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At heart, the decision was driven by declining numbers of customers and increasing financial losses for the Post Office network. As my hon. Friend said, the number of customers has declined by about 4 million per week and losses are running at about £3.5 million per week. A number of lifestyle changes are driving those factors, which I think he understands, given his speech. By that, I mean greater use of direct debit to pay bills, more payment of benefits and pensions into bank accounts, greater use of online services to carry out transactions such as buying car tax and so on. I appreciate that not everyone is part of
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those trends, particularly elderly people, but they are nevertheless real and inevitably have an impact on the use and the finances of the Post Office network.

On top of that, the Post Office operates in an increasingly competitive environment with other providers bidding for, and sometimes winning, work that has traditionally been carried out by the Post Office, such as the BBC’s decision on the TV licence contract. My hon. Friend is absolutely right when he says that the Government do not see the Post Office as a commercial network. We appreciate the social and community role played by post offices and the value of a widespread network that, even after this round of closures, will be far bigger than all the banks and supermarkets put together. That is why we have committed a subsidy of £150 million a year to support the network, a subsidy that did not exist under the previous Administration. However, despite the subsidy, the difficult decision was taken to reduce the size of the network, offset to some degree by the establishment of 500 new outreach services that may replace a post office with a part-time service or a service perhaps hosted by another partner in the community.

I want to consider some of the specific points that my hon. Friend made. He raised several detailed issues about Post Office financing, especially the relationship between the central infrastructure costs and those of an individual branch. That is an important issue and I hope that I can clarify matters for him.

My hon. Friend paid particular attention to the central infrastructure costs and asked how they could be higher in some instances than the payments to the agents who run the branches. If I explain what the costs entail, it may help. The payments to agents include two elements: a fixed fee and an additional, variable amount based on the business that the branch carries out. Post Office Ltd receives a mixture of fixed and variable income from its contracts with clients, for example, the Government, through the Post Office card account. However, increasingly, the trend in the competitive market, for example, in bill paying and so on, is for contracts to be based purely on transaction and service volumes, thus generating a variable income without being able to rely only on the fixed income. A declining number of contracts have a fixed income element geared towards covering network costs.

In calculating the costs involved in a branch, Post Office Ltd allocates both income and infrastructure costs to an individual branch. My hon. Friend asked about the infrastructure costs. They reflect the large amount of support needed to sustain the largest retail network in the country and the franchise model operated by the Post Office. There is some difference between that franchise model and others.

Unlike most franchise operations, in which franchisees source and pay for much of the supporting infrastructure themselves, Post Office Ltd covers virtually all the costs associated with providing its products. For example, two key elements are providing cash to the network and the IT system that supports it. The IT system links the whole network, facilitating and recording the wide range of services and financial transactions. Moving cash around the country and not charging branches for holding it are important parts of the central infrastructure support costs.

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Due to the nature of the business, especially paying out benefits, pensions and so on, there has to be a high specification of cash availability and robust contingency arrangements to ensure that post offices do not run out of money on payment days. That is an important and relatively costly element of the infrastructure costs. Other costs include maintenance of equipment, such as safes, alarm systems and other equipment in the post office, and the distribution of many leaflets and forms, often for accessing Government services. It is not unusual or surprising that those elements can form a sizeable part of the overall costs of a post office branch.

The third element to be considered is the savings to Post Office Ltd, to which my hon. Friend alluded, from closing a branch. They include a proportion of, though not all, the infrastructure costs. That is because, although the cash may no longer have to be delivered to a specific office and the terminals for the IT may not be there, the Post Office still has central costs for maintaining such services nationwide. It therefore calculates that a proportion of, but not all, those costs will be saved when a branch closes.

I appreciate that my hon. Friend is sceptical about that method of financing but it nevertheless exists and is an important part of the costs and calculations that are involved in supporting the network.

Michael Jabez Foster: I appreciate that my hon. Friend may not be able to answer my question today, but all the aspects that he has listed are specific to a branch. I have given him the figures. Out of £24,000, only £6,000 was attributed to that element. That means that £18,000—three quarters of the sum—is attributable to something else, to which he has not referred. I want to know about that.

Mr. McFadden: What I am saying is that the infrastructure costs attributed to the branch will not all be saved if that branch is closed, because there are certain support costs—in IT or cash distribution networks, for example—that still have to be maintained, even though there is one fewer branch in the network.

My hon. Friend was also sceptical about Post Office Ltd’s assumptions about migration and business. I want to make two points about that. First, those assumptions are not plucked out of the air; they are based on the experience of urban reinvention and what happened after that. Secondly, the assumptions take into account local circumstances. Post Office Ltd therefore does not take a blanket approach throughout the country when calculating the migration of business; rather, it also takes into account the proximity of other branches nearby, and so on.

Those are the main elements in calculating the costs of an individual branch. I am not quite sure whether I followed my hon. Friend when he quoted some of the figures that he extrapolated for the branch. The best way to understand the position is that Post Office Ltd takes into account three things. The first is the payment to agents, the second is the central infrastructure costs in support of the branch and the third is the cost that Post Office Ltd calculates it can save if it no longer supports that branch. All three are taken into account in calculating the cost to Post Office Ltd of running that branch.

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Overall, the programme is to close around 2,500 post offices, with 500 new outreach services. I understand that that will be difficult. However, the £150 million network subsidy payment is designed to help the Post Office maintain a network of that size, after that closure programme has taken place.

My hon. Friend raised one or two other issues, which I hope to touch on in the time available to me. He asked about third parties wishing to step in and pick up the costs of the branch. I have encouraged Post Office Ltd to engage seriously with local authorities or other third parties in that position. However, it is also reasonable for Post Office Ltd to say that all costs associated with the branch must be covered and to ask for a long-term commitment. It would not do my hon. Friend’s or any other hon. Member’s constituents any good if someone stepped in, but six months later the branch was going through the same closure process. Post Office Ltd will rightly ask for all the relevant costs to be taken into account and for a commitment of several years in support. I hope that that is of some help to my hon. Friend.

Overall, the programme will lead to a smaller network than we have now. However, I believe that it can be a more stable network, provided that Post Office Ltd does one other thing—innovate to attract more customers.

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My hon. Friend asked me about the Post Office card account. There is a successor product to POCA, which we have been legally required to put out to tender. I am sure that the Post Office will make a strong bid, but the outcome will have to be decided in a proper way. It is not possible for the Government simply to grant the contract to the Post Office without its tendering for it. The decision on that will be announced later this year.

Innovation is important, and there is cause for optimism. Post Office Ltd has been setting out new products and services. It is now the biggest provider of foreign exchange in the UK, and is doing more in car insurance, broadband and free cash machines, as well as setting up a new, safe Christmas savings club, to help protect against some of the problems that we saw with Farepak a year or two ago.

Post Office Ltd is innovating. With a combination of cost control in the network, continued Government support, which my hon. Friend has acknowledged and which I have repeated tonight, and the innovation necessary to attract more customers, we can put the network on a more stable basis for the future.

Question put and agreed to.

Adjourned accordingly at eleven minutes to Eight o’clock.

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