APPENDIX 6
Memorandum by the Department of Trade
and Industry
INTRODUCTION
1. The Department welcomes this inquiry
which looks at significant issues that are potentially key to
the development and future of the Royal Mail and the Post Office
network.
2. This Memorandum is intended to provide
the Committee with some helpful background and factual information
on the proposed financial framework together with the latest position
on that and employee incentivisation. We believe that it would
also be helpful to reiterate our role as shareholder in the Royal
Mail as this sets the backdrop for our approach to these issues.
3. We understand that the Department for
Work and Pensions has provided the Committee with a Memorandum
about the future of the Post Office Card Account.
GOVERNMENT'S
ROLE AS
SHAREHOLDER
4. The Shareholder Executive, located in
the Department of Trade and Industry, has responsibility for the
Government's shareholding in Royal Mail. The Executive was created
in September 2003 with the overarching objective of making Government
an effective and well-informed shareholder. Its remit extends
to around 25 Government owned businesses with a combined turnover
of around £20 billion. Its role is to advise Ministers and
officials on a wide range of shareholder issues including objectives,
governance, strategy, performance monitoring, Board appointments
and remuneration. The Executive draws on the skills of both the
private and public sectors to meet its objective.
5. The Shareholder Executive directly manages
the Government's financial interests in Royal Mail. It takes full
account of Government policy (which, of course, includes non-commercial
objectives), but within this context, it seeks to use its discretion
to act as a commercial shareholder. As set out in the 1999 Post
Office Reform White Paper, this is an arm's length relationship
to ensure that the management has the commercial freedom to run
the business and the Executive does not seek to micro-manage it.
The Executive has sought to increase Royal Mail's accountability
to its owner and to ensure that the company delivers the shareholder's
objectives. These objectives are:
— Royal Mail to be a best-in-class,
publicly-owned postal service provider with robust, long-term,
sustainable business health; and
— the delivery of government and
other services effectively through an efficient and fit for purpose
Post Office branch network which offers maximum access to those
who need it.
PROPOSED FINANCE
FRAMEWORK
6. This is a pivotal moment in the history
of the Royal Mail. From 1 January 2006, the postal services market
was fully liberalised by the independent regulator, Postcomm.
Royal Mail now has to respond to the challenges that a fully open
market represents. It has to be efficient and provide the quality
of service that customers require so that it can maintain volumes
and build on the turnaround that has taken place over the last
four years.
7. Added to this the company also faces
the challenge, as do many private sector companies following adverse
stock market and bond conditions, changing actuarial assumptions
and new accounting standards, of a very large pension deficit
that stands at £5.6 billion. This pension deficit is the
largest of any UK corporate.
8. In order to succeed under these conditions,
the Royal Mail Board decided that it required access to finance
to enable it to modernise the business while at the same time
seeking to address the pension fund deficit. Royal Mail was asked
to submit a business case to justify an investment by the shareholder
in the company.
9. Following discussions between the shareholder
and the company, an agreement in principle was reached on a new
finance framework for Royal Mail that gives the company wider
freedoms to use its resources and borrowing facilities to modernise
and secure its future in the competitive market. It also provides
stability for the pension fund and reassurance to those in the
Royal Mail pension schemes.
10. As the Secretary of State announced
in a Parliamentary statement on 18 May, the proposed financial
structure includes:
— the release of £850 million
of the Royal Mail Reserve for the company to transfer into a pension
escrow account that may be drawn on by the pension trustees in
the unlikely event that the company should fail;
— in principle agreement by Government
to extend the existing debt facilities such that £900 million
is available for use by Royal Mail on commercial terms.
11. The detail of the finance framework
is still being discussed with Royal Mail and formal documentation
has not been put in place. The shareholder's overriding objective
in these discussions has been to ensure that the arrangements
put in place are commercially based. During the period while the
company is being transformed, the Government does not expect to
receive a dividend but it does expect to receive a return on its
investment through an increase in the value of the company. It
is not the Government's intention to provide access to finance
on un-commercial terms that could be construed to be illegal state
aid and distort the newly liberalised market, and have received
professional advice to that effect.
12. Once the loan facilities are in place,
the management of Royal Mail will be able to access them as they
see fit to carry out its transformation of the business through
the investment in new machinery and to meet other restructuring
costs. Royal Mail will also have access to funds generated through
its business activities to invest in the company. The price control
agreed with Postcomm allows for £1.2 billion to be invested
by company in modernisation over the next four years.
13. In his statement, the Secretary of State
also said that level of support for the post office network, beyond
the Social Network payments of £150 million per annum until
2008, depended on decisions taken on the future of the network
which the Government will consult on. This remains the position.
14. A copy of the Secretary of State's statement
is attached at Annex 1 for ease of reference. *[25]
EMPLOYEE SHARE
SCHEME
15. As set out in its manifesto, the Government
have no plans to privatise the Royal Mail.
16. The shareholder's position on an Employee
Share Scheme remains unchanged since Barry Gardiner, then DTI
Minister for Competitiveness, appeared before the Committee last
November. He said then that "Royal Mail is not for sale"
and that the Government would only consider an employee share
scheme where the shares were held in trust and could not be traded
on the open market. Within this context, the shareholder was prepared
to listen to the company's ideas for such a scheme. The shareholder
continues to believe that it is important for the workforce to
be appropriately incentivised during this period of change in
the company.
17. Since Barry Gardiner gave evidence to
the Committee, the shareholder has received a proposal from the
Royal Mail Board for an employee share scheme. We are carefully
considering this proposal that involves the establishment of a
trust and would not permit shares to be sold on the open market.
No decision has, however, been taken to proceed with such a scheme.
The Government has not set a timetable for its deliberations as
we wish to carefully weigh up the pros and cons of such a scheme,
taking views from a number of stakeholders, and to reach a decision
that would be in the best interests of the shareholder, the tax
payer, the company and its employees.
POST OFFICE
CARD ACCOUNT
18. Decisions on the future of the Post
Office Card Account are matters for the Department of Work and
Pension and we understand that the DWP is submitting a separate
Memorandum on this to the Committee. We are currently considering
with Post Office Limited the impact of the ending of the POCA
in 2010 and this will be a factor in any decisions taken on the
future of the post office network.
3 July 2006
25 *Not printed, see HC Deb Col 65WS (18 May
2006). Back
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