APPENDIX 7
Supplementary memorandum by the Department
of Trade and Industry
At my oral evidence session on 18 July, I promised
to provide you with additional information on some of the points
that were raised.
POST OFFICE
"DIVIDENDS"
You asked for a note on whether the Government
took money out of the Post Office during the period of the pension
holiday. As Barry Gardiner explained in his letter to you last
December (published in Volume II of the TIC Second Report of Session
2005-06), the External Finance Limit (EFL) set for the Post Office
did not constitute money received by the Treasury. The money generated
under the EFL was retained in a reserve on the business' balance
sheet and none was taken out of the company. Under the Government's
Post Office reforms, the corporation was transformed into a public
limited company in 2001 and was able to pay dividends to its shareholder.
However, the shareholder decided to forego dividends in view of
the company's poor financial performance around that time. I enclose
for ease of reference the list of the EFL and dividends received
since 1981-82 (ie from the BT/Post Office split) that was attached
to Barry's letter (Annex A). The pension holiday ran from 1990-2001
to 2002-03.
The Government has allowed the reserve to be
used mainly to support the post office network, for example to
fund the Horizon project and to support the rural network through
the Social Network. The intention is that the remaining funds
in the reserve (£850 million) will be placed in an escrow
account to help stabilise the pension fund. Any surplus cash could
be paid over to Government in the future once the pension fund
deficit has been recovered and the Royal Mail balance sheet is
strengthened by successful operation.
PUBLIC SECTOR
CLASSIFICATION
The Committee asked whether 95% of the shares
in a company needed to be owned by Government for that company
to be classified as public sector. The Office of National Statistics
(ONS) has responsibility for classifying bodies in the public
or private sector. The criteria that the ONS use to judge whether
a body is public or private sector is control of general corporate
policy. Most usually this is evidenced through the appointment
process for the board, but can come through other means, such
as contractual relationships or rights over key business decisions.
Transferring 20% of the economic interest in
Royal Mail into a trust for the benefit of employees would not,
on its own, lead to ONS reclassifying Royal Mail. Even if those
20% shares came with 20% voting rights, the majority voting rights
would be held by the public sector, and so the public sector would
still be able to exert dominant influence over the body and the
classification would be unaffected.
POCA
You asked whether POL and the banks knew that
POCA would not be renewed after 2010 at the time the contracts
were signed.
An agreement was made with the banks to provide
a contribution towards the costs of the Post Office Card Account
for five years of the seven year contract. The banks, therefore,
are committed to pay £182,250,000-£36,450,000 each year
between them. DWP also has a contractual commitment to fund the
POCA over the seven years of the contract. Government therefore
funds the POCA until March 2010 and the banks provide a contribution
to the costs until March 2008. That is what all the parties signed
up to in March 2002.
While it was made clear to all parties that
the contract would run for seven years to 2010, DWP could not
have known in 2003 what new banking and savings products might
be available in the future which would be suitable for POCA customers.
The Government response to the 2002-03 TISC Inquiry 11th Report
made this clear stating that it was the first year of a seven
year contract and it was too early to speculate about what might
happen in the future. At no time has DWP committed itself to an
extension and none should have been assumed.
25 July 2006
Annex A
External Finance Limited/Dividends
(£m)
| Year | Post-Tax profit
| EFL (paid into reserve on balance sheet)
| % |
| 1981-82 | 96.2 | 12
| 13% |
| 1982-83 | 138.5 | 60
| 43% |
| 1983-84 | 118.9 | 62
| 52% |
| 1984-85 | 112.2 | 100
| 89% |
| 1985-86 | 99.5 | 75
| 75% |
| 1986-87 | 132.9 | 93
| 70% |
| 1987-88 | 121.4 | 80
| 66% |
| 1988-89 | 102.5 | 102
| 100% |
| 1989-90 | 3.0 | 102
| - |
| 1990-91 | 31.0 | -
| 0% |
| 1991-92 | 152.0 | 74
| 49% |
| 1992-93 | 187.0 | 80
| 43% |
| 1993-94 | 195.0 | 182
| 93% |
| 1994-95 | 314.0 | 235
| 75% |
| 1995-96 | 270.0 | 245
| 91% |
| 1996-97 | 361.0 | 268
| 74% |
| 1997-98 | 447 | 313
| 70% |
| 1998-99 | 496 | 310
| 63% |
| 1999-2000 | (415) | 151
| 50% |
| | Dividends
| |
| 2000-01 | (44)^ |
0* |
|
| 2001-02 | (940)^ |
0 | - |
| 2002-03 | (559)^ |
0 | - |
| 2003-04 | 7^ | 0
| |
| 2004-05 | 235 ^ |
0 | - |
* A dividend of £93 million was declared but was not
paid to HMG. It was placed in a reserve on the Royal Mail balance
sheet alongside the accumulated EFL.
^ These figures represent (loss)/profit after tax and
exceptional items.
| 
