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To Baroness Neville-Rolfe
From Annette Rusling, ShEx! GRO I
Date 22 January 2016
Meeting with Tim Parker, Post Office Chair
0900-0930 Tuesday 26" January
Purpose
o The meeting is an opportunity for Tim Parker, Chair of Post Office Limited (POL),
to update you on the progress of his review into legal challenges relating to the
Horizon IT system and also to discuss his impressions of the business a few months
into his Chairmanship.
Attendees
o Tim Parker
o Laura Thompson, ShEx.
Our objective
o. To hear Mr Parker’s reflections the business following his first few months as Chair
o To discuss the progress made in his investigations relating to the Horizon IT system
o To discuss the restatement of last year’s account following a provisioning error
His objective
o As above, plus Mr Parker may want to outline POL’s recent agreement on access to
banking services.
Issues
o After Mr Parker met the Secretary of State in November (meeting note in Annex A),
the Secretary of State asked officials to examine potential future ownership options
for Post Office Limited.
o Mr Parker does not yet know about this work - it is appropriate that Government, as
Shareholder, first clarifies its position before engaging with POL. However, you
should still take this opportunity to hear Mr Parker’s view of the future direction of
the business, having been in post since October.
CC list: Private Offices, Spads, ShEx POL Team, Comms
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AGENDA FOR MEETING
I. MAIN POINTS FOR DISCUSSION
Review of Post Office’s Horizon IT system
¢ You asked Mr Parker to undertake a review of Post Office’s Horizon IT system,
specifically, the complaints received about potential errors in the system, and Post
Office’s handling of those claims.
¢ As previously advised, he appointed a QC (Jonathan Swift, former First Treasury
Counsel) to assist him in this review. He has held a number of meetings including
with Lord (James) Arbuthnot and with the independent investigators Second Sight.
¢ Mr Parker is currently in the process of finalising this work, and we expect he will
want to explain his initial thoughts on what he has found and what further steps he
wants to take. We suggest you discuss with him whether and how the findings of his
work might be made public. Andrew Bridgen MP and Oliver Letwin MP have
expressed interest in hearing the outcome of his review.
You should also note that:
e The Criminal Cases Review Commission (CCRC) continue their investigations into
a small number of applications (c.20) and Post Office continue to provide the CCRC
with all information requested. There is still no indication that the CCRC will
complete their investigations any time soon.
¢ Further to the November press notice that the Justice for Subpostmasters Alliance
(JFSA) are preparing a group action against Post Office on this matter, Post Office
had some limited correspondence with the legal firm appointed by the JFSA, Freeths
Solicitors, but are yet to receive any letter before action.
Provision/ accounts restatement
¢ POL has now completed its review of the error and will be issuing their interim
accounts (with restated prior year figures) this coming week (w/c 25 January). POL
has confirmed the magnitude of the error (£87m) but that the estimated cost of the
overall Network Change Programme remains at £430m and that neither the company
nor subpostmasters have suffered any losses.
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Mr Parkers reflection on the business
e Mr Parker joined the business on the 1st October. Since that point he has held three
Board meetings, and appointed two new non-executives. The most recent Board
meeting took place on Friday 22 January, which was the first with the two new
NEDs (Ken McCall and Carla Stent).
¢ His initial views of the businesses are forming (see Annex A) and he will discuss
with you his further reflections
¢ You may wish to ask him about what he sees as the future direction of the business,
and how Government can assist
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II. GENERAL BACKGROUND ON CURRENT PERFORMANCE
e Although YTD revenue is £4m (0.6%) behind budget, operating profit is £3.1m
(4.8%) ahead of expectations on strong cost performance.
¢ Revenue impacted by weaker than expected performance in Travel Insurance,
withdrawal of the NS&I contract and lower supply chain income.
© Costs are ahead of budget, driven by lower subpostmasters costs which have been
partially offset by higher staff and non-staff costs.
e POL sees trading risks and opportunities in the 4th Quarter; currently income risks
are offset by lower expenditure.
« Management expects to be able to meet budget operating profit in the year to March
2016. This is reassuring although below budget revenue remains a concern.
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Annex A
Readout of Secretary of State Meeting with Tim Parker
SoS meeting with Tim Parker, Chair, Post Office Limited, 24 November 2015
SoS opened by thanking TP for taking on the job as POL Chair. He then asked TP to
set out the key challenges facing PO.
TP explained that the ‘public sector inheritance’ is still a big factor - POL is a young
company with many of the characteristics of a public agency. POL has a high cost
structure and while Crown branches are profitable there is a significant tranche of
branches that have barely any footfall/revenue.
Furthermore, POL is facing increasing competition in the mails market, and more and
more mail is heading online. There is also increasing competition in the financial
services sector, in which POL has interests.
POL is slowly trying to wean itself of Govt subsidy, TP added, and there have been
“steady improvements all round”. He does, however, worry that POL may “hit a buffer
revenue-wise” in the medium term (2-3 years), and noted the challenge of keeping
11,500 branches open in this context.
Further challenges were that POL revenues driven by Govt services continue to
dwindle; this makes sense to him, it seems an anachronism that many benefits are
distributed by POL and not digitally.
TP said his principle concern about the future of POL is its contractual relationship
with Royal Mail, which is up for renegotiation in the next couple of years.
The SoS asked if POL could move in to other markets.
“Not really, no”, TP replied. He reiterated that some POL branches are very profitable
and could be spun out as part of a broader retail business. Where POL branches are
“last shop in town”, he feels they would be better served be offering a range of public
services (eg NHS outreach) under one roof.
The problem with trying to get a private operator to absorb Crown branches is that this
cohort of branches are highly unionised and the staff benefit from higher wages and
superior benefits than the employees of, say, WHSmith (the kind of business you
would expect could be interested in POL).
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Ultimately, however, this kind of change is TP’s vision, but it is a question of appetite
among politicians and POL’s management — he reiterated that there would be real
handling challenges to any privatisation push on POL.
SoS said it was better to take these fights on at the beginning of a Parliament rather
than when a Govt had lost momentum. He asked TP what issues would need to be
resolved in order to make POL really attractive to the private sector.
TP repeated that it is the Royal Mail relationship that must be resolved. He wondered if
Royal Mail itself might want to own POL eventually.
SoS asked if the POL Exec Team is of the necessary calibre to explore radical options
for POL.
TP equivocated on this, but then backed his team.
In AOBs, TP said Paula Vennels (POL CEO) deserved a pay rise — SoS agreed but
noted the handling difficulties.
TP also asked that POL not be included as one of the agencies that are bound by the
exit payment rules that will come in via the Enterprise Bill.
SoS acknowledged TP had a “good point” but made no firm commitment.
Closing, SoS thanked TP for his ideas and said the Govt should explore reform options
for POL.