Select Committee on Trade and Industry First Special Report



Profit, dividend and results
(a)There are grounds for fearing that the Post Office may struggle to maintain even its current level of profitability. Some consideration needs to be given to the desirable proportion between what the Government take from the Post Office by way of dividend and what it hands back as subsidy (paragraphs 5 and 6).
The Government has already reduced its financial demands on the Post Office by effectively halving the rate at which profits are taken out of the business. The Post Office is required to set aside the equivalent of a commercial dividend in its reserves which it will pay over to Government once it becomes a plc. The dividend is set at commercial levels, in keeping with the Government's intention that the Post Office and the future Post Office company should be driven by market disciplines. In allowing the organisation to retain more of its profits, the Government has increased its ability to invest in new technology and enhanced services in its core business as well as in new business areas. In time this retained investment should grow the value of the overall business.
We need to keep the question of any financial support for the counters' network separate from the financial targets set by Government for the business as a whole. As shareholder, the Government intends to set financial targets which are challenging, but fair and which are based on the Strategic Plan, external benchmarking, the regulatory environment and market expectations. It would not be in keeping with our policy of exposing the organisation to market disciplines if the target regime and the dividend policy that flows from it were compromised to take account of the need for subsidies for a specific part of the business. The need for any financial support must be looked at separately.
(b)We expect the Post Office's next Annual Report to provide indications of the financial results for each business unit (paragraph 7).
The Government considers that it is a matter for the Post Office whether it will include in future Report and Accounts financial results for each business unit. The Post Office's response to this recommendation is shown at Appendix 2. The Government believes that the Post Office should operate in the same way as any other public limited company. Once it becomes a plc on 26 March 2001, it will be required to comply with company law and produce appropriate accounts as it does now. What appears in the accounts beyond the standard requirements will then be a matter for the Directors of the Post Office company. The Post Office will, however, be required to produce separate accounts for regulatory purposes. These will be submitted to the Postal Services Commission who will treat them as commercially confidential.
Vacant properties
(c)Now that the Post Office property function has been separated out as a business unit, we expect a vigorous and focussed approach to be taken to disposing of vacant properties (paragraph 8).
This is a matter for the Post Office whose response is shown at Appendix 2. As owner/shareholder of the Post Office, the Government would expect it to manage its property holdings effectively in order to maximise the return from these assets for the benefit of the business and the shareholder.
(d)We continue to regard the ability of the Post Office management to make Parcelforce a real success as a test of their entitlement to the commercial freedoms they now enjoy (paragraph 12).
The Government agrees that making Parcelforce a success will be a test for Post Office management. The modernisation and development programmes underway should enable Parcelforce to improve its performance. All this is happening against a background of fast changing internationalisation of the sector and responses to new developments such as e-commerce. The commercial freedoms given to the Post Office mean that Parcelforce should now be better placed to achieve success and the Government will be following this closely in connection with the development and monitoring of the Strategic Plan.
Industrial relations
(e)We remain concerned at the work which remains to be done to produce an improvement in industrial relations in the Post Office, although we recognise that all concerned are pursuing this end with vigour (paragraph 16).
The Government considers that this is a matter for the Post Office and its response is shown at Appendix 2. The Government also wishes to see improvements in industrial relations in the Post Office. As the Committee quite rightly recognises, more still needs to be done. The Post Office's future success will depend on all those involved from the top to the bottom of the company being committed to respond positively to the challenges coming from other postal services providers, such as Deutsche Post and TPG in the Netherlands. Without such commitment the Post Office will be left behind with a dwindling share of the market.
Environmental guidance
(f)We recommend that the draft environmental guidance to be issued soon for consultation address explicitly the issues raised by the heavy use made by postal services of road transport (paragraph 20).
The draft social and environmental guidance, which was published on 19 December, proposes that the Commission should encourage postal operators to take account of the issues raised by the heavy use of road transport in a number of ways. These include both encouraging more efficient, cleaner and less noisy operation and looking at alternative transport options.
Task of Postal Services Commission
(g)We recommend that the Postal Services Commission take the necessary steps to ensure that it is adequately funded and staffed so as to be able to perform the additional tasks imposed on it by the Government's acceptance of the recommendations in the PIU Report (paragraph 22).
This is a matter for the Postal Services Commission and this recommendation has been drawn to its attention (see Appendix 3).
(h)There is natural concern that the network should not be dependent in the longer term on subsidy from Government which can be switched off as readily as it can be switched on. Such a subsidy is no substitute for measures to provide a long-term sustainable network which pays its way and earns its living from transaction charges and fee payments (paragraph 24).
The Government agrees with Committee's conclusion. We are working with the Post Office to ensure that the network rises to the PIU's challenge to "grasp every opportunity to maximise the potential for the network". We are encouraging the Post Office to put in place a structure that will drive the network business to develop revenue-generating opportunities, minimising the need for subsidy.
Most of the £270 Million of ring-fenced in SR 2000 for the Post Office is targeted at developing the commercial viability of the network - for example by piloting potential new income generating opportunities such as the Government General Practitioner (GGP) project, and by modernising and improving the efficiency of the urban network.
Our long-term vision is of a network that will operate commercially, moving beyond Government subsidy to offer a profitable business proposition for Sub-Postmasters.
(i)It is important to ensure that the DTI's budget properly reflects the calls to be made on it for support of the Post Office network both over the next three years and in the subsequent Spending Review period; that the sums are available for support of the network before the start of the 2000-01 financial year; and that there is full accounting to Parliament of how the money is spent (paragraph 26).
The Government has noted the amendment to this recommendation as set out in the Clerk of the Committee's letter of 14 November to the Department's Parliamentary Liaison Officer (year referred to should be 2001-02, rather than 2000-01).
We confirm that the DTI budget properly reflects the existing calls to be made on it by the Post Office over the next three years and that we will seek to make available additional funding as necessary against robust business cases. Appropriate levels of funding will be sought to cover the period commencing in 2004-5.
All of the Department's programme expenditure, including expenditure on the Post Office, is subject to approval by the Department's Accounting Officer who is accountable to Parliament for the expenditure.
Horizon programme
(j)We are relieved that the failure a year ago to meet the first Horizon milestone, about which we expressed some concern in our 1999 Report, has not proved to be significant. It is obviously essential that the ambitious plans being developed by the Post Office to enable it to become a major financial services outlet do not stumble as a result of any technical deficiencies in the Horizon programme. If banks are in effect to be obliged to make their basic accounts accessible through post offices, and to pay for the privilege, they are entitled to know that the system will be resilient and cost effective (paragraphs 30 and 41).
Good progress continues to be made with the Horizon programme. The system is now installed in over 15,000 (83% of the network) post offices and the programme is on course for completion on schedule in Spring 2001. A major upgrade of software was introduced in October and now includes smartcard compatibility for the automated payments service, direct electronic links between branches and the stock and cash management systems. The system also integrates several stand-alone automated payment systems enabling payment of utilities' bills using magnetic swipecards and barcoded bills. The system infrastructure has a high level of security and resilience which will enable it to support a wide range of new or re-engineered financial transaction including those that require on-line authorisation such as counter services for High Street banks.
The Government agrees with the Committee that the Post Office's systems for providing banking services through post offices, including Horizon, need to be resilient and cost effective. The Post Office is currently considering different IT platforms through which it could connect to Banks. The platform chosen will need to work through the Horizon system. In this, as in other aspects of its work, the Post Office will need to ensure that it is competitive.
(k)We welcome the positive duty now placed on the Post Office to prevent any avoidable closures, although we would be reassured if we had a clearer indication of the criteria to be applied. We also welcome the introduction of objective access criteria to be used by the Postal Services Commission in considering which closures to resist, and the availability of Government funds to assist in averting selected closures. While it must be understood that there is no magic wand which can keep a subpostoffice open for ever and a day, the onus is now on the Post Office to justify any closure, and on the Government to justify any refusal of funds needed to avert a closure (paragraph 32).
The Government is pleased that the Committee has welcomed the positive duty now placed on The Post Office to prevent avoidable closures in rural areas.
The Government believes strongly that the retention and modernisation of the rural network is vital to the quality of life in those areas. We have also stressed that every effort should be made to find creative, locally tailored solutions to the provision of postal services in rural communities. And we have insisted that all reasonable options must be explored fully before the Post Office could claim legitimately that a closure is unavoidable. We agree with the Committee that the onus is now on The Post Office to justify any closures.
The Post Office are reviewing with the Consumer Council and others the present Code of Practice on post office closures. We have urged the Post Office to ensure that the revised Code fully reflects all the necessary processes for avoiding rural closures. And we have asked The Post Office to discuss details of their approach to avoiding rural closures with the Postal Services Commission (PSC). The PSC, in consultation with the Consumer Council, is responsible for reporting to the Government on the network.
Ring-fenced funding has been set aside in the Spending Review for new investment of £270 million over the next three years to start the implementation of the PIU report recommendations, including support to modernise and maintain the rural network. As recommended by the PIU (conclusion 6) the PSC has been asked to advise on the best way to channel financial assistance to post offices. They are expected to report by Autumn 2001.
Universal Bank
(l)Discussions on the Universal Bank are at a delicate stage. It is the declared intention of Ministers that a firm conclusion should be reached by the end of the year. The outcome needs to provide a fully funded, reliable and cost-effective means of ensuring that benefits can be received in cash, in full and free of charge at post offices. That this should also provide a source of income for rural and deprived urban post offices such as to ensure their survival is an added benefit. The Post Office bank facility must make provision for utility payment at least broadly similar to standard direct debit arrangements. Those millions of people who have a current account but now choose to collect benefits in cash at a post office must be able to continue to do so without obstacles being put in their way. We hope that an acceptable outcome is found. It must not be allowed to fail because of either a lack of Government funding or equivocation by the Post Office or retail banks in their commitment to the wider social goal of reducing financial exclusion (paragraph 46).
The Government is committed to tackling financial exclusion and to the migration of benefit payments to ACT from 2003. It is intended that this will be facilitated by the provision of universal banking services through post offices.
Following constructive negotiations with the banking industry, the Government announced on 20th December agreement in principle had been reached with Barclays, Lloyds TSB, RBS/NatWest, HSBC, Abbey National and the Halifax that they will contribute towards Universal Banking Services at the Post Office. We are continuing to discuss with other banks and building societies the contribution they can make
The agreement with the main High Street Banks means that Universal Banking Services can now be developed to provide a range of banking services available at post offices. It will bring those people currently without bank accounts into the financial mainstream by offering basic bank accounts but without overdraft or borrowing facilities.
These accounts will enable customers to access their benefits without charge in cash at post offices. Both before and after the change to ACT, those benefit and pension recipients who wish to continue drawing their money in cash, in full and free of charge, across a post office counter, will still be able to do so.
Universal Banking Services will provide facilities for customers who wish to do so to make utility payments by direct debit or similar arrangements.
(m)We welcome the Post Office's plans to install ATMs in post offices, but are concerned that the Government's early optimism may prove unfounded (paragraph 52).
As the Committee has noted, developments since the Post Office's announcement of plans to install 3,000 additional ATMs at post offices by December 2001 have necessitated a reassessment of these plans. The Post Office is currently in negotiations with prospective partners and still believes it will be possible to build up to 3,000 ATMs across the network but over a longer timescale than originally planned.
Migration to ACT
(n)We recommend that henceforth the undertaking to avoid additional steps to migrate benefit recipients to ACT before 2003 be strictly honoured (paragraph 53).
There have been no steps to migrate benefit recipients to ACT in advance of 2003. The Government is happy to give the Committee an undertaking that we will avoid additional steps to migrate benefit recipients before 2003.
Contracts with government departments
(o)While it must be right that departments are free to seek the most cost-effective form of service delivery, they must also bear in mind that their customers have entitlements as citizens, are not free to chose other service providers, and may not be wired up to the internet. Government departments must be wary of pursuing policies of cost-effectiveness so blindly that they unintentionally hinder access to the services they are there to provide (paragraph 54).
The Government is committed to provision of a choice of access channels to public services and fully recognises the importance of post offices as an access point for many customers. The Secretary of State for Trade and Industry has written to colleagues in relevant Departments emphasising the Government's commitment to the PIU conclusion that services should continue to be offered at post offices as long as there remains customer demand to make it cost effective to do so. A new contract between the Post Office and the UK Passport Agency for three years to April 2003 is now in place and a variant of the previous contract with the Department of Health will continue until April 2001 when a new contract, currently under negotiation, is expected to be signed.
(p)While we share the vision of post offices benefiting from the fulfilment of electronic ordering, the details of the commercial arrangements now being made between Post Office Counters, Parcelforce and electronic retailers, and their effect on other private sector fulfilment companies, deserves careful scrutiny by the regulator (paragraph 62).
The Government agrees with the Committee's conclusion. It wants the Post Office network to operate on a commercial basis. That means making the most of its commercial freedom to develop new income streams whilst operating in accordance with domestic and European competition law.

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