addition to or instead of Government, in a way that is cost-
effective.
4.6 Partner Banking
We would want to continue Government recognition of the Post Office as a fully-fledged
‘challenger bank’ which is a significant player in the reform of the UK banking system — as
well as the parallel position of the Post Office network as a part of the universal ‘UK banking
infrastructure’ enabling access to accounts with partner banks (at commercial contract rates
paid by the banks so that they can meet their infrastructure requirements).
4.7 Premium Bonds
Our current contract with NS&I ends in September 2015 and NS&I are looking to get a view
from HMT regarding the extension of the contract (as it was a year ago). The purdah period
means the decision (by HMT) cannot be taken until a new Government is in place. Therefore
NS&l are preparing their case for extension so that a decision can be made as soon as
possible thereafter.
Post Office will need a decision from HMT/BIS in May/June since Post Office cannot
continue to sell premium bonds without being remunerated (from August 2015).
We should therefore stress to BIS minsters the importance of an early, favourable decision.
4.9 SME support
All parties are committed to support SME growth, which in turn is recognised as a key motive
force in the development of the economy over the next five years. The positioning of the
Post Office as an essential infrastructure to help SME’s develop is attractive across the
political spectrum (all the smallest SME needs to grow is access to the internet and a nearby
Post Office and it can trade with a vastly enhanced customer base). Promoting Post Offices
as infrastructure that accelerates economic activity and opportunity is a critical part of a
growth narrative — necessary to counter perceptions amongst politicians of the Post Office
as a legacy outfit catering for a diminishing non-digital base.
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Appendix 5 — outline narrative for use with new government
KEY MESSAGES:
1.
We are making steady progress towards commercial sustainability, managing the
commercial challenges while safeguarding our trusted brand, social purpose and
network of over 11,500 branches
The Government can have confidence that we are a credible commercial entity that
is delivering against its plans, taking a strong line on costs and succeeding in a
tough competitive environment.
As a result, the financial support required from Government will continue to fall,
delivering strong value for money in policy terms
Beyond 2017/18 the Government has clear choices between moving towards a
purely commercial service with no government support versus protecting our social
role in return for a limited annual payment. We will deliver an approach which best
serves our customers and recognises the pressure on the public purse — our key
requirement is to have clarity and the commercial flexibility required to survive in
tough competitive markets.
These choices are not cheap and cannot sensibly be accelerated without incurring
disproportionate costs and substantial legal complexity.
ADDITIONAL DETAIL:
1.
We are making steady progress towards commercial sustainability, managing
the commercial challenges while safeguarding our trusted brand, social
purpose and network of over 11,500 branches
Post Office has agreed a strategy with Government designed to tackle the underlying
economic challenges facing the network while safeguarding the essential role we
play in communities.
The primary objective is to achieve commercial sustainability and the most significant
target is to break-even before network support (‘EBITDAS’).
To support the execution of this transformation the Government has provided £360m
in investment funding over the three years to March 2018, in addition to £280m over
the three years to support the non-commercial branches maintaining a network of
over 11,500 locations.
Four key planks to the transformation programme, set out below.
Firstly, modernising our network of over 11,500 branches in order to:
© move agents onto new contracts which: a) pay them on a variable basis to
incentivise stronger sales performance and make the business more resilient to
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market downturns, saving at least [£45m] pa; and b) remove the right to exit
compensation to ensure that future investment is focused on strengthening the
network rather than on those leaving the business;
o deliver a better experience for customers through longer opening hours (over
100,000 additional hours per week already) and brighter, more modern store
environments.
Secondly, overhauling our IT infrastructure, both in-branch and in the back office.
Existing system is over 20 years old, and is crippling our ability to compete because
of high operating costs and inflexibility. More importantly, without it, the PO will
simply stop functioning — out of support software, Fujistu data centre etc. New
infrastructure will save c£27m pa and enable us to respond more rapidly to new
requirements, supporting our ability to compete in dynamic markets.
Thirdly, reducing costs through a more streamlined operating model. Staff numbers
in central teams have reduced by 25 per cent; reduced central costs by £60m in
2014/15 and will increase this to £100m annualised savings by the end of 2015/16.
[Add more detail on what we've done and show the evidence]
Fourthly, re-establishing profitable revenue growth in the face of structural declines in
traditional areas such as mails (especially letters), government services and
payments. In particular we're:
o establishing the Post Office as a major challenger brand in financial services,
delivering significant topline growth as well as building genuine asset value
particularly in insurance; [add more detail]
© ensuring we're positioned to benefit from the growth of parcels and e-
commerce [add further detail in light of mails strategy], and
o supporting the government's shift to digital by default, including as one of the
approved providers of identity assurance — providing citizens with a
reassuring and trusted name to help them navigate the shift to online
interactions with government.
[Add further detail if required to recognise that some revenue streams have not
materialised as expected — highlight structural declines vs new growth separately to
show the headwinds we're facing.]
The transformation programme is already delivering remarkable results, despite
challenging market conditions:
o Inthe financial year just ended we reduced our pre-subsidy losses to [£64m],
down from £115m in 2012/13. [Hit our profit target in each of the three years
since separation];
o Crown network is on track to reach breakeven in the year ahead, having
suffered annual losses of around £40m just a couple of years ago;
o and by 2017/18 we expect to achieve the historic milestone of generating a
profit before subsidy for the business as a whole. (NB although this doesn’t
mean subsidy can therefore just be removed because we won't be sufficiently
cash generative to cover ongoing needs such as investment).
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e Sustained improvements in profitability is enabling us to reduce the network
subsidy payment rapidly, from £210m in 2012/13 to £70m in 2017/18 — equivalent
to an annual real terms decrease of over 20%.
« Show that EBITDAS has been delivered on plan to date in spite of income
challenges
e This has been achieved while maintaining over 11,500 branches and continuing to
meet our network access criteria, avoiding the closures that were required in
previous restructuring programs.
2. The Government can have confidence that we are a credible commercial entity
that is delivering against its plans, taking a strong line on costs and
succeeding in a tough competitive environment.
e Market challenges (particularly in mails and government services) mean that we
are now on track to achieve breakeven around a year later than envisage in the
Strategic Plan — but we are making steady progress and delivering against the
factors within our control
« While we have already made significant progress in transforming the business,
there is more to be done over the next 3 years to complete the job. We need the
Government's ongoing support in this regard — both in terms of backing the
difficult decisions we have to take (NT, workforce reform etc.) and maintaining the
existing agreed funding.
e [Add further detail to build on the proof points in the actual delivery to date, to
explain why the Government should be confident that that our plans will be
delivered:
- Where are the next three years of cost savings coming from?
- Where is the new income coming from?]
3. As a result, the financial support required from government will continue to
fall, delivering strong value for money in policy terms
e Including investment funding, total payment from government is reducing from
£410m in 2012/13 to £140m in 2017/18.
e Provided we maintain this strong progress towards commercial sustainability,
would expect to be able to maintain the existing size of network with an annual
subsidy payment in the region of £50-70m pa, far lower than the historical run
rate.
e [NB will need defensive lines to respond to the potential suggestion that the Rol
has declined relative to Strategic Plan expectations. ]
« Because the Post Office is primarily funded by commercial activities, the
Government gets a lot in return for this annual payment — we're a key part of the
national infrastructure:
a. acornerstone for communities in rural and urban deprived areas, supporting
social and economic inclusion in localities where services would otherwise be
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absent. 99.7% of UK population live within 3 miles of a Post Office;
b. this role encompasses both the direct services we provide (access to
cash/banking, mails and government services) and also the intangible but
crucial role we play in communities — social value estimated at £2.3-£10.2bn
pa according to 2009 NERA study; 85% of postmasters say they look out for
vulnerable customers on a regular basis;
¢. supporting competition in the banking sector as one of the faster growing
challenger banks in our own right, with £3m customers and over £16bn in
savings — providing a trusted alternative to the high street banks;
d. playing a key role in supporting small businesses — around a third of SMEs
visit us each week to conduct banking, access the benefits of e-commerce or
interact with government. Also a network of local businesses in our own right,
with over 97% of the network run on a franchise basis;
e. we're the third largest distributor of cash in the UK — with c430 vehicles
shifting £33bn across the country each year, including in the remote areas not
serviced by our competitors. One of four members of the Bank of England's
Note Circulation Scheme. We're also growing our cash services to other
retailers, providing much needed competition in a market that would
otherwise be dominated by just two nationwide players;
f. akey partner in the delivery of government services - including for DWP.
(POCA), Home Office (passports & biometric residence permits) and the
DVLA (driving licences). And we're ready to support the shift to digital by
default both as one of the approved providers of identity assurance and also
as the only credible nationwide institution capable of providing assisted digital
services for those who need it.
Besides these policy outcomes, this spending is arguably good value for money in
political terms, avoiding the need for another noisy and painful programme of
branch closures (last programme was met with substantial public opposition,
including a petition to No.10 signed by 4 million people).
Beyond 2017/18 the Government has clear choices between moving towards a
purely commercial service with no government support versus protecting our
social role in return for a limited annual payment. We will deliver an approach
which best serves customers and recognises the pressure on the public purse
- our key requirement is to have clarity and the commercial flexibility required
to survive in tough competitive markets.
If we were running a purely commercial network, it would have around xxxx full
branches and xxx parcel points.
Outlying communities would need to be serviced through lower cost operating
models, such as outreach vans.
The run rate savings would be in the regions of £xm, which would enable us to
maintain a profitable business free of government support
[Set out further detail on social and political impacts — numbers of branches
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closed, how many constituencies, service impacts etc]
« In addition to the social and political impacts, the restructuring costs to move to
this shape of network would be in the region of £xm. [add further detail on
comparative Rol vs ‘Plan A]
¢ There would also be a point at which the Government would need to consider the
ownership choices if the business were to move to a fully commercial basis.
5. These choices are not cheap and cannot sensibly be accelerated without
incurring disproportionate costs and substantial legal complexity.
e There are no credible quick wins to unpick the existing funding to 2017/18 that
wouldn’t jeopardise our ability to achieve commercial sustainability and therefore
represent worse value for money for taxpayers in the long term.
e Pursuing an accelerated restructuring to get to a fully commercial network would
cost an additional £xm in transitional costs, worsening the Rol, and would raise a
number of significant legal and stakeholder issues [add details]. Even then we
couldn't feasibly execute such a plan in less than x years.
e Also need to take into account the fact that existing contractual funding
agreement has been approved by the European Commission and is taken into
account by our auditors and independent Board of Directors in assessing our
going concern status. If there were perceived to be a material threat that this
agreement would be reopened then it would raise serious issues for our directors
and commercial partners.
e If the government could do more to commercially underpin POL in the interim
period through profitable new revenue streams then our subsidy requirement
might reduce.
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Appendix 6 — Mechanics of Influencing in the post-election environment
How?
Briefing meeting with the new minister as soon as possible after this is
announced.
The new minister is also due to attend the Board Away Day on 17" June
Briefing meetings with other key ministers (HMT, Cabinet Office).
Fix visits to Kennington Park flagship (digital) and constituency branches for
ministers.
Parallel engagement strategy with MPs in new Parliament. To include: early
briefing for all MPs , offer introductory meetings with all new MPs, Westminster
drop-in session for all MPs in June, briefing meetings with key MPs (shadow
ministers, BIS select committee, All Party Group)
Build relationships with other channels across Government (Special Advisers,
key officials, Parliamentary Private Secretaries)
The Public Affairs team and other colleagues already have good links with key
contacts likely to feature in the new parliament and government. We will seek to
exploit these.
Who?
Assuming current departmental responsibilities:
.
.
Minister for Employment Relations and Consumer Affairs (BIS) and
advisers/allies
Secretary of State (BIS) and key officials
Chief Secretary to the Treasury and key advisers/officials
Minister for the Cabinet Office and key advisers/officials
Permanent Secretary, BIS and key advisers/officials
Key MPs (opinion formers, select committee members, opposition spokespeople)
Special Advisers across Govt including key departments (DWP, Home Office)
and including No 10
Key political commentators (media, thinktanks etc.)
When?
Immediate post-election window in which to influence, before Ministers are asked
to make departmental funding decisions in the summer.
General Election: Thursday 7" May. The next parliament will meet for the first
time on Monday 18" May to elect the Speaker and swear-in members. The state
opening of Parliament, which will feature the first Queen’s Speech for the new
Government, has been confirmed as due to take place on Wednesday 27" May.
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