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Shareholder
Executive
HM Government
Post OFFICE LIMITED (“POL”)
MEETING WITH PAULA VENNELLS, CHIEF EXECUTIVE OFFICER
BRIEFING ANNEXES AND SUPPORTING INFORMATION
JUNE 2015
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@ Annex A: PossiBLe AGENDA PoINTs For DiscussiON
FINANCIAL = POL beat operating profit targets for the year ending March 2015 (outturn of £100m vs. budget of £99m)
PERFORMANCE although revenue fell short of budget by £55m. Results were therefore mainly driven by cost control.
= Paula may reflect on this, particularly after a very difficult start to the 2014/15 financial year. It shows that
the business is willing to take hard decisions and focused action to respond to underperformance.
= POL’s annual report is scheduled to be published at the end of this month. Furthermore the new financial
year has also started well, and after one month POL is ahead of budget in revenue and operating profit.
LonG TERM = POL is working on a refresh of its strategic plan and expects to present this to HMG mid-year. Although it
STRATEGY is likely to move away from existing targets POL is confident of operating in line with available funding.
6) = Paula might want to talk about the progress POL have made in their plan to date, including highlighting
the main challenges faced and those ahead.
NETWORK = Paula may want to update you on NT; progress has been strong and to date more than 75 per cent. of
TRANSFORMATION eligible branches have been modernised or are contractually committed to be transformed.
(«NT”)
= Paula may also want to talk about actions being taken to complete NT by the planned end-date in 2018.
This includes communicating with a number of branches in coming weeks of changes to contract terms.
NATIONAL = Paula may update you on progress to agree a new funding model for the NFSP, who are the
FEDERATION OF representative body for subpostmasters and who boast a membership of >6,000 operators of branches.
UBPOSTMASTERS : : ae Hop
ads = This new model looks to move the NFSP away from being a subscription based organisation, negotiating
on behalf of subpostmasters, to one where its interests are better aligned with POL.
@& Shareholder
7 = See relevant supplementary information page
Executive @
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@ Annex A: PossiBLe AGENDA POINTS For DISCUSSION (CONT’D)
Premium BonDs/ = NS&lI has confirmed that it is not renewing its contract with POL for the sale of Premium Bonds. This is an
NS&l iconic product which POL has sold for >60 years, and it will be withdrawn from branches from August.
= From a shareholder perspective this is disappointing. The contract delivers £8.5m revenue per year and
its loss will very likely trigger hostile reactions — focused on HMG — from stakeholders and the press.
= You have been sighted on advice provided to Baroness Neville-Rolfe on 9 June; following this a call is
being scheduled between the Minister and Harriett Baldwin at HMT to discuss the situation.
= Paula may also use this issue to prompt a discussion about POL’s business with Government more
generally (e.g. traditional Government services revenues are declining with the move to digital).
BANKING = POL are working with the BBA and high street banks to develop a standardised service to all personal
SERVICES and SME current account customers in the UK (e.g. withdrawals and deposits). This is important as with
banks continuing to shut branches POL is increasingly the only provider of these services in many
communities.
= Discussions have slowed in the past few weeks although negotiations are continuing. Paula might want to
seek your views on this topic, and on access to finance (and POL’s role here) more generally.
= You have been sighted on advice provided to Anna Soubry on 10 June; this seeks guidance on what role
BIS should play in this area after some negative press coverage following the General Election.
HORIZON IT = There continues to be no evidence of systemic fault with POL’s IT system and the mediation scheme is
@rm ongoing. This remains independent of Government, and POL are supportive of this approach.
= Paula may want to discuss POL’s handling of the Horizon mediation scheme and the forthcoming BBC.
Panorama programme on this, which is tentatively scheduled for Monday 29 June.
@& Shareholder
7 = See relevant supplementary information page
Executive @
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@ Annex B: BiloGRAPHIES OF POL ATTENDEES
I PAULA VENNELLS, CHIEF EXECUTIVE OFFICER
I
Paula has worked for Post Office Limited since 2007 in a number of senior roles including Managing Director. I
i She became Chief Executive on 1 April 2012. Previously Paula spent five years with Whitbread plc latterly as I
Group Commercial Director. She began her career with Unilever and L’Oreal and held directorships in sales and I
marketing with a number of major retailers including Dixons Stores Group and Argos. She is currently a Non-
: Executive Director and Trustee for Hymns Ancient and Modern Group.
: AL CAMERON, CHIEF FINANCIAL OFFICER
Al became the Chief Financial Officer of Post Office in January 2015. He is also a non-executive on the Board of
i Oxford University Hospitals. From 2002-14 Al worked in a variety of roles for Centrica plc, a FTSE 100 company,
including Director of Audit & Risk, Group Financial Controller, Finance Director of British Gas and Managing I
i Director of British Gas Enterprise. Previously he was a partner with Arthur Andersen and served as a trustee of I
the e-Learning Foundation. I
Note: Richard Callard and Tim Mcinnes will join the meeting from The Shareholder Executive. Richard is a Non-Executive on
the Board of POL and has led the shareholder team for about 14 months, and Tim has worked on The Shareholder Executive
team for 3-years with primary a focus on financial monitoring, funding, State aid and strategy.
@& Shareholder
Executive
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SUPPLEMENTARY INFORMATION
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@) OVERVIEW OF POL
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POL operates a network of c.11,700 Post Office branches, and delivers a
wide range of services across mails and retail, financial services,
Government services and telephony markets. This network is larger than all
the branches operated by the high street banks combined.
The business owns and operates about 300 of its branches, known as
Crowns, which account for c.15 per cent. revenue. The remaining 11,400
branches are managed by independent entrepreneurs known as
subpostmasters, who operate standalone post office branches or branches
that are co-located in other retail premises (e.g. convenience or grocery).
POL has c.6,700 direct employees who mainly work in its c.300 owned
branches, its cash management operation and its network support function.
It is however also responsible for the employment of more than 50,000
additional people via its subpostmasters and their employees.
In 2014/15 POL generated revenue of £870m (£1,030m including Network
Subsidy) and an operating profit of £100m. POL’s most significant cost is
payments made to subpostmasters — in 2014/15 £435m was paid out to
c.11,400 subpostmasters, averaging c.£38,000 per branch. After
subpostmaster payments, POL’s largest expenditures are: Staff Costs
(c.£234m); IT (c.£104m); and Property (c.£53m).
Shareholder
Executive
REVENUE SPLIT (% REVENUE)
TOTAL 2014/15 REVENUE: £870M
a
33%
MAILS AND RETAIL HI FINANCIAL SERVICES
GIGOVERNMENT SERVICES ——_[7] TELEPHONY AND OTHER
REVENUE & PROFIT PERFORMANCE
1,000
900
800
700
600
500
400
£ REVENUE £ OPERATING PROFIT
865 867 870 875
11/12A 12/13A 13/14A 14/15A 15/16B
Wi TOTAL REV. ~O=Op. PROFIT ~O=Op. PROFIT (PRE-SUBSIDY)
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@) OVERVIEW OF POL — 2014/15 FINANCIAL PERFORMANCE
€m 2014/15 2013/14
ACTUAL ACTUAL
MAILS AND RETAIL 383.5 385.8 internation
Partially offse
FINANCIAL SERVICES 289.3 279.6 : 3.5%
GOVERNMENT SERVICES 113.0 114.9 (1.9) (1.6%)
TELECOMS 47.2 46.0 {2 2.7%
OTHER 37.0 40.5 (3.5) (8.6%)
NET INCOME 870.0 866.7 3.3 0.4%
STaFF Costs (234.0) (253.9) (7.8%)
POSTMASTER COSTS (434.9) (447.6) (2.8%) shift to digi
POca revenue, due to higher c
Non-STAFF Costs (273.3) (264.8) 3.2%
ONE-OFF PROJECT Costs (23.2) (26.0) (10.9%)
Overall cost f bread
TOTAL EXPENDITURE (965.4) (992.3) (2.7%) efficienc IT
outsource a tain one-off
FOREIGN EXCHANGE JV INCOME 35.8 33.1 2k 8.3% in IT and marketing
EBITDAS (59.6) (92.5) 32.9 (35.6%)
DEPRECIATION (0.4) (0.4) (0.0) 3.2% ed by £7m but on
£40m
NETWORK SUBSIDY 160.0 200.0 (40.0) (20.0%) by 35 per
a cent 3 >I and
OPERATING PROFIT 100.0 107.1 (OM (6.6%) [ concerted cost management, supported by a robust
OPERATING PROFIT (PRE-SUBSIDY) (60.0) (92.9) \329/] (35.4%) — I or-line
Shareholder
Executive
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OVERVIEW OF POL FUNDING
Government provides funding to POL in order to maintain a network beyond its optimal commercial size and footprint, and to
make this network more efficient. Currently the requirement is for POL to operate a network of more than 11,500 branches
which meets 5 clearly defined access criteria (e.g. 99% of the UK population must live within 3 miles of their nearest post office).
There is a legally-binding funding agreement between Government and POL linked to this.
Since 2010 Government has committed £1,975m to POL. This has been focused on two areas:
NeETworK Sussipy (£1,030m): Payment to maintain a network of post offices in line with Government's requirements. This is
recognised by POL as revenue in its accounts.
INVESTMENT FUNDING (£945m): Funding for POL to invest in its network, to make it more efficient and less reliant on taxpayer
funding. This is recognised by POL as a direct cashflow in its accounts.
As a result of its network modernisation strategy, cost efficiencies and revenue growth POL anticipates being able to reduce its
recurring funding requirement to around £50m from 2019/20. This would support >3,000 branches which serve a “social” purpose
but which would not be financially viable in their own right.
FUNDING PROFILE (£m)
600 ee Nore: (A) + (B) = £1,975 ——EE 7 :
PREvious FUNDING: £1.34BN (A) CURRENT FUNDING: £640M (B) © IN FUNDING
500 410 415 a
400 330s : : : I
. 280 : : I
200 ‘ : : :
300 ise 215 i : ee I
200 : 1500 ago
140 —
11/2 12/13 13/14 14/15 15/16 16/17 17/18 18/19E 19/20E
Shareholder i NETWorK SussiDY INVESTMENT FUNDING
Executive 8
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LONG TERM STRATEGY
POL’s strategy was developed in 2013 and covers the period to March 2020. It represented a continuation of POL’s previous
plan and forms part of the basis on which POL secured Government's recent £640m funding commitment. It is focused on
delivering a financially sustainable POL, less reliant on subsidy, and is centred on three core pillars.
PILLAR I: NETWORK TRANSFORMATION
= Aim: Complete the network investment strategy, modernising branches to improve customers’ experience and making them
less reliant on taxpayer support.
= Status: Generally has progressed in line with plans.
PILLAR Il: REVENUE GROWTH
= Aim: Increased sales in existing areas and launch of new products and services, focusing on particular strengths in mails and
retail, financial services and Government services.
= Status: Slower than expected progress, with low demand growth, fewer new contracts than expected (particularly in
Government Services) and intense competition.
PILLAR Ill: TRANSFORMATION AND EFFICIENCY
= Aim: Reduce costs through a significant transformation of POL’s IT infrastructure and a restructuring of the corporate
overhead.
= Status: Again, progress has been slower than expected, particularly due to frequently volatile or hostile relations with key
stakeholders including subpostmaster and employee representatives.
POL has been working on a refresh of its strategic plan for the past few months, which is expected to be presented to
Government in mid-2015. We expect that the main objectives and pillars of this will remain the same, but that some details might
change and financial targets will be reduced. However, POL is confident that it will be able to deliver the refreshed strategy in
Brspathtpegyalaole funding.
Executive
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@ Lone Term STRATEGY — NETWORK TRANSFORMATION
NT was developed in 2010 as a strategy to transform and modernise both the
Crown post offices and agency post offices operated by subpostmasters. The
aim of NT, by adopting new operating models and subpostmaster contracts, is = _£ SUBPOSTMASTER CosTS % FIXED
to: 3
© 483 478g
(i) Improve customer experience by investing in branch environments; S 7 435 429
7 a _ g I 186 ve ME 108 88
(ii) Improve operator performance with increased footfall and efficiency; .
9
(iii) Make POL’s costs more flexible, so costs move with revenue; and g a 21%
; ; “327 332 321 327 341
(iv) Reduce POL’s reliance on taxpayer support.
To date more than 75 per cent. of eligible branches have transformed orhave °
contracted to do so. Key performance indicators include: TU12A 123A 134A 145A 15/168
Variable Pay Fixed Pay —Q=% Fixed
= c.4,300 branches have transformed and a further c.2,255 have
contractually committed to modernise (i.e. pipeline of transformations);
= > 3,000 further “last shop” branches are protected, making sure May 2015 ToraL: 11,684
communities that need to access services continue to have access; 12,500
: a" = Crowns
= > 125,000 opening hours have been added across the Post Office 10,000 = Traditional Branches
network and > 2,500 branches are now open on Sundays; 7500 = Other Committed to NT
= Customer satisfaction ratings with the new branches are 98 per cent. ; = Main and Local Pipeline
And operator satisfaction ratings are above 80 per cent.; and 5,000 = Local
2,163 Main
= Transformed Post Offices are seeing average increases in retail sales of 2,500 = Community and Outreach
(1) Transformed ire GRIM LoL AAKU Go kA BEES GA SHS tN ONEin and Local Pipeline; and Other Committed
to NT. Together these are >75 per cent. of the eligible branches (i.e. total Network less Community and Outreach) 0
Post Office Network
Note: Traditional Branches have not engaged with NT or are in the early
Shareho Ider stages of doing so. POL is taking action in 2015/16 with these branches
Executive
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HORIZON SYSTEM AND MEDIATION SCHEME
Following complaints from a small number of (mostly former) subpostmasters about the Horizon IT system, in 2012 the Post
Office commissioned an independent firm, Second Sight, to examine the system for systemic flaws that could cause accounting
discrepancies.
Second Sight’s interim report, published in July 2013, and final report, published in April 2015, both make clear that there is
no evidence of system-wide problems with Horizon.
The interim report raised some questions about the training and support offered to some subpostmasters, and Post Office
implemented a series of measures to improve its processes and also created a mediation scheme to consider individual
subpostmasters’ cases.
A working group was created to set up the mediation scheme, consisting of POL, Second Sight and the Justice for
Subpostmasters Alliance (“JFSA”) and with an independent Chair: Sir Anthony Hooper, a former Court of Appeal judge.
Each case in the scheme was subject to a re-investigation by POL and independent review by Second Sight, after which the
case could proceed to mediation overseen by an independent mediator. Mediation is voluntary and requires the consent of
both parties. It is not a compensation scheme, although an outcome of mediation could be for POL to offer some
compensation.
Individuals who had criminal convictions (usually for theft or false accounting) were eligible for the scheme, but on the basis
that mediation cannot overturn a Court judgment. POL consider whether to mediate these applications on a case-by-case
basis. Any individual who feels their conviction is unsafe can pursue legal avenues, regardless of whether they enter into
mediation.
POL hopes to complete mediation on all remaining cases by the end of 2015. However JFSA are attempting to delay any
future mediations and are campaigning for a new independent scheme.
POL’s Horizon System and Mediation Scheme has received some coverage in printed and broadcast media, mostly driven by
the JFSA. In particular it has featured on the BBC’s “The One Show’ and regional airings of “Inside Out”.
@ASprisedeoidranorama on this topic is due to be broadcast on 29 June. This will mainly be a matter for POL but officials have
been workingslosely with POL, Ministers and SPADs to make sure any risks related to this are managed appropriately.. 1"
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® POL REVENUE SPLIT
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MaiLs AND RETAIL REVENUE (£m) FINANCIAL SERVICES REVENUE (£m)
TOTAL 2014/15 REVENUE: £383.5M
TOTAL 2014/15 REVENUE: £289.3M
IB PARCELFORCE
CIINT'L PRIORITY & STANDARD
MLaBELs (1ST & 2ND CLASS)
HRM MAIL FIXED
Home SHOPPING RETURNS
(SPECIAL DELIVERY
MiSTAMPs (1ST & 2ND CLASS)
MRM SIGNED FoR
MRETAIL & LOTTERY
MAILS OTHER
MIBILL PAYMENT SERVICES DIRECT
[IPosTAL ORDERS
[PERSONAL BANKING CLIENTS
MIBUSINESS BANKING
(i PFS-Savincs
(I PFS-LENDING
(TRAVEL INSURANCE
MNS&l
BILL PAYMENT SERVICES RESELLER
(PAYMENT SERVICES
DWP EXxcePTIONS
ATM
i PFS-INSURANCE
[BUREAU
li MoneyGram
OTHER
Shareholder
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HM Government
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® POL REVENUE SPLIT (CONT’D)
GOVERNMENT SERVICES REVENUE (£m) TELEPHONY AND OTHER REVENUE (£M)
TOTAL 2014/15 REVENUE: £113.0M TOTAL 2014/15 REVENUE: £84.2m
IE MoTORING SERVICES BETELEPHONY
MiCarD ACCOUNT
[CHECK AND SEND i SuppLy CHAIN
AE! (DVLA & UKBA)
(OTHER
MOTHER
Shareholder
Executive