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Department for
UK Government Business, Energy
I " " & Industrial Strategy
nvestments OFFICIAL-SENSITIVE: COMMERCIAL
Date: 26 September 2019
Director General: Mark Russell (UKGI)
Lead Official: Tom Aldred (UKGI), Beth White (BEIS)
Lead Official Telephone:
Recipient To Note / Comment To Approve / Decide
Permanent Secretary Xx
Kelly Tolhurst x
Post Office Limited (POL): Quarterly update
Summary
1. This is a regular quarterly update on Post Office Limited (POL), and follows the
previous update submitted on 13 June.
Timing
2. Regular quarterly update. This also provides background for your upcoming
meetings with Nick Read (30 September and 17 October) and Tim Parker (date
tbc).
Overview
1. The new CEO has arrived at an important moment for POL. While headline
financial performance is good and with a positive outlook, financial controls
need to improve and we are currently withholding funding pending information
on investment spending. Meanwhile, the litigation case has exposed both
historic weaknesses and an ongoing need for culture change throughout the
business.
Legal
2. Sparrow’ litigation. POL has been developing its strategy for mediation,
including detailed work by its legal advisors to understand and verify the
magnitude of potential claims. Separately, UKGI and BEIS are engaging with
HMT to discuss preparations and clearance processes for a possible
settlement. The final strategy will be contingent on two processes: the
judgment of the ‘Horizon’ trial (no date confirmed, but expected in the next
month) and the Court of Appeal’s decision on whether POL can appeal the first
‘Common Issues’ verdict (an oral hearing is due on 12 November). Mediation is
unlikely to start before December, but we may need to move quickly to obtain
the necessary approvals. UKGI and BEIS comms have met POL to discuss
comms around the Horizon judgment. Further advice will follow the judgment
and appeal hearing.
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Department for
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Governance
4. New CEO. Nick Read joined as CEO on 16 September, and you are meeting
him on 30 September, and again with Kelly Tolhurst on 17 October. He was
previously Chief Executive at Extra Energy (2018-19) and at Nisa (2014-2017).
UKGI and BEIS met with Nick on 17 September and he attended his first Board
on 23 September. He has publicly stated his intention to establish a clear
vision for POL within 100 days (by Christmas), and to agree this both across
the business and with its wide set of stakeholders. As part of this, we
understand that Nick plans a series of ‘roadshows’ with staff and postmasters.
5. Bonuses. Following BEIS’ earlier steer to consider future executive/bonuses
policy, at the September Board, Remco proposed measures to provide greater
discretion in future. These changes would not be operational for 19/20 STIP or
LTIP performance periods because to do so would breach contractual
entitlement and thus leave POL exposed to legal challenge. We are waiting
formal proposals from the Remco.
6. Future of STIP and LTIP. We have also been working with Remco on revised
measures for STIP and LTIP for FY 20/21 onwards. While EBITDAS has been
effective in focusing management on the turnaround and restructuring, we think
we should think about moving away it because it doesn’t capture change spend
very well or balance sheet efficiency. We have also proposed a change in the
operational performance measures to include achieving improvements in areas
that the Common Issues judgement highlighted. We are currently waiting a
new proposal from Remco.
7. Executive team and succession planning. POL’s senior leadership team is in a
period of significant transition. 2019 has seen the departure of the Chief
Executive, General Counsel, Chief Information Officer and HR Director. It is
quite likely that Al Cameron will leave POL, having stepped up to interim CEO
and now returned to his role as Chief Financial and Operating Officer. Nick
Read may also want to restructure the leadership team and populate it with
people who share his vision. We have pushed POL to develop its succession
planning and the Board needs to revisit this regularly rather than as a one-off.
8. NEDs. Following a selection process, POL has identified three lead candidates
for the two open roles (all women, one BAME) and we expect them to request
shareholder approval shortly. We are hopeful that they will be in place for
POL’s next Board on 29 October, but to guard against the prospect of a double
gap on the Board, we have agreed to extend the term of one of the outgoing
NEDs (Tim Franklin) until both new NEDs have joined the Board.
9. New leadership at PO Insurance. POI have appointed Ed Dutton as CEO,
replacing Rob Clarkson, with a remit to execute its growth strategy. Ed had
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Department for
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estments OFFICIAL-SENSITIVE: COMMERCIAL
previously been CEO of British Gas Insurance for 8 years. In addition, Tim
Franklin has been appointed as POI Chairman.
10. Culture change. The litigation case has exposed historic failings in POL’s
dealings with postmasters and a degree of complacency in preparing for, and
reacting to, an adverse judgment. At the UKGI Board, you indicated that you
see the POL Board’s attitude to 2019/20 bonuses as reflecting the same
problem, and that culture change must become a primary focus for the senior
leadership of POL and especially its Chair, Tim Parker. Encouragingly, POL’s
Board had a discussion on corporate culture at September's Board and UKGI’s
NED suggested they commission an ‘organisational health check’ to provide a
clearer picture of the current situation.
11.Engagement with the Chair. You are due to meet with Tim Parker in October,
to provide clear direction on BEIS’s priorities. We would also expect to send a
new Chair's letter in early 2020 to supersede that of January 2019. We would
also recommend that you aim to meet with the Chair on a quarterly basis, in
line with best practice across the UKGI portfolio.
12. Framework Document. POL is finalising a corporate restructuring for increased
efficiency and to ensure a robust governance framework is in place. As part of
this project we are revising POL’s Articles of Association and establishing a
Framework Document for the first time. This will provide clarity on our
relationship, governance requirements and information-sharing arrangements.
Agreement has taken longer than expected, with POL’s engagement generally
slow and unduly legalistic. A few outstanding issues remain, focusing on
Shareholder reserved matters and applicability of HMG pay guidance, but
following progress at the September Board, we hope to agree these shortly.
13. Compliance with pay quidelines. POL have now agreed to stop offering private
medical insurance (PMI) to new joiners and to state within the Framework
Document that they will comply with guidance on public sector pay and terms.
This is a positive development as it had been a sticking point for several
months. POL is not currently required to comply with the £95k cap on exit
payments but have indicated that they would face significant problems if they
were. These relate to long-serving employees are covered by pre-existing
agreements with unions, as well as the remuneration of their most senior
executives.
14. Shareholder meeting. UKGI and BEIS will hold a formal Shareholder meeting
with POL on 24 October covering issues of both operational effectiveness and
policy. While standard practice across the UKGI portfolio, this was a missing
piece of POL’s governance and holding them every six months been stipulated
as a requirement within the new Framework Document.
15.Board_ review and Chair appraisal. POL completed a Board evaluation in
January 2019. We have agreed with the SID to delay the next review until
March 2020 to allow time for the new Board members to form a view on its
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ae Department for
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& Industrial Strategy
Investments OFFICIAL-SENSITIVE: COMMERCIAL
effectiveness. It makes sense to carry out the Chair appraisal at the same time.
This will be led by the SID and you will be invited to share your thoughts on the
Chair's performance.
IRRELEVANT
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Department for
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Government Strategy and Spending Review
21.Long term policy work: The Post Office policy team are working with UKGI and
POL to develop options to advise the Minister on the 16" October on the
following areas:
e Funding, ownership and commercial sustainability: we are exploring
the feasibility of and case for continuing a Government subsidy post
2021, taking account of POL’s aspirations to become commercially
sustainable whilst recognizing the need to maintain a footprint that
reflects POL’s social purpose balanced against fair agent pay.
e Sustainability of the network and workforce relations: we are exploring
a range of options from reviewing network size, access criteria and
definition of a branch to potential L&D and professional development
support offers for postmasters (to complement POL’s agent pay
initiatives)
e Role of social purpose: we are undertaking a review of cross-
government agendas that could link with POL’s ‘social purpose’
including the cross-government loneliness agenda (DCMS) and
community assets agenda (MHCLG). We are also considering the role
of community branches and exploring ways in which the social purpose
could be better defined and measured.
e Alignment of POL’s activities with wider Government agendas: we will
be undertaking further work to better understand opportunities linked
to OGD digitization of services vs tailored support for vulnerable
customers.
IRRELEVANT
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POL Business Strategy
25. Agent Pay. POL is carrying out a Review of postmaster pay in light of an
increase in resignations, difficulty in recruiting people to run a post office and
significant parliamentary and media attention. POL is implementing some
‘quick wins’, increasing fixed remuneration by 10% for all community and hard-
to-place branches and bringing forward increases for banking transactions.
Plans for addressing more fundamental questions about the structure and level
of postmaster pay will be brought to the Board in October, and officials are
engaging with POL on this work. These issues will be a crucial part of the 5YP
and the wider issue of how to improve POL’s relationship with postmasters.
27.Franchising. POL is continuing to franchise its Directly Managed Branches
(DMBs). There are currently 151 DMBs and POL has exited 37 of the 69 DMBs
they plan to franchise in this financial year. This ongoing programme has led to
a reduction in losses from this part of the network but continues to create noise
in affected communities, mainly due to misconceptions in the consultation
process. POL is currently reviewing its communications around the
consultation process to mitigate these misconceptions and are due to report on
the outcomes of this review on 30 September.
28.The Minister and officials are broadly satisfied that common concerns about
decreased accessibility, service level and quality in franchised locations -are
addressed by POL on a case-by-case basis. We continue to work closely with
POL to equip Minister Tolhurst to address concerns about specific cases.
Customer satisfaction levels are typically high after franchising has taken
place. Further, we also plan to engage with Citizens Advice who are currently
carrying out research to better understand customer satisfaction and difference
in quality of service between traditional DMBs and franchised DMBs. Whilst
they are due to publish a report on their findings in January 2020, we plan to
engage with their recommendations early and build this into our long term
vision work, as appropriate.
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UKGI00010561
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Department for
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Imestments & Industrial Strategy
32. ‘Cash logistics. POL undertook a strategic review into its cash logistics
operations and presented findings at the July Board. It has decided against
either a material acquisition or divestment in this area and will instead focus on
optimising the current operation. It will look to develop its technology and
explore commercial partnerships to reduce the cost of excess capacity in the
market. POL is onboarding staff with relevant experience and creating a
business case.
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Department for
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Department for
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Investment: & Industrial Strategy
estments OFFICIAL-SENSITIVE: COMMERCIAL
Annex C: Network performance
Network update
s/n Network Commentary
Programme
1 Franchising POL plan to franchise 69 DMBs in 2019/20 and have exited 37
YTD. Franchising can be poorly received by unions and local
stakeholders but once open, customers usually welcome better
accessibility and opening hours providing by the franchised branch.
2 New branches _ I POL plans to open 220 new branches in 2019/20 (92 opened YTD),
to meet under-served customer demand and, in certain areas, to
spread concentrated demand across a wider area.
3 Outreaches Outreaches are typically small, part-time branches using a village
hall or a mobile van which enable services to be provided to
communities which would not otherwise receive them. While
Outreaches can represent the most appropriate provision in rural
areas for continuity of service, we have some concerns about their
rapid increase.
4 I Hard to Place I Around 361 postmasters have expressed a wish to leave the
postmasters network but cannot because, under current policy, POL is only
allowed to pay compensation to departing postmasters when a
replacement branch is available - otherwise communities will lose
their post office.
Network Accessibility Performance
Criteria Total Total Deprived Urban Rural Postcode
Population Population Urban Population Population _ Districts less
within 3 within 1 Population within 1 within 3 than 95%
miles mile within 1 mile miles Population
mile within 6
miles
Target 99% 90% 99% 95% 95% 0
Performance I 99.7% 92.7% 99.4% 98.2% 98.6 4
*POL is working on restoring services in these Post Code Areas
Network coverage of SGEls (Services of General Economic Interest)
Category of Service No. of No. branches
bre les where service is
required available
able’ social benefits and tax credit payments to the 11,000 11,491
2 I Processing of national identity and licensing scheme 11.500 I Client contract
applications , dependent
3_I Universal payment facilities for public utility services 11,500 11,625
4 I Access to postal services 11,500 11,625
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Investments oF FICIAL-SENSITIVE: COMMERCIAL
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5 I Universal access to basic cash and banking facilities,
especially for rural customers and those on social
benefits
11,000
11,491
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