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Witness Name: Sir Martin Donnelly
Statement No.: WITN11250100
Dated: 24 July 2024
POST OFFICE HORIZON IT INQUIRY
FIRST WITNESS STATEMENT OF SIR MARTIN DONNELLY
I, Sir Martin Donnelly, will say as follows.
Introduction
1.
I was previously the Permanent Secretary of the Department for Business,
Innovation and Skills and joint Permanent Secretary of the Department for
Business, Energy and Industrial Strategy. I make this statement in response to
the Inquiry's request for evidence dated 13 June 2024 (“the Rule 9 request’). I
have prepared it with the support of the Government Legal Department and
counsel. I have been dependent on others putting documents before me to assist
with the chronology of events as set out herein, but any views expressed in this
statement are my own. I would be very happy to clarify or expand upon the
evidence set out in this statement should it assist the Inquiry.
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2. I have answered the Rule 9 request in sequential order and have endeavoured
where possible to provide my account in chronological order as requested.
3. I was shocked to learn of the appalling miscarriage of justice caused by the
Horizon scandal. The huge impact of wrongful prosecutions on innocent people
working for the Post Office and dedicated to their local communities has
devastated so many lives. This is the worst case of sustained injustice in the
public sector which I have encountered in my almost forty-year career in
government service. As a former civil servant, I feel ashamed that this scandal
could have occurred and then continued for so long. We owe all the people
affected a full and accurate account of what happened and why. I hope that my
evidence contributes towards providing that truth for the victims of such injustice
and helps to prevent anyone else from enduring what they have had to go
through.
Background
Career history
4. I joined the UK Civil Service in 1980 following a degree in politics, philosophy and
economics at Oxford University and postgraduate study in international economics
at the College of Europe, Bruges.
5. I worked in the Treasury, with secondments to the Ecole National D’Administration,
the Northern Ireland Office, the European Commission and the French Finance
Ministry until 1997, when I moved to the Cabinet Office as a Director until 2003. I
then worked in a range of senior positions in the Home Office and the Foreign and
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Commonwealth Office (“FCO”), with a secondment to Ofcom. In 2010 I became
acting Permanent Under-Secretary of the FCO. In October 2010 I became
Permanent Secretary of the Department for Business, Innovation and Skills (“BIS”
or “the Department’). I remained in that post until July 2016, when I was briefly
joint Permanent Secretary of the Department for Business, Energy and Industrial
Strategy (“BEIS”) following machinery of Government changes until September
2016, when I became acting Permanent Secretary setting up the new Department
for International Trade.
6. I left the Civil Service in April 2017. I was a visiting Fellow at Hertford College,
Oxford from 2017 to 2019. I also worked part-time for Teneo Consulting and was
a Board member of several charities. I joined Boeing in July 2019 and worked as
UK Managing Director until October 2023. I am currently a non-executive director
of the National Audit Office and a part-time adviser to the South Yorkshire Mayoral
Combined Authority on business development.
Overview of BIS
7. BIS was created in 2009 following a merger of the Department for Business,
Enterprise and Regulatory Reform and the Department for Innovation, Universities
and Skills.
8. BIS had a very wide range of specific responsibilities within its central objective of
promoting economic growth through investment in skills and education, trade and
investment promotion, fostering innovation and helping businesses to grow. The
range and extent of these functions were unusual for a single government
department to manage.
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9. Over 80% of the Department's expenditure was delivered through 45 diverse
Partner Organisations, structured separately from the core Department to allow
them to function effectively. These Partner Organisations ranged from the Student
Loans Company to Research Councils, the UK Space Agency, Low Pay
Commission and Ordnance Survey.
10.1 joined BIS as its new Permanent Secretary at the end of October 2010. As
Permanent Secretary, I was the civil service head of the Department. I set out what
this role entails in more detail below.
11. The range of issues covered by the Department meant that it had a Secretary of
State and a second Minister who attended Cabinet (Vince Cable and David
Willetts, respectively, when I started in 2010) as well as five other junior ministers
in 2010, rising to seven junior ministers by 2015, some shared with other
Departments.
12.My arrival as Permanent Secretary came very shortly after the completion of the
2010 cross-Government spending review, which required cuts of some 25% in the
Department's running costs. These cuts and the restructuring which they entailed
took up a substantial part of my time at the start and significantly affected the
morale of officials in the Department. It took the best part of two years to rebuild
morale. Constant difficult negotiations on funding with the Treasury were a major
part of my work. Regular funding crises arose during my time in this job which were
both time consuming and politically sensitive to manage.
13.A further set of reductions in BIS operating costs on a larger scale (30-40%) were
then mandated in the summer of 2015 by the incoming Government. These again
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became a major focus of my time and that of other senior civil servants, including
dealing with their severe impact on staff morale over plans for some redundancies.
14. Throughout my time in post, the core central Department had around 2,600 staff.
Including some 45 non-departmental public bodies for which BIS had overall
responsibility, the average number of staff employed was around 22,000 by 2016,
compared with over 27,000 in 2010.
The role of Permanent Secretary
15.The Permanent Secretary leads the management of the Department's staff and
resources, and as Accounting Officer is directly responsible to Parliament for the
proper use of the funds it is voted. He or she is also directly responsible to the
Secretary of State for delivery of the political priorities set by Ministers, and to the
Head of the Civil Service for the overall functioning of the Department as part of
the wider machinery of Government.
16.The Permanent Secretary has to engage closely with the political priorities and
requirements of the Secretary of State and the Prime Minister's team on key policy
areas, respond quickly to crises, act as a public representative of the Department
with its many external stakeholders, provide evidence to Parliamentary
committees, be a visible leader to the Department's staff, and share in the
collective leadership of the Civil Service.
17.Given the range of work across the core Department, the Permanent Secretary
has to ensure that systems are in place to manage it effectively without personal
intervention, while maintaining an overview of all the Department's work. This
involves reviewing large amounts of briefing information at the end of each day,
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prioritising issues that affect the whole Department or top the political agenda, and
maintaining close contact with the senior team who manage specific areas of the
Department's work, so as to be ready to identify and respond quickly to new
political priorities or major external crises which concern Ministers or the Prime
Minister.
18.In addition to dealing with major policy issues as they arose, I focussed on leading
and developing capability across the Department to offset our reduced financial
resources, ensuring that staff were doing their jobs professionally and ethically. I
also worked to build a more diverse, inclusive Senior Civil Service leadership team,
which by 2014 was evenly balanced between women and men, and included job
shares and part-time working by senior managers. Our aim was to foster a resilient
culture of team-working across the core Department, avoid silos and devolve
responsibilities within a supportive management structure.
19.Policy priorities evolved significantly over my tenure as BIS Permanent Secretary.
The priorities of BIS under the Coalition Government included managing the sharp
increase in student fees and loan provisions after 2011, constructing a new
Regional Growth Fund with other departments, developing a new Industrial
Strategy and Green Investment Bank, increasing exports and inward investment
through UK Trade and Investment (“UKTI”), a body jointly managed with the FCO,
managing the sale of shares in Royal Mail, influencing EU trade policy and
business regulation, and increasing the number and quality of apprenticeships.
After the 2015 election new priorities included the introduction of the Living Wage,
the design and implementation of the Apprenticeship Levy, a goal of doubling
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exports, and further reductions to departmental headcount. The Department also
steered the 2011 Postal Services Act and seven other pieces of primary legislation
through Parliament during my tenure as Permanent Secretary.
20.To manage this range of challenges my senior team and I developed a
Departmental structure which, by 2015, consisted of six departmental Groups,
each led by a Director General: Business and Science; Economics and Markets;
Shareholder Executive; Skills, Deregulation, Local Growth and Legal; People,
Strategy and Higher Education; and Finance, Commercial and_ Digital
Transformation. I note that the Director General of the Shareholder Executive
(“ShEx”) was part of the senior team — this was initially Stephen Lovegrove and
then Mark Russell.
21.Responsibility for relevant Partner Organisations was distributed within this
structure. The Shareholder Executive was responsible within BIS for those
Partners that provided near commercial services. By 2015 these were the British
Business Bank, Companies House, the Green Investment Bank, Insolvency
Service, Land Registry, Ordnance Survey and Post Office Ltd.
22.Given the complexity and range of BIS responsibilities the departmental groups
worked with Partners in the way which they considered most effective and
appropriate to their function and status. In the central Department we developed
formal governance structures to provide an overview of the key departmental
issues, including a Departmental Board chaired by the Secretary of State. The
Executive Board which I chaired met every two or three weeks. I attended the
Departmental Audit and Risk Committee meetings. There were also a
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Performance, Finance and Risk Committee, an Operations Committee, and a
People Committee which reported to the Executive Board.
23.1 complemented this formal structure with monthly one on one meetings with each
of the Directors General, providing an opportunity to discuss informally what was
on their minds, and any evolving significant issues affecting their areas of work. In
addition the Directors General, the Secretary of State’s Private Secretary and I held
several short morning catchups each week at the start of the day to pick up on
urgent issues which we all needed to be aware of across the senior team.
24.My objective was to lead the Department in a way in which officials at all levels felt
empowered to do their jobs and raise issues with those more senior, whether
personal or professional, wherever necessary. I described my role to staff as
providing a clear sense of direction for the Department, a professional and
supportive management structure, and the space and resources for staff members
to deliver on their own specific responsibilities.
25.Two aspects of the role are worth clarifying. First, as with any large organisation it
is not realistic for the most senior leader to be across the detail of everything that
is going on in the organisation, or desirable for them to second-guess or check the
accuracy of the briefings and other information they are being provided with, unless
they have specific information from another source that would cause them to raise
questions. They have to be able to rely generally on what they are being told by
those in their team, whom they trust to behave professionally. This raises an issue
to which I will return in this statement, namely whether any system of accountability
or governance can deal effectively with a situation where people consistently fail
to provide accurate information to those requesting it.
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26.Secondly, the role of Permanent Secretary is different to that of a CEO. A CEO is
empowered and expected by the company board to run a company or organisation
as they see fit to deliver value for shareholders or achieve their objectives, and has
a large degree of discretion day-to-day as to what they prioritise and how they go
about achieving this. The Permanent Secretary's role is to implement the policy of
the Government and carry out the instructions of Ministers. This requires regular
discussion with the Secretary of State and Number 10 to ensure that their priorities
are being followed, and where needed to engage in resolving conflicts between
objectives which may be incompatible or unachievable with the resources
available.
27.There was no such thing as a typical day or week in my time as Permanent
Secretary. It was a demanding job often requiring long hours. It involved, amongst
many other aspects, the following:
a. Short morning meetings with the Directors-General of the Department on
most working days to ensure we started work with a shared view of the
major issues emerging that might need an immediate response.
b. Being in day-to-day contact with the Secretary of State’s private office, in
order to be informed about what Ministers wanted or were concerned about,
and near-daily contact with Number 10 to keep up-to-date with what the
Prime Minister's office required.
c. A one-to-one meeting with the Secretary of State most weeks to ensure I
knew what was on his mind and was aligning the Department's work to his
priorities. I would also regularly join key external meetings which the
Secretary of State would have with major stakeholders, for example with
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business or trade union organisations. I generally did not meet with the
junior Ministers or join their external meetings but would leave them and
their teams to deliver their portfolios.
. One-to-one catch-ups with each individual Director General about every
month, to check what was on their agendas, and whether there was
anything I needed to know more about. These meetings were informal and
frank. As well as reviewing major policy challenges, they provided an
opportunity to discuss personnel issues within the Department and give
feedback on the effectiveness of our governance systems.
. Preparing for and chairing the BIS Executive Board, which met once a
month and had several sub-committees. This Board led the strategic
management of the Department, and frequently focussed on resourcing and
organisational structures. I also maintained close contact with the BIS
independent Non-Executive Directors who sat on the main Board chaired
by the Secretary of State which met several times a year.
Making several impromptu speeches each day on a range of issues, internal
and external, to communicate the Department's priorities. These included
informal question and answer sessions with groups of staff in BIS
headquarters, and visits to sites and Partners across the country.
. External engagement, both in meetings and correspondence, with the wider
Civil Service and Cabinet Office, as well as key ongoing stakeholders such
as the CBI or TUC. I regularly visited businesses, colleges and research
institutes in each region of the UK to ensure that we had an understanding
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of their concerns, which was time consuming but an important part of
ensuring the Department's effectiveness.
h. Dealing with management, staffing and performance issues arising within
the Department, and when requested also in the wider civil service.
i. Preparation for Parliamentary committee hearings, in particular the Public
Accounts Committee, which involved detailed scrutiny of individual BIS
policy areas as well as annual examination of the BIS Report and Accounts.
j. Regular overseas travel to support UK exporters and help attract inward
investment. As the Department jointly supervised UKTI with the FCO during
my time as Permanent Secretary, this meant at least two-three long-haul
trips to Asia or America each year (usually for 4 or 5 working days) as well
as regular shorter trips to European capitals. I also took my team of
Directors General to Brussels, Berlin and Paris on several occasions to
meet their counterparts, negotiate trade and regulatory issues and seek
support on European Union policy issues led by BIS.
k. Within the Department, helping to cover any gaps at Director General level
when someone moved on without the post being immediately filled. This
occurred on several occasions during my time at BIS, in UKTI and Science.
I. Attending and speaking at a large number of breakfast, lunch and evening
functions and events with business, university and research stakeholders,
usually in London but also around the UK.
28.In addition to these events and tasks, I would be copied in to several hundred
pages of submissions to Ministers every day. It was best practice for me to be
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copied in on substantive policy submissions only, not correspondence or process
matters. My private office would prioritise these submissions and provide the
highest-priority ones to me every evening. I would review these (with generally a
very short time to look through each one) to ensure that there were no major issues
arising across the Department of which I was not aware, at least in broad terms.
29.Whilst I would be copied in to at least some of what Directors General and their
teams were working with their Ministers on in policy terms, therefore, I would
expect them to manage that work, and escalate any issues they thought I needed
to know about. On occasion I would become involved in the detail of major strategic
pieces of legislation or changes such as the sale of Royal Mail, usually for financial
propriety reasons, or to ensure that Ministers were content with the support they
were receiving on high profile policy challenges such as student loan finances.
30.There were three main ways in which issues or risks could be escalated up from
within the various parts of the Department for my attention.
31.The first was through the morning meetings with my senior team (the Directors
General). These would normally be focussed on urgent external or political issues,
including financial pressures.
32.The second was through my regular one-to-one meetings with each individual
Director General, talking over progress on key priorities, and any personnel issues
arising in their area requiring action.
33.The third was through the Departmental top-level risk register and ‘dashboard’.
Each of the Directors General contributed to this, drawing upon the risk registers
held by each of their own Groups, and it was updated by the Departmental Board
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secretariat in between meetings. The dashboard covered finance, personnel,
performance and risk. The risk register contained a ‘partner organisation risk
summary’, which highlighted the overall level of risk carried by each individual
partner organisation (including POL) in any particular month, but did not generally
give details of what the specific risks were; these were managed within ShEx or
the relevant Group responsible for each Partner.
34.In addition to these three primary mechanisms, it was of course always possible
that if the Secretary of State raised an issue with me, or if an issue made a major
impact in the media, I would ask for further information about it. However, a story
in the national media would only be of concern to me if a Minister or major
Government policy affecting BIS was a significant element of it. Given the range of
BIS responsibilities there was a large number of such media stories each day.
These were dealt with by relevant policy teams reporting to Ministers.
Handovers
35.When I took over as Permanent Secretary, I received a high-level handover from
my predecessor, which mainly focussed on personnel, where the needs were and
how existing key relationships were functioning. I recall that I also asked the
Directors General for a two-page briefing on each of their areas, setting all the
current main issues with which they were dealing.
36. These briefings focussed on the range of strategic issues the Department faced
across its portfolio and Ministerial priorities. When I arrived in autumn 2010 they
included setting up the Regional Growth Fund, the end of the Regional
Development Agencies and their replacement with Local Enterprise Partnerships,
and work with Treasury on a cross-Government plan for growth, plus how to
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manage the immediate cuts required in the Department's budget, running costs
and staff numbers.
37.For incoming Ministers, the policy teams for each policy area within their portfolio
would produce written briefings setting out the current main issues, which their
private office would collate. These would be supplemented by early oral briefings
from the relevant officials. When the Secretary of State changed I would provide a
strategic overview of the Department, introduce myself and the senior team,and
explain the processes and overall structure and working methods in place.
Accounting Officer role
38.As Permanent Secretary I was also Accounting Officer for the Department, with
certain key responsibilities in relation to the spending of public money and use of
public assets, as explained in Managing Public Money (UKGI00006045, HM
Treasury - Managing Public Money Report, July 2013). This includes taking
particular care to scrutinise expenditure which is ‘novel, contentious or
repercussive’. As Accounting Officer, maintaining transparency of BIS spending
was a key objective. This led to a successful consolidation of the accounts of most
of the Partners for which BIS had oversight into the main BIS accounts. However,
this did not include Royal Mail and the Post Office; as noted above they had a
separate report and accounts produced to commercial standards given their status
as a public corporation. The way that the Accounting Officer system works is by
delegation, from the Treasury to the Accounting Officers of each department or
ALB and then down through each organisation from there. The model did not quite
apply in the same way for Royal Mail and from 2012 the Post Office given their
greater operational independence as public corporations.
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39.As Permanent Secretary, I was not Accounting Officer for Royal Mail and Post
Office (as explained in the current version of Managing Public Money,
UKG1I00043211, HM Treasury - Managing Public Money - May 2023, at paragraph
A7.3.13, public corporations do not have accounting officers), although I was
accountable for any transactions between them and the Department. I was not
responsible for their day-to-day expenditure nor for their annual report, accounts
and profit and loss statements, but I would expect to have input on major financial
decisions affecting the public purse. For example, I was closely involved in the
decision to make an Initial Public Offering of Royal Mail shares given that this
involved the valuation and sale of public assets, for which as Accounting Officer I
was responsible to Parliament. My focus as BIS Accounting Officer, insofar as that
role related to Royal Mail and the Post Office, was to ensure transparency and
professionalism in all issues relating to the Royal Mail sale. It was my duty to
ensure that a sale of Royal Mail met Government criteria for value for money, and
to ensure that the correct procedures were followed in relation to the sale.
The Government's interest in POL
The role of the Shareholder Executive
40. The Shareholder Executive (“ShEx”, which subsequently became UK Government
Investments, “UKGI”) was responsible for the policy and oversight role in relation
to the Royal Mail and Post Office during my time as Permanent Secretary. This
was the structure I inherited when I joined the Department.
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41.ShEx had oversight of Government assets, including the Post Office, and was
effectively acting as the shareholder. The Director General in charge of ShEx was
on the BIS Executive Board and was part of my leadership team. ShEx offered
professional expertise in their oversight of commercial organisations. When I
started at the Department this model was seen as best practice to avoid
micromanagement while providing oversight and necessary briefing for Ministers.
42.Within my senior Executive Team of Directors General, the Director General of
ShEx (called the ShEx Chief Executive) had a distinct position. Although based
within BIS, ShEx worked with a range of departments, maintained close links to
the Treasury and had been given a cross-Government remit. ShEx was the only
part of BIS with its own separate advisory Board, which was a reflection of its
Government-wide role as a centre of excellence for advising and delivering for
different Government departments on a range of commercial responsibilities and
transactions. The central ShEx team (which numbered around 100 officials by
2014) was recruited from both inside and outside Government, with fewer of the
usual Civil Service recruitment constraints, to ensure the right mix of commercial
and administrative skills. ShEx was seen as a high-quality unit which attracted
good staff.
43.When I joined BIS as Permanent Secretary, I judged that the ShEx role was key to
ensuring the effective supervision of government assets and bodies such as the
Royal Mail and Post Office working in a commercial environment. I worked hard to
ensure it had the necessary resources to carry out these responsibilities
professionally, despite the cuts to the overall departmental headcount and running
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costs; and it was never suggested to me that ShEx had insufficient resources to
undertake its role effectively.
44. It was made clear to me (I think by my predecessor as Permanent Secretary and
certainly by the Treasury) that ShEx required a significant degree of autonomy in
its work, hence the existence of its separate Board. It had close links to the
Treasury and had a different, more commercial focus than other parts of the
Department in order to carry out its functions. I therefore did not expect to be
briefed on all the detail of its work with the bodies it supervised, except where those
affected my Accounting Officer responsibilities or raised major political issues,
such as was the case with the Royal Mail IPO.
45.1 recall being reassured by the fact that ShEx had this role; it seemed a professional
arrangement for the supervision of these commercial bodies, and I felt I had
inherited a structure which was working.
46.1 had great confidence in the two heads of ShEx with whom I worked. I had worked
with Stephen Lovegrove (now Sir Stephen), the Chief Executive (i.e., Director
General) of ShEx, before at an earlier point in my career and knew him to be
competent, professional and commercially experienced. I had a consistently high
opinion of him, and was not surprised when he was promoted to Permanent
Secretary. I was also impressed with Mark Russell as his equally professional and
experienced successor. So working relations between us were good throughout
this time.
47.1 should add for completeness that when in April 2016 ShEx merged with UK
Financial Investments it became a single holding company — UKGI — with HM
Treasury as its sole shareholder. Whereas ShEx had been accountable through
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the Department, UKGI a new body was accountable to Treasury Ministers via its
fiduciary Board. Together with a Treasury Permanent Secretary, I was appointed
as a Non-Executive Director of the UKGI Board on 12 February 2016, having not
previously been a member of the ShEx Advisory Board. I attended three Board
meetings before I left the UKGI Board on 28 September 2016, when I moved to
the Department for International Trade. I do not recall any substantive discussion
of Post Office Horizon issues during my short period on the UKGI Board. I recall
the UKGI Board meetings as wide ranging across their portfolio as well as the wider
political environment — this was in the runup to the June 2016 referendum - and
professional in their approach to items on the agenda.
The role of ShEx in relation to the Post Office
48.In October 2010, when I started as Permanent Secretary, the Royal Mail and Post
Office had for many years had wide-ranging autonomy as public corporations
working in a commercial environment. They produced their own annual report and
accounts. When I joined the Department a major piece of work was underway to
achieve a formal separation of the two entities prior to the potential sale of Royal
Mail. Details of this process and the emergence of POL were set out in the Opening
Submissions of UKGI to the Inquiry.
49. In relation to the Post Office from 2010, I was aware of the Government's objective
to maintain the extent of the branch network while reducing the level of subsidy
and helping the Post Office become more competitive. Work to prepare the Royal
Mail for a potential sale was a major focus for the Department and Ministers in the
period from 2010 to 2013, given its political sensitivity and the sums involved. I was
concerned as Accounting Officer to ensure value for money was achieved in any
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change of ownership. The sale process required the development of separate
governance for the Post Office, and the process of considering and developing this
was carried out by ShEx under Ministerial supervision.
50.The implementation of government policy towards the Post Office was the
responsibility of ShEx. From my perspective this was an important part of their
work, part of a wider portfolio of work they undertook for BIS which included by
2015 the governance of the British Business Bank, Companies House, the UK
Green Investment Bank, the Insolvency Service, Land Registry and the Ordnance
Survey, each with specific issues to manage.
5
-Political oversight of ShEx was provided by Ministers of various departments
through their policy portfolios. Wider policy on the Post Office was led by the
relevant junior Minister within BIS, working with the ShEx team who advised them
on Post Office matters. Policy issues such as the size and financing of the network
or the future structure of the Post Office were for Ministers to decide on the basis
of input from ShEx and the Post Office itself. I would not generally be involved in
any of these discussions unless they raised wider issues eg for the financing of the
Department. There was a clear line of policy accountability from ShEx to the
relevant Minister and ultimately to the Secretary of State.
52. It was also for ShEx to consider governance issues around the composition of the
POL Board and performance of the POL Chief Executive, as with other
organisations they supervised. That is what they were set up and resourced to do.
53.1 am aware that around two years after I left the Department a decision was taken
to separate the policy and governance functions, with a Post Office policy team set
up within the Department which was distinct to UKGI. At the time I was in post,
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ShEx seemed to be able to deal with both roles effectively and it was never
suggested to me that the approach should change. I think if anyone had suggested
this, I would have been open to persuasion as to why it might offer improved
effectiveness at that time, while being aware that separating the two functions
would have inevitably added some cost and complexity.
54.During my time as Permanent Secretary, ShEx was responsible for oversight of
the Post Office in both governance and policy terms. As to the accountability of the
ShEx team, this came in three ways. First, on policy ShEx provided advice to the
relevant junior Minister (and ultimately if required the Secretary of State) who made
decisions. Secondly, the ShEx Advisory Board (later becoming a fiduciary board
when UKGI was formed) was responsible for ensuring ShEx carried out its
governance function effectively. The Advisory Board could have come to me as
Permanent Secretary if they had any significant concerns about ShEx’s
performance, but to the best of my recollection this did not ever take place. My
limited time on the UKGI Board in 2016 allowed for any specific Post Office Horizon
issues to be raised with me directly; I do not recall this happening. Thirdly, I was
the line manager for the ShEx Director General/Chief Executive, as well as
Accounting Officer for BIS (within which ShEx was situated). I therefore had a role
in supporting and appraising Stephen Lovegrove and latterly Mark Russell and
ensuring their compliance with the normal financial controls over the ShEx budget.
Oversight of POL by ShEx
55.Given the structure described above, I was not involved in the detail of ShEx’s
oversight of POL, for example relating to the performance of senior staff. I was
aware that the Post Office senior management team and Board were well
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compensated in comparison with civil servants or the management and Boards of
other ALBs and I expected that to be reflected in a correspondingly professional
and competent executive performance.
56.1 do not recall ShEx ever raising concerns with me about the performance of the
Post Office senior management or Board. I have been shown a document which
was discussed during Alice Perkins’ oral evidence to the Inquiry (UKGI00042677,
PowerPoint presentation re: Post Office Ltd Senior Management - Risk and
Assurance Committee - February 2014). It has the logos of both ShEx and the
Department on it, but this looks to be an internal ShEx document for discussion
within their team, rather than a document created with the involvement of the
broader Department. I therefore did not see it and I would not have expected to be
copied internal ShEx notes.
57.As mentioned above, I do not believe any issues relating to Horizon were ever
raised with me in my capacity as a UKGI Board member in 2016.
58.As well as working to become commercially competitive, I and everybody else in
BIS and ShEx would have expected the Post Office Board and management to
understand that as a public corporation they were public servants. That meant not
only being compliant with the essential elements of corporate governance and
accounting standards which applied to all private sector companies, but also
holding themselves to the high standards of transparency and fairness expected
of the public sector in dealing with individuals.
59. Officials within the Department, including those in ShEx (and subsequently UKGI),
were required to comply with the Nolan Principles and Civil Service Code. I
expected public sector values and ethics to be respected at all times, and in the
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central Department we sought to lead by example on our duty of care for staff. I
started from the basic assumption that, as a public corporation, similar values were
also acknowledged by POL, and the nature of the structures put in place to provide
oversight of POL assumed that to be the case, and to be reflected in managerial
behaviour.
60.1 have been surprised to learn that some at least in POL appear to have seen the
group litigation by sub-postmasters as ordinary commercial litigation without it
making any difference that POL was Government-owned. I would have expected
everyone within the Post Office, as elsewhere in the public sector, to have seen a
duty of care towards their staff including sub-postmasters as a core part of their
work. The Inquiry may wish to consider whether it should be made explicit, if it is
not already, that the senior management and Board of public corporations such as
POL are expected to abide by public sector values, by for example requiring them
to sign up to the Nolan Principles.
Specific issues
61.1 have been asked by the Inquiry to explain the background to the Government's
position that operational and/or contractual matters were for Royal Mail and/or POL
and not for Government. This represented a view taken by successive Ministers
and the Treasury about the most appropriate way to manage a commercial
organisation in the public sector. The Opening Submissions to the Inquiry from
UKGI sets out the rationale in more detail.
62.In terms of how the operational/strategic divide worked in practice, I would have
expected high-level decisions such as overall branch numbers/size of network or
the level of the Government subsidy to be considered strategic and require
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Government policy input, whereas how the business was run month-by-month and
year-by-year to achieve its strategic objectives was a matter for its management
and Board. There would inevitably be a judgement that had to be made by the
Royal Mail and Post Office Board as to what was strategic rather than operational.
The Government appointed the Chair of the Board for both organisations, and the
Board then oversaw their operations.
63. There were also no constraints on Ministers asking about any issue, although they
would of course have had to know about it to ask questions. So, if they considered
a concern which had been raised with them in Parliament, in a stakeholder
meeting, in the media or in correspondence to be potentially strategic they could
ask for more information about it through the relevant officials. For example, the
possible closure of specific post office branches. When this was raised, the Minister
would in the first instance have met with or been briefed by ShEx officials, who
would have sought the relevant information from POL.
64.1 recognise that the additional layer of oversight provided by ShEx, coupled with
the assumption that ShEx officials would carefully interrogate the information
provided to them by POL, might have provided a false sense of comfort about the
truth and accuracy of POL’s assurances. Normally this intermediary control
structure increases the opportunity for effective scrutiny, because the officials
concerned start with some knowledge of and access to the organisation.
65.The Inquiry has also asked me to consider UKGI00017317 (Post Office Limited
Strategy) and comment on the extent to which the Government's arms-length
position in respect of the Post Office was adopted in order to allow the Post Office
to sell or provide a wider range of goods and services than it would otherwise be
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able to. I have not seen this document before, which seems to be an internal ShEx
document from some point before June 2008, a considerable time before I joined
BIS in late 2010. I am therefore unable to comment on it with any authority.
However, I can say that by autumn 2010 there were well-advanced discussions
about whether to sell Royal Mail and what form the Post Office should take once
that had happened, including mutualisation or itself being sold, because it
continued to cost Government a lot of money by way of subsidy. In order for those
options to be explored, it had to be set up as a commercial organisation that other
businesspeople and investors could understand. This would require the Post Office
to have comparable professional management, finance, human resources, IT
systems and so on to other businesses, to be audited and to be commercially
transparent.
66. The Inquiry has also asked me to consider a ShEx Board meeting of 15 September
2010 (UKGI00001339, HM Government Shareholder Executive Board Meeting
Minutes for 15/09/10). This is also a document I have not seen before, which
predates my arrivalin BIS. I can say that I was never aware during my interactions
with the ShEx Director General that they felt any substantive conflict of interest or
tension between their role as Shareholder representatives and policy advisers to
Ministers, and their role as non-executive directors on the boards of the
organisations they oversaw.
67.It was clear that ShEx could add value to policy decisions by Ministers, through
their explanations of the commercial consequences of different options. It was
therefore a bringing together of complementary perspectives with no ultimate clash
of interests, because the ultimate owner was the Government. That seems to be
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consistent with what Stephen Lovegrove sets out in these meeting minutes: “ShEx
would always start from a commercial position but would overlay policy priorities in
order to get a settled and agreed position”.
68. In relation to POL my Accounting Officer responsibilities meant that I was involved
in a specific POL accounting issue in 2015. This related to an error in accounting
for the costs of compensation to sub-postmasters for the network transformation
programme, which meant that Postal Services Holding Company Limited was late
in filing its 2014-15 annual accounts (see UKGI00042351, Report re: Postal
Services Holding Company Limited (PoSH) — late filing of annual accounts - from
Martin Donnelly to Richard Callard). This error was subsequently corrected and did
not impact any payments; some improvements in POL’s financial systems were
made to ensure a similar issue did not arise, and I reported this in the BIS annual
accounts for 2015-16. The reason I got involved with this issue was that even
though the error had no material consequences, it was of potential reputational
significance for BIS to fail to comply with a corporate reporting deadline, and I was
concerned to ensure that BIS retained its good reputation for the provision of timely
and accurate accounts across all its Partners as well as in the core Department.
Organisation of ShEx and strategy of oversight
69.The Inquiry has asked me a series of questions about the detailed workings of
ShEx, including the team structure, reporting lines and purpose of the Executive
Committee. I do not know the answer to these questions. Similarly, I am unable to
comment on the various ShEx internal notes, briefings and meeting minutes to
which the Inquiry has drawn my attention under this heading. I have described
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above my understanding of the role ShEx had and the extent of my involvement
with it.
70.From the perspective of the high-level information I received, I was satisfied that
ShEx were performing the range of their functions professionally. These included
the normal sponsorship functions of briefing Ministers and liaising with the Post
Office on all issues arising from Ministerial correspondence or meetings. Some
submissions were copied to me, in common with submissions to other Ministers or
the Secretary of State. This allowed me to be aware of the range of issues being
dealt with across the Department. I would not normally expect to intervene unless
there were wider Accounting Officer implications such as immediate financial
needs, or if the Secretary of State asked me to do so.
7
.I have been asked a specific question by the Inquiry (relating to UKGI00016656,
NOTE OF ShEx EXECUTIVE COMMITTEE MEETING - 27 April 2010) about the
potential for Chief Executive roles becoming aligned to Accounting Officer roles. I
am afraid I have not seen this document before, which pre-dates my time as
Permanent Secretary, and do not know what the discussion entailed.
Knowledge of relevant issues
72. With the exception of the high-level briefing for a meeting with Alice Perkins in 2014
which I refer to below (and which I did not remember until the document was shown
to me), at no point during my time in the Department was I aware that there was a
serious issue with the Horizon system at the Post Office or its integrity and remote
access, which was leading to complaints by SPMs and allegations of unsafe
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convictions for theft, fraud and false accounting. I cannot remember it coming up
at all.
Actual oversight
73. The Inquiry has drawn my attention to a large number of internal ShEx documents,
including the minutes of ShEx board meetings, risk registers, emails and briefings.
With the exception of those which I address below, I did not see any of these
documents at the time, nor would I have expected to have seen them. The ShEx
risk register was a normal part of ShEx’s own internal management systems, which
as explained above included its own advisory Board. I do not recall the Horizon
issue ever being raised at the Departmental Board.
74.1 have been asked a series of questions about the mechanisms for reporting,
feedback and provision of information between POL and ShEx, and then between
ShEx and the wider Department. I have also been asked questions about the
extent to which ShEx oversaw POL, its operations, the conduct of prosecutions,
contract and personnel management, and its response to the allegations made by
SPMs about the reliability of the Horizon system. These cover two periods of time:
from 2010 to the separation of POL from Royal Mail; and then from separation to
the end of my time as Permanent Secretary.
75. Throughout this time ShEx and then UKGI held the responsibility for managing the
Government's relations with the Post Office, supervised by its board and a Minister.
My role as Permanent Secretary was to be satisfied that ShEx, in common with
other Groups across the Department, were equipped to carry out the tasks they
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had. This required delegation of the individual relationships with relevant partner
organisations to ShEx, including the Post Office, with the expectation that I would
be informed of any wider strategic issues arising from their work.
76.1 have specifically been asked if I discussed the allegations raised in the May 2009
Computer Weekly article with others in the Department, POL or Royal Mail. The
article pre-dated my time in the Department by some eighteen months. I was
unaware of it, and the issues raised in the article were not covered in any briefing
when I arrived in BIS or thereafter.
77.Similarly, I did not see the BBC Panorama programme about Horizon in 2015. I did
receive a daily media update which covered headlines on the wide range of BIS
issues. My focus was on immediate Ministerial concerns of relevance to
departmental work or resourcing; responding to other media and Parliamentary
issues was handled through the policy teams as part of their normal functions.
78. The Inquiry has asked me about any involvement which I or the Department more
widely had with POL’s response to the Justice for Sub postmasters Alliance
(‘JFSA”). I was not in the Department until late October 2010 and had no
involvement in briefing Ed Davey (now Sir Ed) on his response to the letter from
Alan Bates (now Sir Alan) dated 20 May 2010. In any event, as I explained above,
I was not generally involved in junior Ministerial meetings or correspondence.
Specifically, I would not have had any involvement with Ed Davey and Alan Bates’
meeting on 5 October 2010 as I joined the Department later that month.
79. After Alice Perkins was appointed Chair of POL I had roughly annual meetings with
her to listen to her views on the range of Post Office issues, with a particular focus
on Post Office funding and the network transformation programme. I have been
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provided with the briefings I was given for these meetings (UKGI00042642,
UKGI00042646, UKGI00042645 and BEISO000010). I note that the briefing for the
8 April 2014 meeting (BEISO000010, Briefing Note from Peter Batten to Martin
Donnelly re Briefing for meeting with Post Office Ltd Chair) included as the last of
five briefing points a short reference to the risks around the Horizon working group
and separate Valuation Office agency risks. Specifically, the two relevant
paragraphs are these:
“12. All in-branch transactions performed by subpostmasters and POL staff are
recorded by POL's accounting software, known as ‘Horizon’. Shortly after
joining POL and in response to persistent grumblings by a small number of
former subpostmasters, Alice commissioned a review of the integrity of the
Horizon system. An independent report, published in July 2013 found there
were "no systemic" issues with the software, but made recommendations about
POL's training and support processes.
13. Following the report, POL has worked to establish a working group under
an independent Chair that has set up a mediation process for former
subpostmasters who feel wronged by the Horizon system. The working group
has received 147 submissions, but progress has been extremely slow and there
is a potential presentation risk. The POL Board is seized of the need for a swift
conclusion to this issue and is working to identify solutions.”
80. I do not recall the Horizon issue being raised at all during the April 2014 meeting,
which as far as I can remember focussed on the future transformation of the Post
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Office and its financial challenges. I was not alerted to the potential significance of
the Horizon mediation process, nor asked to follow it up.
81.1 have been asked about the Department's involvement with work within POL to
establish an independent Board and prepare for separation at the time of the Royal
Mail IPO. I have also been asked whether the Department exercised any oversight
of the pilot or rollout of Horizon Online. I am not aware of what BIS or ShEx did in
relation to either of these detailed issues. Whilst I knew there was work done by
ShEx on new governance arrangements for POL post-separation I was not
engaged with any of the detail. I have no recollection of Horizon Online being raised
with me.
82.Whilst I am aware that there was considerable involvement from senior civil
servants and ministers when Horizon was first commissioned as an IT project, that
was because it was a huge change for the Post Office with significant cross-
Government impact (including to DWP benefits payments) and was a massive
purchase which involved very large expenditure. Horizon Online was an iteration
and development of the existing system, and therefore fell into the category of
operational decisions which were a matter for POL to deal with in the first instance.
83.1 have been asked specifically about what I knew of the involvement of Second
Sight, the Mediation Scheme and the review by Jonathan Swift QC (as he then
was) (POL00006355, Review on behalf of the Chairman of Post Office Ltd
concerning the steps taken in response to various complaints made by sub-
postmasters) and POL’s response to these developments. I am afraid that I knew
nothing of any of these at the time. I would have expected ShEx to alert me to any
relevant issues with wider financial or political implications requiring my input.
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84.As far as I can recall and am aware now, neither I nor the Board of BIS were
informed about, or otherwise had knowledge of, the existence of bugs and errors
in the Horizon IT system, the Helen Rose report (POL00022598, Horizon Data
Lepton SPSO 191320 by Helen Rose (v.1 draft)), the Simon Clarke advices
(POL00006357, Advice on the use of expert evidence relating to the integrity of the
Fujitsu Services Ltd Horizon System and POL00129453, Simon Clarke's Advice
re: Disclosure - The Duty to record and retain material - Post Office LTD),
Linklaters’ advice on the Mediation Scheme (POL00107317, Legally privileged
report prepared by Linklaters on behalf of Post Office into initial complaint review
and mediation scheme legal issues), Deloitte’s Project Zebra report
(POL00028069, Deloitte Draft Board Briefing document further to report on Horizon
desktop review of assurance sources and key control features), the Swift Review
(POL00006355, Review on behalf of the Chairman of Post Office Ltd concerning
the steps taken in response to various complaints made by sub-postmasters), nor
Fujitsu’s ability to insert data or amend audit files within Horizon without SPMs’
consent.
Reflections on my time as Permanent Secretary
85.1 have followed the revelations about the Post Office since reading The Great Post
Office Scandal book by Nick Wallis when it was first published, and the subsequent
BBC and ITV radio and television programmes, as well as the progress of the
Inquiry hearings, with increasing shock and anger at the appalling effects of the
scandal on so many individuals and families.
86.1 have reflected on whether the governance system for POL could have been set
up differently. The governance system was designed to provide a professional level
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of scrutiny suitable for a commercial organisation owned by the Government, with
an independent Board and senior executive team, and a deliberate legal separation
from the Department to avoid micromanagement. It was considered best practice
at the time and underwent further improvements, including the decision to have a
ShEx non-executive director on the POL Board.
87.My impression from my direct involvement with Stephen Lovegrove and Mark
Russell was that ShEx as an organisation within BIS was effective and professional
to deal with, carrying out its responsibilities to the best of their staff's ability. That
impression was bolstered by the consistently positive feedback on ShEx I received
from the rest of Government. I did not ever get the sense that either ShEx or the
relevant Ministers were insufficiently engaged with Post Office or unwilling to
challenge where necessary.
88.Clearly this structure did not succeed in preventing the most serious miscarriages
of justice over many years. That is a matter of huge regret to me. However, even
with the benefit of hindsight I am unclear whether a different system of oversight
could have prevented or uncovered these miscarriages of justice earlier, given it
was dealing with an organisation which, it seems, did not provide accurate or
honest information to those overseeing it. No system of governance can be set up
to deal with an organisation which refuses to tell the truth about what it knows, and
I have struggled to imagine a different oversight system which would have been
certain to produce a better outcome faced with the incomplete and erroneous
information provided by the Post Office over a long period.
89.My belief now is that parts of the Post Office culture and its prevailing attitude
towards SPMs, as well as at least some of its management, were seriously
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dysfunctional in various ways. They were so seriously dysfunctional in dealing with
the Horizon issue that the assumptions of basic transparency, honesty and
competence upon which any normal governance system in the public sector is
based did not seem to hold good in this case.
90.In other organisations I would expect the CEO to be responsible for the provision
of accurate and timely information from their organisation, to be aware of when any
significant problems were emerging and to take the necessary steps to resolve
them, supervised by the Board. Maintaining the integrity of governance, risk
management and information sharing systems within POL was first and foremost
the responsibility of senior management there. It is, however, a matter of great
sadness to me that the Department's supervision of POL was unable to stop these
abuses from occurring, nor prevent their shocking consequences for those affected
by the miscarriages of justice that resulted. I wish we could have done better.
Statement of truth
I believe the content of this statement to be true.
Dated: 24 Faly avcik
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Page 34 of 39
Index to First Witness Statement of Sir Martin Donnelly
No
URN
Document Description
Control Number
UKGI00006045
HM Treasury -
Managing Public Money
Report, July 2013
UKGI016859-001
UKGI00043211
HM Treasury -
Managing Public Money
- May 2023
UKGI00043211
UKGI00042677
PowerPoint presentation
re: Post Office Ltd
Senior Management -
Risk and Assurance
Committee - February
2014
UKGI051572-001
UKGI00017317
Post Office Limited
Strategy
UKG1I027324-001
UKGI00001339
HM Government
Shareholder Executive
Board Meeting Minutes
for 15/09/10
UKGI012153-001
UKGI00042351
Report re: Postal
Services Holding
Company Limited
(PoSH) - late filing of
UKGI051246-001
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annual accounts - from
Martin Donnelly to
Richard Callard
UKGI00016656
NOTE OF ShEx
EXECUTIVE
COMMITTEE MEETING
— 27 April 2010
UKGI011468-001
UKG100042642
Briefing to Martin
Donnelly for a meeting
with Alice Perkins, Chair
- Post Office Ltd
15:00-15:30 Tuesday 27
September 2011
UKGI051537-001
UKGI00042646
Briefing to BIS Perm
Sec for a meeting with
Alice Perkins, Chair -
Post Office Ltd
15:00-15:30 Tuesday 27
September 2011
UKGI051541-001
10
UKGI00042645
Department for
Business, Innovation &
Skills - BIS Permanent
Secretary meeting with
Post Office Ltd Chair
UKGI051540-001
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1
BEIS0000010
Briefing Note from Peter
Batten to Martin
Donnelly re Briefing for
meeting with Post Office
Ltd Chair
ViS00000904
12
POL00006355
Review on behalf of the
Chairman of Post Office
Ltd concerning the steps
taken in response to
various complaints
made by sub-
postmasters
POL-0017623
13
POL00022598
Horizon Data Lepton
SPSO 191320 by Helen
Rose (v.1 draft)
POL-0019077
14
POL00006357
Advice on the use of
expert evidence relating
to the integrity of the
Fujitsu Services Ltd
Horizon System
POL-0017625
15
POL00129453
Simon Clarke's Advice
re: Disclosure - The
Duty to record and
retain material - Post
Office LTD
POL-0134937
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16
POL00107317
Legally privileged report
prepared by Linklaters
on behalf of Post Office
into initial complaint
review and mediation
scheme legal issues
POL-0105625
17
POL00028069
Deloitte Draft Board
Briefing document
further to report on
Horizon desktop review
of assurance sources
and key control features
POL-0023072
18
POL00006355
Review on behalf of the
Chairman of Post Office
Ltd concerning the steps
taken in response to
various complaints
made by sub-
postmasters
POL-0017623
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