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To Edward Davey
From Post Office Network Team
Date 24 October 2011
Meeting with Alice Perkins, Chair - Post Office Ltd
12:45-13:30 Thursday 27 October 2011
Purpose
To formally meet Alice Perkins, Chair of Post Office Ltd (POL) in her capacity as newly
appointed Chair; to discuss the Government's strategic goals; and to explore her initial
impressions of the company.
Attendees
Alice Perkins (POL), Will Gibson (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 how important it is that POL reduces its long-term reliance on subsidy,
through the successful implementation of its commercial strategy.
¢ Ifraised, to make clear the importance that ShEx has a presence on the POL Board
following operational separation from Royal Mail.
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 Vince
Cable on 3 October).
Background
Alice’s appointment as Chair was approved in July, and is first step in establishing the
new, separate and robust governance arrangements that are necessary for POL to be
successfully separated from Royal Mail.
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 have been progressing in recent months, and
agreement is expected during November, with the businesses becoming operationally
separate when the pension deficit solution is implemented (expected March 2012).
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Separation proposals are due to be put to the POL Board on 10 November and Alice will
be able to update you on progress in negotiations.
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 will be aware that we have been clear to Alice that it is your and Vince Cable’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. Alice voiced some reservations about this in her introductory meetings with the
Secretary of State and Martin Donnelly. The Secretary of State was firm with Alice that
ShEx should take a Board seat, and after further discussions with you last week the
Secretary of State has sent a letter to Alice seeking to end discussion on the matter.
However, Alice may also wish to test her views with you. As you are aware, 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 the Annex, along with a copy of the Secretary of State’s letter).
Over the course of the spending review period, POL’s strategy encompasses the
introduction of new network models to 6,000 post offices (c4,000 “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 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”. POL has pitched this as providing more face-
to-face services on Government's behalf, helping Government to make savings and move
towards digital delivery by outsourcing these transactions. POL has secured some small
contract wins — some through being a prime bidder and some by partnering. However,
they lost the DWP contract for the cheque replacement service, and there have been
some reservations on their ability to manage the tender process. Recently, UKBA has
given their intent to award their biometric residency permit enrolment service to POL, and
the day of your meeting with Alice is the last day of the stand-still period, during which
other bidders can challenge the award. Alice is also meeting Jeremy Heywood on 27
October, immediately before her meeting with you.
Following your recent presentation to PEX(ER), Stephen Lovegrove has written to the
commercial directors of OGDs to encourage them to engage with POL, on a without
prejudice basis, and we are in the process of setting up key meetings (including with
HMRC, DWP and DH). Senior POL and Shex teams are meeting at the end of November
to agree strategic comms for GS.
Preparing the company for possible mutualisation (assuming the successful
implementation of the commercial strategy) will also be a key role. We have now
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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 to date.
Alice has voiced some concern to officials that POL is under-resourced to engage
effectively in the process to develop mutualisation proposals, given other priorities (eg
separation and the implementation of the commercial strategy). POL is considering how
best to input into the current consultation; deciding whether to submit a formal response or
instead continuing to engage with you and officials on a more informal basis (ie through
papers, meetings and calls) so that business requirements are fully understood and
incorporated.
You met Alice prior to her appointment.
CC list Cable MPST; Perm Sec MPST; SPAD MPST; Stephen Lovegrove; Susannah
Storey; ShEx POL team; Josh Coe.
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AGENDA FOR MEETING - ISSUES TO RAISE AND POINTS TO MAKE
e It was good to meet you prior to your appointment and I am very
glad that you are now in position in the important role of POL
Chair.
I am also pleased that Neil McCausland has joined your Board as
Senior Independent Director.
I'm keen to hear more about your plans to develop the Board and
ensure the right balance of skills and expertise is present.
I understand that you are interviewing possible candidates to
Chair the Audit and Risk Committee. Are you in a position to
provide an update on progress?
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.
Separation and I understand that negotiations on the Master Services Agreement
establishment of and Mail Distribution Agreement are progressing. Getting these
the Board right will be critical for the future of POL. How are negotiations
progressing?
To ensure the right commercial contracts are in place, POL clearly
needs an independent and robust Board to represent its interests
in the negotiations and that is why your appointment is so
important.
[If raised] I understand the Secretary of State wrote to you this
week to confirm that a Shareholder Executive official will join the
POL Board on separation from Royal Mail next spring.
[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 SR settlement. Its successful implementation is a key priority
Commercial of mine, and a necessary precondition to future mutualisation.
Strategy: . . . F sel i ;
General e 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.
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« Government services form a key part of the Commercial Strategy
— UKBA is good news, but there is still a long way to go.
¢ It is fundamentally important that POL offers a compelling
commercial offer to win Government contracts. The DWP Green
Giro (SMOTs) contract experience shows that Government cannot
simply award contracts to POL.
e Very important that you as Chair are clear that POL has the skills
and resources to enable them to deliver on the Government
Services growth they put forward to us in the commercial strategy.
Commercial « I understand you met Jeremy Heywood earlier today to discuss
Strategy: this — how did the meeting go?
Government ae
Services If POL’s procurement status is raised:
e Previous legal advice suggests that POL would not qualify for
direct award of contracts through a crown-to-crown exemption,
largely because the bulk of POL’s revenue is from private sources.
My officials are revisiting this issue as a matter of good practice,
and will engage with POL as part of this. However, the current
expectation is that POL’s status will remain unchanged.
As competition Minister I also clearly have an interest in ensuring
the benefits of procurement — innovation, service quality and VfM
for the tax payer — are met.
The next year is particularly important for the network as new
sommercial operating models are developed and implemented.
rategy:
Networw « By 2015, over half the network will have moved to new operating
Transformation models. POL has a good track record of 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.
I appreciate that mutualisation can only happen once POL has
successfully separated from Royal Mail and implemented its
commercial strategy and these are clearly the key immediate
priorities.
But it is critical that any mutual structure and any transitional
arrangements strike the balance between developing the mutual
Mutualisation culture of engagement among stakeholders and ensuring that
management can get on with running the business to deliver
success.
It is therefore vital that we have sufficient input from POL into the
mutualisation consultation — whether through a formal response or
otherwise — to ensure we achieve that balance.
We will continue actively engaging with you and the POL team as
we develop our response to the issues raised by the consultation
and as the policy develops thereafter.
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Annex — background on Shareholder Executive Board seats and implications for
Post O
ffice
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 was originally made by you and the
Secretary of State this spring, and was reconfirmed by you earlier this month.
Alice is aware of our intention, but in her meeting with Martin Donnelly indicated
some concerns about this.
Alice’s concerns were relayed to you after that meeting and you again reiterated
your strong feeling that ShEx should take a Board seat.
Stephen Lovegrove spoke to Alice in advance of her meeting with the Secretary of
State, to pass on your views.
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 materially change the position.
3. 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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Department for Business
Innovation & Skills
BIS
‘The Rt Hon Vince Cable MP
Alice Perkins
Chair
Post Office Limited
148 Old Street
Londot
ECIV ‘HQ ZG October 2011
Post Office Limited Board Composition
It was a pleasure to meet you on 3 October and to hear your thoughts about
your new role as Chair of Post Office Ltd. As you rightly pointed out at that
meeting, much progress is already being made but there continue to be major
issues for the business to focus upon over coming months. Separation from
Royal Mail, building up the Front Office for Government offering and rolling out
the network transformation programme are perhaps just the three most
prominent.
I am therefore very pleased that the Post Office senior team have you to
support them in those endeavours. To the same end I am also delighted at
the swift progress you have been making in making further appointments to
the board. From our discussions I could tell that you have clearly hit the
ground running over your first few weeks and I would like to thank you for it.
At our meeting you raised the issue of whether it was best for an official from
the Shareholder Executive to join the Post Office board from the point of
separation from Royal Mail next spring. Since then I have reflected further on
your views but I have concluded that I should confirm to you my initial
decision. This practice embeds constructive, candid and open relationships
between the Shareholder Executive and the boards of its portfolio businesses,
and the vast majority of portfolio businesses now have a Shareholder
Executive board representative. I firmly believe that the already extremely
positive relationship that exists between Post Office management and the
Shareholder Executive team would therefore be further enhanced by this
move. Importantly, such an appointment would also ensure necessary
Government accountability for the investment it is making in the business over
the spending review period.
1 Victoria Street, London SW1H OET
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I would also like to reassure you that any Shareholder Executive appointee
would be subject to the full range of legal duties applicable to other directors.
So there would be no risk that such an appointment would lead to any
diminution of the arm’s length relationship between Government and the
business.
I will write to you in more detail in a few weeks’ time to set out in more detail
my objectives for the Post Office over the next few years. However, given its
relevance to your ongoing work to form the Post Office board, I thought you
would appreciate clarity on this one issue at an early stage. Stephen
Lovegrove will be discussing with you the identity of the individual the
department nominates in the coming days.
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