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Post Office update for the
Permanent Secretary
BEIS POL Policy Sponsorship Team
UKGI POL Team
25/07/2024
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Outline
* Live issues:
1. Litigation
2. CEO appointment
3. Postmaster remuneration
4. DMB franchising
5. Telco business
« Longer term issues:
1. Ambition and strategy for POL
2. Dividend policy
3. Investment facility
* Responsibilities across BEIS
* 2019 milestones
Annex: Financial performance and investment
2 Post Office Update for the Permanent Secretary
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Slide 2 Notes
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Live issues: (1) Litigation
POL has changed its legal adviser and is considering appeal options
Common Issues trial
+ 15 March: Judgement handed down on Common Issues Trial, finding that the contract with Postmasters is relational
and terms must be implied into it
+ POL is considering the operational impacts of the decision, which has led to a delay in approving the Budget for FY 19/20
Recusal application
* 21 March: POL applied for the trial judge to recuse himself from the rest of the litigation on the grounds of ‘apparent bias’
+ 9 April: Justice Fraser dismissed the recusal application and refused permission to appeal
+ 11 April: POL filed an application directly with the Court of Appeal, seeking its permission to appeal the recusal decision. No date has yet
been set for a hearing at the Court of Appeal
POL’s legal strategy and appeal
* 16 April: Board appoints Herbert Smith Freehills to take oversight of the litigation and revisit the approach including Common Issues
Appeal, Horizon Issues Trial, resolution strategy. The Board is looking for a material change in substance and tone
+ 24 April: POL litigation sub-committee to review appeal options (Tom C to give verbal update)
Horizon trial
+ 4 June: the Horizon Issues Trial will resume, hearing the IT Expert Witnesses for both parties. This is subject to the Court of Appeal’s
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Slide 3 Notes
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Live issues: (2) CEO appointment
CEO recruitment is underway but we expect CST to reject POL’s pay proposal
« Al Cameron has been appointed as interim CEO
« Afua Kyei has accepted the role of interim CFO and will sit on the Board
* POL have proposed that remuneration for the new CEO increases by 27% to bring it closer in line with the
lower quartile of comparable organisations
* This package has been approved by BEIS ministers and is now with CST
« Discussions with HMT suggest they are content for the base to be increased, but resistant to an increase
in the overall package. We have asked the Minister to write to the CST on this issue
* In parallel, headhunters have worked up a longlist, contingent on CST decision (UKGI to give verbal
update)
* The selection panel (including an independent member) will meet on 30 April. Subject to CST approval,
POL may be able to move to interviews, allowing us to get ahead of timetable
+ We have asked POL to do more on Succession Planning — a paper is coming to Board on 30 April
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Slide 4 Notes
BEIS theme: Title and content slide
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Live issues: (3) Postmaster remuneration
si bea some have expressed concern about remuneration affecting the sustainability of the
network, branch numbers have been stable and are rising. POL is continuing efforts to
simplify post office transactions and improve the balance with the retail offer
However, a recent survey by the National Federation of SubPostmasters found:
. _ take home less than the National Minimum Wage and 61% have seen their earnings decline over
Ime
* In 2018, postmasters took an average of 10 days leave, with 1/3 taking none at all
* 22% said they planned to close or downsize in the next year
On 15 April, POL announced that under the new Banking Framework remuneration for all
cash deposit services will double and in some cases triple (from Oct 2019)
a undertaking a deep dive on remuneration, which will report to the Board in October
Minister Tolhurst will convene a working group with POL and the NFSP on 13 June [date
TBC], to discuss these and other issues
We recommend that it remain a HMG priority to ensure that running a post office is an
on ey roposition and are working closely with POL and NFSP to explore what more
could be done
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Slide 5 Notes
BEIS theme: Title and content slide
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Live issues: (4) DMB franchising
* ‘Crown’ branches make up <3% of the network. Since January 2016, POL has
been seeking to franchise around 135 directly managed ‘Crown’ post offices,
following the 48 that were franchised 2012-15
¢ Franchising has helped reduce losses in this part of the network from £46
million per year in 2012 to break-even today. POL plan to complete their
current programme of franchising
¢ Local opposition, including from constituency MPs, is common when branches
are franchised and misconceptions persist about the implications for local
services
¢ We are working closely with POL to explore how their communications around
franchising could be improved (for example developing a ‘mythbuster’)
¢ Minister Tolhurst will meet with POL to discuss franchising comms on 7 May
[likely to be rescheduled]
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Slide 6 Notes
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Live issues: (5) Telco business
POL is considering strategic options for its Telco business
¢ POL sells TalkTalk broadband and home phone services, receiving commission on sales
* This is a profitable business unit, with c.£150m revenue and £30m EBITDAS p.a.
* POL has undertaken strategic work which shows their offering is at its peak — POL can’t
compete with providers who also sell fibre and TV as part of the deal
* This results in 3 feasible options:
o Invest significantly in capability to maintain the profitable revenue stream
o Do nothing and enjoy the profits while they last
o Sell the customer base and arrange a distribution agreement with the buyer
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Slide 7 Notes
BEIS theme: Title and content slide
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Longer term issues: (1) Ambition and strategy for POL
+ Minister Tolhurst has clearly indicated a desire to do more with on POL. The BEIS Policy Sponsorship
team was established in August 2018 and will take this work forward
* The team are initiating strategy work to develop a Government vision for the future of the Post Office
* Priority areas include delivering on POL’s social purpose, ensuring sustainability of the network and
alignment with Government objectives
+ We intend to prepare materials for Ministers to review before Summer recess
+ POL are also undertaking internal work on business eee (including taking advice from McKinsey). The
timing of this is partly dependent on the arrival of the new CEO; BEIS will need to ensure that work on the
HMG ambition feeds into POL strategy
Questions for discussion:
+ What are the Permanent Secretary’s key priorities for the future of the Post Office?
* What should the scale and scope of our ambition be (timeline, approach, stakeholders)?
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Slide 8 Notes
BEIS theme: Title and content slide
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Longer term issues: (2) Dividend policy
We should consider a dividend policy now that POL is
becoming more profitable
Historically POL have not been able to pay dividends because they were not profitable and has no distributable reserves
* The medium term prospects for POL are good and it should generate more profit than it needs to invest in the business
(on a BAU basis)
« Under the current Funding Agreement, POL receives £50m p.a. subsidy for uncommercial branches. BEIS would like to
eliminate this subsidy, with POL effectively cross-subsidising loss-making branches
+ Alternatively, we could continue to pay POL for the service provided, and take out excess profits via a dividend. This is
the approach set out in HMG budgeting guidance
+ Weare seeking ministerial approval to develop a formal dividend policy, exploring how to share the proceeds of any
excess profits between investment, taxpayers and the workforce
* Including a capital reduction as part of POL’s planned corporate restructure would enable it to pay dividends
* POL’s management has been resistant to a dividend as it thinks this could be difficult to manage with postmasters
* History: Pre-privatisation, Royal Mail (including Post Office) paid dividends from 1969-99 of a total of £2.4bn. The 1990s
averaged a 75% payout ratio, peaking at 93% of post-tax profits in 1993/94. This lead to severe cashflow problems and
even excess staff as they couldn't afford redundancy payments
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Slide 9 Notes
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Longer term issues: (3) Investment facility
POL can fund BAU investment but will need finance options for
major projects
POL do not require a CDEL budget in the next Spending Review
POL operates in commercial markets so may need to finance large investments that it cannot fund from
its own resources
This could includes an acquisition (FRES or an insurance firm) or investment in the supply chain or ATMs
An investment facility of up to £500m would allow this, likely in the form of an amortising loan
The availability of an investment facility should make POL more willing to accept a dividend policy that
reduces their ability to build up reserves
HMT have proposed that this could sit with the Nuclear Liabilities Fund who are looking for investment
opportunities, but only have 2 funding windows a year — the loan could sit with HMT in the interim
Tom Taylor has approved UKGI to work with BEIS to develop the facility
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Slide 10 Notes
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Roles and responsibilities across BEIS
* POL have two primary points of contact with government:
1. UKGI, as the shareholder representative
2. The BEIS policy sponsorship team on all policy matters
« In brief, UKGI leads on managing POL as a Government asset,
in the interests of UK citizens. BEIS leads on Government’s long-
term approach to POL and ensuring that POL’s activity is
consistent with wider government policy
* BEIS finance and partnerships teams primarily provide support
to these teams, rather than dealing directly with POL
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Slide 11 Notes
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POL: 2019 milestones
Apr 2019
21 May:
BEIS Select
' 26 Apr: Committee
Parliament/ I io inquiry
Hall Debate
external
Banking 28 May:
Framework Il Corporate
agreed restructure
due for Board
30 Apr: Board approval
meeting to
agree annual
POL budget
een 24 Apr: POL
Litigation rtreh
HMG
Summer
recess
30-31 Jul
POL
strategy off
site
House
returns
Board
discussion on
remuneration
Banking
Framework Il
remuneration
starts to
postmasters
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Annex: Financial performance and investment
POL will beat its profits target for FY 18/19
+ Unaudited figures for FY 18/19 show a £61.5m trading profit, ahead of
Actual Budget Variance YoYI its £50m target, up from £35m in FY 17/18
Retail 575.4 568.6 6.8 2%I * Cost savings are the main driver
ESST 321-7 384.7 (13.0) 0%) . Transformation spend has not been as good as hoped, with IT overruns
anil at te bee A and cost benefits below forecast
rotal Revenue I 968.3 965.4 32 2%I ° Mails is the biggest source of revenue and is on budget, but in a declining
Cost of Sales I (128.4) (127.3) (1.4) 6% ‘Market, while banking services are benefitting from bank closures that
Net Income 839.9 837.8 24 1%I increase reliance on POL
‘Agents Pay (365.0) (366.8) 1.8 -2%I * The 2018 travel market struggled due to warm weather and a weak
‘Staff Costs (191.7) (180.9) (10.8) 2% jound, so Travel Money (FX) and Insurance are behind budget
A p 'y fe]
rene [BRS ay es ee oe + Telecoms revenues are behind budget as POL struggles to compete
onenincome 15.7 120 ( = we + Verify has seen growth during the year, but HMG’s fee cut in Q3 harms
Trading Profit 61.5 50.0 11.5 119% "evenue
+ Areduction in agents pay has been driven by smaller Mails volumes
+ Admin expenses are beating the budget due to lower IT and property
costs and underspend on marketing budgets
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Slide 13 Notes
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Annex: Financial performance and investment
Higher banking fees should drive further growth in FY
19/20
* Trading profit is forecast to rise to £86m in 2019/20, primarily Bridge from 2018/19 to 2019/20 £m
driven by the new Banking Framework in January 2020. This Previous Forecast for 2018/19 60.0
which will increase the group’s revenues by c.£100m p.a. Benefits from transformation spend 41.9
* UKGI believes POL’s target could be more ambitious Banking Framework 2 (Q4 only) 18.0
* Budget and transformation spend plans will change due to the _I Lost Identity contracts (16.9)
litigation judgment. The potential implications on the operations I Moving staff from change spend to opex I (8.8)
of the business are being worked through with the aim to return I Loss of Week 53 (6.4)
to the May Board for approval 2.6% staff pay increase (5.2)
* McKinsey are advising on cost efficiency improvements Marketing spend increase (5.0)
* Benefits from the transformation programme should also drive INew BO! arrangement (incl. Credit Card I (1.8)
cost efficiencies deal)
+ Identity revenues are forecast to fall due to reduced fees plus I Other 1.3
losing the UKVI (Home Office) contract Sub-total for 2019/20 7A
* Litigation costs are classed as exceptional items outside of IFRS16 impact on leases 9.0
trading profit Target for 2019/20 86.1
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Slide 14 Notes
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Annex: Financial performance and investment
Transformation spending to continue to deliver benefits in FY 19/20
+ POL’s 3YP to March 2021 included investment spend of c.£460m, of which BEIS provides £210m and the remainder to come from POL’s
own commercial income streams.
+ POL spent c.£260m in 2018/19, of which £168m has been contributed by BEIS
+ UKGl has reviewed the planned investments for 2019/20 which are projected to cost £170m and are consistent with the three-year
strategy:
o Mandatory spend (£100m) on projects that are vital, such as the DMB franchising programme (£30m) and migration of Horizon to
the cloud (£16.6m)
o Strategic spend (£25m) on business units, such as Insurance (including a system migration) (£11.6m), Telecoms (£8m) and Identity
services (£6m)
o Discretionary spend (£45m) to develop new revenues and create longer-term cost savings, such as investments in mails and
converting small mains branches
+ This is forecast to provide an incremental £41.9m of benefits to POL’s trading profit for 2019/20
+ UKGI expects POL to draw the maximum £42m per the Funding Agreement during the first quarter of 2019/20
+ POL’s investments will be subject to its business case approval process and POL shall provide UKGI with quarterly reports to monitor
portfolio performance
* Overall, POL proposes to increase the c.£460m to c.£500m, mainly on non-cash items (e.g. DMB onerous lease provisions), funded by its
additional profits
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Slide 15 Notes
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