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To Secretary of State
From Annette Rusling, ShEx Ext
Date 20 November 2015
Meeting with Tim Parker, Chair of Post Office Limited, 24" November 2015
Purpose
o. This is an introductory meeting with Tim Parker, who took up the post of Chair of
Post Office Limited (POL) on 1“ October 2015. This is the first time you have met Mr
Parker in this role. The objective is to understand Tim’s first impressions of the
business, its challenges, and his ideas on future direction.
Attendees
o Tim Parker (POL, Chair)
o Richard Callard (ShEx, HMG representative on POL board)
Topics likely to be raised by Tim
o POL’s freedom to operate commercially
o Banking framework and negotiations with the major banks
o Apprenticeships
CC list
o Baroness Neville-Rolfe, Perm Sec, George Freeman, SpAds, Richard Callard (ShEx),
ShEx POL team.
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AGENDA FOR MEETING - NOTES ON LIKELY TOPICS RAISED
Likely challenge Points to make:
e Asa publicly owned business POL faces constraints that
prevent it operating as a purely commercial enterprise.
¢ These apply to almost all publicly owned businesses, therefore
it is unlikely that progress would be possible without changes
to legal arrangements (e.g. regarding public procurement) or
HMT policy (e.g. in respect of appointments and
remuneration).
e We are sympathetic to POL's position and have previously
encouraged the business to engage with HMG constructively
to explore possible solutions; so far they have not acted on our
advice, and instead have limited their engagement to high level
lobbying of Ministers.
« We recommend you encourage POL to engage with officials
(we are well positioned to help), albeit noting that change in
the short term might be difficult to achieve.
e Public Procurement: POL is bound by public procurement
legislation which means it must run open and fair competitions
when tendering for contracts above a certain size. These take
time and cost money, which prevents POL from operating on a
level playing field alongside its competitors.
e¢ Working Capital: POL has a £950m facility from HMT that
Freedom for POL to allows it to make sure there is cash in the network. While the
operate pricing of this is benchmarked to the market (i.e. and as such it
commercially does not constitute State aid) other terms are not commercial;
for instance POL needs to give more warning of drawdown to
HMT than a commercial lender would require. This prevents
POL from operating its finance function in the most efficient
way possible.
e External Borrowing: Even though POL is permitted to
borrow, this is subject to shareholder approval. While POL
has never made a formal request to HMG to borrow
externally, POL believes the need for shareholder approval
(which based on precedent would be unlikely to be granted)
places constraints on the business.
e Remuneration/appointment approvals: Tim may express
frustration at the amount of time it has taken recent
appointment and remuneration processes to be cleared through
Government.
e This includes:
o Securing approval to fill two Board vacancies (the
Senior Independent Director and the Audit Committee
Chair)
o Approving the Executive (CEO and CFO) remuneration
for 2015-16, which took over four months and resulted
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o in the CFO’s one-off contractual bonus payment
(payable after his first six months in post) being paid
late.
e Tim may raise the roles of POL’s Nominations and
Remunerations Committees, and to what extent they have the
authority to operate independently of Government. Our advice
is clear that, where appointments are made by Ministers or
approved by them, then they need to be involved at each stage
in the appointment process.
e Exit payments: The Enterprise Bill includes provisions for
Government to introduce a cap of £95,000 on public sector
exit payments, with the exact detail to be set out in regulations.
(Note this is HMT policy)
e Post Office are expected to be within the scope of these
regulations. There are some public corporations through which
are likely to be exempt, and Tim may ask you whether Post
Office can be included in those exemptions.
e Post Office are concerned that the rules may affect their ability
to move quickly in making structural changes if necessary —
they have agreed to provide officials with a note setting out
their concerns. We have advised Post Office that the
Government expects all parts of the public sector are expected
to put these arrangements in place, even if they are not
explicitly included in the regulations.
¢ POL has been working for almost a year with the BBA and
leading High Street banks to develop a “standardised service”
that can be offered to all High Street bank customers
(consumer and small business) for common transactions.
e These services are already available for the majority of
account holders, but not on a consistent basis across all banks.
The standardised proposition has, we understand, been agreed
by the BBA, the banks and POL but commercial arrangements
now need to be negotiated.
e POL is finding it difficult to make progress in these
discussions, particularly regarding a change in fee
Banking framework arrangements whereby the banks will move from variable-only
costs to fixed-plus-variable costs (higher overall). While this
change improves the economics for POL it is not clear why the
banks would voluntarily sign up to pay a higher price.
e For this “standardised service” to work / deliver an economic
return, POL needs a majority of the banks to sign up (i.e. to
shoulder and share the fixed cost element of the price). The
banks are aware of this and POL considers that two of the
larger banks are stalling on signing up to an agreement. POL
also believes these banks are encouraging similarly slow
progress among the other banks.
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e¢ POL might raise the possibility of government exerting
influence on the banks to make progress. This is difficult —
these are commercial decisions being made by independent
businesses, accountable to their own shareholders. While there
is a clear comms benefit to them from working with POL (i.e.
as they close branches it guarantees customers’ access to cash)
it is not clear what Ministers can reasonably do apart from
encouraging progress.
e POL may also raise this from a perspective of government
“subsidising the banks’, as POL continue to provide services
to customers of the High Street banks where their branches
have closed.
e Since the election POL has been working on developing two
new apprenticeship schemes. The first of these is for direct
employees (e.g. those that work in POL's owned branches and
its supply chain function) while the second is for those that
work in the agency network (e.g. sub-postmasters and their
employees). POL has been engaging with the National
Federation of Sub-Postmasters and BIS officials in Vocational
Education.
e POL is now waiting for HMG's response to its consultation on
the apprenticeship levy before taking any decisions on timings,
structure of the schemes and numbers. Once HMG's response
Apprenticeships is published we would hope to see fairly rapid progress
towards a launch.
e Asa publicly owned business it is important for POL to take a
lead on apprenticeships, and to set an example for other large
employers. We would recommend you encourage POL to
continue making progress while also setting ambitious targets
for a launch.
Note: POL currently has c.6,700 direct employees, and it works
with more than 10,000 subpostmasters who in turn employ up to
30,000 people in their independent retail premises.
Background and other notes if needed:
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Background on POL
o. There are over 11,500 post office branches in the UK, with the Post Office network at
its most stable for over two decades.
o Government has invested almost £2 billion in funding POL since April 2011 to sustain
and modernise the network ensuring communities have access to services and that
POL remains viable in the future. This includes £640 million for the period running
from 2015 to 2018.
o 93% of the national population (and over 95% in urban areas) live within one mile of
their nearest post office branch.
o Around 18 million customers & a third of SMEs visit post offices every week.
o Post Office Ltd was separated from Royal Mail in April 2012, and is an independent
company. It has a long term commercial agreement with Royal Mail to provide
access to Royal Mail services at post office branches.
Government services
o Tim may raise Post Office’s role as a provider of Identity Assurance via the
Government’s “Verify” service. Post Office are one of a number of Verify providers
and currently have the largest market share and success rate. However, volumes have
dropped significantly below those projected by the Government Digital Service
(GDS), largely due to HMRC withdrawing some of their online products from the
Verify service. Post Office are therefore concerned that they will not meet their
revenue projections as a result of the promised volumes not materialising, and Tim
may ask you to raise this with Cabinet Office colleagues. We have already flagged
this to GDS at official level.
Horizon
o Tim Parker agreed with Baroness Neville-Rolfe that he would undertake a review into
the Post Office “Horizon” IT system and various claims that subpostmasters have
been wrongly prosecuted as a result of faults in the system. Tim has appointed a QC
to assist him in that review, and expects to report back to Baroness Neville-Rolfe
early in the New Year.
o We do not expect Tim will want to discuss this matter in detail. The Government’s
position is that, while Tim is undertaking his review, while Post Office continue to
work through mediation of individual cases, and while the Criminal Cases Review
Commission considers the c.20 applications on this matter, it would not be
appropriate for Government to intervene.
Spending Review
o BIS submitted a bid to HMT in the SR for POL that reflected: (i) the legally
committed contractual commitment we have to POL for the years 2016/17 and
2017/18 (i.e. £220m and £140m respectively); and (ii) an indicative funding
requirement for subsequent years of between £50m and £60m
o. This indicative requirement was developed in 2013 in expectation of favourable
market conditions, which did not materialise, and as such they could be considered to
be at risk. POL will be revisiting these numbers in 2016 and it is a real possibility that
the funding requirement for the post office network for 2018/19 and subsequent years
is higher than these expectations set out
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o Depending on BIS’s final SR settlement this might require discussions with BIS
Finance and / or HMT in 2016 to make sure the network has access to sufficient
funding, otherwise branches could be at risk of closure.
Consumer Futures (CF)/ Citizens Advice (CitA)
o CF isa statutory consumer protection body, created by merging Postwatch and
Energywatch, with a general interest in “consumers of postal services” and may
investigate “any matter relating to the number and location of public Post Offices”.
The organisation was subsumed into CitA in April 2014.
o CF has played the key role in overseeing the public consultations on changes to post
office locations.
o. The step up in numbers of consultations related to Network Transformation (NT) has
been matched by a step up in the numbers of CF case workers. CF’s increased
scrutiny is beginning to create friction and frustration with the risk that this will
impact POL’s ability to meet NT targets.
o More troubling is CitA’s research programme which, through its narrow focus on
POL is lacking a strategic context to their findings.
o. The funding for this activity comes from Royal Mail (RM) via a levy on that business.
RM has been challenging the levy (c £3.2m this year). BIS refutes RM’s claimed
entitlement to judge whether each piece of work meets a ‘relation to postal activity”
test. However, we are sympathetic to the idea that the levy should not be used for
CitA work looking at Post Office’s other business activity e.g. financial services.
CitA view any activity which may affect Post office’s viability as being worthy of
investigation and thus eligible for funding via the levy. We are challenging them on
this and will continue to do so as we move into reviewing CitA’s work plans for next
year.
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Tim Parker biography:
e Mr Parker started as Post Office Limited (POL) Chair on Ist
October 2015.
e He replaces Alice Perkins who stepped down in July 2015. Neil
McCausland had been interim Chair (having been Senior
Independent Director).
e Mr Parker is the current Chairman of the National Trust and of
Samsonite. He has been CEO of Clarks, Kwik-Fit, the AA, and
Samsonite. He has been Chair of Channel Nine TV in Australia and the
Autobar Group, Europe’s largest vending company. He has also served as
a non-executive director on the Boards of Legal & General, Alliance
Boots, and Compass Group. He is also a director and owner of the British
Pathé film archive.