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To Secretary of State
From Post Office Network Team
Date 30 September 2011
Meeting with Alice Perkins, Chair - Post Office Ltd
14:30-15:30 Monday 3 October 2011
Purpose
To meet Alice Perkins, the newly appointed Chair of Post Office Ltd (POL); to
discuss the Government's strategic goals; and to explore her initial
impressions of the company.
Attendees
Alice Perkins (POL), Will Gibson (ShEx), Susannah Storey (ShEx)
Your objectives
¢ To emphasise to Alice the priority with which the Department views the
Post Office.
¢ To gain an initial impression from Alice, of how she views the
challenges and opportunities of the new role.
* To make clear (in the context of the Postal Services Act) the
importance of there being an orderly separation of POL from Royal
Mail; and the role of a strong, independent POL Board in achieving that;
and to understand the progress Alice is making in establishing that
Board.
¢ To stress the importance that POL reduces its long-term reliance on
subsidy, through the successful implementation of its commercial
strategy.
If raised:
¢ Given the £1.34 billion investment Government is making into POL over
the spending review period, to stress the important that ShEx has a
presence on the POL Board once POL is operationally separate from
Royal Mail, expected to be from March 2012. (This is consistent with
the governance for many other ShEx businesses.)
Alice Perkins’ objectives
¢ Alice formally became Chair on 22 September and is holding bilateral
meetings with the BIS Senior team. She will be looking to gain a clear
understanding of the Department's priorities (Alice met Martin Donnelly
on 27 September, and will be meeting Edward Davey later in October).
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AGENDA FOR MEETING - ISSUES TO RAISE AND POINTS TO MAKE
Points to draw from:
e Separation will allow POL to focus on the challenges and
opportunities that it faces. But POL and Royal Mail will
remain reliant on one another.
¢ To ensure the right commercial contracts are in place,
POL needs an independent and robust Board to
represent its interests in the negotiations.
I have approved the aa ee of a Senior
. Independent Director, Neil McCausland. I’m keen to hear
Separation and more about your plans to develop the Board, and ensure
establishment the right balance of skills and expertise is present.
of the Board [If raised] Given Government’s ongoing 100%
ownership of POL, and in light of the £1.34 billion
investment, it is important that the Shareholder
Executive joins the Board.
[If raised]This is consistent with the governance
arrangements for other businesses in which the
Government has made a significant investment, and is
something that I must insist upon.
The Commercial Strategy was instrumental in securing
such a large and generous SR settlement. Its successful
. implementation is a key Ministerial priority and a
Commercial necessary precondition to future mutualisation.
Strategy: ¢ Implementing this Commercial Strategy will be critical in
making the business more sustainable and reducing its
long-term reliance on subsidy, and will require strong
Board support and oversight.
¢ Government services form a key part of the Commercial
Strategy.
7 e It is fundamentally important that POL is as commercial
eouerael as possible to win Government contracts. The DWP
G Gy: t Green Giro (SMOTs) contract experience shows that
lovernmen Government cannot simply award contracts to POL.
Services 7 :
¢ The importance of new Government services revenues
to the delivery of the strategy means that it is critical that
POL’s team is appropriately resourced and staffed.
e The next year is particularly important for the network as
Commercial new operating models are developed and implemented.
Strategy: e By 2015, over half the network will have moved to new
Network operating models. POL has a good track record of
Transformation successfully conducting large scale network changes,
but we must not be complacent
e We have now begun our consultation on developing a
mutual ownership model for POL.
¢ We will continue actively engaging with you and the POL
team as the policy develops.
Mutualisation
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Background
Post Office Ltd (POL) is a subsidiary of Royal Mail Group Ltd, and although
the company has executive directors of its own, it has, historically, been
subject to oversight by the full Royal Mail Holdings plc Board. The passage of
the Postal Services Act 2011 will separate POL from Royal Mail, and
preparations are being made for new, separate and suitably robust
governance arrangements for a separated POL.
Alice’s appointment, approved by Ministers in July, was the first step in
establishing those governance arrangements. She formally took office on 22
September. Alice met Edward Davey (with officials) prior to her appointment
but, and met Martin Donnelly last week on 27 September. Alice will need to
demonstrate clear and strong leadership to ensure that the interests of POL,
often perceived to date as the junior partner to Royal Mail, are best reflected
in the separation process. This involves negotiating key contracts with Royal
Mail around shared services and the distribution by POL of Royal Mail
products (historically c40% of POL revenues). Separation negotiations are
expected to be completed in the next few months, with the businesses
becoming operationally separate when the pension deficit solution is
implemented (expected March 2012).
Alice’s role will also involve building an independent Board for the company;
supporting POL executives in the delivery of the company’s strategy to
reduce its long-term reliance on Government subsidy; and positioning the
company for a possible future move to a mutual structure. To achieve this,
Alice has stated her intention to conduct a review of POL’s Board to ensure
that there is an appropriate mix of skills and experience to meet the
challenges that the business faces in transforming its network; implementing
its commercial strategy: developing new services and winning contracts; and
eliminating Crown losses. You should be aware that we have been clear to
Alice that it is your and Edward Davey’s view that the Shareholder Executive
should be part of that board (consistent with the arrangements on the
majority of their other portfolio companies) after separation next March. We
understand from her discussion with Martin Donnelly last week that Alice has
some reservations about this but we think it is very important to hold the line
given the level of financial commitment the Government is making to the Post
Office and the priority with which it is viewed. (Further background on this
issue is set out in Annex A).
Over the course of the spending review period, POL’s strategy encompasses
the introduction of new network models to 6,000 post offices (¢4,000 “Main”
post offices and c2,000 “Post Office Locals”). These will have longer opening
hours, greater automation and therefore address queuing issues. They will
also introduce a greater level of variability to POL’s cost base. Over the same
period, POL also proposes to eliminate the losses made by its 373 Crown
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post offices, which currently lose c£55m pa. This will involve both cost
reduction (principally staff costs) and growing revenues. The principal target
for revenue growth is Government services, where POL’s ambition is to
become the “Front Office for Government” as more and more local and
national Government services move online and see their front office functions
outsourced. However, POL has faced difficulties to date in winning new
Government work, for example losing out to a rival bidder in relation to
DWP’s “SMOTs” contract for the payment of benefit cheques. The outcome
of a current tender for UKBA work is expected imminently.
Preparing the company for possible mutualisation (assuming the successful
implementation of the commercial strategy) will also be a key role. We have
now published our consultation document on developing a mutual ownership
model for POL (on 19 September) and are grateful to Alice and the wider
POL team for their input into this. We will continue engaging with Alice and
the team as the policy is developed over the coming months.
CC list Davey MPST; Perm Sec MPST; SPAD MPST; Susannah Storey;
ShEx POL team; Josh Coe.
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Annex A - background on Shareholder Executive Board seats and
implications for Post Office
e ShEx practice is to take Board seats in its portfolio assets unless there
are compelling reasons not to.
¢ We sit on the Boards of the majority of our portfolio businesses. For
example, ShEx officials sit on the Boards of Eurostar, Urenco, The
Royal Mint, Scottish Water, Ordnance Survey, the Met Office and the
Land Registry, among others.
¢ This is also standard practice in other areas where shareholders own a
significant proportion of a business (for example private equity financed
businesses).
¢ The decision for ShEx to take a Board seat (originally made by you and
Edward this spring) was confirmed by Edward Davey this month.
e Alice is aware of our intention, but in her meeting with Martin Donnelly
indicated some concerns about this.
e Alice’s concerns were relayed to Edward Davey after that meeting and
Edward has again reiterated his strong feeling that ShEx should take a
Board seat.
e [Stephen Lovegrove is seeking to speak to Alice in advance of her
meeting with you, to pass on Edward’s views. But it is possible that
Alice may raise her concerns with you.]
So that you are aware, Alice raised three concerns about ShEx Board
membership in her meeting with Martin:
1. Her first concern was that ShEx joining the Board was inconsistent
with the vision for a mutual where Government's relationship with
POL is purely contractual.
ShEx position: We do not agree with that position because between
now and mutualisation POL must successfully implement its
commercial strategy, which is something in which the Government
has an intrinsic interest and a ShEx Board seat is therefore important
for the reasons set out above.
2. Her second concern was that ShEx joining the Board would in some
way prevent Government insulation from the impact of operational
decisions.
ShEx position: In reality, the impacts of many operational issues in
POL already lead to pressure on the Department, at both official and
Ministerial level. We do not see that a ShEx Board member would
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materially change the position.
. Her third concern was that one Board member had indicated they
would be reluctant to serve on a Board where a ShEx appointee was
also a director.
ShEx position: This is concerning in that if a POL non-executive is
reluctant to serve on a Board with a representative of the shareholder
who has approved his appointment, then that does raise questions of
why they are serving on the Board.
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Annex B - Key commitments contained in the Policy Statement
“Securing the Post Office Network in the Digital Age” (Nov. 2010)
e We recognise that the Post Office is more than a commercial entity
and serves a distinct social purpose.
e¢ We will ensure that post offices remain a valuable social and
economic asset for our communities and businesses.
e There will be no programme of post office closures under this
Government.
¢ The Post Office is not for sale.
e We will provide £1.34 billion for the Post Office to modernise the
network and to safeguard its future, making it a stronger partner for
Royal Mail.
¢ We want to see the Post Office become a genuine Front Office for
Government at both the national and local level.
e We will support the expansion of accessible and affordable personal
financial services available through the Post Office.
e We will support greater involvement of local authorities in planning
and delivering local post office provision.
¢ We will create the opportunity for a mutually owned Post Office.
¢ The breakdown of payments to the Post Office will be as follows:
£180 million in the financial year 2011-12 (as we have already
committed)
£410 million in the financial year 2012-13
£415 million in the financial year 2013-14
£330 million in the financial year 2014-15